Recovery without Hiring, World Inflation Waves, Theory and Reality of Economic History and Monetary Policy Based on Fear of Deflation, Peaking Valuation of Risk Financial Assets, World Financial Turbulence and Economic Slowdown with Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
Executive Summary
I Recovery without Hiring
IA1 Hiring Collapse
IA2 Labor Underutilization
IA3 Ten Million Fewer Full-time Job
IA4 Youth and Middle-Aged Unemployment
II World Inflation Waves
IIA Appendix: Transmission of Unconventional Monetary Policy
IIA1 Theory
IIA2 Policy
IIA3 Evidence
IIA4 Unwinding Strategy
IIB United States Inflation
IIC Long-term US Inflation
IID Current US Inflation
IIE Theory and Reality of Economic History and Monetary Policy Based on Fear of Deflation
III World Financial Turbulence
IIIA Financial Risks
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
IV Global Inflation
V World Economic Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
Appendixes
Appendix I The Great Inflation
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIG Appendix on Deficit Financing of Growth and the Debt Crisis
IIIGA Monetary Policy with Deficit Financing of Economic Growth
IIIGB Adjustment during the Debt Crisis of the 1980s
III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment, decline of wealth of households over the business cycle by 10.9 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IIIQ2012 and unsustainable fiscal deficit/debt threatening prosperity that can cause risk premium on Treasury debt with Himalayan interest rate hikes; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk financial assets during the week. There are various appendixes for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.
IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Jan 11 and daily values throughout the week ending on Jan 18 2013 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Jan 11 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Jan 11, 2012”, first row “USD/EUR 1.3343 -2.1%,” provides the information that the US dollar (USD) depreciated 2.1 percent to USD 1.3343/EUR in the week ending on Fri Jan 11 relative to the exchange rate on Fri Jan 4. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).
The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3343/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Jan 11, depreciating to USD 1.3382/EUR on Mon Jan 14, 2013, or by 0.3 percent. The dollar depreciated because more dollars, $1.3382, were required on Mon Jan 14 to buy one euro than $1.3343 on Jan 11. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3343/EUR on Jan 11; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Jan 11, to the last business day of the current week, in this case Fri Jan 18, such as appreciation by 0.2 percent to USD 1.3321/EUR by Jan 18; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (denoted by positive sign) by 0.2 percent from the rate of USD 1.3343/EUR on Fri Jan 11 to the rate of USD 1.3321/EUR on Fri Jan 18 {[(1.3321/1.3343) – 1]100 = -0.2%} and appreciated (denoted by positive sign) by 0.4 percent from the rate of USD 1.3377 on Thu Jan 17 to USD 1.3321/EUR on Fri Jan 18 {[(1.3321/1.3377) -1]100 = -0.4%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.
Table III-I, Weekly Financial Risk Assets Jan 14 to Jan 18, 2013
| Fri Jan 11, 2013 | M 14 | Tue 15 | W 16 | Thu 17 | Fr 18 |
| USD/EUR 1.3343 -2.1% | 1.3382 -0.3% -0.3% | 1.3305 0.3% 0.6% | 1.3289 0.4% 0.1% | 1.3377 -0.3% -0.7% | 1.3321 0.2% 0.4% |
| JPY/ USD 89.19 -1.2% | 89.48 -0.3% -0.3% | 88.78 0.5% 0.8% | 88.38 0.9% 0.5% | 89.87 -0.8% -1.7% | 90.09 -1.0% -0.2% |
| CHF/ USD 0.9136 1.2% | 0.9220 -0.9% -0.9% | 0.9319 -2.0% -1.1% | 0.9310 -1.9% 0.1% | 0.9326 -2.1% -0.2% | 0.9343 -2.3% -0.2% |
| CHF/ EUR 1.2190 -0.9% | 1.2338 -1.2% -1.2% | 1.2398 -1.7% -0.5% | 1.2372 -1.5% 0.2% | 1.2477 -2.4% -0.8% | 1.2443 -2.1% 0.3% |
| USD/ AUD 1.0536 0.9491 0.5% | 1.0567 0.9463 0.3% 0.3% | 1.0565 0.9465 0.3% 0.0% | 1.0572 0.9459 0.3% 0.1% | 1.0547 0.9481 0.1% -0.2% | 1.0509 0.9516 -0.3% -0.4% |
| 10 Year T Note 1.862 | 1.852 | 1.836 | 1.817 | 1.872 | 1.84 |
| 2 Year T Note 0.247 | 0.251 | 0.243 | 0.247 | 0.264 | 0.252 |
| German Bond 2Y 0.13 10Y 1.58 | 2Y 0.14 10Y 1.55 | 2Y 0.14 10Y 1.51 | 2Y 0.13 10Y 1.57 | 2Y 0.20 10Y 1.61 | 2Y 0.18 10Y 1.56 |
| DJIA 13488.43 0.4% | 13507.32 0.1% 0.1% | 13534.89 0.3% 0.2% | 13511.23 0.2% -0.2% | 13596.02 0.8% 0.6% | 13649.70 1.2% 0.4% |
| DJ Global 2075.84 1.2% | 2076.10 0.0% 0.0% | 2072.72 -0.2% -0.2% | 2065.52 -0.5% -0.3% | 2078.82 0.1% 0.6% | 2087.80 0.6% 0.4% |
| DJ Asia Pacific 1342.50 0.2% | 1345.28 0.2% 0.2% | 1350.73 0.6% 0.4% | 1341.05 -0.1% -0.7% | 1333.10 -0.7% -0.6% | 1350.52 0.6% 1.3% |
| Nikkei 10801.57 1.1% | 10801.57 0.0% 1.4% | 10879.08 0.7% 0.7% | 10600.44 -1.9% -2.6% | 10609.64 -1.8% 0.1% | 10913.30 1.0% 2.9% |
| Shanghai 2243.00 -1.5% | 2311.74 3.1% 3.1% | 2325.68 3.7% 0.6% | 2309.50 3.0% -0.7% | 2284.91 1.9% -1.1% | 2317.07 3.3% 1.4% |
| DAX 7715.53 -0.8% | 7729.52 0.2% 0.2% | 7675.91 -0.5% -0.7% | 7691.13 -0.3% 0.2% | 7735.46 0.3% 0.6% | 7702.23 -0.2% -0.4% |
| DJ UBS Comm. 138.55 0.6% | 139.62 0.8% 0.8% | 139.92 1.0% 0.2% | 140.02 1.1% 0.1% | 140.85 1.7% 0.6% | 141.48 2.1% 0.4% |
| WTI $ B 93.56 0.5% | 94.14 0.6% 0.6% | 93.38 -0.2% -0.8% | 94.19 0.7% 0.9% | 95.20 1.8% 1.1% | 95.33 1.9% 0.1% |
| Brent $/B 110.64 -0.6% | 111.96 1.2% 1.2% | 110.46 -0.2% -1.3% | 109.82 -0.7% -0.6% | 110.61 0.0% 0.7% | 111.79 1.0% 1.1% |
| Gold $/OZ 1660.60 0.1% | 1669.40 0.5% 0.5% | 1679.10 1.1% 0.6% | 1679.20 1.1% 0.0% | 1687.40 1.6% 0.5% | 1684.00 1.4% -0.2% |
Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss
Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce
Sources: http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
Discussion of current and recent risk-determining events is followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States. A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html). Rita Nazareth and Sarah Pringle, writing on “Dow Average rises to 5-year high amid debt-ceiling talks,” on Jan 18, 2012, published in Bloomberg (http://www.bloomberg.com/news/2013-01-18/u-s-stock-futures-little-changed-before-earnings-data.html), find that the DJIA reached on Jan 18, 2012, the highest level in five years at 13,649.70 with volume of 6.6 billion shares in US exchanges, which is higher by 6.9 percent than the average in three months. Vito J. Bacanelli, writing on “GOP proposal lifts Dow to five-year high,” on Jan 19, 2013, published by Barron’s (http://online.barrons.com/article/SB50001424052748703596604578235762819811322.html?mod=BOL_hpp_mag#articleTabs_article%3D1), finds that the closing level of 13,649.70 on Jan 18, 2013, is the highest close since Dec 10, 2007, only 4 percent lower than the all-time high and the best start for a year since 1997. The Wall Street Journal finds a 52-week high of 13661.87 on Oct 5, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The S&P 500 at 1485.98 is 5 percent below its all time high of 1565 in 2007. An important risk event is the reduction of growth prospects in the euro zone discussed by European Central Bank President Mario Draghi in “Introductory statement to the press conference,” on Dec 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is121206.en.html):
“This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.
The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”
Reuters, writing on “Bundesbank cuts German growth forecast,” on Dec 7, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/8e845114-4045-11e2-8f90-00144feabdc0.html#axzz2EMQxzs3u), informs that the central bank of Germany, Deutsche Bundesbank reduced its forecast of growth for the economy of Germany to 0.7 percent in 2012 from an earlier forecast of 1.0 percent in Jun and to 0.4 percent in 2012 from an earlier forecast of 1.6 percent while the forecast for 2014 is at 1.9 percent.
The major risk event during earlier weeks was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 and 5.366 percent for the ten-year of Spain and 4.527 percent for the ten-year of Italy on Fri Nov 14, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Vanessa Mock and Frances Robinson, writing on “EU approves Spanish bank’s restructuring plans,” on Nov 28, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578146520774638316.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the European Union regulators approved restructuring of four Spanish banks (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia), which helped to calm sovereign debt markets. Harriet Torry and James Angelo, writing on “Germany approves Greek aid,” on Nov 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578150532603095790.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the German parliament approved the plan to provide Greece a tranche of €44 billion in promised financial support, which is subject to sustainability analysis of the bond repurchase program later in Dec 2012. A hurdle for sustainability of repurchasing debt is that Greece’s sovereign bonds have appreciated significantly from around 24 percent for the bond maturing in 21 years and 20 percent for the bond maturing in 31 years in Aug 2012 to around 17 percent for the 21-year maturity and 15 percent for the 31-year maturing in Nov 2012. Declining years are equivalent to increasing prices, making the repurchase more expensive. Debt repurchase is intended to reduce bonds in circulation, turning Greek debt more manageable. Ben McLannahan, writing on “Japan unveils $11bn stimulus package,” on Nov 30, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/adc0569a-3aa5-11e2-baac-00144feabdc0.html#axzz2DibFFquN
), informs that the cabinet in Japan approved another stimulus program of $11 billion, which is twice larger than another stimulus plan in late Oct and close to elections in Dec. Henry Sender, writing on “Tokyo faces weak yen and high bond yields,” published on Nov 29, 2012 in the Financial Times (http://www.ft.com/intl/cms/s/0/9a7178d0-393d-11e2-afa8-00144feabdc0.html#axzz2DibFFquN), analyzes concerns of regulators on duration of bond holdings in an environment of likelihood of increasing yields and yen depreciation.
First, Risk-Determining Events. The European Council statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:
“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”
Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.
There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.
(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):
“6 September 2012 - Technical features of Outright Monetary Transactions
As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:
Conditionality
A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of Outright Monetary Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be fully sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.
Securities Markets Programme
Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”
Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):
“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.
Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):
“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.
The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”
Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).
Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, 2012, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, 2012, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10, 2012 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24, 2012. The yield of the ten-year sovereign bond of Spain traded at 5.235 percent on Dec 28, 2012 and that of the ten-year sovereign bond of Italy at 4.447 percent with further declines to 5.056 percent for the ten-year sovereign bond of Spain and 4.117 percent for the ten-year sovereign bond of Italy on Jan 18, 2013 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Diminishing aversion is captured by increase of the yield of the two- and ten-year Treasury notes and the two- and ten-year government bonds of Germany. Table III-1A provides yields of US and German governments bonds and the rate of USD/EUR. Yields of US and German government bonds decline during shocks of risk aversion and the dollar strengthens in the form of fewer dollars required to buy one euro. The yield of the US ten-year Treasury note fell from 2.202 percent on Aug 26, 2011 to 1.459 percent on Jul 20, 2012, reminiscent of experience during the Treasury-Fed accord of the 1940s that placed a ceiling on long-term Treasury debt (Hetzel and Leach 2001), while the yield of the ten-year government bond of Germany fell from 2.16 percent to 1.17 percent. In the week of Jan 18, 2012, the yield of the two-year Treasury increased to 0.252 percent and that of the ten-year Treasury fell to 1.84 percent while the two-year bond of Germany rose to 0.18 percent and the ten-year fell to 1.56 while the dollar appreciated to USD 1.3321/EUR. The zero interest rates for the monetary policy rate of the US, or fed funds rate, carry trades ensure devaluation of the dollar if there is no risk aversion but the dollar appreciates in flight to safe haven during episodes of risk aversion. Unconventional monetary policy induces significant global financial instability, excessive risks and low liquidity. The ten-year Treasury yield is about equal to consumer price inflation of 1.7 percent in the 12 months ending in E3d (Section II and earlier http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html) and the expectation of higher inflation if risk aversion diminishes. Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. The lower part of Table III-1A provides the same flight to government securities of the US and Germany and the USD during the financial crisis and global recession and the beginning of the European debt crisis in the spring of 2010 with the USD trading at USD 1.192/EUR on Jun 7, 2010.
Table III-1A, Two- and Ten-Year Yields of Government Bonds of the US and Germany and US Dollar/EUR Exchange rate
| US 2Y | US 10Y | DE 2Y | DE 10Y | USD/ EUR | |
| 1/18/13 | 0.252 | 1.84 | 0.18 | 1.56 | 1.3321 |
| 1/11/13 | 0.247 | 1.862 | 0.13 | 1.58 | 1.3343 |
| 1/4/13 | 0.262 | 1.898 | 0.08 | 1.54 | 1.3069 |
| 12/28/12 | 0.252 | 1.699 | -0.01 | 1.31 | 1.3218 |
| 12/21/12 | 0.272 | 1.77 | -0.01 | 1.38 | 1.3189 |
| 12/14/12 | 0.232 | 1.704 | -0.04 | 1.35 | 1.3162 |
| 12/7/12 | 0.256 | 1.625 | -0.08 | 1.30 | 1.2926 |
| 11/30/12 | 0.248 | 1.612 | 0.01 | 1.39 | 1.2987 |
| 11/23/12 | 0.273 | 1.691 | 0.00 | 1.44 | 1.2975 |
| 11/16/12 | 0.24 | 1.584 | -0.03 | 1.33 | 1.2743 |
| 11/9/12 | 0.256 | 1.614 | -0.03 | 1.35 | 1.2711 |
| 11/2/12 | 0.274 | 1.715 | 0.01 | 1.45 | 1.2838 |
| 10/26/12 | 0.299 | 1.748 | 0.05 | 1.54 | 1.2942 |
| 10/19/12 | 0.296 | 1.766 | 0.11 | 1.59 | 1.3023 |
| 10/12/12 | 0.264 | 1.663 | 0.04 | 1.45 | 1.2953 |
| 10/5/12 | 0.26 | 1.737 | 0.06 | 1.52 | 1.3036 |
| 9/28/12 | 0.236 | 1.631 | 0.02 | 1.44 | 1.2859 |
| 9/21/12 | 0.26 | 1.753 | 0.04 | 1.60 | 1.2981 |
| 9/14/12 | 0.252 | 1.863 | 0.10 | 1.71 | 1.3130 |
| 9/7/12 | 0.252 | 1.668 | 0.03 | 1.52 | 1.2816 |
| 8/31/12 | 0.225 | 1.543 | -0.03 | 1.33 | 1.2575 |
| 8/24/12 | 0.266 | 1.684 | -0.01 | 1.35 | 1.2512 |
| 8/17/12 | 0.288 | 1.814 | -0.04 | 1.50 | 1.2335 |
| 8/10/12 | 0.267 | 1.658 | -0.07 | 1.38 | 1.2290 |
| 8/3/12 | 0.242 | 1.569 | -0.02 | 1.42 | 1.2387 |
| 7/27/12 | 0.244 | 1.544 | -0.03 | 1.40 | 1.2320 |
| 7/20/12 | 0.207 | 1.459 | -0.07 | 1.17 | 1.2158 |
| 7/13/12 | 0.24 | 1.49 | -0.04 | 1.26 | 1.2248 |
| 7/6/12 | 0.272 | 1.548 | -0.01 | 1.33 | 1.2288 |
| 6/29/12 | 0.305 | 1.648 | 0.12 | 1.58 | 1.2661 |
| 6/22/12 | 0.309 | 1.676 | 0.14 | 1.58 | 1.2570 |
| 6/15/12 | 0.272 | 1.584 | 0.07 | 1.44 | 1.2640 |
| 6/8/12 | 0.268 | 1.635 | 0.04 | 1.33 | 1.2517 |
| 6/1/12 | 0.248 | 1.454 | 0.01 | 1.17 | 1.2435 |
| 5/25/12 | 0.291 | 1.738 | 0.05 | 1.37 | 1.2518 |
| 5/18/12 | 0.292 | 1.714 | 0.05 | 1.43 | 1.2780 |
| 5/11/12 | 0.248 | 1.845 | 0.09 | 1.52 | 1.2917 |
| 5/4/12 | 0.256 | 1.876 | 0.08 | 1.58 | 1.3084 |
| 4/6/12 | 0.31 | 2.058 | 0.14 | 1.74 | 1.3096 |
| 3/30/12 | 0.335 | 2.214 | 0.21 | 1.79 | 1.3340 |
| 3/2/12 | 0.29 | 1.977 | 0.16 | 1.80 | 1.3190 |
| 2/24/12 | 0.307 | 1.977 | 0.24 | 1.88 | 1.3449 |
| 1/6/12 | 0.256 | 1.957 | 0.17 | 1.85 | 1.2720 |
| 12/30/11 | 0.239 | 1.871 | 0.14 | 1.83 | 1.2944 |
| 8/26/11 | 0.20 | 2.202 | 0.65 | 2.16 | 1.450 |
| 8/19/11 | 0.192 | 2.066 | 0.65 | 2.11 | 1.4390 |
| 6/7/10 | 0.74 | 3.17 | 0.49 | 2.56 | 1.192 |
| 3/5/09 | 0.89 | 2.83 | 1.19 | 3.01 | 1.254 |
| 12/17/08 | 0.73 | 2.20 | 1.94 | 3.00 | 1.442 |
| 10/27/08 | 1.57 | 3.79 | 2.61 | 3.76 | 1.246 |
| 7/14/08 | 2.47 | 3.88 | 4.38 | 4.40 | 1.5914 |
| 6/26/03 | 1.41 | 3.55 | NA | 3.62 | 1.1423 |
Note: DE: Germany
Source:
http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
http://www.federalreserve.gov/releases/h15/data.htm
http://www.ecb.int/stats/money/long/html/index.en.html
Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year, two-year and one-month Treasury constant maturity yields. The beginning yields in Chart III-1A for July 31, 2000, are 3.67 percent for one month, 3.79 percent for two years and 5.07 percent for ten years. On July 31, 2007, yields inverted with the one month at 5.13 percent, the two-year at 4.56 percent and the ten year at 5.13 percent. During the beginning of the flight from risk financial assets to US government securities (see Cochrane and Zingales 2009), the one-month yield was 0.07 percent, the two-year yield 1.64 percent and the ten-year yield 3.41. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe. The final point of Chart III1-A is for Jan 17, 2013, with the one-month yield at 0.05 percent, the two-year at 0.28 percent and the ten-year at 1.89 percent.
Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields Jul 31, 2001-Jan 17, 2013
Note: US Recessions in shaded areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/update/
Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
![clip_image004[1]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbEWqX3KpfolMNzRd8OIirGk_XyYMY0jxnW8v6H5RUbcbD8lm6hfP3DPoJqnso877qtEne6lIwSFHFcPrJBzn66ehVmYO8QqF7C5UDlaBAkg-MA4me7pcCDN7I61A3n2cwdp1qIDSz9_k/s1600-h/clip_image004%25255B1%25255D%25255B2%25255D.gif "clip_image004[1]"){kind=small}
declines.
There was strong performance in equity indexes in Table III-1 in the week ending on Jan 18, 2013. Stagnating revenues are causing reevaluation of discounted net earnings with deteriorating views on the world economy and United States fiscal sustainability but investors have been driving indexes higher. DJIA increased 0.3 percent on Jan 4, increasing 3.8 percent in the week. Germany’s Dax increased 0.4 percent on Fri Jan 18 and increased 1.2 percent in the week. Dow Global increased 0.4 percent on Jan 18 and increased 0.6 percent in the week. Japan’s Nikkei Average increased 2.9 percent on Fri Jan 18 and increased 1.0 percent in the week as the yen continues to be oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration. Dow Asia Pacific TSM increased 1.3 percent on Jan 18 and increased 0.6 percent in the week while Shanghai Composite increased 1.4 percent on Jan 18 and increased 3.3 percent in the week supported by stronger GDP and economic data, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2317.07 on Fri Jan 18. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.
Commodities were stronger in the week of Jan 18, 2013. The DJ UBS Commodities Index increased 0.4 percent on Fri Jan 18 and increased 2.1 percent in the week, as shown in Table III-1. WTI increased 1.9 percent in the week of Jan 18 while Brent increased 1.0 percent in the week even with conflicts in the Middle East. Gold decreased 0.2 percent on Fri Jan 18 and increased 1.4 percent in the week.
Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the long-term refinancing operations (LTROs). Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increased from €546,747 million on Dec 31, 2010, to €879,130 million on Dec 28, 2011 and €1,113,646 million on Jan 11, 2013. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,699,248 million in the statement of Jan 11, 2013. There is high credit risk in these transactions with capital of only €85,693 million as analyzed by Cochrane (2012Aug31).
Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR
| Dec 31, 2010 | Dec 28, 2011 | Jan 11, 2013 | |
| 1 Gold and other Receivables | 367,402 | 419,822 | 438,687 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 | 251,302 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 | 31,388 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 | 21,714 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 | 1,113,646 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 | 200,114 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 | 585,602 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 | 29,961 |
| 9 Other Assets | 278,719 | 336,574 | 280,118 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 | 2,952,532 |
| Memo Items | |||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 | 1,699,248 |
| Capital and Reserves | 78,143 | 85,748 | 85,693 |
Source: European Central Bank
http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html
http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html
http://www.ecb.int/press/pr/wfs/2013/html/fs130115.en.html
IIIE Appendix Euro Zone survival risk. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU), or euro area, are only 42.6 percent of the total. Exports to the non-European Union area with share of 44.0 percent in Italy’s total exports are growing at 9.6 percent in Jan-Nov 2012 relative to Jan-Nov 2011 while those to EMU are falling at 1.0 percent.
Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Nov 2012 | Exports | ∆% Jan-Nov 2012/ Jan-Nov 2011 | Imports | Imports |
| EU | 56.0 | -0.1 | 53.7 | -7.3 |
| EMU 17 | 42.6 | -1.0 | 43.4 | -7.2 |
| France | 11.6 | 0.1 | 8.4 | -6.4 |
| Germany | 13.1 | -0.3 | 15.5 | -11.1 |
| Spain | 5.3 | -8.0 | 4.5 | -8.0 |
| UK | 4.7 | 9.6 | 2.7 | -13.4 |
| Non EU | 44.0 | 10.0 | 46.3 | -3.7 |
| Europe non EU | 13.3 | 9.6 | 10.8 | -1.4 |
| USA | 6.1 | 18.5 | 3.2 | -1.2 |
| China | 2.7 | -10.0 | 7.4 | -16.7 |
| OPEC | 4.7 | 25.6 | 8.5 | 21.2 |
| Total | 100.0 | 4.3 | 100.0 | -5.6 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79713
Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €559 million with the 17 countries of the euro zone (EMU 17) in Nov 2012 and deficit of €2194 million in Jan-Nov 2012. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €10,857 million in Jan-Nov 2012 with Europe non European Union and of €12,716 million with the US and in reducing the deficit with non European Union of €1251 million in Jan-Nov 2012. There is significant rigidity in the trade deficits in Jan-Nov of €15,005 million with China and €18,209 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.
Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro
| Regions and Countries | Trade Balance Nov 2012 Millions of Euro | Trade Balance Cumulative Jan-Nov 2012 Millions of Euro |
| EU | 508 | 10,111 |
| EMU 17 | -559 | -2,194 |
| France | 1,074 | 11,262 |
| Germany | -632 | -5,472 |
| Spain | 193 | 1,514 |
| UK | 842 | 8,841 |
| Non EU | 1,855 | -1,251 |
| Europe non EU | 1,320 | 10,857 |
| USA | 1,325 | 12,716 |
| China | -838 | -15,005 |
| OPEC | -1,355 | -18,209 |
| Total | 2,363 | 8,860 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79713
Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Nov 2012 relative to Jan-Nov 2011. Growth rates in 12 months of imports are negative with the exception of 7.9 percent for energy. The higher rate of growth of exports of 4.3 percent in Jan-Nov 2012/Jan-Nov 2011 relative to imports of minus 5.6 percent may reflect weak demand in Italy with GDP declining during five consecutive quarters from IIIQ2011 through IIIQ2012.
Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 28.9 | 5.4 | 25.0 | -3.0 |
| Durable | 5.9 | 3.2 | 3.0 | -6.7 |
| Non | 23.0 | 6.0 | 22.0 | -2.5 |
| Capital Goods | 32.3 | 2.3 | 21.1 | -12.9 |
| Inter- | 34.2 | 2.9 | 34.3 | -10.7 |
| Energy | 4.7 | 21.7 | 19.6 | 7.9 |
| Total ex Energy | 95.3 | 3.5 | 80.4 | -8.9 |
| Total | 100.0 | 4.3 | 100.0 | -5.6 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79713
Table III-6 provides Italy’s trade balance by product categories in Nov 2012 and cumulative Jan-Nov 2012. Italy’s trade balance excluding energy generated surplus of €7027 million in Nov 2012 and €67,201 million in Jan-Nov 2012 but the energy trade balance created deficit of €4664 million in Nov 2012 and €58,341 million in Jan-Nov 2012. The overall surplus in Nov 2012 was €2363 million with surplus of €8860 million in Jan-Nov 2012. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.
Table III-6, Italy, Trade Balance by Product Categories, € Millions
| Nov 2012 | Cumulative Jan-Nov 2012 | |
| Consumer Goods | 2,105 | 15,515 |
| Durable | 1,227 | 10,598 |
| Nondurable | 877 | 4,917 |
| Capital Goods | 4,270 | 44,859 |
| Intermediate Goods | 652 | 6,827 |
| Energy | -4,664 | -58,341 |
| Total ex Energy | 7,027 | 67,201 |
| Total | 2,363 | 8,860 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79713
Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.
The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30 the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).
Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.
Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:
“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”
If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.
The prospects of survival of the euro zone are dire. Table III-7 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/datamapper/index.php?db=WEO) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.
Table III-7, World and Selected Regional and Country GDP and Fiscal Situation
| GDP 2012 | Primary Net Lending Borrowing | General Government Net Debt | |
| World | 71,277 | ||
| Euro Zone | 12,065 | -0.5 | 73.4 |
| Portugal | 211 | -0.7 | 110.9 |
| Ireland | 205 | -4.4 | 103.0 |
| Greece | 255 | -1.7 | 170.7 |
| Spain | 1,340 | -4.5 | 78.6 |
| Major Advanced Economies G7 | 33,769 | -5.1 | 89.0 |
| United States | 15,653 | -6.5 | 83.8 |
| UK | 2,434 | -5.6 | 83.7 |
| Germany | 3,367 | 1.4 | 58.4 |
| France | 2,580 | -2.2 | 83.7 |
| Japan | 5,984 | -9.1 | 135.4 |
| Canada | 1,770 | -3.2 | 35.8 |
| Italy | 1,980 | 2.6 | 103.1 |
| China | 8,250 | -1.3* | 22.2** |
*Net Lending/borrowing**Gross Debt
Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
The data in Table III-7 are used for some very simple calculations in Table III-8. The column “Net Debt USD Billions” in Table III-8 is generated by applying the percentage in Table III-7 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2012 is $4155.8 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3975.1 billion, adding rows D+E+F+G+H in column “Net Debt USD billions.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-8. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8130.8 billion, which would be equivalent to 136.7 percent of their combined GDP in 2012. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 241.5 percent if including debt of France and 177.4 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.
Table III-8, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %
| Net Debt USD Billions | Debt as % of Germany Plus France GDP | Debt as % of Germany GDP | |
| A Euro Area | 8,855.7 | ||
| B Germany | 1,996.3 | $8130.9 as % of $3367 =241.5% $5971.4 as % of $3367 =177.4% | |
| C France | 2,159.5 | ||
| B+C | 4,155.8 | GDP $5,947.0 Total Debt $8130.9 Debt/GDP: 136.7% | |
| D Italy | 2,041.4 | ||
| E Spain | 1,053.2 | ||
| F Portugal | 234.0 | ||
| G Greece | 435.3 | ||
| H Ireland | 211.2 | ||
| Subtotal D+E+F+G+H | 3,975.1 |
Source: calculation with IMF data http://www.imf.org/external/datamapper/index.php?db=WEO
There is extremely important information in Table III-9 for the current sovereign risk crisis in the euro zone. Table III-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Nov 2012. German exports to other European Union (EU) members are 56.3 percent of total exports in Nov 2012 and 57.1 percent in Jan-Nov 2012. Exports to the euro area are 37.2 percent in Nov and 37.6 percent in Jan-Nov. Exports to third countries are 43.7 percent of the total in Nov and 42.9 percent in Jan-Nov. There is similar distribution for imports. Exports to non-euro countries are decreasing 0.6 percent in Nov 2012 and increasing 3.9 percent in Jan-Nov 2012 while exports to the euro area are decreasing 5.7 percent in Nov and decreasing 1.7 percent in Jan-Nov 2012. Exports to third countries, accounting for 43.7 percent of the total in Nov 2012, are increasing 5.6 percent in Nov and 10.4 percent in Jan-Nov, accounting for 42.9 percent of the cumulative total in Jan-Nov 2012. Price competitiveness through devaluation could improve export performance and growth. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of high share in its exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.
Table III-9, Germany, Structure of Exports and Imports by Region, € Billions and ∆%
| Nov 2012 | Nov 12-Month | Jan–Nov 2012 € Billions | Jan-Nov 2012/ | |
| Total | 94.1 | 0.0 | 1,018.4 | 4.3 |
| A. EU | 53.0 % 56.3 | -4.0 | 581.5 % 57.1 | 0.2 |
| Euro Area | 35.0 % 37.2 | -5.7 | 382.8 % 37.6 | -1.7 |
| Non-euro Area | 18.0 % 19.1 | -0.6 | 198.8 % 19.5 | 3.9 |
| B. Third Countries | 41.1 % 43.7 | 5.6 | 436.9 % 42.9 | 10.4 |
| Total Imports | 77.1 | -1.2 | 842.2 | 1.4 |
| C. EU Members | 50.0 % 64.9 | 0.9 | 534.4 % 63.5 | 1.6 |
| Euro Area | 34.8 % 45.1 | 1.1 | 374.0 % 44.4 | 1.3 |
| Non-euro Area | 15.3 % 19.8 | 0.5 | 160.4 % 19.1 | 2.3 |
| D. Third Countries | 27.0 % 35.0 | -4.9 | 307.8 % 36.6 | 1.1 |
Notes: Total Exports = A+B; Total Imports = C+D
Source:
Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/01/PE13_005_51.html;jsessionid=EAAD291DC09A1212A967AB76756E5FFC.cae2
IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.
First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:
D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)
Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,
{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:
N(t+1) = (1+n)N(t), n>-1 (2)
The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:
B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)
On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.
Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (5)
Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):
“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”
An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.
There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:
(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress
(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality
(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.
IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.
Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 2.6 | 1.7 | 1.3 | 7.7 |
| Japan | 0.5 | -0.2 | -0.6 | 4.1 |
| China | 7.9 | 2.5 | -1.9 | |
| UK | 0.0 | 2.7* | 2.2* output | 7.8 |
| Euro Zone | -0.6 | 2.2 | 2.1 | 11.8 |
| Germany | 0.9 | 2.0 | 1.4 | 5.4 |
| France | 0.0 | 1.5 | 1.9 | 10.5 |
| Nether-lands | -1.4 | 3.4 | 4.0 | 5.6 |
| Finland | -1.1 | 3.5 | 2.3 | 7.9 |
| Belgium | -0.3 | 2.1 | 5.3 | 7.4 |
| Portugal | -3.4 | 2.1 | 3.8 | 16.3 |
| Ireland | -0.5 | 1.6 | 2.8 | 14.6 |
| Italy | -2.4 | 2.6 | 2.2 | 11.1 |
| Greece | -7.2 | 0.3 | 2.5 | NA |
| Spain | -1.6 | 3.0 | 2.8 | 26.6 |
Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier
*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/december-2012/index.html **Core
PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/december-2012/index.html
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/; country statistical sources http://www.census.gov/aboutus/stat_int.html
Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 2.6 percent in IIIQ2012 relative to IIIQ2011 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_3rd.pdf See I Mediocre and Decelerating United States Economic Growth at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). Japan’s GDP fell 0.2 percent in IVQ2011 relative to IVQ2010 and contracted 1.6 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 10.4 percent in IIIQ2011, increasing at the SAAR of 0.3 percent in IVQ 2011, increasing at the SAAR of 5.7 percent in IQ2012 and decreasing at 0.1 percent in IIQ2012 but contracting at the SAAR of 3.5 percent in IIIQ2012 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html ); the UK grew at 0.9 percent in IIIQ2012 relative to IIQ2012 and GDP changed 0.0 percent in IIIQ2012 relative to IIIQ2011 (see Section VH at http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_2.html); and the Euro Zone grew at minus 0.1 percent in IIIQ2012, IIIQ2011 (see Section VD at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html). These are stagnating or “growth recession” rates, which are positive or about nil growth rates with some contractions that are insufficient to recover employment. The rates of unemployment are quite high: 7.7 percent in the US but 18.2 percent for unemployment/underemployment or job stress of 29.5 million (see Table I-4 at http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html), 4.1 percent for Japan (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_2.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html), 7.8 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/december-2012/index.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.7 percent in the US, -0.2 percent for Japan, 2.5 percent for China, 2.2 percent for the Euro Zone and 2.7 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III and earlier http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html); (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (see http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html), weak hiring with the loss of 10 million full-time jobs (see Section I at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/recovery-without-hiring-united-states.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (Section I at http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see Section I http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.
In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.
Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):
“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.
Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.
The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”
Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:
“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”
The Federal Open Market Committee (FOMC) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
Unconventional monetary policy will remain in perpetuity, or QE∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at 1.5 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that the US economy grew at 6.2 percent on average during cyclical expansions in the postwar period while growth has been at only 2.2 percent on average in the cyclical expansion in the 13 quarters from IIIQ2009 to IIIQ2012. Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.
First, reduction of the unemployment rate to normal would take between 35 and 256 years depending on the definition (http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html). The US labor force stood at 153.373 million in Dec 2011 and 154.904 million in Dec 2012, not seasonally adjusted, for increase of 1.531 million or 127,583 per month. The average increase of 130,100 new nonfarm jobs per month in the US from Mar to Dec 2012 is insufficient even to absorb 127,583 new entrants per month into the labor force. The difference between the average increase of 137,200 new private nonfarm jobs per month in the US from Mar to Dec 2012 and the 127,583 average monthly increase in the labor force from Nov 2011 to Nov 2012 is 9,617 monthly new jobs net of absorption of new entrants in the labor force. There are 29.6 million in job stress in the US currently. The provision of 9,617 new jobs per month net of absorption of new entrants in the labor force would require 3078 months to provide jobs for the unemployed and underemployed (29.6 million divided by 9,617) or 256 years (3078 divided by 12). Net job creation of 9,617 jobs per month only adds 115,404 jobs in a year. The civilian labor force of the US in Dec 2012 not seasonally adjusted stood at 154.904 million with 11.844 million unemployed or effectively 18.700 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 8.7 years (1 million divided by product of 9,617 by 12, which is 115,404). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.745 million (0.05 times labor force of 154.904 million) for new net job creation of 4.099 million (11.844 million unemployed minus 7.745 million unemployed at rate of 5 percent) that at the current rate would take 35.5 years (4.099 million divided by 115,404). Under the calculation in this blog there are 18.700 million unemployed by including those who ceased searching because they believe there is no job for them. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 10.612 million jobs net of labor force growth that at the current rate would take 91.9 years (18.700 million minus 0.05(161.760 million) divided by 115,404, using LF PART 66.2% and Total UEM in Table ESI-1). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. Second, calculations show that actual US GDP growth is around 1.7 percent per year that will perpetuate unemployment/underemployment (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). This rate of 1.7 percent is well below trend growth of 3 percent per year from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Weakness of growth is shown by the exceptional one-time contributions to growth from items that are not aggregate demand, 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011 and 0.64 percentage points contributed by exceptional expenditures in national defense together with 0.73 percentage points of inventory accumulation to growth of 3.1 percent in IIIQ2012. Deducting inventory accumulation and one-time national defense expenditures adjusts IIIQ2012 growth to annual 1.73 percent. Cumulative growth of 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and adjusted 1.73 percent in IIIQ2012 annualizes to 1.7 percent in the first three quarters of 2012 {([(1.02)1/4(1.013)1/4(1.01731/4]4/3 -1)100 = 1.7%}. The actual rate required to reduce unemployment/underemployment to normal is even much higher than 3 percent in historical trend.
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation, QE∞ cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.
The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):
“Release Date: December 12, 2012
For immediate release
Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
There are several important issues in this statement.
1. Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):
“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”
2. Open-ended Quantitative Easing or QE∞. Earlier programs are continued with an additional open-ended $85 billion of bond purchases per month: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.”
3. Advance Guidance on “6 ¼ 2 ½ “Rule. Policy will be accommodative even after the economy recovers satisfactorily: “o support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
4. Monitoring and Policy Focus on Jobs. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output that is actually a target of growth forecast. The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html; see Shultz et al 2012), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness.
Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Dec 12, 2012. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IIIQ2012 is analyzed in I Mediocre and Decelerating United States Economic Growth at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html) and the PCE inflation data from the report on personal income and outlays (Section IV at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html). The Bureau of Economic Analysis (BEA) provides the third estimate of IIIQ2012 GDP with the advance estimate of IVQ2012 and annual for 2012 to be released on Jan 30 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm See Section I at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in sections IIA and IV in this blog for Nov 2012 at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html. The next report on “Personal Income and Outlays” for Dec will be released at 8:30 AM on Jan 31, 2012 (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm). PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog (the Nov report at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html; the Oct report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html; the Sep report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or_7.html; the Aug report is in Section I at http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or.html and the Jul report is analyzed at http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html). The report for Dec was released on Fri Jan 4, 2013 (http://www.bls.gov/ces/) and analyzed in this blog (http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html). “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf).
It is instructive to focus on 2012 and 2013 as 2014, 2015 and longer term are too far away, and there is not much information even on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Dec 12, 2012 and the second row “PR” the projection of the Sep 13, 2012 meeting. There are three major changes in the view.
1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun 2011 to 2.5 to 2.9 percent in Nov 2011 and 2.2 to 2.7 percent at the Jan 25 meeting but increased it to 2.4 to 2.9 percent at the Apr 25, 2012 meeting, reducing it to 1.9 to 2.4 percent at the Jun 20, 2012 meeting and further to 1.7 to 2.0 percent at the Sep 13, 2012 meeting and 1.7 to 1.8 percent at the Dec 12, 2012 meeting. GDP growth in 2013 has been increased to 2.5 to 3.0 percent at the meeting on Sep 13
2012 from 2.2 to 2.8 percent at the meeting on Jun 20, 2012 but reduced to 2.3 to 3.0 percent at the Dec 12, 2012 meeting.
2. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun 2011 to 8.5 to 8.7 percent in Nov 2011 but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting and further down to 7.8 to 8.0 percent at the Apr 25, 2012 meeting but increased it to 8.0 to 8.2 percent at the Jun 20, 2012 meeting and did not change it at 8.0 to 8.2 at the meeting on Sep 13, 2012, lowering the projection to 7.8 to 7.9 percent at the Dec 12, 2012 meeting. The rate of unemployment for 2013 has been changed to 7.6 to 7.9 percent at the Sep 13 meeting compared with 7.5 to 8.0 percent at the Jun 20 meeting and reduced to 7.4 to 7.7 percent at the Dec 12 meeting.
3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun 2011 to virtually the same of 1.4 to 2.0 percent in Nov 2011 but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting but increased it to 1.9 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.2 to 1.7 percent at the Jun 20, 2012 meeting. The interval was increased to 1.7 to 1.8 percent at the Sep 13, 2012 meeting and 1.6 to 1.7 percent at the Dec 12, 2012 meeting.
4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun 2011 of 1.4 to 2.0 percent and the Nov 2011 projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting but increased to 1.8 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.7 to 2.0 percent at the Jun 20, 2012 meeting. The projection was virtually unchanged at 1.7 to 1.9 percent at the Sep 13 meeting. For 2013, the projection for core inflation was changed from 1.6 to 2.0 percent at the Jun 20, 2012 meeting to 1.7 to 2.0 percent at the Sep 13, 2012 meeting and lowered to 1.7 to 1.9 percent at the Dec 12, 2012 meeting.
Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, June 2012 and Sep 2012
| ∆% GDP | UNEM % | ∆% PCE Inflation | ∆% Core PCE Inflation | |
| Central | ||||
| 2012 Sep PR | 1.7 to 1.8 1.7 to 2.0 | 7.8 to 7.9 8.0 to 8.2 | 1.6 to 1.7 1.7. to 1.8 | 1.6 to 1.7 1.7 to 1.9 |
| 2013 | 2.3 to 3.0 | 7.4 to 7.7 | 1.3 to 2.0 | 1.6 to 1.9 1.7 to 2.0 |
| 2014 | 3.0 to 3.5 | 6.8 to 7.3 | 1.5 to 2.0 | 1.6 to 2.0 |
| 2015 | 3.0 to 3.7 3.0 to 3.8 | 6.0 to 6.6 6.0 to 6.8 | 1.7 to 2.0 1.8 to 2.0 | 1.8 to 2.0 1.9 to 2.0 |
| Longer Run Sep PR | 2.3 to 2.5 2.3 to 2.5 | 5.2 to 6.0 5.2 to 6.0 | 2.0 2.0 | |
| Range | ||||
| 2012 | 1.6 to 2.0 | 7.7 to 8.0 | 1.6 to 1.8 | 1.6 to 1.8 |
| 2013 | 2.0 to 3.2 | 6.9 to 7.8 | 1.3 to 2.0 | 1.5 to 2.0 |
| 2014 | 2.8 to 4.0 | 6.1 to 7.4 | 1.4 to 2.2 | 1.5 to 2.0 |
| 2015 Sep PR | 2.5 to 4.2 2.5 to 4.2 | 5.7 to 6.8 5.7 to 6.9 | 1.5 to 2.2 1.8 to 2.3 | 1.7 to 2.2 1.8 to 2.3 |
| Longer Run Sep PR | 2.2 to 3.0 2.2 to 3.0 | 5.0 to 6.0 5.0 to 6.3 | 2.0 2.0 |
Notes: UEM: unemployment; PR: Projection
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf
Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):
“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.
The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”
The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html See Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-116). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.
The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf). There are 19 participants expecting the rate to remain at 0 to ¼ percent in 2012 and none to be higher. Not much change is expected in 2013 either with 17 participants anticipating the rate at the current target of 0 to ¼ percent and only two expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for 14 participants with three expecting the rate to be in the range of 1.0 to 2.0 percent, one participant expecting rates at 0.5 to 1.0 percent and one participant expecting rates from 2.0 to 3.0. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014. For 2015, nine participants expect rates to be below 1.0 percent while nine expect rates from 1.0 to 4.5 percent. In the long-run, all 19 participants expect rates to be between 3.0 and 4.5 percent.
Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012
| 0 to 0.25 | 0.5 to 1.0 | 1.0 to 1.5 | 1.0 to 2.0 | 2.0 to 3.0 | 3.0 to 4.5 | |
| 2012 | 19 | |||||
| 2013 | 17 | 1 | 1 | |||
| 2014 | 14 | 1 | 3 | 1 | ||
| 2015 | 1 | 8 | 6 | 1 | 3 | |
| Longer Run | 19 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf
Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2012 to 2015. It is evident from Table IV-4 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.
Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012
| Appropriate Year of Increasing Target Fed Funds Rate | Number of Participants |
| 2012 | 1 |
| 2013 | 2 |
| 2014 | 3 |
| 2015 | 13 |
| 2016 | 1 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf
There are two categories of responses in the Empire State Manufacturing Survey of the Federal Reserve Bank of New York (http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html): current conditions and expectations for the next six months. There are responses in the survey for two types of prices: prices received or inputs of production and prices paid or sales prices of products. Table IV-5 provides indexes for the two categories and within them for the two types of prices from Jan 2011 to Jan 2013. Current prices paid were rising at an accelerating rate from 35.79 in Jan 2011 to 69.89 in May 2011 but the rate of increase dropped significantly to 25.88 in Feb 2012, increasing sharply to 50.62 in Mar in the commodity price shock but falling to 45.78 in Apr, 37.35 in May, 19.59 in Jun and 7.41 in Jul as risk aversion caused decline of commodity prices. At the margin, the index of prices paid rose to 16.47 in Aug and 19.15 in Sep in yet net another bout of carry trade but eased to 17.20 in Oct, 14.61 in Nov and 16.13 in Dec 2012 with renewed risk aversion. The index of current prices paid increased to 22.58 in Jan 2013. The index of current prices received also fell sharply from 27.96 in May 2011 to 4.49 in Oct 2011, meaning that prices were increasing at a very low rate and then rose to 13.58 in Mar 2012, increasing to 19.28 in Apr but declining to 12.05 in May, 1.03 in Jun, 3.70 in Jul, 2.35 in Aug, which is also relatively low, near the border of contraction at 0.0, and 5.32 in Sep 2012, easing to 4.30 in Oct 2012 and increasing to 5.62 in Nov 2012, falling to 1.08 in Dec 2012 and increasing to 10.75 in Jan 2013. In the expectations for the next six months, the index of prices paid also declined from 68.82 in May 2011 to 56.98 in Dec 2011, rising to 66.67 in Mar 2012 but declining to 50.60 in Apr 2012, increasing to 57.83 in May and falling to 34.02 in Jun 2012, 35.80 in Jul and 31.76 in Aug but increasing to 40.43 in Sep 2012 and 44.09 in Oct 2012, declining to 39.33 in Nov 2012 and rising to 51.61 in Dec 2012, decreasing to 38.71 in Jan 2013. Expected prices received also rose in the first five months of 2011, declining from 35.48 in May 2011 to 15.22 in Aug 2011 but then rising to 32.10 in Mar 2012 and declining to 22.89 in Apr and May 2012, 17.53 in Jun, 16.05 in Jul and 14.12 in Aug but increasing to 23.40 in Sep 2012 and 24.73 in Oct 2012, declining to 15.73 in Nov 2012, rising to 25.81 in Dec 2012 and declining to 21.51 in Jan 2013. Unconventional monetary policy of zero interest rates and quantitative easing has increased the volatility of inflation via carry trades, creating uncertainty in financial and economic decisions.
Table IV-5, US, FRBNY Empire State Manufacturing Survey, Diffusion Indexes, Prices Paid and Prices Received, SA
| Current Prices Paid | Current Prices Received | Six Months Prices Paid | Six Months Prices Received | |
| Jan 2013 | 22.58 | 10.75 | 38.71 | 21.51 |
| Dec 2012 | 16.13 | 1.08 | 51.61 | 25.81 |
| Nov | 14.61 | 5.62 | 39.33 | 15.73 |
| Oct | 17.20 | 4.30 | 44.09 | 24.73 |
| Sep | 19.15 | 5.32 | 40.43 | 23.40 |
| Aug | 16.47 | 2.35 | 31.76 | 14.12 |
| Jul | 7.41 | 3.70 | 35.80 | 16.05 |
| Jun | 19.59 | 1.03 | 34.02 | 17.53 |
| May | 37.35 | 12.05 | 57.83 | 22.89 |
| Apr | 45.78 | 19.28 | 50.60 | 22.89 |
| Mar | 50.62 | 13.58 | 66.67 | 32.10 |
| Feb | 25.88 | 15.29 | 62.35 | 34.12 |
| Jan | 26.37 | 23.08 | 53.85 | 30.77 |
| Dec 2011 | 24.42 | 3.49 | 56.98 | 36.05 |
| Nov | 18.29 | 6.10 | 36.59 | 25.61 |
| Oct | 24.47 | 4.49 | 40.45 | 17.98 |
| Sep | 32.61 | 8.70 | 53.26 | 22.83 |
| Aug | 28.26 | 2.17 | 42.39 | 15.22 |
| Jul | 43.33 | 5.56 | 51.11 | 30.00 |
| Jun | 56.12 | 11.22 | 55.10 | 19.39 |
| May | 69.89 | 27.96 | 68.82 | 35.48 |
| Apr | 57.69 | 26.92 | 56.41 | 38.46 |
| Mar | 53.25 | 20.78 | 71.43 | 36.36 |
| Feb | 45.78 | 16.87 | 55.42 | 27.71 |
| Jan | 35.79 | 15.79 | 60.00 | 42.11 |
Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html
Price indexes of the Federal Reserve Bank of Philadelphia Outlook Survey are provided in Table IV-6. As inflation waves throughout the world (analyzed in II and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html), indexes of both current and expectations of future prices paid and received were quite high until May 2011. Prices paid, or inputs, were more dynamic, reflecting carry trades from zero interest rates to commodity futures. All indexes softened after May 2011 with even decline of prices received in Aug 2011 during the first round of risk aversion. Current and future price indexes have increased again but not back to the levels in the beginning of 2011 because of risk aversion frustrating carry trades even under zero interest rates. In Jan 2013, the index of current prices received was minus 1.1, indicating moderate decrease of prices received. The index of future prices paid fell to 34.3 in Jan 2013 from 45.8 in Dec 2012, indicating expectation of lower pressure of increases of input prices while the index of future prices received fell marginally from 25.6 in Dec 2012 to 21.7 in Jan 2013.
Table IV-6, US, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Prices Paid and Prices Received, SA
| Current Prices Paid | Current Prices Received | Future Prices Paid | Future Prices Paid | |
| Dec 2010 | 44.3 | 6.6 | 59.6 | 25.3 |
| Jan 2011 | 48.9 | 11.9 | 58.3 | 34.4 |
| Feb | 58.9 | 13.1 | 62.1 | 33.3 |
| Mar | 57.5 | 16.8 | 60.2 | 31.8 |
| Apr | 49.4 | 19.8 | 54.2 | 32.4 |
| May | 47.7 | 18.5 | 52.7 | 27.6 |
| Jun | 38.9 | 8.1 | 38.3 | 6.8 |
| Jul | 35.6 | 6 | 49.6 | 16.7 |
| Aug | 23.3 | -4.7 | 44.3 | 22.7 |
| Sep | 31.6 | 7.6 | 41.8 | 21.8 |
| Oct | 25.4 | 4.1 | 44.5 | 28.4 |
| Nov | 26.3 | 7.6 | 39 | 29.1 |
| Dec 2011 | 27.5 | 8.2 | 46.7 | 23.5 |
| Jan 2012 | 27.1 | 7.9 | 47.2 | 21.9 |
| Feb | 30.2 | 9.7 | 43.5 | 28.6 |
| Mar | 14.3 | 5.4 | 35.9 | 22 |
| Apr | 16 | 5.3 | 33.3 | 18.6 |
| May | 5.4 | -2.2 | 37.2 | 8.3 |
| Jun | 5.4 | -3.4 | 29.6 | 16.6 |
| Jul | 10.3 | 4.2 | 29.3 | 19.6 |
| Aug | 15.7 | 4.7 | 38 | 23.9 |
| Sep | 15.4 | 4 | 42.8 | 27.4 |
| Oct | 20.6 | 8.4 | 48.1 | 16.1 |
| Nov | 27.9 | 7.5 | 50.7 | 14 |
| Dec 2012 | 23.5 | 12.4 | 45.8 | 25.6 |
| Jan 2013 | 14.7 | -1.1 | 34.3 | 21.7 |
Source: Federal Reserve Bank of Philadelphia http://www.philadelphiafed.org/index.cfm
Chart VI-14 of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices paid or prices of inputs from 2006 to 2013. Recession dates are in shaded areas. In the middle of deep global contraction after IVQ2007, input prices continued to increase in speculative carry trades from interest rates falling toward zero into commodities futures. The index peaked above 70 in the second half of 2008. Inflation of inputs moderated significantly during the shock of risk aversion in late 2008, even falling briefly into contraction territory below zero during several months in 2009 in the flight away from risk financial assets into US government securities (Cochrane and Zingales 2009) that unwound carry trades. Return of risk appetite induced carry trade with significant increase until return of risk aversion in the first round of the European sovereign debt crisis in Apr 2010. Carry trades returned during risk appetite in expectation that the European sovereign debt crisis was resolved. The various inflation waves originating in carry trades induced by zero interest rates with alternating episodes of risk aversion are mirrored in the prices of inputs after 2011, in particular after Aug 2012 with the announcement of the Outright Monetary Transactions Program of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html).
Chart IV-1, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid Diffusion Index SA
Source: Federal Reserve Bank of Philadelphia
http://www.phil.frb.org/index.cfm
Chart IV-2 of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices received from 2006 to 2013. The significant difference between the index of current prices paid in Chart IV-1 and the index of current prices paid in Chart IV-2 is that increases in prices paid are significantly sharper than increases in prices received. There were several periods of negative readings of prices received from 2010 to 2013 but none of prices paid. Prices paid relative to prices received deteriorate most of the time largely because of the carry trades from zero interest rates to commodity futures. Profit margins of business are compressed intermittently by fluctuations of commodity prices induced by unconventional monetary policy, frustrating production, investment and hiring decisions of business, which is precisely the opposite outcome desired by unconventional monetary policy.
Chart IV-2, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Received Diffusion Index SA
Source: Federal Reserve Bank of Philadelphia
http://www.phil.frb.org/index.cfm
Inflation in advanced economies has been fluctuating in waves at the production level with alternating surges and moderation of commodity price shocks. Table IV-7 provides month and 12-month percentage rates of inflation of Japan’s corporate goods price index (CGPI). Inflation measured by the CGPI increased 0.3 percent in Dec 2012 as in many European countries and fell 0.6 percent in 12 months. Measured by 12-month rates, CGPI inflation increased from minus 0.2 percent in Jul 2010 to a high of 2.2 percent in Jul-Aug 2011 and declined to minus 0.6 percent in Dec 2012. Calendar-year inflation for 2011 is 1.5 percent, which is the highest after declines in 2009 and 2010 but lower than 4.6 percent in the commodity shock driven by zero interest rates during the global recession in 2008. Inflation of the corporate goods prices follows waves similar to those in other indices around the world (Section II and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In the first wave, annual equivalent inflation reached 5.9 percent in Jan-Apr 2011, driven by commodity price shocks of the carry trade from zero interest rates to commodity futures. In the second wave, carry trades were unwound because of risk aversion caused by the European debt crisis, resulting in average annual equivalent inflation of minus 1.2 percent in May-Jun 2011. In the third wave, renewed risk aversion caused annual equivalent decline of the CGPI of minus 2.2 percent in Jul-Nov 2011. In the fourth wave, continuing risk aversion resulted in annual equivalent inflation of minus 0.6 percent in Dec 2011 to Jan 2012. In the fifth wave, renewed risk appetite resulted in annual equivalent inflation of 2.4 percent in Feb-Apr 2012. In the sixth wave, annual equivalent inflation dropped to minus 5.8 percent in May-Jul 2012. In the seventh wave, annual equivalent inflation jumped to 2.4 percent in Aug-Sep 2012. In the eighth wave, annual equivalent inflation was minus 1.8 percent in Oct-Nov 2012 in a new round of risk aversion. In the ninth wave, annual equivalent inflation returned at 3.7 percent in Dec 2012. Unconventional monetary policies of zero interest rates and quantitative easing have created a difficult environment for economic and financial decisions with significant inflation volatility.
Table IV-7, Japan, Corporate Goods Price Index (CGPI) ∆%
| Month | Year | |
| Dec 2012 | 0.3 | -0.6 |
| AE ∆% Dec | 3.7 | |
| Nov | 0.0 | -0.9 |
| Oct | -0.3 | -1.0 |
| AE ∆% Oct-Nov | -1.8 | |
| Sep | 0.2 | -1.5 |
| Aug | 0.2 | -1.9 |
| AE ∆% Aug-Sep | 2.4 | |
| Jul | -0.4 | -2.2 |
| Jun | -0.7 | -1.5 |
| May | -0.4 | -0.8 |
| AE ∆% May-Jul | -5.8 | |
| Apr | -0.1 | -0.6 |
| Mar | 0.5 | 0.3 |
| Feb 2012 | 0.2 | 0.4 |
| AE ∆% Feb-Apr | 2.4 | |
| Jan | -0.1 | 0.3 |
| Dec 2011 | 0.0 | 0.8 |
| AE ∆% Dec-Jan | -0.6 | |
| Nov | -0.1 | 1.3 |
| Oct | -0.8 | 1.3 |
| Sep | -0.2 | 2.0 |
| Aug | -0.1 | 2.2 |
| Jul | 0.3 | 2.2 |
| AE ∆% Jul-Nov | -2.2 | |
| Jun | 0.0 | 1.9 |
| May | -0.2 | 1.6 |
| AE ∆% May-Jun | -1.2 | |
| Apr | 0.8 | 1.8 |
| Mar | 0.6 | 1.3 |
| Feb | 0.1 | 0.7 |
| Jan | 0.4 | 0.6 |
| AE ∆% Jan-Apr | 5.9 | |
| Dec 2010 | 0.5 | 1.2 |
| Nov | -0.1 | 0.9 |
| Oct | -0.1 | 0.9 |
| Sep | 0.0 | -0.1 |
| Aug | -0.1 | 0.0 |
| Jul | 0.0 | -0.2 |
| Calendar Year | ||
| 2011 | 1.5 | |
| 2010 | -0.1 | |
| 2009 | -5.3 | |
| 2008 | 4.6 |
AE: annual equivalent
Source: Bank of Japan http://www.boj.or.jp/en/
Chart IV-3 of the Bank of Japan provides year-on-year percentage changes of the domestic and services Corporate Goods Price Index (CGPI) of Japan from 1970 to 2012. Percentage changes of inflation of services are not as sharp as those of goods. Japan had the same sharp waves of inflation during the 1970s as in the US (see Table IV-7 at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html). Behavior of the CGPI of Japan in the 1970s mirrors the Great Inflation episode in the United States with waves of inflation rising to two digits. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). Inflation also collapsed in the beginning of the 1980s as a result of tight monetary policy in the US with focus on inflation instead of on the gap of actual relative to potential output. The areas in shade correspond to the dates of cyclical recessions. The salient event is the sharp rise of inflation of the domestic goods CGPI in 2008 during the global recession that was mostly the result of carry trades from fed funds rates collapsing to zero to long positions in commodity futures in an environment of relaxed financial risk appetite. The panic of toxic assets in banks to be withdrawn by the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009) drove unusual risk aversion with unwinding of carry trades of exposures in commodities and other risk financial assets. Carry trades returned once TARP was clarified as providing capital to financial institutions and stress tests verified the soundness of US banks. The return of carry trades explains the rise of CGPI inflation after mid 2009. Inflation of the CGPI fluctuated with zero interest rates in alternating episodes of risk aversion and risk appetite.
Chart IV-3, Japan, Domestic Corporate Goods Price and Services Index, Year-on-Year Percentage Change, 1970-2012
Notes: Blue: Domestic Corporate Goods Price Index All Commodities; Red: Corporate Price Services Index
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html#
There is similar behavior of year-on-year percentage changes of the US producer price index from 1970 to 2012 in Chart IV-4 of the US Bureau of Labor Statistics as in Chart IV-3 with the domestic goods CGPI. The behavior of the CGPI of Japan in the 1970s is quite similar to that of the US PPI. The US producer price index increased together with the CGPI driven by the period of one percent fed funds rates from 2003 to 2004 inducing carry trades into commodity futures and other risk financial assets and the slow adjustment in increments of 25 basis points at every FOMC meeting from Jun 2004 to Jun 2006. There is also the same increase in inflation in 2008 during the global recession followed by collapse because of unwinding positions during risk aversion and new rise of inflation during risk appetite.
Chart IV-4, US, Producer Price Index Finished Goods, Year-on-Year Percentage Change, 1970-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
Finer detail is provided by Chart IV-5 of the domestic CGPI from 2008 to 2012. The CGPI rose almost vertically in 2008 as the collapse of fed funds rates toward zero drove exposures in commodities and other risk financial assets because of risk appetite originating in the belief that the financial crisis was restricted to structured financial products and not to contracts negotiated in commodities and other exchanges. The panic with toxic assets in banks to be removed by TARP (Cochrane and Zingales 2009) caused unwinding carry trades in flight to US government obligations that drove down commodity prices and price indexes worldwide. Apparent resolution of the European debt crisis of 2010 drove risk appetite in 2011 with new carry trades from zero fed funds rates into commodity futures and other risk financial assets. Domestic CGPI inflation returned in waves with upward slopes during risk appetite and downward slopes during risk aversion.
Chart IV-5, Japan, Domestic Corporate Goods Price Index, Monthly, 2008-2012
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html#
There is similar behavior of the US producer price index from 2008 to 2012 in Chart IV-6 as in the domestic CGPI in Chart IV-5. A major difference is the strong long-term trend in the US producer price index with oscillations originating mostly in bouts of risk aversion such as the downward slope in the final segment in Chart IV-6 followed by increasing slope during periods of risk appetite. Carry trades from zero interest rates to commodity futures and other risk financial assets drive the upward trend of the US producer price index while oscillations originate in alternating episodes of risk aversion and risk appetite.
Chart IV-6, US, Producer Price Index Finished Goods, Monthly, 2008-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
There was milder increase in Japan’s export corporate goods price index during the global recession in 2008 but similar sharp decline during the bank balance sheets effect in late 2008, as shown in Chart IV-7 of the Bank of Japan. Japan exports industrial goods whose prices have been less dynamic than those of commodities and raw materials. As a result, the export CGPI in Chart IV-7 trends down with oscillations after a brief rise in the final part of the recession in 2009.
Chart IV-7, Japan, Export Corporate Goods Price Index, Monthly, 2008-2012
Source: Bank of Japan
http://www.stat-search.boj.or.jp/ssi/cgi-bin/famecgi2?cgi=$graphwnd_en
Japan imports primary commodities and raw materials. As a result, the import corporate goods price index in Chart IV-8 shows an upward trend after the rise during the global recession in 2008 driven by carry trades from fed funds rates collapsing to zero into commodity futures and decline during risk aversion from late 2008 into beginning of 2008 originating in doubts about soundness of US bank balance sheets. More careful measurement should show that the terms of trade of Japan, export prices relative to import prices, declined during the commodity shocks originating in unconventional monetary policy. The decline of the terms of trade restricted potential growth of income in Japan.
Chart IV-8, Japan, Import Corporate Goods Price Index, Monthly, 2008-2012
Source: Bank of Japan
http://www.stat-search.boj.or.jp/ssi/cgi-bin/famecgi2?cgi=$graphwnd_en
Chart IV-9 provides the monthly corporate goods price index (CGPI) of Japan from 1970 to 2012. Japan also experienced sharp increase in inflation during the 1970s as in the episode of the Great Inflation in the US. Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). A remarkable similarity with US experience is the sharp rise of the CGPI of Japan in 2008 driven by carry trades from interest rapidly falling to zero to exposures in commodity futures during a global recession. Japan had the same sharp waves of consumer price inflation during the 1970s as in the US (see Table IV-7 at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html).
Chart IV-9, Japan, Domestic Corporate Goods Price Index, Monthly, 1970-2012
Source: Bank of Japan
http://www.stat-search.boj.or.jp/ssi/cgi-bin/famecgi2?cgi=$graphwnd_en
The producer price index of the US from 19700 to 2012 in Chart IV-10 shows various periods of more rapid or less rapid inflation but no bumps. The major event is the decline in 2008 when risk aversion because of the global recession caused the collapse of oil prices from $148/barrel to less than $80/barrel with most other commodity prices also collapsing. The event had nothing in common with explanations of deflation but rather with the concentration of risk exposures in commodities after the decline of stock market indexes. Eventually, there was a flight to government securities because of the fears of insolvency of banks caused by statements supporting proposals for withdrawal of toxic assets from bank balance sheets in the Troubled Asset Relief Program (TARP), as explained by Cochrane and Zingales (2009). The bump in 2008 with decline in 2009 is consistent with the view that zero interest rates with subdued risk aversion induce carry trades into commodity futures.
Chart IV-10, US, Producer Price Index Finished Goods, Monthly, 1970-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/ppi/data.htm
Further insight into inflation of the corporate goods price index (CGPI) of Japan is provided in Table IV-8. Petroleum and coal with weight of 5.7 percent increased 2.3 percent in Dec and increased 4.0 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, prices of production machinery, with weight of 3.1 percent, increased 0.1 percent in Dec and increased 1.5 percent in 12 months. In general, most manufactured products have been experiencing negative or low increases in prices while inflation rates have been high in 12 months for products originating in raw materials and commodities. Ironically, unconventional monetary policy of zero interest rates and quantitative easing that intended to increase aggregate demand and GDP growth deteriorated the terms of trade of advanced economies with adverse effects on real income.
Table IV-8, Japan, Corporate Goods Prices and Selected Components, % Weights, Month and 12 Months ∆%
| Dec 2012 | Weight | Month ∆% | 12 Month ∆% |
| Total | 1000.0 | 0.3 | -0.6 |
| Food, Beverages, Tobacco, Feedstuffs | 137.5 | 0.1 | 0.6 |
| Petroleum & Coal | 57.4 | 2.3 | 4.0 |
| Production Machinery | 30.8 | 0.1 | 1.5 |
| Electronic Components | 31.0 | 0.0 | -2.7 |
| Electric Power, Gas & Water | 52.7 | -0.3 | 4.9 |
| Iron & Steel | 56.6 | -0.2 | -9.6 |
| Chemicals | 92.1 | 0.5 | -0.7 |
| Transport | 136.4 | -0.1 | -1.8 |
Source: Bank of Japan http://www.boj.or.jp/en/ http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1212.pdf
Percentage point contributions to change of the corporate goods price index (CGPI) in Sep 2012 are provided in Table IV-9 divided into domestic, export and import segments. In the domestic CGPI, increasing 0.3 percent in Dec, the energy shock resulting from carry trades is evident in the contribution of 0.15 percentage points by petroleum and coal products in new carry trades of exposures in commodity futures. The exports CGPI decreased 0.3 percent on the basis of the contract currency with deduction of 0.08 percentage points by electric & electronic products. The imports CGPI increased 0.1 percent on the contract currency basis. Petroleum, coal & natural gas added 0.18 percentage points because of new carry trades into energy commodity exposures while other primary products and manufactured goods added 0.04 percentage points. Shocks of risk aversion cause unwinding carry trades that result in declining commodity prices with resulting downward pressure on price indexes. The volatility of inflation adversely affects financial and economic decisions.
Table IV-9, Japan, Percentage Point Contributions to Change of Corporate Goods Price Index
| Groups Dec 2012 | Contribution to Change Percentage Points |
| A. Domestic Corporate Goods Price Index | Monthly Change: |
| Petroleum & Coal Products | 0.15 |
| Agriculture, Forestry and Fishery Products | 0.07 |
| Nonferrous Metals | 0.05 |
| Chemicals & Related Products | 0.05 |
| Electric Power, Gas & Water | -0.02 |
| B. Export Price Index | Monthly Change: |
| Electric & Electronic Products | -0.08 |
| Chemicals & Related Products | -0.06 |
| Other Primary Products & Manufactured Goods | -0.04 |
| C. Import Price Index | Monthly Change: 0.1 % contract currency basis |
| Petroleum, Coal & Natural Gas | 0.18 |
| Other Primary Products & Manufactured Goods | 0.04 |
| Metals & Related Products | -0.06 |
Source: Bank of Japan http://www.boj.or.jp/en/ http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1212.pdf
The harmonized index of consumer prices of the euro area in Table IV-10 has similar inflation waves as in most countries (see Section II World Inflation Waves and earlier http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In the first wave, consumer prices in the euro area increased at the annual equivalent rate of 5.2 percent in Jan-Apr 2011. In the second wave, risk aversion caused unwinding of commodity carry trades with inflation decreasing at the annual equivalent rate of minus 2.4 percent in May-Jul 2011. In the third wave, improved risk appetite resulted in annual equivalent inflation in Aug-Nov at 4.3 percent. In the fourth wave, return of risk aversion caused decline of consumer prices at the annual equivalent rate of minus 3.0 percent in Dec 2011 to Jan 2012. In the fifth wave, improved attitudes toward risk aversion resulted in higher consumer price inflation at the high annual equivalent rate of 9.6 percent in Feb-Apr 2012. In the sixth wave, equivalent inflation fell to minus 2.8 percent in May-Jul 2012. In the seventh wave, increasing risk appetite caused new carry trade exposures that resulted in annual equivalent inflation of 6.8 percent in Aug-Sep 2012 and 5.3 percent in Aug-Oct 2012. In the eighth wave, annual-equivalent inflation was minus 2.4 percent in Nov 2012. In the ninth wave, annual equivalent inflation was 4.9 percent in Dec 2012. Inflation volatility around the world is confusing the information required in investment and consumption decisions.
Table IV-10, Euro Area Harmonized Index of Consumer Prices Month and 12 Months ∆%
| Month ∆% | 12 Months ∆% | |
| Dec 2012 | 0.4 | 2.2 |
| AE ∆% Dec | 4.9 | |
| Nov | -0.2 | 2.2 |
| AE ∆% Nov | -2.4 | |
| Oct | 0.2 | 2.5 |
| Sep | 0.7 | 2.6 |
| Aug | 0.4 | 2.6 |
| AE ∆% Aug-Oct | 5.3 | |
| Jul 2012 | -0.5 | 2.4 |
| Jun | -0.1 | 2.4 |
| May | -0.1 | 2.4 |
| AE ∆% May-Jul | -2.8 | |
| Apr | 0.5 | 2.6 |
| Mar | 1.3 | 2.7 |
| Feb | 0.5 | 2.7 |
| AE ∆% Feb-Apr | 9.6 | |
| Jan | -0.8 | 2.7 |
| Dec 2011 | 0.3 | 2.7 |
| AE ∆% Dec-Jan | -3.0 | |
| Nov | 0.1 | 3.0 |
| Oct | 0.4 | 3.0 |
| Sep | 0.7 | 3.0 |
| Aug | 0.2 | 2.6 |
| AE ∆% Aug-Nov | 4.3 | |
| Jul | -0.6 | 2.6 |
| Jun | 0.0 | 2.7 |
| May | 0.0 | 2.7 |
| AE ∆% May-Jul | -2.4 | |
| Apr | 0.6 | 2.8 |
| Mar | 1.4 | 2.7 |
| Feb | 0.4 | 2.4 |
| Jan | -0.7 | 2.3 |
| AE ∆% Jan-Apr | 5.2 | |
| Dec 2010 | 0.6 | 2.2 |
AE: annual equivalent
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
EUROSTAT provides the decomposition in percentage point contributions of the rate of inflation of 2.2 percent in the 12 months ending in Dec 2012 relative to Dec 2011 shown in Table IV-11. Energy-rich components dominate the 12-month rate of inflation with percentage point contributions: 0.10 by fuel for transport, 0.10 by electricity and 0.07 by gas. Table IV-11 only lists highest magnitudes of positive and negative contributions.
Table IV-11, Euro Area, Harmonized Index of Consumer Prices Sub-Indices with Most Important Impact %
| Dec 2012/ Dec 2011 ∆% 2.2 | Weight 2012 % | Rate ∆% | Impact |
| Positive Contribution | |||
| Fuel for Transport | 48.5 | 4.3 | 0.10 |
| Electricity | 26.4 | 6.0 | 0.10 |
| Vegetables | 14.0 | 7.8 | 0.08 |
| Gas | 18.3 | 6.2 | 0.07 |
| Meat | 35.8 | 3.5 | 0.05 |
| Tobacco | 23.4 | 4.2 | 0.05 |
| Negative Contribution | |||
| IT Equipment | 5.1 | -7.4 | -0.05 |
| Garments | 50.7 | 1.2 | -0.05 |
| Rents | 60.5 | 1.4 | -0.05 |
| Financial Services | 6.8 | -7.0 | -0.06 |
| Cars | 36.2 | 0.3 | -0.07 |
| Telecom | 29.8 | -4.1 | -0.19 |
PP: percentage points
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-16012013-AP/EN/2-16012013-AP-EN.PDF
EUROSTAT provides the decomposition in percentage point contributions of the rate of inflation of 0.4 percent in Dec 2012 relative to Nov 2012 shown in Table IV-12. Inccrease of the HIPC by 0.4 percent was largely dominated by increase of prices of package holidays by 16.2 percent that added 0.20 percentage points, accommodation services increasing 6.3 percent for contribution of 0.09 percentage points and air transport increasing 13.0 percent with contribution of 0.08 percentage points.
Table IV-12, Euro Area, Harmonized Index of Consumer Prices Sub-Indices with Most Important Impact %
| Dec 2012/Nov 2012 ∆ % 0.4 | Weight 2012 % | Rate ∆% | Impact Percentage Points |
| Positive Contribution | |||
| Package Holidays | 14.2 | 16.2 | 0.20 |
| Accommodation Services | 16.5 | 6.3 | 0.09 |
| Air Transport | 6.3 | 13.0 | 0.08 |
| Vegetables | 14.0 | 3.2 | 0.04 |
| Rail Transport | 5.0 | 1.3 | 0.00 |
| Gardens, Plants and Flowers | 6.1 | 1.0 | 0.00 |
| Negative Contribution | |||
| Footwear | 13.6 | -0.7 | -0.02 |
| Rents | 60.5 | 0.1 | -0.02 |
| Restaurants and Cafés | 68.8 | 0.1 | -0.02 |
| Heating Oil | 8.9 | -2.7 | -0.03 |
| Fuel for Transport | 48.5 | -0.8 | -0.06 |
| Garments | 50.7 | -1.5 | -0.10 |
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-16012013-AP/EN/2-16012013-AP-EN.PDF
The estimate of consumer price inflation in Germany in Table IV-13 is 2.1 percent in 12 months ending in Dec 2012, 0.9 percent NSA in Dec 2012 relative to Nov 2012 and 0.3 percent SA in Dec 2012 relative to Nov 2012. There are waves of consumer price inflation in Germany similar to those worldwide (Section II and earlier http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html), as shown in Table IV-13. In the first wave, annual equivalent inflation was 4.9 percent in Feb-Apr 2011 NSA and 2.4 percent SA during risk appetite in carry trades from zero interest rates to commodity futures. In the second wave, annual equivalent consumer price inflation collapsed to 0.6 percent NSA and 2.4 percent SA in May-Jun 2011 because of risk aversion caused by European sovereign debt event. In the third wave, annual equivalent consumer price inflation was 1.2 percent NSA and 1.9 percent SA in Jul-Nov 2011 as a result of relaxed risk aversion. In the fourth wave, annual equivalent inflation was 1.8 percent NSA and 1.8 percent SA in Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation rose to 4.9 percent NSA and 2.4 percent SA in Feb-Apr 2012 during another energy-commodity carry trade shock. In the sixth wave, annual equivalent inflation in May-Jun 2012 is minus 1.8 percent NSA and 1.2 percent SA. In the seventh wave, annual equivalent inflation NSA is 4.9 percent in Jul-Aug 2012 and 3.7 percent SA. In the eighth wave in Sep-Nov 2012, annual equivalent inflation is minus 0.4 percent NSA and 1.6 percent SA. In the ninth wave, annual equivalent inflation jumped to 11.4 percent NSA in Dec 2012 and 3.7 percent SA. Under unconventional monetary policy of zero interest rates and quantitative easing inflation becomes highly volatile during alternative shocks of risk aversion and risk appetite, preventing sound investment and consumption decisions.
Table IV-13, Germany, Consumer Price Index ∆%
| 12-Month ∆% | Month ∆% NSA | Month ∆% CSA | |
| Dec 2012 | 2.1 | 0.9 | 0.3 |
| AE ∆% Dec | 11.4 | 3.7 | |
| Nov | 1.9 | -0.1 | 0.1 |
| Oct | 2.0 | 0.0 | 0.2 |
| Sep | 2.0 | 0.0 | 0.1 |
| AE ∆% Sep-Nov | -0.4 | 1.6 | |
| Aug | 2.1 | 0.4 | 0.4 |
| Jul | 1.7 | 0.4 | 0.2 |
| AE ∆% Jul-Aug | 4.9 | 3.7 | |
| Jun | 1.7 | -0.1 | 0.1 |
| May | 1.9 | -0.2 | 0.1 |
| AE ∆% May-Jun | -1.8 | 1.2 | |
| Apr | 2.1 | 0.2 | 0.2 |
| Mar | 2.1 | 0.3 | 0.1 |
| Feb | 2.3 | 0.7 | 0.3 |
| AE ∆% Feb-Apr | 4.9 | 2.4 | |
| Jan | 2.1 | -0.4 | 0.2 |
| Dec 2011 | 2.1 | 0.7 | 0.1 |
| AE ∆% Dec-Jan | 1.8 | 1.8 | |
| Nov | 2.4 | 0.0 | 0.2 |
| Oct | 2.5 | 0.0 | 0.1 |
| Sep | 2.6 | 0.1 | 0.2 |
| Aug | 2.4 | 0.0 | 0.1 |
| Jul | 2.4 | 0.4 | 0.2 |
| AE ∆% Jul-Nov | 1.2 | 1.9 | |
| Jun | 2.3 | 0.1 | 0.2 |
| May | 2.3 | 0.0 | 0.2 |
| AE ∆% May-Jun | 0.6 | 2.4 | |
| Apr | 2.4 | 0.2 | 0.2 |
| Mar | 2.1 | 0.5 | 0.2 |
| Feb | 2.1 | 0.5 | 0.2 |
| Jan | 2.0 | -0.4 | 0.2 |
| AE ∆% Feb-Apr | 4.9 | 2.4 | |
| Dec 2010 | 1.7 | 1.0 | 0.3 |
| Nov | 1.5 | 0.1 | 0.2 |
| Oct | 1.3 | 0.1 | 0.2 |
| Sep | 1.3 | -0.1 | 0.2 |
| Aug | 1.0 | 0.0 | 0.1 |
| Annual Average ∆% | |||
| 2012 | 2.0 | ||
| 2011 | 2.3 | ||
| 2010 | 1.1 | ||
| 2009 | 0.4 | ||
| 2008 | 2.6 | ||
| Dec 2009 | 0.9 | ||
| Dec 2008 | 1.1 | ||
| Dec 2007 | 3.1 | ||
| Dec 2006 | 1.4 | ||
| Dec 2005 | 1.4 | ||
| Dec 2004 | 2.3 | ||
| Dec 2003 | 1.0 | ||
| Dec 2002 | 1.2 | ||
| Dec 2001 | 1.6 |
AE: Annual Equivalent
Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart IV-11, of the Statistisches Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index of Germany from 2004 to 2012. There is an evident acceleration in the form of sharper slope in the first months of 2011 and then a flattening in subsequent months with renewed strength in Dec, decline in Jan 2012 and another upward spike from Feb to Apr 2012, new drop in May-Jun 2012 and increases in Jul and Aug 2012 relaxed in Sep-Nov 2012. Inflation returned in Dec 2012. If risk aversion declines, new carry trades from zero interest rates to commodity futures could again result in higher inflation.
Chart IV-11, Germany, Consumer Price Index, Unadjusted, 2005=100
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart IV-14, of the Statistisches Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index and trend of Germany from 2008 to 2012. Chart IV-13 captures inflation waves with alternation of periods of positive and negative slopes resulting from zero interest rates with shocks of risk appetite and risk aversion. For example, the negative slope of decline of inflation by 0.2 percent in May 2012 and 0.1 percent in Jun 2012 follows an upward slope of price increases in Feb-Apr 2012 after decline of inflation by 0.4 percent in Jan 2012. The final segment shows another positive slope caused by inflation of 0.4 percent in Jul 2012, which is followed by 0.4 percent in Aug 2012 and flattening segment as inflation remains unchanged in both Sep and Oct 2012, declining in Nov 2012 and increasing in Dec 2012. The waves occur around an upward trend of prices, disproving the proposition of fear of deflation.
Chart IV-12, Germany, Consumer Price Index, Unadjusted and Trend, 2005=100
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Table IV-14 provides the monthly and 12-month rate of inflation for segments of the consumer price index of Germany in Dec 2012. Inflation excluding energy increased 0.0 percent in Dec 2012 and rose 1.6 percent in 12 months. Excluding household energy inflation was 1.1 percent in Dec and rose 2.0 percent in 12 months. Food prices increased 1.2 percent in Dec and increased 4.8 percent in 12 months. There were differences in inflation of energy-related prices. Heating oil rose 1.8 percent in 12 months and decreased 5.1 percent in Dec. Motor fuels decreased 1.4 percent in Dec and increased 3.2 percent in 12 months.
Table IV-14, Germany, Consumer Price Index ∆%
| Dec 2012 | Weight | 12- Month ∆% | Month ∆% |
| Total | 1,000.00 | 2.1 | 0.9 |
| Excluding heating oil and motor fuels | 955.42 | 2.0 | 1.1 |
| Excluding household energy | 940.18 | 2.0 | 1.1 |
| Excluding Energy | 904.81 | 1.6 | 0.0 |
| Total Goods | 493.00 | 1.9 | 1.2 |
| Nondurable Consumer Goods | 305.11 | 3.3 | 0.0 |
| Medium-Term Life Consumer Goods | 95.24 | 3.4 | 0.3 |
| Durable Consumer Goods | 92.65 | 0.3 | 0.0 |
| Services | 507.00 | 1.4 | 1.8 |
| Energy Components | |||
| Motor Fuels | 35.37 | 3.2 | -1.4 |
| Household Energy | 59.82 | 3.6 | -0.8 |
| Heating Oil | 9.21 | 1.8 | -5.1 |
| Food | 89.99 | 4.8 | 1.2 |
Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/01/PE13_018_611.html;jsessionid=A8DD3A39430A0FCD0AC0C2CB24DE5EA1.cae1
The first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-15. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May 2011 at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep 2011, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in Oct-Nov 2011 jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was 1.2 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation increased to 3.0 percent in Jul-Aug 2012. In the ninth wave, inflation collapsed to zero in Sep-Oct 2012 and fell at 0.8 percent annual equivalent in Sep-Nov 2012. In the tenth wave, annual equivalent inflation in Dec 2012 was 2.4 percent. Economies are shocked worldwide by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion.
Table IV-15, Italy, Consumer Price Index
| Month | 12 Months | |
| Dec 2012 | 0.2 | 2.3 |
| AE ∆% Dec | 2.4 | |
| Nov | -0.2 | 2.5 |
| Oct | 0.0 | 2.6 |
| Sep | 0.0 | 3.2 |
| AE ∆% Sep-Nov | -0.8 | |
| Aug | 0.4 | 3.2 |
| Jul | 0.1 | 3.1 |
| AE ∆% Jul-Aug | 3.0 | |
| June | 0.2 | 3.3 |
| May | 0.0 | 3.2 |
| AE ∆% May-Jun | 1.2 | |
| Apr | 0.5 | 3.3 |
| Mar | 0.5 | 3.3 |
| Feb | 0.4 | 3.3 |
| AE ∆% Feb-Apr | 5.7 | |
| Jan | 0.3 | 3.2 |
| Dec 2011 | 0.4 | 3.3 |
| AE ∆% Dec-Jan | 4.3 | |
| Nov | -0.1 | 3.3 |
| Oct | 0.6 | 3.4 |
| AE ∆% Oct-Nov | 3.0 | |
| Sep | 0.0 | 3.0 |
| Aug | 0.3 | 2.8 |
| Jul | 0.3 | 2.7 |
| AE ∆% Jul-Sep | 2.4 | |
| Jun | 0.1 | 2.7 |
| May | 0.1 | 2.6 |
| AE ∆% May-Jun | 1.2 | |
| Apr | 0.5 | 2.6 |
| Mar | 0.4 | 2.5 |
| Feb | 0.3 | 2.4 |
| Jan | 0.4 | 2.1 |
| AE ∆% Jan-Apr | 4.9 | |
| Dec 2010 | 0.4 | 1.9 |
| Annual | ||
| 2011 | 2.8 | |
| 2010 | 1.5 | |
| 2009 | 0.8 | |
| 2008 | 3.3 | |
| 2007 | 1.8 | |
| 2006 | 2.1 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79656
Consumer price inflation in Italy by segments in the estimate by ISTAT for Dec 2012 is provided in Table IV-16. Total consumer price inflation in Dec 2012 was 0.2 percent and 2.3 percent in 12 months. Inflation of goods was 0.0 percent in Dec and 2.7 percent in 12 months. Prices of durable goods increased 0.0 percent in Dec and decreased 0.2 percent in 12 months, as typical in most countries. Prices of energy decreased 0.3 percent in Dec and increased 9.3 percent in 12 months. Food prices increased 0.3 percent in Dec and increased 2.6 percent in 12 months. Prices of services increased 0.6 percent in Dec and rose 2.0 percent in 12 months. Transport prices, also influenced by commodity prices, increased 2.3 percent in Dec and increased 4.4 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion (Section II and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html).
Table IV-16, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%
| Dec 2012 | Month ∆% | 12-Month ∆% |
| General Index | 0.2 | 2.3 |
| I Goods | 0.0 | 2.7 |
| Food | 0.3 | 2.6 |
| Energy | -0.3 | 9.3 |
| Durable | 0.0 | -0.2 |
| Nondurable | 0.1 | 0.4 |
| II Services | 0.6 | 2.0 |
| Housing | 0.1 | 2.7 |
| Communications | 0.0 | -0.1 |
| Transport | 2.3 | 4.4 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79656
Chart IV-13 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy with marginal increase followed by decline to 2.5 percent in Nov 2012 and 2.3 percent in Dec 2012.
Chart, IV-13, Italy, Consumer Price Index, 12-Month Percentage Changes
Source: Istituto Nazionale di Statistica
Inflation in the UK is somewhat higher than in many advanced economies, deserving more detailed analysis. Table IV-17 provides 12-month percentage changes of UK output prices for all manufactured products, excluding food, beverage and petroleum and excluding duty. The 12-month rates rose significantly in 2011 in all three categories, reaching 6.3 percent for all manufactured products in Sep 2011 but declining to 5.7 percent in Oct, 5.4 in Nov and down to 1.8 percent in Jul 2012, increasing marginally to 2.3 percent in Aug 2012, 2.5 percent in Sep, 2.6 in Oct, 2.1 percent in Nov 2012 and 2.2 percent in Dec 2012. Output price inflation is highly sensitive to commodity prices as shown by the increase by 6.7 percent in 2008 when oil prices rose over $140/barrel even in the midst of a global recession driven by the carry trade from zero interest rates to oil futures. The mirage episode of false deflation in 2001 and 2002 is also captured by output prices for the UK, which was originated in decline of commodity prices but was used as an argument for unconventional monetary policy of zero interest rates and quantitative easing during the past decade.
Table IV-17, UK Output Prices 12 Months ∆% NSA
| All Manufactured Products | Excluding Food, Beverage and | All Excluding Duty | |
| Dec 2012 | 2.2 | 1.5 | 1.9 |
| Nov | 2.1 | 1.4 | 1.8 |
| Oct | 2.6 | 1.4 | 2.3 |
| Sep | 2.5 | 1.2 | 2.2 |
| Aug | 2.3 | 1.2 | 1.9 |
| Jul | 1.8 | 1.2 | 1.5 |
| Jun | 2.0 | 1.7 | 1.7 |
| May | 2.8 | 2.1 | 2.5 |
| Apr | 3.3 | 2.3 | 3.1 |
| Mar | 3.7 | 2.5 | 3.5 |
| Feb | 4.1 | 3.0 | 4.1 |
| Jan | 4.0 | 2.4 | 4.0 |
| Dec 2011 | 4.8 | 3.0 | 4.8 |
| Nov | 5.4 | 3.1 | 5.6 |
| Oct | 5.7 | 3.3 | 5.9 |
| Sep | 6.3 | 3.7 | 6.4 |
| Aug | 6.0 | 3.5 | 6.2 |
| Jul | 6.1 | 3.4 | 6.2 |
| Jun | 5.8 | 3.2 | 5.9 |
| May | 5.4 | 3.4 | 5.5 |
| Apr | 5.6 | 3.6 | 5.8 |
| Mar | 5.6 | 3.1 | 5.5 |
| Feb | 5.3 | 3.1 | 5.2 |
| Jan | 5.0 | 3.3 | 5.0 |
| Dec 2010 | 4.2 | 2.7 | 4.0 |
| Year ∆% | |||
| 2012 | 2.8 | 1.8 | 2.5 |
| 2011 | 5.6 | 3.4 | 5.7 |
| 2010 | 4.2 | 3.0 | 3.9 |
| 2009 | 1.6 | 2.5 | 1.0 |
| 2008 | 6.7 | 3.7 | 6.7 |
| 2007 | 2.4 | 1.4 | 2.1 |
| 2006 | 2.0 | 1.5 | 2.0 |
| 2005 | 1.9 | 1.0 | 1.9 |
| 2004 | 1.0 | -0.3 | 0.6 |
| 2003 | 0.6 | 0.1 | 0.5 |
| 2002 | -0.1 | -0.4 | -0.1 |
| 2001 | -0.3 | -0.6 | -0.3 |
| 2000 | 1.4 | -0.5 | 0.8 |
| 1999 | 0.6 | -1.0 | -0.3 |
| 1998 | 0.0 | -0.9 | -0.9 |
| 1997 | 0.9 | 0.3 | 0.1 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/december-2012/index.html
Monthly and annual equivalent rates of change of output prices are shown in Table IV-11. There are waves of inflation similar to those in other countries (Section II and earlier http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In the first wave, annual equivalent inflation was 12.0 percent in Jan-Apr 2011 with relaxed risk aversion in commodity markets. In the second wave, intermittent risk aversion resulted in annual equivalent inflation of 2.0 percent in May-Oct 2011. In the third wave, alternation of risk aversion resulted in annual equivalent inflation of 1.6 percent in Nov 2011 to Jan 2012. In the fourth wave, the energy commodity shock processed through carry trades caused the jump of annual equivalent inflation to 7.9 percent in Feb-Apr 2012. A fifth wave occurred in May-Jun 2012 with decline of output inflation by 5.3 percent annual equivalent in an environment of risk aversion that caused decline of commodity prices. A sixth wave under commodity shocks induced by carry trades from zero interest rates resulted in annual equivalent inflation of 4.5 percent in Jul-Sep 2012 and 4.0 percent in Jul-Oct 2012. In the seventh wave, annual equivalent inflation in Nov-Dec 2012 fell to minus 2.4 percent.
Table IV-18, UK Output Prices Month ∆% NSA
| All Manufactured Products | Excluding Food, Beverage and | All Excluding Duty | |
| Dec 2012 | -0.1 | 0.0 | -0.1 |
| Nov | -0.3 | -0.1 | -0.2 |
| ∆% AE Nov-Dec | -2.4 | 0.0 | -2.4 |
| Oct | 0.2 | 0.1 | 0.2 |
| Sep | 0.5 | 0.3 | 0.5 |
| Aug | 0.5 | 0.1 | 0.6 |
| Jul | 0.1 | -0.1 | 0.1 |
| ∆% AE Jul-Oct | 4.0 | 1.2 | 4.3 |
| Jun | -0.6 | -0.2 | -0.6 |
| May | -0.3 | -0.1 | -0.4 |
| ∆% AE May-Jun | -5.3 | -1.8 | -5.8 |
| Apr | 0.7 | 0.6 | 0.5 |
| Mar | 0.6 | 0.1 | 0.5 |
| Feb | 0.6 | 0.5 | 0.6 |
| ∆% AE Feb-Apr | 7.9 | 4.9 | 6.6 |
| Jan | 0.4 | 0.3 | 0.3 |
| Dec 2011 | -0.2 | -0.1 | -0.2 |
| Nov | 0.2 | -0.1 | 0.2 |
| ∆% AE Nov-Jan | 1.6 | 0.4 | 1.2 |
| Oct | 0.0 | -0.1 | 0.1 |
| Sep | 0.3 | 0.3 | 0.2 |
| Aug | 0.0 | 0.1 | 0.1 |
| Jul | 0.3 | 0.4 | 0.3 |
| Jun | 0.2 | 0.2 | 0.2 |
| May | 0.2 | 0.2 | 0.2 |
| ∆% AE May-Oct | 2.0 | 2.2 | 2.2 |
| Apr | 1.1 | 0.8 | 0.9 |
| Mar | 1.1 | 0.5 | 1.1 |
| Feb | 0.5 | 0.0 | 0.5 |
| Jan | 1.1 | 0.8 | 1.1 |
| Jan-Apr | 12.0 | 6.5 | 11.4 |
| Dec 2010 | 0.5 | 0.0 | 0.6 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/december-2012/index.html
Input prices in the UK have been more dynamic than output prices until the current event of risk aversion, as shown by Table IV-19, but with sharp oscillations because of the commodity and raw material content. The 12-month rates of increase of input prices, even excluding food, tobacco, beverages and petroleum, are very high, reaching 18.1 percent in Sep 2011 for materials and fuels purchased and 13.3 percent excluding food, beverages and petroleum. Inflation in 12 months of materials and fuels purchased moderated to 5.4 percent in Mar 2012 and 4.1 percent excluding food, tobacco, beverages and petroleum with the rates falling further in Apr to 1.1 percent for materials and fuels purchased and 2.2 percent excluding food, tobacco, beverages and petroleum. Input-price inflation collapsed in the 12 months ending in Jul 2012 to minus 2.6 percent for materials and fuels purchased and minus 1.5 percent excluding food, beverages and tobacco. Inflation returned at 1.2 percent in the 12 months ending in Aug 2012 but minus 0.5 percent excluding food, tobacco, beverages and petroleum. Inflation of input prices in Sep 2012 was minus 0.8 percent and minus 0.8 percent excluding food, beverages and petroleum. In Nov 2012, inflation of input prices of all manufacturing and materials purchased was minus 0.1 percent in 12 months and minus 0.1 percent in 12 months excluding food, tobacco, beverages and petroleum. Inflation of materials and fuels purchased in 12 months was 0.3 percent in Dec 2012 and 0.0 percent excluding tobacco, beverages and petroleum. There is only comparable experience with 22.2 percent inflation of materials and fuels purchased in 2008 and 16.9 percent excluding food, beverages and petroleum followed in 2009 by decline of 3.8 percent by materials and fuels purchased and increase of 1.6 percent for the index excluding items. UK input and output inflation is sensitive to commodity price increases driven by carry trades from zero interest rates. The mirage of false deflation is also observed in input prices in 1997-9 and then again from 2001 to 2003.
Table IV-19, UK, Input Prices 12-Month ∆% NSA
| All Manufacturing Materials and Fuels Purchased | Excluding Food, Tobacco, Beverages and Petroleum | |
| Dec 2012 | 0.3 | 0.0 |
| Nov | -0.1 | -0.1 |
| Oct | 0.2 | -0.4 |
| Sep | -0.8 | -0.8 |
| Aug | 1.2 | -0.5 |
| Jul | -2.6 | -1.5 |
| Jun | -2.2 | -0.3 |
| May | 0.1 | 1.1 |
| Apr | 1.1 | 2.2 |
| Mar | 5.4 | 4.1 |
| Feb | 7.7 | 5.7 |
| Jan | 6.5 | 5.6 |
| Dec 2011 | 8.9 | 7.2 |
| Nov | 13.8 | 10.2 |
| Oct | 14.5 | 11.0 |
| Sep | 18.1 | 13.3 |
| Aug | 16.3 | 13.0 |
| Jul | 18.5 | 13.3 |
| Jun | 16.8 | 12.6 |
| May | 16.3 | 11.4 |
| Apr | 17.9 | 12.2 |
| Mar | 14.8 | 10.3 |
| Feb | 14.9 | 10.7 |
| Jan | 14.2 | 10.5 |
| Dec 2010 | 13.1 | 9.0 |
| Year ∆% | ||
| 2012 | 1.3 | 1.2 |
| 2011 | 15.4 | 11.3 |
| 2010 | 9.9 | 5.7 |
| 2009 | -3.8 | 1.6 |
| 2008 | 22.2 | 16.9 |
| 2007 | 2.9 | 2.4 |
| 2006 | 9.8 | 7.2 |
| 2005 | 11.0 | 6.9 |
| 2004 | 3.3 | 1.6 |
| 2003 | 1.2 | -0.6 |
| 2002 | -4.4 | -4.8 |
| 2001 | -1.2 | -1.2 |
| 2000 | 7.4 | 3.7 |
| 1999 | -1.3 | -3.6 |
| 1998 | -9.1 | -4.6 |
| 1997 | -8.2 | -6.3 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/december-2012/index.html
Table IV-20 provides monthly percentage changes of UK input prices for materials and fuels purchased and excluding food, tobacco, beverages and petroleum. There are strong waves of inflation of input prices in the UK similar to those worldwide (Section II and earlier http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In the first wave, input prices rose at the high annual equivalent rate of 35.6 percent in Jan-Apr 2011, driven by carry trades from unconventional monetary policy into commodity exposures. In the second wave, alternating risk aversion caused annual equivalent inflation of minus 3.1 percent in May-Oct 2011. In the third wave, renewed risk aversion resulted in annual equivalent inflation of minus 1.2 percent in Nov-Dec 2011. In the fourth wave, annual equivalent inflation of input prices in the UK surged at 18.1 percent in Jan-Mar 2012 under relaxed risk aversion. In the fifth wave, annual equivalent inflation was minus 21.9 percent in Apr-Jun 2012 because of collapse of commodity prices during increasing risk aversion. In the sixth wave, annual equivalent inflation of materials and fuels purchased jumped to 4.0 percent in Jul-Aug 2012. In the seventh wave, annual equivalent inflation moderated to 1.6 percent in Sep-Nov 2012. In the eighth wave, annual equivalent inflation in Dec 2012 is minus 2.4 percent.
Table IV-20, UK Input Prices Month ∆%
| All Manufacturing Materials and Fuels Purchased NSA | Excluding Food, Tobacco, Beverages and Petroleum SA | |
| Dec 2012 | -0.2 | -0.4 |
| ∆% Dec | -2.4 | -4.7 |
| Nov | 0.1 | 0.3 |
| Oct | 0.2 | 0.1 |
| Sep | 0.1 | 0.3 |
| ∆% Sep-Nov | 1.6 | 2.8 |
| Aug | 2.0 | 1.0 |
| Jul | 0.2 | -0.3 |
| ∆% Jul-Aug | 14.0 | 4.3 |
| Jun | -2.1 | -0.2 |
| May | -2.6 | -0.8 |
| Apr | -1.4 | 0.1 |
| ∆% Apr-Jun | -21.9 | -3.6 |
| Mar | 1.6 | -0.7 |
| Feb | 2.5 | 1.0 |
| Jan | 0.1 | -0.2 |
| ∆% AE Jan-Mar | 18.1 | 0.4 |
| Dec 2011 | -0.6 | -0.7 |
| Nov | 0.4 | 0.1 |
| ∆% AE Nov-Dec | -1.2 | -3.6 |
| Oct | -0.8 | -0.5 |
| Sep | 2.1 | 0.6 |
| Aug | -1.9 | 0.1 |
| Jul | 0.6 | 0.9 |
| Jun | 0.1 | 1.0 |
| May | -1.6 | -0.1 |
| ∆% AE May-Oct | -3.1 | 4.1 |
| Apr | 2.8 | 2.0 |
| Mar | 3.8 | 1.0 |
| Feb | 1.4 | 1.0 |
| Jan | 2.3 | 1.5 |
| ∆% AE Jan-Apr | 35.6 | 17.8 |
| Dec 2010 | 3.9 | 1.9 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/december-2012/index.html
The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of manufactured products, shown in Table IV-21. There are high contributions of 0.46 percentage points by food products, 0.84 percentage points by tobacco and alcohol, 0.26 percentage points by computer, electrical and optical and 0.40 percentage points by other manufactured products. There are diversified sources of contributions to 12 months output price inflation such as 0.17 percentage points by clothing, textile and leather and 0.11 percentage points by transport equipment. In general, contributions by products rich in commodities are the drivers of inflation. There were diversified contributions in percentage points to monthly inflation: 0.02 percentage points by food products, 0.01 percentage points by tobacco and alcohol and 0.01 percentage points by transport equipment. The decrease of petroleum prices by 1.5 percent deducted 0.13 percentage points from monthly inflation of manufactured products and increase of 0.1 percent by chemical and pharmaceutical added 0.01 percentage points.
Table IV-21, UK, Contributions to Month and 12-Month Change in Prices of All Manufactured Products, Percentage Points, NSA
| Dec 2012 | 12 Months | 12 Months ∆% | Month % Points | Month ∆% |
| Total % | 2.2 | -0.1 | ||
| Food Products | 0.46 | 2.9 | 0.02 | 0.2 |
| Tobacco & Alcohol | 0.84 | 8.1 | 0.01 | 0.1 |
| Clothing, Textile & Leather | 0.17 | 1.6 | -0.02 | -0.3 |
| Paper and Printing | -0.03 | -0.7 | 0.00 | 0.1 |
| Petroleum | -0.05 | -0.4 | -0.13 | -1.5 |
| Chemical & Pharmaceutical | 0.05 | 0.6 | 0.01 | 0.1 |
| Metal, Machinery & Equipment | -0.01 | -0.3 | 0.00 | 0.1 |
| Computer, Electrical & Optical | 0.26 | 3.1 | -0.01 | -0.1 |
| Transport Equipment | 0.11 | 1.1 | 0.01 | 0.2 |
| Other Manufactured Products | 0.40 | 2.3 | 0.00 | 0.0 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/december-2012/index.html
The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of input prices, shown in Table IV-22. Crude oil is a large factor with deduction of 0.83 percentage points from the 12-month rate and deduction of 0.31 percentage points from the monthly rate in Dec. Inflation also transfers to the domestic economy through the prices of imported inputs: imported metals deducted 0.51 percentage points from the 12-month rate and added 0.06 percentage points to the Dec rate. Domestic food added 1.35 percentage points to the 12-month rate and added 0.25 percentage points to the Dec rate. Reversals of commodity exposures in carry trades during risk aversion are a major source of financial instability.
Table IV-22, UK, Contributions to Month and 12-Month Change in Prices of Inputs, Percentage Points NSA
| Dec 2012 | 12 Months | 12 Months ∆% | Month % Points | Month ∆% |
| Total | 0.3 | -0.2 | ||
| Fuel | 0.39 | 3.9 | 0.01 | 0.1 |
| Crude Oil | -0.83 | -3.0 | -0.31 | -0.9 |
| Domestic Food Materials | 1.35 | 13.4 | 0.25 | 1.8 |
| Imported Food Materials | 0.28 | 5.3 | -0.02 | -0.2 |
| Other Domestic Produced Materials | -0.02 | -0.5 | 0.01 | 0.2 |
| Imported Metals | -0.51 | -6.6 | 0.06 | 0.6 |
| Imported Chemicals | -0.09 | -0.8 | -0.07 | -0.6 |
| Imported Parts and Equipment | -0.14 | -0.9 | -0.05 | -0.3 |
| Other Imported Materials | -0.12 | -1.1 | -0.08 | -0.6 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/december-2012/index.html
Consumer price inflation in the UK is shown in Table IV-23. The CPI index increased 0.5 percent in Dec 2012 and 2.7 percent in 12 months. The same inflation waves (Section II and earlier http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html) are present in UK CPI inflation. In the first wave in Jan-Apr 2011, annual equivalent inflation was at a high 6.5 percent. In the second wave in May-Jul 2011, annual equivalent inflation fell to only 0.4 percent. In the third wave in Aug-Nov 2011, annual equivalent inflation returned at 4.6 percent. In the fourth wave in Dec 2011 to Jan 2012, annual equivalent inflation was minus 0.6 percent because of decline of 0.5 percent in Jan 2012. In the fifth wave, annual equivalent inflation increased to 6.2 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was minus 3.0 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation in Jul-Dec 2012 was 4.5 percent and 6.2 percent in Oct 2012 with the rate in Oct caused mostly by increases in university tuition payments.
Table IV-23, UK, Consumer Price Index All Items, Month and 12-Month ∆%
| Month ∆% | 12 Months ∆% | |
| Dec 2012 | 0.5 | 2.7 |
| Nov | 0.2 | 2.7 |
| Oct | 0.5 | 2.7 |
| Sep | 0.4 | 2.2 |
| Aug | 0.5 | 2.5 |
| Jul | 0.1 | 2.6 |
| AE ∆% Jul-Dec | 4.5 | |
| Jun | -0.4 | 2.4 |
| May | -0.1 | 2.8 |
| AE ∆% May-Jun | -3.0 | |
| Apr | 0.6 | 3.0 |
| Mar | 0.3 | 3.5 |
| Feb | 0.6 | 3.4 |
| AE ∆% Feb-Apr | 6.2 | |
| Jan | -0.5 | 3.6 |
| Dec 2011 | 0.4 | 4.2 |
| AE ∆% Dec-Jan | -0.6 | |
| Nov | 0.2 | 4.8 |
| Oct | 0.1 | 5.0 |
| Sep | 0.6 | 5.2 |
| Aug | 0.6 | 4.5 |
| AE ∆% Aug-Nov | 4.6 | |
| Jul | 0.0 | 4.4 |
| Jun | -0.1 | 4.2 |
| May | 0.2 | 4.5 |
| May-Jul | 0.4 | |
| Apr | 1.0 | 4.5 |
| Mar | 0.3 | 4.0 |
| Feb | 0.7 | 4.4 |
| Jan | 0.1 | 4.0 |
| AE ∆% Jan-Apr | 6.5 | |
| Dec 2010 | 1.0 | 3.7 |
| Nov | 0.4 | 3.3 |
| Oct | 0.3 | 3.2 |
| Sep | 0.0 | 3.1 |
| Aug | 0.5 | 3.1 |
| Jul | -0.2 | 3.1 |
| Jun | 0.1 | 3.2 |
| May | 0.2 | 3.4 |
| Apr | 0.6 | 3.7 |
| Mar | 0.6 | 3.4 |
| Feb | 0.4 | 3.0 |
| Jan | -0.2 | 3.5 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/december-2012/index.html
Inflation has been unusually high in the UK since 2006, as shown in Table IV-17. There were no rates of inflation close to 2.0 percent in the period from 1997 to 2004. Inflation has exceeded 2 percent since 2005, reaching 3.6 percent in 2008, 3.3 percent in 2010, 4.5 percent in 2011 and 2.8 percent in 2012.
Table IV-24, UK, Consumer Price Index, Annual ∆%
| 1997 | 1.8 |
| 1998 | 1.6 |
| 1999 | 1.3 |
| 2000 | 0.8 |
| 2001 | 1.2 |
| 2002 | 1.3 |
| 2003 | 1.4 |
| 2004 | 1.3 |
| 2005 | 2.1 |
| 2006 | 2.3 |
| 2007 | 2.3 |
| 2008 | 3.6 |
| 2009 | 2.2 |
| 2010 | 3.3 |
| 2011 | 4.5 |
| 2012 | 2.8 |
Source: UK Office for National Statistics
http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/december-2012/index.html
Table IV-25 provides the analysis of inflation in Dec 2012 by the UK Office for National Statistics. The driver of monthly inflation of 0.5 percent is increase of 2.0 percent in housing & household services, adding 0.28 percentage points. Food & nonalcoholic beverages increased 1.2 percent, contributing 0.14 percentage points and transport increased 0.7 percent, adding 0.12 percentage points. Contributions of percentage points to the 12-month rate of consumer price inflation of 2.7 percent are provided by the final two columns in Table IV-18. Food and nonalcoholic beverages increased 3.9 percent in 12 months, adding 0.44 percentage points. Education increased 3.8 percent in Dec, adding 0.42 percentage points to the 12-month inflation of consumer prices. Education increased 19.7 percent, adding 0.37 percentage points. The UK Office for National Statistics explains as follows (http://www.ons.gov.uk/ons/dcp171778_286398.pdf pages 3-4):
“The CPI rose by 0.5 per cent between September and October this year. By far the largest upward contribution to the 1-month change came from: education: prices, overall, rose by 19.1 per cent between September and October. This is more than twice the size of the next biggest monthly increase for education prices since CPI records began in 1996. The increase was due predominantly to a significant rise in undergraduate tuition fees, where the maximum annual tuition fees for new UK and EU students in England rose to £9,000.”
Table IV-25, UK, Consumer Price Index Month and Twelve-month ∆% and Percentage Point Contributions to Change by Components
| Dec 2012 | Month ∆% | Percentage Point Contribution | 12 Months ∆% | Percentage Point Contribution |
| CPI All Items | 0.5 | 2.7 | ||
| Food & Non-Alcoholic Beverages | 1.2 | 0.14 | 3.8 | 0.42 |
| Alcohol & Tobacco | -1.1 | -0.05 | 6.0 | 0.25 |
| Clothing & Footwear | -1.5 | -0.10 | 0.8 | 0.07 |
| Housing & Household Services | 2.0 | 0.28 | 3.9 | 0.55 |
| Furniture & Household Goods | 1.3 | 0.08 | 0.9 | 0.06 |
| Health | 0.1 | 0.00 | 2.8 | 0.07 |
| Transport | 0.7 | 0.12 | 1.1 | 0.19 |
| Communication | -0.1 | 0.00 | 2.2 | 0.06 |
| Recreation & Culture | -0.1 | -0.01 | 0.7 | 0.09 |
| Education | 0.0 | 0.00 | 19.7 | 0.37 |
| Restaurants & Hotels | 0.0 | 0.00 | 3.2 | 0.37 |
| Miscellaneous Goods & Services | 0.0 | 0.00 | 2.0 | 0.19 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/december-2012/index.html
V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/datamapper/index.php?db=WEO) to show GDP in dollars in 2011 and the growth rate of real GDP of the world and selected regional countries from 2012 to 2015. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has lowered its forecast of the world economy to 3.3 percent in 2012 but accelerating to 3.6 percent in 2013, 4.2 percent in 2014 and 4.4 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,697 billion of world output of $69,899 billion, or 48.2 percent, but are projected to grow at much lower rates than world output, 1.9 percent on average from 2012 to 2015 in contrast with 3.9 percent for the world as a whole. While the world would grow 16.4 percent in the four years from 2012 to 2015, the G7 as a whole would grow 7.8 percent. The difference in dollars of 2011 is rather high: growing by 16.4 percent would add $11.5 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,867 but growing by 7.8 percent would add $5.2 trillion of output to the world, or somewhat below the output of Japan in 2011. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2011 of $25,438 billion, or 36.4 percent of world output. The EMDEs would grow cumulatively 24.9 percent or at the average yearly rate of 5.7 percent, contributing $6.3 trillion from 2012 to 2015 or the equivalent of 86.8 percent of $7,298 billion of China in 2011. The final four countries in Table V-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,468 billion, or 19.3 percent of world output, which is equivalent to 39.9 percent of the combined output of the major advanced economies of the G7.
Table V-1, IMF World Economic Outlook Database Projections of Real GDP Growth
| GDP USD 2011 | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | |
| World | 69,899 | 3.3 | 3.6 | 4.2 | 4.4 |
| G7 | 33,697 | 1.4 | 1.5 | 2.2 | 2.5 |
| Canada | 1,739 | 1.9 | 2.0 | 2.4 | 2.4 |
| France | 2,778 | 0.1 | 0.4 | 1.1 | 1.5 |
| DE | 3,607 | 0.9 | 0.9 | 1.4 | 1.4 |
| Italy | 2,199 | -2.3 | -0.7 | 0.5 | 1.2 |
| Japan | 5,867 | 2.2 | 1.2 | 1.1 | 1.2 |
| UK | 2,431 | -0.4 | 1.1 | 2.2 | 2.6 |
| US | 15,076 | 2.2 | 2.1 | 2.9 | 3.4 |
| Euro Area | 13,114 | -0.4 | 0.2 | 1.2 | 1.5 |
| DE | 3,607 | 0.9 | 0.9 | 1.4 | 1.4 |
| France | 2,778 | 0.1 | 0.4 | 1.1 | 1.5 |
| Italy | 2,199 | -2.3 | -0.7 | 0.5 | 1.2 |
| POT | 238 | -3.0 | -1.0 | 1.2 | 1.9 |
| Ireland | 221 | 0.4 | 1.4 | 2.5 | 2.9 |
| Greece | 299 | -6.0 | -4.0 | 0.0 | 2.8 |
| Spain | 1,480 | -1.5 | -1.3 | 1.0 | 1.6 |
| EMDE | 25,438 | 5.3 | 5.6 | 5.9 | 6.1 |
| Brazil | 2,493 | 1.5 | 3.9 | 4.2 | 4.2 |
| Russia | 1,850 | 3.7 | 3.8 | 3.9 | 3.9 |
| India | 1,827 | 4.9 | 6.0 | 6.4 | 6.7 |
| China | 7,298 | 7.8 | 8.2 | 8.5 | 8.5 |
Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal
Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/datamapper/index.php?db=WEO). Table V-2 is constructed with the WEO database to provide rates of unemployment from 2011 to 2015 for major countries and regions. In fact, unemployment rates for 2011 in Table V-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. Estimated rates of unemployment for 2012 are particularly high for the countries with sovereign debt difficulties in Europe: 15.5 percent for Portugal (POT), 14.8 percent for Ireland, 23.8 percent for Greece, 24.9 percent for Spain and 10.6 percent for Italy, which is lower but still high. The G7 rate of unemployment is estimated at 7.5 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.
Table V-2, IMF World Economic Outlook Database Projections of Unemployment Rate as Percent of Labor Force
| % Labor Force 2011 | % Labor Force 2012 | % Labor Force 2013 | % Labor Force 2014 | % Labor Force 2015 | |
| World | NA | NA | NA | NA | NA |
| G7 | 7.7 | 7.5 | 7.5 | 7.3 | 6.9 |
| Canada | 7.5 | 7.3 | 7.3 | 7.1 | 6.9 |
| France | 9.6 | 10.1 | 10.5 | 10.3 | 9.8 |
| DE | 6.0 | 5.2 | 5.3 | 5.2 | 5.2 |
| Italy | 8.4 | 10.6 | 11.1 | 11.3 | 11.0 |
| Japan | 4.6 | 4.5 | 4.4 | 4.5 | 4.4 |
| UK | 8.0 | 8.1 | 8.1 | 7.9 | 7.6 |
| US | 8.9 | 8.2 | 8.1 | 7.7 | 7.1 |
| Euro Area | 10.2 | 11.2 | 11.5 | 11.2 | 10.8 |
| DE | 6.0 | 5.2 | 5.3 | 5.2 | 5.2 |
| France | 9.6 | 10.1 | 10.5 | 10.3 | 9.8 |
| Italy | 8.4 | 10.6 | 11.1 | 11.3 | 11.0 |
| POT | 12.7 | 15.5 | 16.0 | 15.3 | 14.7 |
| Ireland | 14.4 | 14.8 | 14.4 | 13.7 | 13.1 |
| Greece | 17.3 | 23.8 | 25.4 | 24.5 | 22.4 |
| Spain | 21.7 | 24.9 | 25.1 | 24.1 | 23.2 |
| EMDE | NA | NA | NA | NA | NA |
| Brazil | 6.0 | 6.0 | 6.5 | 7.0 | 7.0 |
| Russia | 6.5 | 6.0 | 6.0 | 6.0 | 6.0 |
| India | NA | NA | NA | NA | NA |
| China | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 |
Notes: DE: Germany; EMDE: Emerging and Developing Economies (150 countries)
Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog for IQ2012, IIQ2012 and IIIQ2012 available now for all countries. Growth is weak throughout most of the world. Japan’s GDP increased 1.4 percent in IQ2012 and 3.4 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. Japan’s GDP grew 0.0 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of minus 0.1 percent, which is much lower than 5.7 percent in IQ2012. Growth of 3.9 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan’s GDP contracted 0.9 percent in IIIQ2012 at the SAAR of minus 3.5 percent and increased 0.5 percent relative to a year earlier. China grew at 1.8 percent in IIQ2012, which annualizes to 7.4 percent. China grew at 2.2 percent in IIIQ2012, which annualizes at 7.4 percent. In IVQ2012, China grew at 2.0 percent, which annualizes at 8.2 percent, and 7.9 percent in IVQ2012 relative to IVQ2011. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). There is decennial change in leadership in China (http://www.xinhuanet.com/english/special/18cpcnc/index.htm). China’s GDP grew 7.6 percent in IIQ2012 relative to IIQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. China’s GDP grew 8.1 percent in IQ2012 relative to a year earlier but only 7.6 percent in IIQ2012 relative to a year earlier and 7.4 percent in IIIQ2012 relative to IIIQ2011. GDP was flat in the euro area in IQ2012 and fell 0.1 in IQ2012 relative to a year earlier. Euro area GDP contracted 0.2 percent IIQ2012 and fell 0.5 percent relative to a year earlier. In IIIQ2012, euro area GDP fell 0.1 percent and declined 0.6 percent relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. In IIQ2012, Germany’s GDP increased 0.3 percent and 0.5 percent relative to a year earlier but 1.0 percent relative to a year earlier when adjusted for calendar (CA) effects. In IIIQ2012, Germany’s GDP increased 0.2 percent and 0.4 percent relative to a year earlier. Growth of US GDP in IQ2012 was 0.5 percent, at SAAR of 2.0 percent and higher by 2.4 percent relative to IQ2011. US GDP increased 0.3 percent in IIQ2012, 1.3 percent at SAAR and 2.1 percent relative to a year earlier. In IIIQ2012, GDP grew 0.8 percent, 3.1 percent at SAAR and 2.6 percent relative to IIIQ2011 (Section I http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html) but with substantial unemployment and underemployment (Section I and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html) and weak hiring (http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In IQ2012, UK GDP fell 0.3 percent, increasing 0.2 percent relative to a year earlier. UK GDP fell 0.4 percent in IIQ2012 and decreased 0.3 percent relative to a year earlier. UK GDP increased 0.9 percent in IIIQ2012 and fell 0.0 percent relative to a year earlier. Italy has experienced decline of GDP in five consecutive quarters from IIIQ2011 to IIIQ2012. Italy’s GDP fell 0.8 percent in IQ2012 and declined 1.4 percent relative to IQ2011. Italy’s GDP fell 0.7 percent in IIQ2012 and declined 2.4 percent relative to a year earlier. In IIIQ2012, Italy’s GDP fell 0.2 percent and declined 2.4 percent relative to a year earlier. France’s GDP stagnated in IQ2012 and increased 0.2 percent relative to a year earlier. France’s GDP decreased 0.1 percent in IIQ2012 and increased 0.1 percent relative to a year earlier. In IIIQ2012, France’s GDP increased 0.1 percent and increased 0.0 percent relative to a year earlier.
Table V-3, Percentage Changes of GDP Quarter on Prior Quarter and on Same Quarter Year Earlier, ∆%
| IQ2012/IVQ2011 | IQ2012/IQ2011 | |
| United States | QOQ: 0.5 SAAR: 2.0 | 2.4 |
| Japan | QOQ: 1.4 SAAR: 5.7 | 3.4 |
| China | 1.8 | 8.1 |
| Euro Area | 0.0 | -0.1 |
| Germany | 0.5 | 1.7 |
| France | 0.0 | 0.2 |
| Italy | -0.8 | -1.4 |
| United Kingdom | -0.3 | 0.2 |
| IIQ2012/IQ2012 | IIQ2012/IIQ2011 | |
| United States | QOQ: 0.3 SAAR: 1.3 | 2.1 |
| Japan | QOQ: 0.0 | 3.9 |
| China | 1.8 | 7.6 |
| Euro Area | -0.2 | -0.5 |
| Germany | 0.3 | 0.5 1.0 CA |
| France | -0.1 | 0.1 |
| Italy | -0.7 | -2.4 |
| United Kingdom | -0.4 | -0.3 |
| IIIQ2012/ IIQ2012 | IIIQ2012/ IIIQ2011 | |
| United States | QOQ: 0.8 | 2.6 |
| Japan | QOQ: –0.9 | 0.5 |
| China | 2.2 | 7.4 |
| Euro Area | -0.1 | -0.6 |
| Germany | 0.2 | 0.4 |
| France | 0.1 | 0.0 |
| Italy | -0.2 | -2.4 |
| United Kingdom | 0.9 | 0.0 |
| IVQ2012/IIQ2012 | IVQ2012/IVQ2011 | |
| China | 2.0 | 7.9 |
QOQ: Quarter relative to prior quarter; SAAR: seasonally adjusted annual rate
Source: Country Statistical Agencies http://www.bea.gov/national/index.htm#gdp
There is evidence of deceleration of growth of world trade and even contraction in more recent data. Table V-4 provides two types of data: growth of exports and imports in the latest available months and in the past 12 months; and contributions of net trade (exports less imports) to growth of real GDP. Japan provides the most worrisome data (Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real_25.html and for GDP Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html). Japan’s exports decreased 4.1 percent in the 12 months ending in Nov, 6.5 percent in the 12 months ending in Oct, 10.3 percent in the 12 months ending in Sep, 5.8 percent in the 12 months ending in Aug and 8.1 percent in 12 months ending in Jul while imports increased 0.8 percent in the 12 months ending in Nov, decreased 1.6 percent in the 12 months ending in Oct, increased 4.1 in the 12 months ending in Sep, decreased 5.4 percent in the 12 months ending in Aug and increased 2.1 percent in the 12 months ending in Jul. The second part of Table V-4 shows that net trade deducted 0.3 percentage points from Japan’s growth of GDP in IIQ2012 and deducted 2.9 percentage points from GDP growth in IIIQ2012. China’s exports fell 1.8 percent in the month of Jul and increased 1.0 percent in 12 months. In Aug 2012, China’s exports increased 0.6 percent and increased 2.7 percent in 12 months. Trade rebounded in China in Sep with growth of exports of 9.9 percent in the 12 months ending in Sep and 2.4 percent for imports. There was further growth in China’s exports of 11.6 percent in the 12 months ending in Oct while imports increased 2.4 percent. In Nov 2012, China’s exports increased 2.9 percent in 12 months and 7.3 percent in Jan-Nov 2012 while imports were unchanged in Nov 2012 and increased 4.1 percent in Jan-Nov 2012. In the 12 months ending in 2012, China’s exports increased 14.1 percent and imports 6.0 while in Jan-Dec 2012 exports increased 7.9 percent and imports increased 4.3 percent. Germany’s exports decreased 3.4 percent in the month of Nov 2012 and increased 0.0 percent in the 12 months ending in Nov 2012 while imports decreased 1.2 percent in the month of Nov and decreased 1.2 percent in the 12 months ending in Nov. Net trade contributed 1.4 percentage points to growth of Germany’s GDP in IIQ2012 and contributed 1.4 percentage points in IIIQ2012. The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing output, fell from 47.4 in Sep to 46.0 in Oct for the eighth consecutive month in contraction territory below 50.0 and much lower than the long-term average of the index of 52.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10278). New export orders fell for sixteen consecutive months at the fastest rate of decline since Apr 2009. UK’s exports increased 1.7 percent in Nov 2012 and decreased 1.0 percent in Sep-Nov 2012 relative to a year earlier while imports increased 1.0 percent in Nov and decreased 0.9 percent in Sep-Nov 2012 relative to a year earlier. Net trade deducted 0.9 percentage points from UK GDP growth in IIQ2012 and added 0.5 percentage points in IIIQ2012. France’s exports decreased 2.8 percent in Nov while imports decreased 2.5 percent and net trade deducted 0.4 percentage points from GDP growth in IIQ2012, adding 0.3 percentage points in IIIQ2012. US exports increased 1.0 percent in Nov 2012 and goods exports increased 4.6 percent in Jan-Nov relative to a year earlier but net trade added 0.38 percentage points to GDP growth in IIIQ2012. US imports increased 3.8 percent in Nov 2012 and goods imports increased 3.7 percent in Jan-Nov 2012 relative to a year earlier. The Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™) seasonally adjusted increased to 54.2 in Dec from 52.8 in Nov, which was the sharpest improvement in eight months, indicating mild expansion of manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465).
New export orders registered 54.8 in Dec from 53.6 in Nov. New export orders registered 54.8 in Dec from 50.3 in Nov, indicating expansion at a higher rate. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with impulse to US economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465).
In the six months ending in Dec 2012, United States national industrial production accumulated increase of 0.9 percent at the annual equivalent rate of 1.8 percent, which is lower than 2.2 percent growth in 12 months. Capacity utilization for total industry in the United States increased 0.1 percentage points in Dec to 78.8 percent from 78.7 percent in Nov, which is 1.5 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 0.8 percent in Dec seasonally adjusted, increasing 1.8 percent not seasonally adjusted in 12 months, and increased 0.7 percent in the six months ending in Dec or at the annual equivalent rate of 1.4 percent (Section VA). Trade values incorporate both price and quantity effects that are difficult to separate. Data do suggest that world trade slowdown is accompanying world economic slowdown.
Table V-4, Growth of Trade and Contributions of Net Trade to GDP Growth, ∆% and % Points
| Exports | Exports 12 M ∆% | Imports | Imports 12 M ∆% | |
| USA | 1.0 Nov | 4.6 Jan-Nov | 3.8 Nov | 3.7 Jan-Nov |
| Japan | Nov -4.1 Oct -6.5 Sep -10.3 Aug -5.8 Jul -8.1 | Nov 0.8 Oct -1.6 Sep 4.1 Aug -5.4 Jul 2.1 | ||
| China | -1.8 Jul 0.6 Aug 4.7 Sep -5.7 Oct 2.2 Nov 11.1 Dec | 1.0 Jul 7.8 Jan-Jul 2.7 Aug 7.1 Jan-Aug 9.9 Sep Jan-Sep 7.4 11.6 Oct 7.8 Jan-Oct 2.9 Nov 7.3 Jan-Nov 14.1 Dec 7.9 Jan-Dec | 2.2 Jul -0.3 Aug 4.9 Sep -9.4 Oct 11.3 Oct 4.9 Dec | 4.7 Jul 6.5 Jan-Jul -2.6 Aug 5.2 Jan-Aug 2.4 Sep 4.8 Jan-Sep 2.4 Oct 4.6 Jan-Oct 0.0 Nov 4.1 Jan-Nov 6.0 Dec 4.3 Jan-Dec |
| Euro Area | 5.4 12-M Nov | 8.3 Jan-Nov | -0.3 12-M Nov | 2.0 Jan-Nov |
| Germany | -3.4 Nov CSA | 0.0 Nov | -3.7 Nov CSA | -1.2 Nov |
| France Nov | -2.8 | -3.4 | -2.5 | -3.4 |
| Italy Nov | 0.4 | 3.6 | -2.2 | -8.2 |
| UK | 1.7 Nov | -1.0 Sep-Nov 12/Sep-Nov 11 | 1.0 Nov | -0.9 Sep-Nov 12/Sep-Nov 11 |
| Net Trade % Points GDP Growth | % Points | |||
| USA IIIQ2012 | 0.38 | |||
| Japan | -0.3 IIQ2012 -2.9 IIIQ2012 | |||
| Germany | 1.4 IIQ2012 1.4 IIIQ2012 | |||
| France | -0.4 IIQ2012 0.3 IIIQ2012 | |||
| UK | -0.9 IIQ2012 0.5 IIIQ2012 |
Sources: http://www.census.gov/foreign-trade/ http://www.bea.gov/iTable/index_nipa.cfm
http://www.customs.go.jp/toukei/latest/index_e.htm http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html
http://english.customs.gov.cn/publish/portal191/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home
https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 http://lekiosque.finances.gouv.fr/AppChiffre/Portail_default.asp
http://www.statistics.gov.uk/hub/index.html
The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table V-5 for Nov 2012. The share of Asia in Japan’s trade is more than one half, 54.8 percent of exports and 45.9 percent of imports. Within Asia, exports to China are 17.2 percent of total exports and imports from China 23.7 percent of total imports. The second largest export market for Japan in Oct 2012 is the US with share of 18.7 percent of total exports and share of imports from the US of 8.1 percent in total imports. Western Europe has share of 10.3 percent in Japan’s exports and of 11.4 percent in imports. Rates of growth of exports of Japan in Nov are sharply negative for all countries and regions with the exception of 5.3 percent for exports to the US, 11.0 percent for Mexico and 19.2 percent for the Middle East. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity, which could be part of the explanation for the decline of Japan’s exports by 4.1 percent in Nov 2012 while imports increased 0.8 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Nov are negative for some trading partners: minus 5.5 percent for the US, minus 4.5 percent for the Middle East and minus 14.2 percent for Australia. Imports from Asia increased 3.6 percent in the 12 months ending in Nov while imports from China increased 5.8 percent.
Table V-5, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens
| Nov 2012 | Exports | 12 months ∆% | Imports Millions Yens | 12 months ∆% |
| Total | 4,983,900 | -4.1 | 5,937,332 | 0.8 |
| Asia | 2,729,189 | -2.5 | 2,726,959 | 3.6 |
| China | 858,693 | -14.5 | 1,406,156 | 5.8 |
| USA | 933,760 | 5.3 | 479,933 | -5.5 |
| Canada | 59,616 | -11.6 | 90,043 | 10.8 |
| Brazil | 33,595 | -10.4 | 91,728 | 0.6 |
| Mexico | 74,434 | 11.0 | 31,446 | 20.9 |
| Western Europe | 513,037 | -21.2 | 676,894 | 3.6 |
| Germany | 131,431 | -14.1 | 190,133 | 7.7 |
| France | 37,419 | -25.5 | 107,427 | 24.5 |
| UK | 89,427 | -34.4 | 56,689 | 16.2 |
| Middle East | 183,230 | 19.2 | 1,034,102 | -4.5 |
| Australia | 120,513 | -1.5 | 338,643 | -14.2 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/latest/index_e.htm
Table V-6 of the World Trade Organization provides actual volume of world trade from 2008 to 2011 and projections of the World Trade Organization Secretariat for 2012 and 2013. Trade was weak during the global recession, increasing 2.3 percent in 2008 and decreasing 12.5 percent in 2009. Trade growth was 13.8 percent in 2010 and 5.0 percent in 2011. The World Trade Organization has reduced its projection of growth of world trade in 2012 to 2.5 percent.
Table V-6, World Trade Organization Projections of Growth of Volume of World Merchandise Trade and GDP, ∆%, 2008-2013
| 2008 | 2009 | 2010 | 2011 | 2012* | 2013* | |
| World | 2.3 | -12.5 | 13.9 | 5.0 | 2.5 | 4.5 |
| Exports | ||||||
| DE | 0.9 | -15.2 | 13.0 | 4.6 | 1.5 | 3.3 |
| DINGE | 4.3 | -7.8 | 15.3 | 5.3 | 3.5 | 5.7 |
| Imports | ||||||
| DE | -1.1 | -14.4 | 11.0 | 2.9 | 0.4 | 3.4 |
| DINGE | 8.6 | -10.5 | 18.3 | 8.3 | 5.4 | 6.1 |
| Real GDP** | 1.3 | -2.4 | 3.8 | 2.4 | 2.1 | 2.4 |
| DE | 0.0 | -3.8 | 2.7 | 1.5 | 1.2 | 1.5 |
| DINGE | 5.6 | 2.2 | 7.3 | 5.3 | 4.9 | 5.2 |
Notes: World Trade Volume: average of exports and imports; *Projections; **At market exchange rates; DE: Developed economies; DINGE: developing economies
Source: World Trade Organization Secretariat for trade, Consensus estimates of GDP forecasts
http://www.wto.org/english/news_e/pres12_e/pr676_e.htm
The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, increased to 53.7 in Dec from 53.6 in Nov, indicating expansion at a moderate rate but at the fastest pace since IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10564). This index has remained above the contraction territory of 50.0 during 41 consecutive months. The index was driven by services with weaker expansion by manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10564). The employment index increased from 50.0 in Nov to 52.3 in Dec with continuing increases in input prices but at a marginally faster pace. David Hensley, Director of Global Economic Coordination at JP Morgan, finds encouraging signs in services while manufacturing vacillates but with sufficient overall strength that can continue in the first part of 2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10564). The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, increased to 50.2 in Dec from 48.6 in Nov, which is the first reading above 50 since May 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10543). New export business declined for the ninth consecutive month in Dec, but at the lowest rate of contraction since May 2012. David Hensley, Director of Global Economics Coordination at JP Morgan, finds improving global manufacturing at the end of the year (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10543). The HSBC Brazil Composite Output Index, compiled by Markit, increased to 53.2 in Dec from 53.0 in Nov, indicating solid expansion at the fastest rate in nine months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10510). The HSBC Brazil Services Business Activity index, compiled by Markit, increased from 52.5 in Nov to 53.5 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10510). Andre Loes, Chief Economist, Brazil, at HSBC, finds improving expectations of economic activity in Brazil (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10510). The HSBC Brazil Purchasing Managers’ IndexTM (PMI™) decreased from 52.2 in Nov to 51.1 in Dec, indicating slower improvement of business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10508). Andre Loes, Chief Economist, Brazil at HSBC, finds continuing expansion in Brazil’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10508).
VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™) seasonally adjusted increased to 54.2 in Dec from 52.8 in Nov, which was the sharpest improvement in eight months, indicating mild expansion of manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465).
New export orders registered 54.8 in Dec from 53.6 in Nov. New export orders registered 54.8 in Dec from 50.3 in Nov, indicating expansion at a higher rate. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with impulse to US economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10465). The Markit US Manufacturing Purchasing Managers’ Index™ (PMI™) increased to 52.4 in Dec from 52.8 in Nov, which is the fastest growth rate since May 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10541). The index of new exports orders increased from 47.2 in Oct to 50.3 in Nov while total new orders increased from 51.1 in Oct to 53.6 in Nov. The index of new export orders increased from 50.3 in Nov to 52.6 in Dec, indicating expansion at a higher rate. Chris Williamson, Chief Economist at Markit, finds that manufacturing in the US is stronger at the end of the year and with expansion in countries such as Brazil and moderating sovereign debt crisis in Europe, US companies could benefit from stronger foreign demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10541). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business® increased 1.2 percentage points from 49.5 in Nov to 50.7 Dec Nov, which is the third reading above 50.0 in seven months (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders was unchanged at 50.3 in Dec from 50.3 in Nov. The index of exports increased 4.5 percentage points from 47.0 in Nov to 51.5 in Dec, moving into expansion territory. The Non-Manufacturing ISM Report on Business® PMI increased 1.4 percentage points from 54.7 in Nov to 56.1 in Dec, indicating growth during 41 consecutive months, while the index of new orders increased 1.2 percentage points from 58.1 in Nov to 59.3 in Dec (http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943). Table USA provides the country economic indicators for the US.
Table USA, US Economic Indicators
| Consumer Price Index | Dec 12 months NSA ∆%: 1.7; ex food and energy ∆%: 2.22 Dec month ∆%: 0.0; ex food and energy ∆%: 0.1 |
| Producer Price Index | Dec 12-month NSA ∆%: 1.3; ex food and energy ∆% 2.0 |
| PCE Inflation | Nov 12-month NSA ∆%: headline 1.4; ex food and energy ∆% 1.5 |
| Employment Situation | Household Survey: Nov Unemployment Rate SA 7.8% |
| Nonfarm Hiring | Nonfarm Hiring fell from 63.8 million in 2006 to 50.1 million in 2011 or by 13.7 million |
| GDP Growth | BEA Revised National Income Accounts IIQ2012/IIQ2011 2.1 IIIQ2012/IIIQ2012 2.6 IQ2012 SAAR 2.0 IIQ2012 SAAR 1.3 IIIQ2012 SAAR 3.1 |
| Real Private Fixed Investment | SAAR IIIQ2012 0.9 ∆% IVQ2007 to IIIQ2012: minus 12.6% Blog 12/23-24/12 |
| Personal Income and Consumption | Nov month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.8 |
| Quarterly Services Report | IIIQ12/IIIQ11 SA ∆%: Financial & Insurance 6.5 |
| Employment Cost Index | Compensation Private IIIQ2012 SA ∆%: 0.5 |
| Industrial Production | Dec month SA ∆%: 0.3 Manufacturing Nov SA ∆% 0.8 Dec 12 months SA ∆% 2.4, NSA 1.8 |
| Productivity and Costs | Nonfarm Business Productivity IIIQ2012∆% SAAE 2.9; IIIQ2012/IIIQ2011 ∆% 1.7; Unit Labor Costs SAAE IIIQ2012 ∆% -1.9; IIIQ2012/IIIQ2011 ∆%: 0.1 Blog 12/9/2012 |
| New York Fed Manufacturing Index | General Business Conditions From Dec -7.30 to Jan -7.78 |
| Philadelphia Fed Business Outlook Index | General Index from Dec 4.6 to Jan -5.8 |
| Manufacturing Shipments and Orders | New Orders SA Nov ∆% 0.0 Ex Transport 0.2 Jan-Nov NSA New Orders 3.2 Ex transport 2.4 |
| Durable Goods | Nov New Orders SA ∆%: 0.7; ex transport ∆%: 1.6 |
| Sales of New Motor Vehicles | Jan-Dec 2012 14,491,873; Jan-Dec 2011 12,777,939. Dec SAAR 15.37 million, Nov SAAR 15.54 million, Dec 2011 SAAR 13.61 million Blog 1/6/13 |
| Sales of Merchant Wholesalers | Jan-Nov 2012/Jan-Nov 2011 NSA ∆%: Total 5.5; Durable Goods: 6.3; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Nov 12/Nov 11 NSA ∆%: Sales Total Business 4.5; Manufacturers 3.3 |
| Sales for Retail and Food Services | Jan-Dec 2012/Jan-Dec 2011 ∆%: Retail and Food Services 5.2; Retail ∆% 4.9 |
| Value of Construction Put in Place | Nov SAAR month SA ∆%: -0.3 Nov 12-month NSA: 7.9 Jan-Nov 2012 ∆% 9.2 |
| Case-Shiller Home Prices | Oct 2012/Oct 2011 ∆% NSA: 10 Cities 3.4; 20 Cities: 4.3 |
| FHFA House Price Index Purchases Only | Oct SA ∆% 0.5; |
| New House Sales | Nov 2012 month SAAR ∆%: 4.4 |
| Housing Starts and Permits | Dec Starts month SA ∆%: 12.1 ; Permits ∆%: 0.3 |
| Trade Balance | Balance Nov SA -$48731 million versus Oct -$42064 million |
| Export and Import Prices | Dec 12-month NSA ∆%: Imports -1.5; Exports 1.1 |
| Consumer Credit | Nov ∆% annual rate: 7.0 |
| Net Foreign Purchases of Long-term Treasury Securities | Nov Net Foreign Purchases of Long-term Treasury Securities: $52.3 billion |
| Treasury Budget | Fiscal Year 2013/2012 ∆% Dec: Receipts 10.8; Outlays 15.5; Individual Income Taxes 15.5 Deficit Fiscal Year 2012 $1,089,353 million Blog 1/13/2013 |
| CBO Budget and Economic Outlook | 2012 Deficit $1128 B 7.3% GDP Debt 11,318 B 72.8% GDP 2013 Deficit $614 B, Debt 12,064 B 76.1% GDP Blog 8/26/12 11/18/12 |
| Commercial Banks Assets and Liabilities | Nov 2012 SAAR ∆%: Securities 0.9 Loans -2.7 Cash Assets 55.6 Deposits 5.5 Blog 12/30/12 |
| Flow of Funds | IIIQ2012 ∆ since 2007 Assets -$2059B Real estate -$4035B Financial +$1529 MM Net Worth -$1232B Blog 12/9/12 |
| Current Account Balance of Payments | IIIQ2012 -$128 B %GDP 3.3 Blog 12/23-24/12 |
Links to blog comments in Table USA:
1/13/13 http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html
1/6/13 http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html
12/30/12 http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html
12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html
12/9/12 http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
11/4/12 http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html
8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html
Industrial production decreased 1.0 percent in Aug 2012, increased 0.2 percent in Sep, fell 0.3 percent in Oct, rebounded 1.0 percent in Nov and increased 0.3 percent in Dec, as shown in Table VA-1, with all data seasonally adjusted. The report of the Board of Governors of the Federal Reserve System states (http://www.federalreserve.gov/releases/g17/current/):
“Industrial production increased 0.3 percent in December after having risen 1.0 percent in November when production rebounded in the industries that had been negatively affected by Hurricane Sandy in late October. For the fourth quarter as a whole, total industrial production moved up at an annual rate of 1.0 percent. Manufacturing output advanced 0.8 percent in December following a gain of 1.3 percent in November; production edged up at an annual rate of 0.2 percent in the fourth quarter. The output at mines rose 0.6 percent in December, and the output of utilities fell 4.8 percent as unseasonably warm weather held down the demand for heating. At 98.1 percent of its 2007 average, total industrial production in December was 2.2 percent above its year-earlier level. “
In the six months ending in Dec 2012, United States national industrial production accumulated increase of 0.9 percent at the annual equivalent rate of 1.8 percent, which is lower than 2.2 percent growth in 12 months. Business equipment fell 0.8 percent in Aug 2012, decreased 0.2 percent in Sep, decreased 1.3 percent in Oct, increased 2.0 percent in Nov and increased 1.3 percent in Dec, growing 8.7 percent in the 12 months ending in Dec and at the annual equivalent rate of 2.4 percent in the six months ending in Dec 2012. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/current/): “Capacity utilization for total industry moved up 0.1 percentage point to 78.8 percent, a rate 1.5 percentage points below its long-run (1972-2011) average.” United States industry is decelerating but the effects of hurricane Sandy prevent accurate evaluation.
Table VA-1, US, Industrial Production and Capacity Utilization, SA, ∆%, %
| 2012 | Dec | Nov | Oct | Sep | Aug | Jul | Sep 12/ Sep 11 |
| Total | 0.3 | 1.0 | -0.3 | 0.2 | -1.0 | 0.7 | 2.2 |
| Market | |||||||
| Final Products | 0.3 | 1.1 | -0.9 | 0.3 | -0.9 | 0.4 | 2.7 |
| Consumer Goods | -0.1 | 0.9 | -0.7 | 0.4 | -1.0 | 0.4 | 0.9 |
| Business Equipment | 1.3 | 2.0 | -1.3 | -0.2 | -0.8 | 0.2 | 8.7 |
| Non | 0.2 | 1.1 | -0.5 | 0.0 | -0.6 | 0.0 | 1.3 |
| Construction | 1.0 | 2.2 | -0.2 | 0.5 | -0.2 | -0.8 | 2.3 |
| Materials | 0.3 | 1.0 | 0.2 | 0.2 | -1.1 | 1.1 | 2.2 |
| Industry Groups | |||||||
| Manufacturing | 0.8 | 1.3 | -0.9 | 0.1 | -0.9 | 0.3 | 2.4 |
| Mining | 0.6 | 0.3 | 1.3 | 1.5 | -0.8 | 1.3 | 3.3 |
| Utilities | -4.8 | 0.2 | 1.2 | -0.8 | -2.2 | 2.9 | -0.3 |
| Capacity | 78.8 | 78.7 | 78.0 | 78.4 | 78.3 | 79.2 | 1.6 |
Sources: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/g17/current/
Manufacturing increased 0.8 percent in Dec 2012 seasonally adjusted, increasing 1.8 percent not seasonally adjusted in 12 months, and increased 0.7 percent in the six months ending in Dec or at the annual equivalent rate of 1.4 percent. More data are required to evaluate output-reducing effects of hurricane Sandy. A longer perspective of manufacturing in the US is provided by Table VA-2. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 as shown by 12 months rates of growth. Growth rates appeared to be increasing again closer to 5 percent but deteriorated. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.4 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appeared to be returning to the levels at 3 percent or higher in the annual rates before the recession but the pace of manufacturing fell steadily in the past six months.
Table VA-2, US, Monthly and 12-Month Rates of Growth of Manufacturing ∆%
| Month SA ∆% | 12-Month NSA ∆% | |
| Dec 2012 | 0.8 | 1.8 |
| Nov | 1.3 | 2.8 |
| Oct | -0.9 | 1.8 |
| Sep | 0.1 | 3.0 |
| Aug | -0.9 | 3.7 |
| Jul | 0.3 | 4.3 |
| Jun | 0.4 | 5.1 |
| May | -0.7 | 5.1 |
| Apr | 0.7 | 5.7 |
| Mar | -0.7 | 4.3 |
| Feb | 0.9 | 5.9 |
| Jan | 1.0 | 4.9 |
| Dec 2011 | 1.5 | 4.4 |
| Nov | 0.0 | 4.0 |
| Oct | 0.5 | 4.3 |
| Sep | 0.4 | 4.0 |
| Aug | 0.3 | 3.4 |
| Jul | 0.8 | 3.2 |
| Jun | 0.0 | 3.1 |
| May | 0.2 | 2.9 |
| Apr | -0.6 | 4.1 |
| Mar | 0.6 | 6.0 |
| Feb | 0.2 | 6.3 |
| Jan | 0.4 | 6.3 |
| Dec 2010 | 1.0 | 6.6 |
| Nov | 0.2 | 5.5 |
| Oct | 0.1 | 6.6 |
| Sep | 0.2 | 6.7 |
| Aug | 0.0 | 7.1 |
| Jul | 0.8 | 7.3 |
| Jun | 0.0 | 9.0 |
| May | 1.4 | 8.3 |
| Apr | 1.0 | 6.5 |
| Mar | 1.1 | 4.2 |
| Feb | 0.1 | 0.6 |
| Jan | 0.9 | 0.5 |
| Dec 2009 | 0.1 | -3.7 |
| Nov | 0.9 | -6.6 |
| Oct | -0.1 | -9.4 |
| Sep | 0.7 | -10.7 |
| Aug | 1.0 | -13.7 |
| Jul | 1.2 | -15.3 |
| Jun | -0.3 | -17.8 |
| May | -1.2 | -17.8 |
| Apr | -0.8 | -18.4 |
| Mar | -2.1 | -17.5 |
| Feb | 0.0 | -16.3 |
| Jan | -2.9 | -16.6 |
| Dec 2008 | -3.3 | -14.1 |
| Nov | -2.3 | -11.4 |
| Oct | -0.7 | -9.1 |
| Sep | -3.4 | -8.8 |
| Aug | -1.4 | -5.3 |
| Jul | -1.1 | -3.8 |
| Jun | -0.6 | -3.2 |
| May | -0.6 | -2.5 |
| Apr | -1.1 | -1.3 |
| Mar | -0.4 | -0.7 |
| Feb | -0.4 | 0.8 |
| Jan | -0.4 | 2.1 |
| Dec 2007 | 0.3 | 1.9 |
| Nov | 0.4 | 3.2 |
| Oct | -0.5 | 2.7 |
| Sep | 0.5 | 2.9 |
| Aug | -0.5 | 2.6 |
| Jul | 0.2 | 3.4 |
| Jun | 0.3 | 2.9 |
| May | -0.2 | 3.1 |
| Apr | 0.8 | 3.6 |
| Mar | 0.6 | 2.5 |
| Feb | 0.6 | 1.7 |
| Jan | -0.5 | 1.4 |
| Dec 2006 | 2.8 | |
| Dec 2005 | 3.4 | |
| Dec 2004 | 4.0 | |
| Dec 2003 | 1.8 | |
| Dec 2002 | 2.3 | |
| Dec 2001 | -5.5 | |
| Dec 2000 | 0.4 | |
| Dec 1999 | 5.4 | |
| Average ∆% Dec 1986-Dec 2012 | 2.3 | |
| Average ∆% Dec 1986-Dec 1999 | 4.3 | |
| Average ∆% Dec 1999-Dec 2006 | 1.3 | |
| Average ∆% Dec 1999-Dec 2012 | 0.3 | |
| ∆% Peak 102.9843 in 06/2007 to 92.8988 in 12/2012 | -9.8 | |
| ∆% Peak 102.9843 on 06/2007 to Trough 80.2365 in 4/2009 | -22.1 | |
| ∆% Trough 80.2365 in 04/2009 to 92.8988 in 12/2012 | 15.8 |
Source: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/g17/current/
Chart VA-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (Cobet and Wilson (2002); see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered to the levels before the global recession.
Chart VA-1, US, Industrial Production, Capacity and Utilization
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/current/ipg1.gif
The modern industrial revolution of Jensen (1993) is captured in Chart VA-2 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart VA-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression (http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html). The bottom left-hand part of Chart VA-2 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of semiconductors has already surpassed the level before the global recession.
Chart VA-2, US, Industrial Production, Capacity and Utilization of High Technology Industries
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/current/ipg3.gif
Additional detail on industrial production and capacity utilization is provided in Chart VA-3 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is still around 5 percent below the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.
Chart VA-3, US, Industrial Production and Capacity Utilization
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/current/ipg2.gif
United States manufacturing output from 1919 to 2012 on a monthly basis is provided by Chart VA-4 of the Board of Governors of the Federal Reserve System. The second industrial revolution of Jensen (1993) is quite evident in the acceleration of the rate of growth of output given by the sharper slope in the 1980s and 1990s. Growth was robust after the shallow recession of 2001 but dropped sharply during the global recession after IVQ2007. Manufacturing output recovered sharply but has not reached earlier levels and is losing momentum at the margin.
Chart VA-4, US, Manufacturing Output, 1919-2012
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/current/
Manufacturing jobs increased 25,000 in Dec 2012 relative to Nov 2012, seasonally adjusted but increased 15,000 in Dec 2012 relative to Nov 2012, not seasonally adjusted because of the weaker economy and international trade. In the six months ending in Dec 2012, United States national industrial production accumulated increase of 0.9 percent at the annual equivalent rate of 1.8 percent, which is lower than 2.2 percent growth in 12 months. Capacity utilization for total industry in the United States increased 0.1 percentage points in Dec to 78.8 percent from 78.7 percent in Nov, which is 1.5 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 0.8 percent in Dec seasonally adjusted, increasing 1.8 percent not seasonally adjusted in 12 months, and increased 0.7 percent in the six months ending in Dec or at the annual equivalent rate of 1.4 percent. Table I-3 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.3 percent in US national income in IIQ2012 and 86.4 percent in IIIQ2012. Most of US national income is in the form of services. In Dec 2012, there were 134.822 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 112.548 million NSA in Dec 2012 accounted for 82.9 percent of total nonfarm jobs of 135.822 million, of which 11.984 million, or 10.7 percent of total private jobs and 8.8 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 94.245 million NSA in Oct 2012, or 69.9 percent of total nonfarm jobs and 83.7 percent of total private-sector jobs. Manufacturing has share of 11.2 percent in US national income in IIQ2011 and 11.1 percent in IIIQ2012, as shown in Table I-3. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.
Table I-3, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total
| SAAR | % Total | SAAR IIIQ2012 | % Total | |
| National Income WCCA | 13,833.6 | 100.0 | 13,969.4 | 100.0 |
| Domestic Industries | 13,586.3 | 98.2 | 13,726.2 | 98.3 |
| Private Industries | 11,933.2 | 86.3 | 12,067.6 | 86.4 |
| Agriculture | 131.7 | 0.9 | 138.7 | 1.0 |
| Mining | 208.3 | 1.5 | 203.2 | 1.5% |
| Utilities | 214.6 | 1.6 | 216.8 | 1.6 |
| Construction | 583.7 | 4.2 | 592.7 | 4.2 |
| Manufacturing | 1548.1 | 11.2 | 1552.5 | 11.1 |
| Durable Goods | 894.3 | 6.5 | 895.6 | 6.4 |
| Nondurable Goods | 653.8 | 4.7 | 656.9 | 4.7 |
| Wholesale Trade | 853.5 | 6.2 | 837.9 | 6.0 |
| Retail Trade | 951.9 | 6.9 | 959.8 | 6.9 |
| Transportation & WH | 414.5 | 3.0 | 414.9 | 3.0 |
| Information | 499.1 | 3.6 | 499.6 | 3.6 |
| Finance, Insurance, RE | 2237.5 | 16.2 | 2324.6 | 16.6 |
| Professional, BS | 1971.7 | 14.3 | 1997.2 | 14.3 |
| Education, Health Care | 1378.1 | 10.0 | 1385.7 | 9.9 |
| Arts, Entertainment | 540.4 | 3.9 | 540.5 | 3.9 |
| Other Services | 400.0 | 2.9 | 403.6 | 2.9 |
| Government | 1653.0 | 11.9 | 1658.6 | 11.9 |
| Rest of the World | 247.3 | 1.8 | 243.1 | 1.7 |
Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart VA-5 of the Board of Governors of the Federal Reserve provides output of motor vehicles and parts in the United States from 1972 to 2012. Output has stagnated since the late 1990s.
Chart VA-5, US, Motor Vehicles and Parts Output, 1972-2012
http://www.federalreserve.gov/releases/g17/current/
Motor vehicle sales and production in the US have been in long-term structural change. Table VA-4 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. In Jan-Dec 2012, light vehicle sales accumulated to 14,491,873, which is higher by 13.4 percent relative to 12,777,939 a year earlier (http://motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 15.37 million in Dec 2012, lower than 15.54 million in Nov 2012 and higher than 13.61 million in Dec 2011 (http://motorintelligence.com/m_frameset.html).
Table VA-4, US, New Motor Vehicle Sales and Car Production, Thousand Units
| New Motor Vehicle Sales | New Car Sales and Leases | New Truck Sales and Leases | Domestic Car Production | |
| 1990 | 14,137 | 9,300 | 4,837 | 6,231 |
| 1991 | 12,725 | 8,589 | 4,136 | 5,454 |
| 1992 | 13,093 | 8,215 | 4,878 | 5,979 |
| 1993 | 14,172 | 8,518 | 5,654 | 5,979 |
| 1994 | 15,397 | 8,990 | 6,407 | 6,614 |
| 1995 | 15,106 | 8,536 | 6,470 | 6,340 |
| 1996 | 15,449 | 8,527 | 6,922 | 6,081 |
| 1997 | 15,490 | 8,273 | 7,218 | 5,934 |
| 1998 | 15,958 | 8,142 | 7,816 | 5,554 |
| 1999 | 17,401 | 8,697 | 8,704 | 5,638 |
| 2000 | 17,806 | 8,852 | 8,954 | 5,542 |
| 2001 | 17,468 | 8,422 | 9,046 | 4,878 |
| 2002 | 17,144 | 8,109 | 9,036 | 5,019 |
| 2003 | 16,968 | 7,611 | 9,357 | 4,510 |
| 2004 | 17,298 | 7,545 | 9,753 | 4,230 |
| 2005 | 17,445 | 7,720 | 9,725 | 4,321 |
| 2006 | 17,049 | 7,821 | 9,228 | 4,367 |
| 2007 | 16,460 | 7,618 | 8,683 | 3,924 |
| 2008 | 13,494 | 6,814 | 6.680 | 3,777 |
| 2009 | 10,601 | 5,456 | 5,154 | 2,247 |
| 2010 | 11,772 | 5,729 | 6,044 | 2,840 |
Source: US Census Bureau http://www.census.gov/compendia/statab/cats/wholesale_retail_trade/motor_vehicle_sales.html
Chart VA-6 of the Board of Governors of the Federal Reserve System provides output of computers and electronic products in the United States from 1972 to 2012. Output accelerated sharply in the 1990s and 2000s and has surpassed the level before the global recession beginning in IVQ2007.
Chart VA-6, US, Output of Computers and Electronic Products, 1972-2012
http://www.federalreserve.gov/releases/g17/current/
Chart VA-7 of the Board of Governors of the Federal Reserve System shows that output accelerated in the 1980s and 1990s with slower growth in the 2000s perhaps because processes matured. Growth was robust after the major drop during the global recession but appears to vacillate in the final segment.
Chart VA-7, US, Output of Durable Manufacturing, 1972-2012
http://www.federalreserve.gov/releases/g17/current/
Chart VA-8 of the Board of Governors of the Federal Reserve System provides output of aerospace and miscellaneous transportation equipment from 1972 to 2012. There is long-term upward trend with oscillations around the trend and cycles of large amplitude.
Chart VA-8, US, Output of Aerospace and Miscellaneous Transportation Equipment, 1972-2012
http://www.federalreserve.gov/releases/g17/current/
The Empire State Manufacturing Survey Index in Table VA-5 provides continuing deterioration that started in Jun 2012 well before Hurricane Sandy in Oct 2012. The current general index has been in negative contraction territory from minus 3.78 in Aug 2012 to minus 7.78 in Jan 2012. The index of current orders has also been in negative contraction territory from minus 4.63 in Aug 2012 to minus 7.18 in Jan 2013 with exception of 2.93 in Nov 2012. Number of workers and hours worked have registered negative or declining readings since Sep 2012. There is improvement in the general index for the next six months to 10.75 in Jan 2013 from 1.08 in Dec 2012 and in new orders to 25.11 in Jan 2013 from 17.19 in Dec 2012.
Table VA-5, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index SA
| General | New Orders | Shipments | # Workers | Average Work-week | |
| Current | |||||
| Jan 2013 | -7.78 | -7.18 | -3.08 | -4.30 | -5.38 |
| Dec 2012 | -7.30 | -3.44 | 11.93 | -9.68 | -10.75 |
| Nov | -4.31 | 2.93 | 14.18 | -14.61 | -7.87 |
| Oct | -6.75 | -7.21 | -6.48 | -1.08 | -4.30 |
| Sep | -7.54 | -10.60 | 7.30 | 4.26 | -1.06 |
| Aug | -3.78 | -4.63 | 6.37 | 16.47 | 3.53 |
| Jul | 7.08 | -2.27 | 11.52 | 18.52 | 0.00 |
| Jun | 4.15 | 2.28 | 6.34 | 12.37 | 3.09 |
| May | 14.52 | 8.99 | 23.11 | 20.48 | 12.05 |
| Apr | 6.40 | 4.81 | 4.51 | 19.28 | 6.02 |
| Mar | 18.00 | 6.55 | 15.97 | 13.58 | 18.52 |
| Feb | 18.31 | 7.93 | 19.90 | 11.76 | 7.06 |
| Jan | 12.12 | 11.21 | 21.69 | 12.09 | 6.59 |
| Dec 2011 | 9.6 | 6.35 | 18.94 | 2.33 | -2.33 |
| Nov | 1.82 | -0.97 | 23.77 | -3.66 | 2.44 |
| Oct | -7.39 | 1.51 | 11.34 | 3.37 | -4.49 |
| Sep | -4.75 | -4.31 | 2.46 | -5.43 | -2.17 |
| Six Months | |||||
| Jan 2013 | 10.75 | 25.11 | 23.86 | 7.53 | 3.23 |
| Dec 2012 | 1.08 | 17.19 | 22.46 | 10.75 | 5.38 |
| Nov | 5.62 | 15.96 | 25.67 | -1.12 | 0.00 |
| Oct | 4.30 | 22.79 | 17.39 | 0.00 | -11.83 |
| Sep | 5.32 | 27.85 | 23.35 | 8.51 | 2.13 |
| Aug | 2.35 | 14.34 | 21.16 | 3.53 | -8.24 |
| Jul | 3.70 | 19.85 | 21.60 | 6.17 | -4.94 |
| Jun | 1.03 | 26.02 | 22.18 | 16.49 | 2.06 |
| May | 12.05 | 31.26 | 26.00 | 12.05 | 8.43 |
| Apr | 19.28 | 38.95 | 40.75 | 27.71 | 10.84 |
| Mar | 13.58 | 39.18 | 41.64 | 32.10 | 20.99 |
| Feb | 15.29 | 39.25 | 40.92 | 29.41 | 18.82 |
| Jan | 23.08 | 45.70 | 44.12 | 28.57 | 17.58 |
| Dec 2011 | 3.49 | 42.20 | 40.36 | 24.42 | 22.09 |
| Nov | 6.10 | 30.89 | 33.01 | 14.63 | 8.54 |
| Oct | 4.49 | 19.71 | 22.65 | 6.74 | -2.25 |
| Sep | 8.70 | 23.52 | 22.89 | 0.00 | -6.52 |
Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html
The Business Outlook Survey Diffusion Index of the Federal Reserve Bank of Philadelphia in Table VA-6 also shows deterioration. The general index fell into contraction territory of minus 5.8 in Jan 2013 and the index of new orders fell to minus 4.3. Employment segments also show contraction: minus 5.2 for number of workers and minus 8.3 for hours worked. Expectations for the next six months are brighter with the general index increasing to 32.5 in Jan 2013 and the index of new orders increasing to 38.9.
Table VA-6, FRB of Philadelphia Business Outlook Survey Diffusion Index SA
| General Index | New Orders | Ship- | # of Workers | Average Workweek | |
| 11-Jan | 15.0 | 19.1 | 11.1 | 13.9 | 8.00 |
| 11-Feb | 25.6 | 15.7 | 24 | 19.6 | 6.9 |
| 11-Mar | 36.1 | 33.2 | 28.1 | 16.1 | 7.3 |
| 11-Apr | 13.7 | 12.6 | 23 | 9.9 | 15.1 |
| 11-May | 4 | 6.8 | 5.4 | 22.2 | 2.8 |
| 11-Jun | -1.1 | -1.2 | 5.7 | 3.4 | 3.7 |
| 11-Jul | 9.4 | 4.7 | 9 | 12.6 | -0.8 |
| 11-Aug | -19 | -18.6 | -4.7 | -0.5 | -7.6 |
| 11-Sep | -10 | -4.5 | -7.4 | 9.4 | -2.8 |
| 11-Oct | 9.7 | 8.8 | 11.2 | 7.8 | 5.2 |
| 11-Nov | 5 | 3.6 | 6.9 | 10.9 | 6.8 |
| 11-Dec | 4.2 | 5.9 | 6.2 | 8 | -0.3 |
| 12-Jan | 4.7 | 9 | 4.4 | 9.6 | 3.9 |
| 12-Feb | 5 | 5.3 | 8.6 | 0.9 | 5.7 |
| 12-Mar | 8.6 | -0.7 | 0.2 | 5.9 | -0.6 |
| 12-Apr | 6.5 | -0.8 | 0.5 | 13.4 | -3.4 |
| 12-May | -4.9 | -0.6 | 2.7 | -0.2 | -6.4 |
| 12-Jun | -12.8 | -13.1 | -13.8 | 2.3 | -16.9 |
| 12-Jul | -9.1 | -2.1 | -7.5 | -4.7 | -13.9 |
| 12-Aug | -1.7 | -0.8 | -5.9 | -7.6 | -9.9 |
| 12-Sep | 1.4 | 2.5 | -10.4 | -4.9 | -2.9 |
| 12-Oct | 4.2 | -0.5 | -3.5 | -7.6 | -6.5 |
| 12-Nov | -8.9 | -4.7 | -6.3 | -6.9 | -7.4 |
| 12-Dec | 4.6 | 4.9 | 14.7 | -0.2 | 0.4 |
| 13-Jan | -5.8 | -4.3 | 0.4 | -5.2 | -8.3 |
| Future | General Index | New Orders | Ship- ments | # of Workers | Average Workweek |
| 10-Dec | 42.1 | 41.9 | 14.5 | 28 | 22 |
| 11-Jan | 35.9 | 39.8 | 10.3 | 29.1 | 19.6 |
| 11-Feb | 38.6 | 42.7 | 14.2 | 22.6 | 11.8 |
| 11-Mar | 53.6 | 52.3 | 12.6 | 25.2 | 13 |
| 11-Apr | 26.6 | 33.5 | 8.8 | 32.3 | 15.9 |
| 11-May | 22.4 | 26.1 | 3.8 | 20.9 | 12.5 |
| 11-Jun | 9.6 | 7.7 | -4.7 | 7.2 | 4.2 |
| 11-Jul | 35 | 31 | 8 | 16.2 | 6.6 |
| 11-Aug | 26.4 | 22.8 | 3.5 | 13.9 | 2.4 |
| 11-Sep | 26.6 | 27 | 6 | 13.4 | 5.7 |
| 11-Oct | 29.8 | 31 | 5.3 | 17.5 | 8.2 |
| 11-Nov | 36.2 | 34 | 8.9 | 27.9 | 4.5 |
| 11-Dec | 37.7 | 31.6 | 4.4 | 7.9 | 2 |
| 12-Jan | 43.9 | 46.1 | 13 | 17.8 | 6.8 |
| 12-Feb | 32.2 | 26.3 | 5.7 | 20.2 | 8.7 |
| 12-Mar | 34.4 | 28.6 | 6 | 19.2 | 8 |
| 12-Apr | 34.8 | 29.6 | 5.6 | 23.6 | 6.9 |
| 12-May | 30.2 | 26 | 10.1 | 11.8 | 1.2 |
| 12-Jun | 35.5 | 35.6 | 6 | 19.1 | 5 |
| 12-Jul | 30.8 | 24.7 | 6.5 | 15.3 | 14.6 |
| 12-Aug | 25.3 | 17.3 | 4.8 | 14.5 | 8.8 |
| 12-Sep | 52 | 42.8 | 12.6 | 21.2 | 13.8 |
| 12-Oct | 22.6 | 22.7 | 8.6 | 9.8 | 10.5 |
| 12-Nov | 23.2 | 24.9 | 2.7 | 7 | 8.2 |
| 12-Dec | 28.3 | 28 | 2.7 | 11.2 | 14.4 |
| 13-Jan | 32.5 | 38.9 | 2.9 | 10.7 | 8.9 |
Source: Federal Reserve Bank of Philadelphia http://www.philadelphiafed.org/index.cfm
Chart VA-9 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Jun 2012. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now by what hopefully appeared as renewed strength from late 2011 into Jan 2012 with decline to negative territory of the current activity index in Nov 2012 and return to positive territory in Dec 2012 with decline of current conditions into contraction in Jan 2013.
Chart VA-9, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
The index of current new orders of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia in Table VA-10 illustrates the weakness of the cyclical expansion. The index weakened in 2006 and 2007 and then fell sharply into contraction during the global recession. There have been six drops into contraction and generally weak readings with some exceptions.
Chart VA-10, Federal Reserve Bank of Philadelphia Current New Orders Diffusion Index
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
Growth rates and levels of sales in millions of dollars of manufacturers, retailers and merchant wholesalers are provided in Table VA-7. Total business sales increased 1.0 percent in Nov after decreasing 0.3 percent in Oct and increased 4.5 percent in the 12 months ending in Nov 2012. Sales of manufacturers increased 0.4 percent in Nov after increasing 0.3 percent in Oct and increased 3.3 percent in the 12 months ending in Nov. Retailers’ sales increased 0.3 percent in Nov, decreased 0.2 percent in Oct and increased 4.8 percent in 12 months ending in Nov. Sales of merchant wholesalers increased 2.3 percent in Nov, falling 0.9 percent in Oct and increased 5.7 percent in 12 months ending in Nov. These data are not adjusted for price changes such that they reflect increases in both quantities and prices.
Table VA-7, US, Percentage Changes for Sales of Manufacturers, Retailers and Merchant Wholesalers
| Nov 12/ Oct 12 | Nov 2012 | Oct 12/ Sep 12 ∆% SA | Nov 12/ Nov 11 | |
| Total Business | 1.0 | 1,258,997 | -0.3 | 4.5 |
| Manufacturers | 0.4 | 469,261 | 0.3 | 3.3 |
| Retailers | 0.3 | 372,926 | -0.2 | 4.8 |
| Merchant Wholesalers | 2.3 | 416,810 | -0.9 | 5.7 |
Source: US Census Bureau http://www.census.gov/mtis/
Chart VA-11 of the US Census Bureau provides total US sales of manufacturing, retailers and wholesalers seasonally adjusted (SA) in millions of dollars. Seasonal adjustment softens adjacent changes for purposes of comparing short-term variations free of seasonal factors. There was sharp drop in the global recession followed by sharp recovery with decline and recovery in the final segment above the peak before the global recession. Data are not adjusted for price changes.
Chart VA-11, US, Total Business Sales of Manufacturers, Retailers and Merchant Wholesalers, SA, Millions of Dollars, Jan 1992-Nov 2012
US Census Bureau http://www.census.gov/mtis/
Chart VA-12 of the US Census Bureau provides total US sales of manufacturing, retailers and wholesalers not seasonally adjusted (NSA) in millions of dollars. The series without adjustment shows sharp jagged behavior because of monthly fluctuations following seasonal patterns. There is sharp recovery from the global recession in a robust trend, which is mixture of price and quantity effects because data are not adjusted for price changes. There is stability in the final segment.
Chart VA-12, US, Total Business Sales of Manufacturers, Retailers and Merchant Wholesalers, NSA, Millions of Dollars, Jan 1992-Nov 2012
US Census Bureau http://www.census.gov/mtis/
Businesses added cautiously to inventories to replenish stocks. Retailers added 0.3 percent to inventories in Nov 2012 and 0.6 percent in Oct with growth of 7.6 percent in 12 months, as shown in Table VA-8. Total business increased inventories by 0.3 percent in Nov, 0.3 percent in Oct and 5.5 percent in 12 months. Inventories sales/ratios of total business continued at a level close to 1.28 under judicious management to avoid costs and risks. Inventory/sales ratios of manufacturers and retailers are higher than for merchant wholesalers. There is stability in inventory/sales ratios in individual months and relative to a year earlier.
Table VA-8, US, Percentage Changes for Inventories of Manufacturers, Retailers and Merchant Wholesalers and Inventory/Sales Ratios
| Inventory Change | Nov 12 | Nov 12/ Oct 12 ∆% SA | Oct 12/ Sep 12 ∆% SA | Nov 12/ Nov 11 ∆% NSA |
| Total Business | 1,654,765 | 0.3 | 0.3 | 5.5 |
| Manufacturers | 614,702 | 0.0 | 0.0 | 2.5 |
| Retailers | 538,405 | 0.3 | 0.6 | 7.6 |
| Merchant | 501,658 | 0.6 | 0.3 | 7.0 |
| Inventory/ | Nov 12 | Nov 2012 SA | Oct 2012 SA | Sep 2011 SA |
| Total Business | 1,654,765 | 1.28 | 1.28 | 1.26 |
| Manufacturers | 614,702 | 1.27 | 1.28 | 1.29 |
| Retailers | 538,405 | 1.38 | 1.38 | 1.33 |
| Merchant Wholesalers | 501,658 | 1.19 | 1.21 | 1.17 |
Source: US Census Bureau http://www.census.gov/mtis/
Chart VA-13 of the US Census Bureau provides total business inventories of manufacturers, retailers and merchant wholesalers seasonally adjusted (SA) in millions of dollars from Jan 1992 to Nov 2012. The impact of the two recessions of 2001 and IVQ2007 to IIQ2009 is evident in the form of sharp reductions in inventories. Inventories have surpassed the peak before the global recession. Data are not adjusted for price changes.
Chart VA-13, US, Total Business Inventories of Manufacturers, Retailers and Merchant Wholesalers, SA, Millions of Dollars, Jan 1992-Nov 2012
US Census Bureau http://www.census.gov/mtis/
Chart VA-14 provides total business inventories of manufacturers, retailers and merchant wholesalers not seasonally adjusted (NSA) from Jan 1992 to Nov 2012 in millions of dollars. The recessions of 2001 and IVQ2007 to IIQ2009 are evident in the form of sharp reductions of inventories. There is sharp upward trend of inventory accumulation after both recessions. Total business inventories are significantly higher than in the peak before the global recession.
Chart VA-14, US, Total Business Inventories of Manufacturers, Retailers and Merchant Wholesalers, NSA, Millions of Dollars, Jan 1992-Nov 2012
US Census Bureau http://www.census.gov/mtis/
Inventories follow business cycles. When recession hits sales inventories pile up, declining with expansion of the economy. In a fascinating classic opus, Lloyd Meltzer (1941, 129) concludes:
“The dynamic sequences (I) through (6) were intended to show what types of behavior are possible for a system containing a sales output lag. The following conclusions seem to be the most important:
(i) An economy in which business men attempt to recoup inventory losses will always undergo cyclical fluctuations when equilibrium is disturbed, provided the economy is stable.
This is the pure inventory cycle.
(2) The assumption of stability imposes severe limitations upon the possible size of the marginal propensity to consume, particularly if the coefficient of expectation is positive.
(3) The inventory accelerator is a more powerful de-stabilizer than the ordinary acceleration principle. The difference in stability conditions is due to the fact that the former allows for replacement demand whereas the usual analytical formulation of the latter does not. Thus, for inventories, replacement demand acts as a de-stabilizer. Whether it does so for all types of capital goods is a moot question, but I believe cases may occur in which it does not.
(4) Investment for inventory purposes cannot alter the equilibrium of income, which depends only upon the propensity to consume and the amount of non-induced investment.
(5) The apparent instability of a system containing both an accelerator and a coefficient of expectation makes further investigation of possible stabilizers highly desirable.”
Chart VA-15 shows the increase in the inventory/sales ratios during the recession of 2007-2009. The inventory/sales ratio fell during the expansions. The inventory/sales ratio declined to a trough in 2011, climbed and then stabilized at current levels in 2012.
Chart VA-15, Total Business Inventories/Sales Ratios 2002 to 2011
Source: US Census Bureau
http://www2.census.gov/retail/releases/historical/mtis/img/mtisbrf.gif
Sales of retail and food services increased 0.5 percent in Dec after increasing 0.4 percent in Nov seasonally adjusted (SA), growing 5.2 percent in Jan-Dec 2012 relative to Jan-Dec 2011 not seasonally adjusted (NSA), as shown in Table VA-9. Excluding motor vehicles and parts, retail sales increased 0.3 percent in Dec 2012, decreasing 0.1 percent in Nov 2012 SA and increasing 4.6 percent NSA in Jan-Dec 2012 relative to a year earlier. Sales of motor vehicles and parts increased 1.6 percent in Dec 2012 after increasing 2.7 percent in Nov SA and increasing 7.9 percent NSA in Jan-Dec 2012 relative to a year earlier. Gasoline station sales decreased 1.6 percent SA in Dec 2012 after decreasing 4.5 percent in Nov 2012 in decreasing prices of gasoline that are moderating, increasing 4.0 percent in Jan-Dec 2012 relative to a year earlier.
Table VA-9, US, Percentage Change in Monthly Sales for Retail and Food Services, ∆%
| Dec/ Nov ∆% SA | Nov/Oct ∆% SA | Jan-Dec 2012 Million Dollars NSA | Jan-Dec 2012 from Jan-Dec 2011 ∆% NSA | |
| Retail and Food Services | 0.5 | 0.4 | 4,889,244 | 5.2 |
| Excluding Motor Vehicles and Parts | 0.3 | -0.1 | 3,997,645 | 4.6 |
| Motor Vehicles & Parts | 1.6 | 2.7 | 891,599 | 7.9 |
| Retail | 0.4 | 0.3 | 4,359,641 | 4.9 |
| Building Materials | 0.0 | 0.8 | 294,046 | 5.4 |
| Food and Beverage | 0.4 | -0.4 | 634,343 | 3.3 |
| Grocery | 0.2 | -0.5 | 568,343 | 3.1 |
| Health & Personal Care Stores | 1.4 | 0.2 | 274,940 | 1.0 |
| Clothing & Clothing Accessories Stores | 1.0 | 0.2 | 239,179 | 5.5 |
| Gasoline Stations | -1.6 | -4.5 | 547,113 | 4.0 |
| General Merchandise Stores | 0.0 | -0.8 | 632,212 | 0.5 |
| Food Services & Drinking Places | 1.2 | 1.2 | 529,603 | 7.3 |
Source: US Census Bureau http://www.census.gov/retail/
Chart VA-16 of the US Bureau of the Census shows percentage change of retail and food services sales. Auto sales have been increasing strongly monthly, and particularly relative to a year earlier, but with weakness in the total excluding auto sales and declines or mild growth in general merchandise.
Chart VA-16, US, Percentage Change of Retail and Food Services Sales
Source: US Census Bureau
http://www2.census.gov/retail/releases/historical/marts/img/martsbrf.gif
Chart VA-17 of the US Census Bureau provides total sales of retail trade and food services seasonally adjusted (SA) from Jan 1992 to Dec 2012 in millions of dollars. The impact on sales of the shallow recession of 2001 was much milder than the sharp contraction in the global recession from IVQ2007 to IIQ2009. There is flattening in the final segment of the series followed by another increase. Data are not adjusted for price changes.
Chart VA-17, US, Total Sales of Retail Trade and Food Services, SA, Jan 1992-Dec 2012, Millions of Dollars
Source: US Census Bureau
Chart VA-18 of the US Census Bureau provides total sales of retail trade and food services not seasonally adjusted (NSA) in millions of dollars from Jan 1992 to Dec 2012. Data are not adjusted for seasonality, which explains sharp jagged behavior, or price changes. There was contraction during the global recession from IVQ2007 to IIQ2009 with strong rebound to a higher level and stability followed by strong increase in the final segment.
Chart VA-18, US, Total Sales of Retail Trade and Food Services, NSA, Jan 1992-Nov 2012, Millions of Dollars
Source: US Census Bureau
Twelve-month rates of growth of US sales of retail and food services in Nov from 2000 to 2012 are shown in Table VA-10. Nominal sales have been dynamic in 2012, 2011 and 2010 after decline of 9.7 percent in 2008 and increase of 4.2 percent in 2009. It is difficult to separate price and quantity effects in these nominal data.
Table VA-10, US, Percentage Change in 12-Month Sales for Retail and Food Services, ∆% NSA
| Dec | 12 Months ∆% |
| 2012 | 2.5 |
| 2011 | 6.6 |
| 2010 | 6.9 |
| 2009 | 4.2 |
| 2008 | 9.7 |
| 2007 | 2.0 |
| 2006 | 3.1 |
| 2005 | 4.8 |
| 2004 | 8.3 |
| 2003 | 6.1 |
| 2002 | 3.3 |
| 2001 | 1.9 |
| 2000 | 0.7 |
Source: US Census Bureau http://www.census.gov/retail/
Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-11. Housing starts jumped 12.1 percent in Dec 2012 after decreasing 4.3 percent in Nov 2012 and increasing 12.4 percent in Sep 2012. Housing permits, indicating future activity, increased 0.3 percent in Dec after increasing 3.7 percent in Nov 2012 but decreased 2.5 percent in Oct 2012 and increased 11.1 percent in Sep 2012. Monthly rates in starts and permits fluctuate significantly as shown in Table VA-11.
Table VA-11, US, Housing Starts and Permits SSAR Month ∆%
| Housing | Month ∆% | Housing | Month ∆% | |
| Dec 2012 | 954 | 12.1 | 903 | 0.3 |
| Nov | 851 | -4.3 | 900 | 3.7 |
| Oct | 889 | 5.5 | 868 | -2.5 |
| Sep | 843 | 12.4 | 890 | 11.1 |
| Aug | 750 | 3.0 | 801 | -1.2 |
| Jul | 728 | -3.4 | 811 | 6.7 |
| Jun | 754 | 6.8 | 760 | -3.1 |
| May | 706 | -5.5 | 784 | 8.4 |
| Apr | 747 | 5.8 | 723 | -6.0 |
| Mar | 706 | -1.7 | 769 | 8.8 |
| Feb | 718 | -0.3 | 707 | 3.4 |
| Jan | 720 | 3.3 | 684 | -2.4 |
| Dec 2011 | 697 | -1.6 | 701 | -1.1 |
| Nov | 708 | 12.4 | 709 | 6.3 |
| Oct | 630 | -2.6 | 667 | 8.3 |
| Sep | 647 | 11.4 | 616 | -4.5 |
| Aug | 581 | -5.4 | 645 | 2.9 |
| Jul | 614 | -0.2 | 627 | -0.9 |
| Jun | 615 | 11.6 | 633 | 1.4 |
| May | 551 | -0.2 | 624 | 7.9 |
| Apr | 552 | -8.0 | 578 | -2.0 |
| Mar | 600 | 15.8 | 590 | 10.1 |
| Feb | 518 | -18.0 | 536 | -5.3 |
| Jan | 632 | 17.3 | 566 | -10.4 |
| Dec 2010 | 539 | -1.1 | 632 | 12.9 |
| Nov | 545 | 0.4 | 560 | 0.4 |
| Oct | 543 | -8.6 | 558 | -0.9 |
| Sep | 594 | -0.8 | 563 | -2.9 |
SAAR: Seasonally Adjusted Annual Rate
Source: US Census Bureau http://www.census.gov/construction/nrc/
Housing starts and permits in Jan-Nov not-seasonally adjusted are provided in Table VA-12. Housing starts increased 28.1 percent in Jan-Dec 2012 relative to Jan-Dec 2011 and in the same period new permits increased 30.3 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 56.7 percent in Jan-Dec 2012 relative to Jan-Dec 2006 and fell 62.3 percent relative to Jan-Dec 2005. Housing permits fell 55.8 percent in Jan-Dec 2012 relative to Jan-Dec 2006 and fell 62.3 percent in Jan-Dec 2012 from Jan-Dec 2005.
Table VA-12, US, Housing Starts and New Permits, Thousands of Units, NSA, and %
| Housing Starts | New Permits | |
| Jan-Dec 2012 | 780.0 | 813.4 |
| Jan-Dec 2011 | 608.8 | 624.1 |
| ∆% Jan-Dec 2012/Jan-Dec 2011 | 28.1 | 30.3 |
| Jan-Dec 2006 | 1800.9 | 1838.9 |
| ∆% Jan-Dec 2012/ | -56.7 | -55.8 |
| Jan-Dec 2005 | 2068.3 | 2155.3 |
| ∆%/ Jan-Dec 2012 | -62.3 | -62.3 |
Source: US Census Bureau http://www.census.gov/construction/nrc/
Chart VA-19 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-19 shows a mild downward trend or stagnation from mid 2010 to the present in single-family houses with a recent mild upward trend in recent months in the category of two or more units but marginal decline in recent months.
Chart VA-19, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr020.html
Table VA-13 provides new housing units started in the US at seasonally adjusted annual rates (SAAR) from Jun to Dec of the year from 2000 to 2012. SAARs have dropped from high levels around 2 million in 2005-2006 to the range of 728,000 to 889,000 in Jun-Dec 2012, which is an improvement over the range of 581,000 to 708,000 in Jun-Nov 2011.
Table VA-13, New Housing Units Started in the US, Seasonally Adjusted Annual Rates, Thousands of Units
| Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| 2000 | 1,559 | 1,463 | 1,541 | 1,507 | 1,549 | 1,551 | 1,532 |
| 2001 | 1,636 | 1,670 | 1,567 | 1,562 | 1,540 | 1,602 | 1,568 |
| 2002 | 1,717 | 1,655 | 1,633 | 1,804 | 1,648 | 1,753 | 1,788 |
| 2003 | 1,867 | 1,897 | 1,833 | 1,939 | 1,967 | 2,083 | 2,057 |
| 2004 | 1,828 | 2,002 | 2,024 | 1,905 | 2,072 | 1,782 | 2,042 |
| 2005 | 2,068 | 2,054 | 2,095 | 2,151 | 2,065 | 2,147 | 1,994 |
| 2006 | 1,802 | 1,737 | 1,650 | 1,720 | 1,491 | 1,570 | 1,649 |
| 2007 | 1,448 | 1,354 | 1,330 | 1,183 | 1,264 | 1,197 | 1,037 |
| 2008 | 1,046 | 923 | 844 | 820 | 777 | 652 | 560 |
| 2009 | 585 | 594 | 586 | 585 | 534 | 588 | 581 |
| 2010 | 536 | 546 | 599 | 594 | 543 | 545 | 539 |
| 2011 | 615 | 614 | 581 | 647 | 630 | 708 | 697 |
| 2012 | 754 | 728 | 750 | 843 | 889 | 851 | 954 |
Source: US Census Bureau http://www.census.gov/construction/nrc/
Chart VA-20 of the US Census Bureau provides construction of new housing units started in the US at seasonally adjusted annual rate (SAAR) from Jan 1959 to Dec 2012 that help to analyze in historical perspective the debacle of US new house construction. There are three periods in the series. (1) There is stationary behavior with wide fluctuations from 1959 to the beginning of the decade of the 1970s. (2) There is sharp upward trend from the 1990s to 2006 propelled by the US housing subsidy, politics of Fannie Mae and Freddie Mac and unconventional monetary policy of near zero interest rates from Jun 2003 to Jun 2004 and suspension of the auction of 30-year Treasury bonds. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html . (3) Housing construction dropped vertically during the global recession. There was initial stability followed by some recovery in recent months.
Chart VA-20, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate), Thousands of Units, Jan 1959-Dec 2012
Source: US Census Bureau
http://www.census.gov/construction/nrc/
Table VA-14 provides actual new housing units started in the US, or not seasonally adjusted, in Jun-Dec from 2000 to 2012. The number of housing units started fell from the peak of 192.8 thousand in Jun 2005 to 61.5 thousand in Dec 2012 or 68.1 percent. The number of housing units started fell from 136.0 thousand in Dec 2005 to 61.5 thousand in Dec 2012 or by 54.8 percent. The number of housing units started jumped from 42.7 thousand in Dec 2011 to 61.5 thousand in Dec 2012 or by 44.0 percent.
Table VA-14, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units
| Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| 2000 | 146.3 | 135.0 | 141.4 | 128.9 | 139.7 | 117.1 | 100.7 |
| 2001 | 155.2 | 154.6 | 141.5 | 133.1 | 139.8 | 121.0 | 104.6 |
| 2002 | 160.3 | 155.9 | 147.0 | 155.6 | 146.8 | 133.0 | 123.1 |
| 2003 | 174.5 | 175.8 | 163.8 | 171.3 | 173.5 | 153.7 | 144.2 |
| 2004 | 172.3 | 182.0 | 185.9 | 164.0 | 181.3 | 138.1 | 140.2 |
| 2005 | 192.8 | 187.6 | 192.0 | 187.9 | 180.4 | 160.7 | 136.0 |
| 2006 | 170.2 | 160.9 | 146.8 | 150.1 | 130.6 | 115.2 | 112.4 |
| 2007 | 137.8 | 127.9 | 121.2 | 101.5 | 115.0 | 88.8 | 68.9 |
| 2008 | 102.5 | 86.7 | 76.4 | 73.9 | 68.2 | 47.5 | 37.7 |
| 2009 | 59.1 | 56.8 | 52.9 | 52.6 | 44.5 | 42.3 | 36.6 |
| 2010 | 53.8 | 51.5 | 56.3 | 53.0 | 45.4 | 40.6 | 33.8 |
| 2011 | 60.5 | 57.6 | 54.5 | 58.8 | 53.2 | 53.0 | 42.7 |
| 2012 | 74.7 | 69.2 | 69.0 | 75.8 | 77.0 | 63.3 | 61.5 |
Source: US Census Bureau
Chart VA-21 of the US Census Bureau provides new housing units started in the US not seasonally adjusted (NSA) from Jan 1959 to Dec 2012. There is the same behavior as in Chart VA-20 SA but with sharper fluctuations in the original series without seasonal adjustment. There are the same three periods. (1) The series is virtually stationary with wide fluctuations from 1959 to the late 1980s. (2) There is downward trend during the savings and loans crisis of the 1980s. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5482.1 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.74 percent of GDP in a year. US GDP in 2011 is estimated at $15,075.7 billion, such that the bailout would be equivalent to cost to taxpayers of about $412.5 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. (3) There is vertical drop of new housing construction in the US during the global recession from (Dec) IVQ2007 to (Jun) IIQ2009 (http://www.nber.org/cycles/cyclesmain.html). The final segment shows upward trend but it could be simply part of yet another fluctuation. Marginal improvement in housing in the US should not obscure the current depressed levels relative to earlier periods.
Chart VA-21, US, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units, Jan 1959-Dec 2012
Source: US Census Bureau
http://www.census.gov/construction/nrc/
A longer perspective on residential construction in the US is provided by Table VA-15 with annual data from 1960 to 2012. Housing starts fell 62.3 percent from 2005 to 2012, 50.3 percent from 2000 to 2012 and 50.3 percent relative to the average from 1959 to 1963. Housing permits fell 62.3 percent from 2005 to 2012, 48.9 percent from 2000 to 2011 and 29.8 percent from the average of 1969-1963 to 2012. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.
Table VA-15, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands
| Starts | Permits | |
| 2012 | 780.0 | 813.4 |
| ∆% 2012/2011 | 28.1 | 30.3 |
| ∆% 2012/2010 | 32.9 | 34.5 |
| ∆% 2012/2005 | -62.3 | -62.3 |
| ∆% 2012/2000 | -50.3 | -48.9 |
| ∆% 2012/Av 1959-1963 | -45.4 | -29.8 |
| 2011 | 608.8 | 624.1 |
| ∆% 2011/2005 | -70.6 | -71.9 |
| ∆% 2011/2000 | -61.2 | -62.0 |
| ∆% 2011/Av 1959-1963 | -57.4 | -46.1 |
| 2010 | 586.9 | 604.6 |
| 2009 | 554.0 | 583.0 |
| 2008 | 905.5 | 905.4 |
| 2007 | 1,355,0 | 1,398.4 |
| 2006 | 1,800.9 | 1,838.9 |
| 2005 | 2,068.3 | 2,155.3 |
| ∆% 2005/2000 | 31.8 | 35.4 |
| 2004 | 1,955.8 | 2,070.1 |
| 2003 | 1,847.7 | 1,889.2 |
| 2002 | 1,704.9 | 1,747.2 |
| 2001 | 1,602.7 | 1,636.7 |
| 2000 | 1,568.7 | 1,592.3 |
| ∆% 2000/1990 | 31.5 | 43.3 |
| 1990 | 1,192,7 | 1,110.8 |
| 1980 | 1,292.2 | 1,190.6 |
| 1970 | 1,433.6 | 1,351.5 |
| Average 1959-63 | 1,429.7 | 1158.2 |
Source: US Census Bureau http://www.census.gov/construction/nrc/
Risk aversion channels funds toward US long-term and short-term securities that finance the US balance of payments and fiscal deficits benefitting at the moment from risk flight to US dollar denominated assets. Net foreign purchases of US long-term securities (row C in Table VA-16) increased from minus $1.0 billion in Oct 2012 to $52.3 billion in Nov 2012. Foreign (residents) purchases minus sales of US long-term securities (row A in Table VA-16) in Oct of $25.4 billion increased to $61.5 billion in Nov 2012. Net US (residents) purchases of long-term foreign securities (row B in Table IIB-5) increased from minus $26.4 billion in Oct to minus $9.1 billion in Nov. In Nov,
C = A + B = $61.5 billion - $9.1 billion = $52.4 billion
There are minor rounding errors. There is increasing demand in Table VA-16 in Oct in A1 private purchases by residents overseas of US long-term securities of $60.9 billion of which increases in A11 Treasury securities of $29.1 billion, increase in A12 of $1.6 billion in agency securities, increase by $8.6 billion of corporate bonds and increase of $21.7 billion in equities. Worldwide risk aversion causes flight into US Treasury obligations with significant oscillations. Official purchases of securities in row A2 increased $0.5 billion with decrease of Treasury securities of $2.7 billion in Nov. Official purchases of agency securities increased $1.1 billion in Nov and decreased $4.1 billion in Oct. Row D shows increase in Nov in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills increased $4.5 billion (row D11) with foreign official holdings increasing $4.1 billion while the category other decreased $3.8 billion. Risk aversion of default losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses.
Table VA-16, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA
| Nov 2011 12 Months | Nov 2012 12 Months | Oct 2012 | Nov 2012 | |
| A Foreign Purchases less Sales of | 583.7 | 453.6 | 25.4 | 61.5 |
| A1 Private | 390.7 | 259.3 | 19.2 | 60.9 |
| A11 Treasury | 320.5 | 167.6 | 3.8 | 29.1 |
| A12 Agency | 51.7 | 90.5 | 12.3 | 1.6 |
| A13 Corporate Bonds | -21.1 | -54.9 | 3.0 | 8.6 |
| A14 Equities | 39.6 | 56.1 | 0.1 | 21.7 |
| A2 Official | 193.0 | 194.3 | 6.2 | 0.5 |
| A21 Treasury | 178.2 | 171.2 | 8.2 | -2.7 |
| A22 Agency | 12.1 | 8.6 | -4.1 | 1.1 |
| A23 Corporate Bonds | -0.5 | 5.5 | 0.8 | 2.3 |
| A24 Equities | 3.2 | 9.0 | 1.2 | -0.2 |
| B Net US Purchases of LT Foreign Securities | -174.3 | 22.9 | -26.4 | -9.1 |
| B1 Foreign Bonds | -83.8 | 47.7 | -26.3 | -2.8 |
| B2 Foreign Equities | -90.5 | -24.8 | -0.1 | -6.3 |
| C Net Foreign Purchases of US LT Securities | 409.4 | 476.5 | -1.0 | 52.3 |
| D Increase in Foreign Holdings of Dollar Denominated Short-term | -114.8 | 45.7 | -2.0 | 0.7 |
| D1 US Treasury Bills | -92.0 | 23.8 | -10.0 | 4.5 |
| D11 Private | 28.2 | 19.3 | -5.6 | 0.4 |
| D12 Official | -120.2 | 4.5 | -4.4 | 4.1 |
| D2 Other | -22.7 | 22.0 | 8.0 | -3.8 |
C = A + B;
A = A1 + A2
A1 = A11 + A12 + A13 + A14
A2 = A21 + A22 + A23 + A24
B = B1 + B2
D = D1 + D2
Sources: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx
Table VA-17 provides major foreign holders of US Treasury securities. China is the largest holder with $1170.1 billion in Nov 2012, decreasing 6.7 percent from $1254.6 billion in Oct 2011. Japan increased its holdings from $1066.4 billion in Nov 2011 to $1132.8 billion in Nov 2012 or by 6.2 percent likely in part by intervention to buy dollars against the yen to depreciate the overvalued yen/dollar rate that diminishes the competitiveness of Japan. Total foreign holdings of Treasury securities rose from $5009.1 billion in Nov 2011 to $5557.2 billion in Nov 2012, or 10.9 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings (see Pelaez and Pelaez, The Global Recession Risk (2007)). A point of saturation of holdings of US Treasury debt may be reached as foreign holders evaluate the threat of reduction of principal by dollar devaluation and reduction of prices by increases in yield, including possibly risk premium. Shultz et al (2012) find that the Fed financed three-quarters of the US deficit in fiscal year 2011, with foreign governments financing significant part of the remainder of the US deficit while the Fed owns one in six dollars of US national debt. Concentrations of debt in few holders are perilous because of sudden exodus in fear of devaluation and yield increases and the limit of refinancing old debt and placing new debt. In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):
“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”
Table VA-17, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period
| Nov 2012 | Oct 2012 | Nov 2011 | |
| Total | 5557.2 | 5526.2 | 5009.1 |
| China | 1170.1 | 1169.9 | 1254.6 |
| Japan | 1132.8 | 1131.9 | 1066.4 |
| Caribbean Banking Centers | 283.7 | 273.5 | 223.3 |
| Oil Exporters | 260.1 | 262.2 | 254.2 |
| Brazil | 257.0 | 254.1 | 226.6 |
| Taiwan | 193.1 | 197.2 | 166.9 |
| Switzerland | 186.9 | 187.8 | 126.2 |
| Russia | 164.1 | 171.1 | 145.1 |
| United Kingdom | 145.0 | 133.2 | 125.2 |
| Luxembourg | 144.8 | 144.7 | 127.2 |
| Hong Kong | 142.3 | 138.5 | 107.9 |
| Belgium | 135.4 | 136.4 | 133.2 |
| Foreign Official Holdings | 3985.7 | 3984.3 | 3628.9 |
| A. Treasury Bills | 383.5 | 379.4 | 379.0 |
| B. Treasury Bonds and Notes | 3602.2 | 3604.9 | 3249.9 |
Source: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticsec2.aspx#ussecs
VB Japan. Table VB-BOJF provides the forecasts of economic activity and inflation in Japan by the majority of members of the Policy Board of the Bank of Japan, which is part of their Outlook for Economic Activity and Prices (http://www.boj.or.jp/en/mopo/outlook/gor1210a.pdf). For fiscal 2013, the forecast is of growth of GDP between 1.3 and 1.8 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.1 to 0.7 percent and the all items CPI less fresh food of 0.2 to 0.6 percent. These forecasts are biannual in Apr and Oct.
Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year
| Fiscal Year | Real GDP | Domestic CGPI | CPI All Items Less Fresh Food |
| 2011 | |||
| Apr 2012 | -0.2 to –0.2 | +1.7 | 0.0 |
| Jan 2012 | -0.4 to –0.3 | +1.8 to +1.9 | -0.1 to 0.0 |
| 2012 | |||
| Oct 2012 | +1.4 to +1.6 [+1.5] | -1.2 to -0.9 [-1.1] | -0.1 to -0.1 [-0.1] |
| Jul 2012 | +2.2 to +2.4 [+2.2] | -0.3 to 0.0 [-0.2] | +0.1 to +0.3 [+0.2] |
| Apr 2012 | +2.1 to +2.4 | +0.4 to +0.7 | +0.1 to +0.4 |
| Jan 2012 | +1.8 to +2.1 | -0.1 to +0.2 | 0.0 to +0.2 |
| 2013 | |||
| Oct 2012 | +1.3 to +1.8 [+1.6] | +0.1 to +0.7 [+0.5] | +0.2 to +0.6 [+0.4] |
| Jul 2012 | +1.6 to +1.8 [+1.7] | +0.6 to +0.8 [+0.6] | +0.5 to +0.7 [+0.7] |
| Apr 2012 | +1.6 to +1.8 | +0.7 to +0.9 | +0.5 to +0.7 |
| Jan 2012 | +1.4 to +1.7 | +0.6 to 1.0 | +0.4 to +0.5 |
| 2014 | |||
| Oct 2012 | +0.2 to +0.7] [+0.6] | +3.7 to +4.4 [+4.2] | +2.4 to +3.0 [+2.8] |
Figures in brackets are the median of forecasts of Policy Board members
Source: Policy Board, Bank of Japan
http://www.boj.or.jp/en/mopo/outlook/gor1210a.pdf
Private-sector activity in Japan contracted at a marginal rate with the Markit Composite Output PMI™ Index decreasing from 49.9 in Nov to 49.3 in Dec, which is marginally lower than 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10549). Paul Smith, economist at Markit and author of the report, finds that growth in services suggests strength but with weakness in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10549). The Markit Business Activity Index of Services increased marginally from 51.4 in Nov to 51.5 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10394). The Markit/JMMA Purchasing Managers’ Index™ (PMI™), seasonally adjusted, decreased from 46.5 in Nov to 45.0 in Dec for the lowest reading in 44 months and the seventh consecutive month of contraction below 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10470). Foreign orders fell for the ninth consecutive month with weakness in markets in Europe and China. Paul Smith, economist at Markit and author of the report, finds weakness in foreign and domestic demand with marked decline of output and particularly in new orders for capital goods (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10470).Table JPY provides the country data table for Japan.
Table JPY, Japan, Economic Indicators
| Historical GDP and CPI | 1981-2010 Real GDP Growth and CPI Inflation 1981-2010 |
| Corporate Goods Prices | Dec ∆% 0.3 |
| Consumer Price Index | Nov NSA ∆% -0.4; Nov 12 months NSA ∆% -0.2 |
| Real GDP Growth | IIIQ2012 ∆%: minus 0.9 on IIQ2012; IIIQ2012 SAAR minus 3.5; |
| Employment Report | Nov Unemployed 2.60 million Change in unemployed since last year: minus 210 thousand |
| All Industry Indices | Oct month SA ∆% 0.2 Blog 12/23-24/12 |
| Industrial Production | Nov SA month ∆%: -1.7 |
| Machine Orders | Total Nov ∆% 5.3 Private ∆%: 15.2 Novt ∆% Excluding Volatile Orders 3.9 |
| Tertiary Index | Nov month SA ∆% minus 0.3 |
| Wholesale and Retail Sales | Nov 12 months: |
| Family Income and Expenditure Survey | Nov 12-month ∆% total nominal consumption 0.1, real 0.2 Blog 12/30/12 |
| Trade Balance | Exports Nov 12 months ∆%: minus 4.1 Imports Nov 12 months ∆% 0.8 Blog 12/23-24/12 |
Links to blog comments in Table JPY:
12/30/12 http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html
12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html
12/16/12 http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html
8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
The tertiary activity index of Japan decreased 0.3 percent SA in Nov 2012 and increased 1.1 percent NSA in the 12 months ending in Nov 2012, as shown in Table VB-1. The tertiary activity index of Japan seasonally adjusted fell at the annual equivalent rate of minus 4.1 percent in Jan-Apr 2012 for cumulative decline of 1.4 percent but increased 2.6 percent not seasonally adjusted in the 12 months ending in Apr 2012, as shown in Table VB-5. The tertiary activity index fell 0.2 percent in the six months from Jun to Nov 2012 or at the annual equivalent rate of minus 0.4 percent. There was strong impact from the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 in the decline of the tertiary activity index by 5.4 percent in Mar 2011 and 3.4 percent in 12 months. The performance of the tertiary sector in the quarter Jul-Sep 2011 was weak: increase of 0.4 percent in Jul, increase of 0.1 percent in Aug and decline of 0.2 percent in Sep, after increasing 1.2 percent in Jun. The not seasonally adjusted index increased 4.2 percent in the 12 months ending in Mar 2012 but the 12-month percentage rate dropped to 0.1 percent in Sep 2012, increasing 1.3 percent in the 12 months ending in Oct 2012 and 1.1 percent in the 12 months ending in Nov 2012. Most of the growth occurred in the quarter from Apr to Jun 2011 with gain of 4.3 percent or at annual equivalent rate of 18.1 percent.
Table VB-1, Japan, Tertiary Activity Index, ∆%
| Month ∆% SA | 12 Months ∆% NSA | |
| Nov 2012 | -0.3 | 1.1 |
| Oct | 0.1 | 1.3 |
| Sep | 0.2 | 0.1 |
| Aug | 0.3 | 0.6 |
| Jul | -0.6 | 0.9 |
| Jun | 0.1 | 0.8 |
| May | 0.9 | 3.2 |
| Apr | -0.2 | 2.6 |
| Mar | -0.6 | 4.2 |
| Feb | 0.0 | 2.4 |
| Jan | -0.6 | 0.4 |
| Dec 2011 | 1.6 | 1.2 |
| Nov | -0.8 | -0.3 |
| Oct | 0.6 | 0.9 |
| Sep | -0.2 | 0.1 |
| Aug | 0.1 | 0.8 |
| Jul | 0.4 | 0.1 |
| Jun | 1.2 | 1.0 |
| May | 0.9 | -0.2 |
| Apr | 2.1 | -2.3 |
| Mar | -5.4 | -3.4 |
| Feb | 0.3 | 2.0 |
| Jan | 0.5 | 1.0 |
| Dec 2010 | -0.2 | 1.8 |
| Nov | 0.6 | 2.5 |
| Oct | 0.2 | 0.5 |
| Sep | -0.4 | 1.3 |
| Aug | 0.1 | 2.3 |
| Jul | 0.7 | 1.6 |
| Jun | 0.1 | 1.0 |
| May | -0.3 | 1.2 |
| Dec 2009 | -5.2 | |
| Dec 2008 | -3.3 | |
| Dec 2007 | -0.3 | |
| Dec 2006 | 0.6 | |
| Dec 2005 | 2.6 | |
| Dec 2004 | 1.6 | |
| Calendar Year | ||
| 2011 | 0.1 | |
| 2010 | 1.3 | |
| 2009 | -5.2 | |
| 2008 | -1.0 | |
| 2007 | 1.0 | |
| 2006 | 1.8 | |
| 2005 | 1.9 | |
| 2004 | 1.8 |
Source: http://www.meti.go.jp/english/statistics/index.html
Month and 12-month rates of growth of the tertiary activity index of Japan and components in Nov 2012 are provided in Table VB-2. Electricity, gas, heat supply and water increased 1.3 percent in Nov and increased 0.8 percent in the 12 months ending in Nov. Wholesale and retail trade increased 1.6 percent in the month of Nov and increased 0.2 percent in 12 months. Information and communications increased 0.2 percent Nov and decreased 0.3 percent in 12 months.
Table VB-2, Japan, Tertiary Index and Components, Month and 12-Month Percentage Changes ∆%
| Nov 2012 | Weight | Month ∆% SA | 12 Months ∆% NSA |
| Tertiary Index | 10,000.0 | -0.3 | 1.1 |
| Electricity, Gas, Heat Supply & Water | 372.9 | 1.3 | 0.8 |
| Information & Communications | 951.2 | 0.2 | -0.3 |
| Wholesale & Retail Trade | 2,641.2 | 1.6 | 0.2 |
| Finance & Insurance | 971.1 | 0.5 | 3.0 |
| Real Estate & Goods Rental & Leasing | 903.4 | -0.4 | -0.4 |
| Scientific Research, Professional & Technical Services | 551.3 | -0.5 | 4.0 |
| Accommodations, Eating, Drinking | 496.0 | 2.2 | 1.8 |
| Living-Related, Personal, Amusement Services | 552.7 | 0.6 | -1.0 |
| Learning Support | 116.9 | 0.0 | 0.5 |
| Medical, Health Care, Welfare | 921.1 | 1.0 | 3.6 |
| Miscellaneous ex Government | 626.7 | -2.6 | 0.1 |
Source: http://www.meti.go.jp/english/statistics/index.html
Japan’s total machinery orders seasonally adjusted in Table VB-3 increased 5.3 percent in Nov 2012 after decreasing 1.6 percent in Oct and falling in three of the four months May-Aug 2012. Total private sector orders increased 15.2 percent in Nov 2012 after falling 10.7 percent in Oct 2012, increasing 15.4 percent in Sep and falling 13.7 percent in Aug. Private-sector orders excluding volatile orders, which are closely watched, increased 3.9 percent in Nov and 2.6 percent in Oct but decreased 4.3 percent in Sep after decreasing 3.3 percent in Aug. Orders for manufacturing increased 3.9 percent in Nov after decreasing 2.8 percent in Oct, growing 2.8 percent in Sep 2012, falling 15.1 percent in Aug following increase of 12.0 percent in Jul with declines 2.9 percent in Jun and 8.0 percent in May. Overseas orders increased 17.0 percent in Nov, 9.4 percent in Oct and were unchanged in Sep 2012 but decreased 14.7 percent in Aug and 9.8 percent in Jun and increased 3.0 percent in Jul. There is significant volatility in industrial orders in advanced economies.
Table VB-3, Japan, Machinery Orders, Month ∆%, SA
| 2012 | Nov | Oct | Sep | Aug |
| Total | 5.3 | -1.6 | 9.6 | -12.6 |
| Private Sector | 15.2 | -10.7 | 15.4 | -13.7 |
| Excluding Volatile Orders | 3.9 | 2.6 | -4.3 | -3.3 |
| Mfg | 3.9 | -3.6 | 2.8 | -15.1 |
| Non Mfg ex Volatile | 6.2 | 2.8 | 1.3 | 3.6 |
| Government | -2.6 | -18.7 | 22.4 | -7.1 |
| From Overseas | 17.0 | 9.4 | 0.0 | -14.7 |
| Through Agencies | 6.4 | -2.5 | 4.0 | -22.0 |
Note: Mfg: manufacturing
Source: Japan Economic and Social Research Institute, Cabinet Office http://www.esri.cao.go.jp/index-e.html
Total orders for machinery and total private-sector orders excluding volatile orders for Japan are shown in Chart VB-1 of Japan’s Economic and Social Research Institute at the Cabinet Office. The trend of private-sector orders excluding volatile orders was showing recovery from the drop after Mar 2011 because of the earthquake/tsunami. There was reversal of the trend of increase in total orders with recent decreases and an upward movement in the final data point. Fluctuations still prevent detecting longer term trends but recovery is still evident from the global recession. There was a major setback by the declines in May 2012 shown in the final segment of Chart VB-1 with partial recovery in Jun 2012, decline again in Jul and Aug 2012 and rebound in total orders in Sep but decline in orders excluding volatile segments with increase in Nov 2012.
Chart VB-1, Japan, Machinery Orders
Source: Japan Economic and Social Research Institute, Cabinet Office
http://www.esri.cao.go.jp/en/stat/juchu/1211juchu-e.html
Table VB-4 provides values and percentage changes from a year earlier of Japan’s machinery orders without seasonal adjustment. Total orders of JPY 1,697,919 million in Nov 2012 are divided between JPY 697,673 million overseas orders, or 41.1 percent of the total, and domestic orders of JPY 909,331 million, or 53.4 percent of the total, with orders through agencies of JPY 90,915 million, or 5.4 percent of the total. Orders through agencies are not shown in the table because of the minor value. Twelve-month percentages changes in Nov 2012 continued to reverse increases in Jul 2012: minus 8.6 percent for total orders, minus 9.6 percent for overseas orders, minus 8.5 percent for domestic orders and increase of 0.3 percent for private orders excluding volatile items. Oct 2012 was also weak with declines of 6.9 percent of total orders, 12.8 percent of overseas orders, 2.6 percent of domestic orders and increase of 1.2 percent of private orders excluding volatile items. Total orders fell 18.6 percent in the 12 months ending in Aug with declines of 31.1 percent in overseas orders and 10.2 percent of domestic orders. Performance was strong in Apr with growth of total orders of 7.5 percent mostly because of growth of domestic orders by 23.0 percent and also in Mar with growth of total orders of 8.1 percent and of domestic orders of 19.0 percent. Percentage growth of overseas orders was negative in ten consecutive months from Feb to Nov 2012. Performance in Feb 2012 was weak with growth of total orders of minus 9.3 percent, minus 8.9 percent of overseas orders, minus 11.2 percent of domestic orders and increase of 8.9 percent of private orders excluding volatile items. Jan 2012 was quite strong with growth of total orders of 9.8 percent driven by growth of overseas orders of 18.3 percent. There is sharp reversal of 12-month percentage changes in Nov 2011 with increase of 11.0 percent in total orders, 8.0 percent in overseas orders, 13.5 percent in domestic orders and 12.5 percent in private orders excluding volatile items. The pace of increase declined in Dec with growth in 12 months of 0.8 percent for total orders, 12.6 percent for overseas orders, decline of 8.5 percent for domestic orders and growth of private orders excluding volatile items of 6.3 percent. There was strong impact from the global recession with total orders falling 23.3 percent in 2008, overseas orders dropping 29.4 percent and domestic orders decreasing 17.4 percent. Recovery was vigorous in 2010 with increase of total orders by 9.4 percent, overseas orders by 3.5 percent and domestic orders by 14.1 percent. The heavy impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 also affected machinery orders.
Table VB-4, Japan, Machinery Orders, 12 Months ∆% and Million Yen, Original Series
| Total | Overseas | Domestic | Private ex Volatile | |
| Value Nov 2012 | 1,697,919 | 697,673 | 909,331 | 662,979 |
| % Total | 100.0 | 41.1 | 53.4 | 40.3 |
| Value Nov 2011 | 1,857,814 | 772,051 | 994,206 | 660,717 |
| % Total | 100.0 | 41.6 | 53.5 | 37.1 |
| 12-month ∆% | ||||
| Nov 2012 | -8.6 | -9.6 | -8.5 | 0.3 |
| Oct 2012 | -6.9 | -12.8 | -2.6 | 1.2 |
| Sep 2012 | -7.8 | -18.4 | -1.8 | -7.8 |
| Aug 2012 | -18.6 | -31.1 | -10.2 | -6.1 |
| Jul 2012 | 2.6 | -1.9 | 3.2 | 1.7 |
| Jun 2012 | -10.9 | -11.3 | -12.4 | -9.9 |
| May 2012 | -6.8 | -7.0 | -8.6 | 1.0 |
| Apr 2012 | 7.5 | -9.6 | 23.0 | 6.6 |
| Mar 2012 | 8.1 | -10.0 | 19.0 | -1.1 |
| Feb 2012 | -9.3 | -8.9 | -11.2 | 8.9 |
| Jan 2012 | 9.8 | 18.3 | 0.5 | 5.7 |
| Dec 2011 | 0.8 | 12.6 | -8.5 | 6.3 |
| Nov 2011 | 11.0 | 8.0 | 13.5 | 12.5 |
| Oct 2011 | -6.8 | -15.6 | -1.0 | 1.5 |
| Dec 2010 | 9.4 | 3.5 | 14.1 | -0.6 |
| Dec 2009 | 1.8 | 0.4 | 3.6 | -1.9 |
| Dec 2008 | -23.3 | -29.4 | -17.4 | -24.7 |
| Dec 2007 | 1.3 | 9.8 | -4.3 | -6.4 |
| Dec 2006 | 0.8 | 0.9 | -0.1 | 0.1 |
Note: Total machinery orders = overseas + domestic demand + orders through agencies. Orders through agencies in Nov 2012 were JPY 90,915 million, or 5.4 percent of the total and 4.9 percent of the total in Nov 2011, and are not shown in the table. The data are the original numbers without any adjustments and differ from the seasonally-adjusted data.
Source: Japan Economic and Social Research Institute, Cabinet Office
http://www.esri.cao.go.jp/index-e.html
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
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