CMP Associates Regulation Blog

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table IIB-5. The percentage change of new house sales from 1963 to 2012 is minus 34.3 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. Between 1995 and 2005 sales of new houses increased 92.4 percent at the yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2005. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). Sales of new houses sold in 2012 fell 44.8 percent relative to the same period in 1995 and 71.3 percent relative to 2005.

Table IIB-5, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2012	-34.3	NA
1991-2001	78.4	5.9
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2012	-44.8	NA
2000-2012	-58.0	NA
2005-2012	-71.3	NA

NA: Not Applicable

Source: US Census Bureau

The available historical annual data of median and average prices of new houses sold in the US between 1963 and 2012 is provided in Table IIB-6. On a yearly basis, median and average prices reached a peak in 2007 and then fell substantially.

Table IIB-6, US, Median and Average Prices of New Houses Sold, Annual Data

Year	Median Price	Average Price
1963	$18,000	$19,300
1964	$18,900	$20,500
1965	$20,000	$21,500
1966	$21,400	$23,300
1967	$22,700	$24,600
1968	$24,700	$26,600
1969	$25,600	$27,900
1970	$23,400	$26,600
1971	$25,200	$28,300
1972	$27,600	$30,500
1973	$32,500	$35,500
1974	$35,900	$38,900
1975	$39,300	$42,600
1976	$44,200	$48,000
1977	$48,800	$54,200
1978	$55,700	$62,500
1979	$62,900	$71,800
1980	$64,600	$76,400
1981	$68,900	$83,000
1982	$69,300	$83,900
1983	$75,300	$89,800
1984	$79,900	$97,600
1985	$84,300	$100,800
1986	$92,000	$111,900
1987	$104,500	$127,200
1988	$112,500	$138,300
1989	$120,000	$148,800
1990	$122,900	$149,800
1991	$120,000	$147,200
1992	$121,500	$144,100
1993	$126,500	$147,700
1994	$130,000	$154,500
1995	$133,900	$158,700
1996	$140,000	$166,400
1997	$146,000	$176,200
1998	$152,500	$181,900
1999	$161,000	$195,600
2000	$169,000	$207,000
2001	$175,200	$213,200
2002	$187,600	$228,700
2003	$195,000	$246,300
2004	$221,000	$274,500
2005	$240,900	$297,000
2006	$246,500	$305,900
2007	$247,900	$313,600
2008	$232,100	$292,600
2009	$216,700	$270,900
2010	$221,800	$272,900
2011	$227,200	$267,900
2012	$245,200	$292,200

Source: US Census Bureau http://www.census.gov/construction/nrs/

Percentage changes of median and average prices of new houses sold in selected years are shown in Table IIB-7. Prices rose sharply between 2000 and 2005. In fact, prices in 2012 are higher than in 2000. Between 2006 and 2012, median prices of new houses sold fell 0.5 percent and average prices fell 4.5 percent. Between 2011 and 2012, median prices increased 7.9 percent and average prices increased 9.1 percent.

Table IIB-7, US, Percentage Change of New Houses Median and Average Prices, NSA, ∆%

	Median New Home Sales Prices ∆%	Average New Home Sales Prices ∆%
∆% 2000 to 2003	15.4	18.9
∆% 2000 to 2005	42.5	43.5
∆% 2000 to 2012	45.1	41.2
∆% 2005 to 2012	1.8	-1.6
∆% 2000 to 2006	45.9	47.8
∆% 2006 to 2012	-0.5	-4.5
∆% 2009 to 2012	13.2	7.9
∆% 2010 to 2012	10.6	7.1
∆% 2011 to 2012	7.9	9.1

Source: US Census Bureau http://www.census.gov/construction/nrs/

Chart IIB-3 of the US Census Bureau provides the entire series of new single-family sales median prices from Jan 1963 to Mar 2013. There is long-term sharp upward trend with few declines until the current collapse. Median prices increased sharply during the Great Inflation of the 1960s and 1970s and paused during the savings and loans crisis of the late 1980s and the recession of 1991. Housing subsidies throughout the 1990s caused sharp upward trend of median new house prices that accelerated after the fed funds rate of 1 percent from 2003 to 2004. There was sharp reduction of prices after 2006 with recovery recently toward earlier prices.

Chart IIB-3, US, Median Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1963-2013

Source: US Census Bureau

Chart IIB-4 of the US Census Bureau provides average prices of new houses sold from the mid 1970s to Mar 2013. There is similar behavior as with median prices of new houses sold in Chart IIB-3. The only stress occurred in price pauses during the savings and loans crisis of the late 1980s and the collapse after 2006 with recent recovery

Chart IIB-4, US, Average Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1975-2013

Source: US Census Bureau

http://fhfa.gov/Default.aspx?Page=14

IIB2 United States House Prices. The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, provides the FHFA House Price Index (HPI) that “is calculated using home sales price information from Fannie Mae and Freddie Mac-acquired mortgages” (http://fhfa.gov/webfiles/24216/q22012hpi.pdf 1). Table IIB1-1 provides the FHFA HPI for purchases only, which shows behavior similar to that of the Case-Shiller index but with lower magnitudes. House prices catapulted from 2000 to 2003, 2005 and 2006. From IVQ2000 to IVQ2006, the index for the US as a whole rose 55.1 percent, with 62.3 percent for New England, 72.4 percent for Middle Atlantic, 70.9 percent for South Atlantic but only by 33.2 percent for East South Central. Prices fell relative to 2012 for all years from 2005 to 2007. Prices for the US increased 3.0 in IVQ2012 relative to IVQ2010 and 5.5 percent from IVQ2011 to IVQ2012. From IVQ2000 to IVQ2011, prices rose for the US and the four regions in Table IIB1-1.

Table IIB1-1, US, FHFA House Price Index Purchases Only NSA ∆%

	United States	New England	Middle Atlantic	South Atlantic	East South Central
4Q2000 to 4Q2003	24.0	40.6	35.9	25.9	11.1
4Q2000 to 4Q2005	50.5	65.3	67.9	62.7	25.5
4Q2000 to 4Q2006	55.1	62.3	72.4	70.9	33.2
4Q2005 t0 4Q2012	-12.2	-13.7	-6.8	-18.1	0.9
4Q2006 to 4Q2012	-14.8	-12.2	-9.3	-22.0	-4.9
4Q2007 to 4Q2012	-12.7	-10.4	-9.7	-19.2	-6.7
4Q2010 to 4Q2012	3.0	-2.0	-2.6	2.7	2.4
4Q2011 to 4Q2012	5.5 144.29	0.5 138.64	1.2 127.44	5.5 140.24	2.9 145.96
4Q2000 to 4Q2012	32.2	42.6	56.4	33.4	26.7

Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

Data of the FHFA HPI for the remaining US regions are provided in Table IIB1-2. Behavior is not very different than in Table IIB1-1 with the exception of East North Central. House prices in the Pacific region doubled between 2000 and 2006. Although prices of houses declined sharply from 2005 to 2012, there was still appreciation relative to 2000.

Table IIB1-2, US, FHFA House Price Index Purchases Only NSA ∆%

	West South Central	West North Central	East North Central	Mountain	Pacific
4Q2000 to 4Q2003	11.2	18.3	14.8	18.9	44.5
4Q2000 to 4Q2005	23.9	31.1	23.9	57.9	107.6
4Q2000 to 4Q2006	31.7	34.0	23.9	68.9	108.5
4Q2005 to 4Q2012	13.9	-3.3	-14.3	-16.7	-31.4
4Q2006 to 4Q2012	7.1	-5.4	-14.3	-22.0	-31.7
4Q2007 to 4Q2012	3.5	-4.8	-11.4	-19.4	-24.4
4Q2010 to 4Q2012	6.7	3.3	0.3	9.4	5.7
4Q2011 to 4Q2012	5.4 144.55	4.7 158.66	2.9 155.19	13.9 172.54	10.9 132.08
4Q2000 to 4Q2012	42.1	26.8	6.2	31.6	42.4

Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

Chart IIB1-1 of the Federal Housing Finance Agency shows the Housing Price Index four-quarter price change from IVQ2001 to IVQ2012. House prices appreciated sharply from 1998 to 2005 and then fell rapidly. Recovery began already after IIQ2008 but there was another decline after IIIQ2010. The rate of decline improved in the second half of 2011 and into 2012 with movement into positive territory in IIQ2012, IIIQ2012 and IVQ2012.

Chart IIB1-1, US, Federal Housing Finance Agency House Price Index Four Quarter Price Change

Source: Federal Housing Finance Agency

Monthly and 12-month percentage changes of the FHFA House Price Index are provided in Table IIB1-3. Percentage monthly increases of the FHFA index were positive from Apr to Jul 2011 while 12 months percentage changes improved steadily from more or equal to minus 6 percent in Mar to May 2011 to minus 4.4 percent in Jun 2011. The FHFA house price index fell 0.7 percent in Oct 2011 and fell 3.2 percent in the 12 months ending in Oct. There was significant recovery in Nov 2012 with increase in the house price index of 0.5 percent and reduction of the 12-month rate of decline to 2.2 percent. The house price index rose 0.4 percent in Dec 2011 and the 12-month percentage change improved to minus 1.2 percent. There was further improvement with revised decline of 0.3 percent in Jan 2012 and decline of the 12-month percentage change to minus 1.0 percent. The index changed to positive change of 0.4 percent in Feb 2012 and increase of 0.3 percent in the 12 months ending in Feb 2012. There was strong improvement in Mar 2012 with gain in prices of 1.3 percent and 2.4 percent in 12 months. The house price index of FHFA increased 0.7 percent in Apr 2012 and 3.0 percent in 12 months and improvement continued with increase of 0.6 percent in May 2012 and 3.9 percent in the 12 months ending in May 2012. Improvement consolidated with increase of 0.6 percent in Jun 2012 and 3.9 percent in 12 months. In Jul 2012, the house price index increased 0.1 percent and 3.9 percent in 12 months. Strong increase of 0.4 percent in Aug 2012 pulled the 12-month change to 4.4 percent. There was another increase of 0.6 percent in Oct and 5.6 percent in 12 months followed by increase of 0.5 percent in Nov 2012 and 5.6 percent in 12 months. The FHFA house price indexed increased 0.6 percent in Jan 2013 and 6.6 percent in 12 months. Improvement continued with increase of 0.7 percent in Feb 2013 and 7.0 percent in 12 months.

Table IIB1-3, US, FHFA House Price Index Purchases Only SA. Month and NSA 12-Month ∆%

	Month ∆% SA	12 Month ∆% NSA
Feb 2013	0.7	7.0
Jan	0.6	6.6
Dec 2012	0.6	5.7
Nov	0.5	5.6
Oct	0.6	5.5
Sep	0.1	4.2
Aug	0.4	4.4
Jul	0.1	3.9
Jun	0.6	3.9
May	0.6	3.9
Apr	0.7	3.0
Mar	1.3	2.4
Feb	0.4	0.3
Jan	-0.3	-1.0
Dec 2011	0.4	-1.2
Nov	0.5	-2.2
Oct	-0.7	-3.2
Sep	0.3	-2.4
Aug	-0.2	-3.8
Jul	0.2	-3.6
Jun	0.5	-4.4
May	-0.1	-6.0
Apr	0.1	-5.9
Mar	-0.7	-6.0
Feb	-1.1	-5.2
Jan	-0.6	-4.7
Dec 2010		-3.9
Dec 2009		-2.9
Dec 2008		-9.8
Dec 2007		-3.1
Dec 2006		2.5
Dec 2005		9.8
Dec 2004		10.2
Dec 2003		8.0
Dec 2002		7.8
Dec 2001		6.7
Dec 2000		7.2
Dec 1999		6.2
Dec 1998		5.9
Dec 1997		3.4
Dec 1996		2.8
Dec 1995		2.9
Dec 1994		2.6
Dec 1993		3.1
Dec 1992		2.4

Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

The bottom part of Table IIB1-3 provides 12-month percentage changes of the FHFA house price index since 1992 when data become available for 1991. Table IIB1-4 provides percentage changes and average rates of percent change per year for various periods. Between 1992 and 2012, the FHFA house price index increased 84.7 percent at the yearly average rate of 3.1 percent. In the period 1992-2000, the FHFA house price index increased 39.4 percent at the average yearly rate of 4.2 percent. The rate of price increase accelerated to 7.5 percent in the period 2000-2003 and to 8.5 percent in 2000-2005 and 7.5 percent in 2000-2006. At the margin the average rate jumped to 10.0 percent in 2003-2005 and 7.5 percent in 2003-2006. House prices measured by the FHFA house price index declined 14.1 percent between 2006 and 2012 and 11.9 percent between 2005 and 2012.

Table IIB1-4, US, FHFA House Price Index, Percentage Change and Average Rate of Percentage Change per Year, Selected Dates 1992-2012

Dec	∆%	Average ∆% per Year
1992-2012	84.7	3.1
1992-2000	39.4	4.2
2000-2003	24.3	7.5
2000-2005	50.4	8.5
2003-2005	21.0	10.0
2005-2012	-11.9	NA
2000-2006	54.3	7.5
2003-2006	24.1	7.5
2006-2012	-14.1	NA

Source: Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

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 8.4 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IVQ2012 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 Fri Apr 19 and daily values throughout the week ending on Apr 26, 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 Apr 19 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Apr 19, 2013”, first row “USD/EUR 1.3052 0.5%,” provides the information that the US dollar (USD) appreciated 0.5 percent to USD 1.3052/EUR in the week ending on Fri Apr 19 relative to the exchange rate on Fri Apr 12. 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 1.3052/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Apr 19, depreciating to USD 1.3067/EUR on Mon Apr 22, 2013, or by 0.1 percent. The dollar depreciated because more dollars, $1.3067, were required on Mon Apr 22 to buy one euro than $1.3052 on Apr 19. 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 1.3052/EUR on Apr 19; 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 Apr 19, to the last business day of the current week, in this case Fri Apr 26, such as appreciation to USD 1.3028/EUR by Apr 26; 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 1.3052/EUR on Fri Apr 19 to the rate of USD 1.3028/EUR on Fri Apr 26 {[(1.3028/1.3052) – 1]100 = -0.2%} and depreciated (denoted by negative sign) by 0.1 percent from the rate of USD 1.3012 on Thu Apr 25 to USD 1.3028/EUR on Fri Apr 26 {[(1.3028/1.3012) -1]100 = 0.1%}. 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 assets to the safety of dollar-denominated assets during risk aversion and return to higher yielding risk assets during risk appetite.

III-I, Weekly Financial Risk Assets Apr 22 to Apr 26, 2012

Fri Apr 19, 2011

M 22

Tue 23

W 24

Thu 25

Fri 26

USD/EUR

1.3052

0.5%

1.3067

-0.1%

1.3001

0.4%

0.5%

1.3016

0.3%

-0.1%

1.3012

0.3%

0.0%

1.3028

0.2%

-0.1%

JPY/ USD

99.54

-1.1%

99.23

0.3%

99.45

0.1%

-0.2%

99.50

0.0%

-0.1%

99.25

0.3%

98.06

1.5%

1.2%

CHF/ USD

0.9336

-0.7%

0.9341

-0.1%

0.9454

-1.3%

-1.2%

0.9468

-1.4%

-0.1%

0.9448

-1.2%

0.2%

0.9428

-1.0%

0.2%

CHF/ EUR

1.2187

-0.2%

1.2206

-0.2%

1.2290

-0.8%

-0.7%

1.2325

-1.1%

-0.3%

1.2294

-0.9%

0.3%

1.2276

-0.7%

0.1%

USD/ AUD

1.0276

0.9731

-2.2%

1.0275

0.9732

0.0%

1.0262

0.9745

-0.1%

1.0279

0.9729

0.0%

0.2%

1.0291

0.9717

0.1%

1.0279

0.9729

0.0%

-0.1%

10 Year T Note

1.702

1.696

1.706

1.701

1.708

1.663

2 Year T Note

0.232

0.224

0.228

0.225

0.229

0.209

German Bond

2Y 0.02 10Y 1.25

2Y 0.01 10Y 1.23

2Y 0.02 10Y 1.26

2Y 0.01 10Y 1.24

2Y 0.00 10Y 1.21

DJIA

14547.51

-2.1%

14567.17

0.1%

14719.46

1.2%

1.1%

14676.30

0.9%

-0.3%

14700.80

1.1%

0.2%

14712.55

1.1%

0.1%

DJ Global

2100.03

-2.1%

2109.45

0.5%

2128.58

1.4%

0.9%

2139.67

1.9%

0.5%

2152.47

2.5%

0.6%

2151.66

2.5%

0.0%

DJ Asia Pacific

1391.04

-1.2%

1403.24

0.9%

1399.61

0.6%

-0.3%

1419.67

2.1%

1.4%

1429.37

2.8%

0.7%

1432.96

3.0%

0.3%

Nikkei

13316.48

-1.3%

13568.37

1.9%

13529.65

1.6%

-0.3%

13843.46

4.0%

2.3%

13926.08

4.6%

0.6%

13884.13

4.3%

-0.3%

Shanghai

2244.64

1.7%

2242.17

-0.1%

2184.54

-2.7%

-2.6%

2218.32

-1.2%

1.5%

2199.31

-2.0%

-0.9%

2177.91

-3.0%

-1.0%

DAX

7459.96

-3.7

7478.11

0.2%

7658.21

2.7%

2.4%

7759.03

4.0%

1.3%

7832.86

5.0%

0.9%

7814.76

4.8%

-0.2%

DJ UBS

Comm.

131.51

-1.7%

130.96

-0.4%

130.09

-1.1%

-0.7%

130.61

-0.7%

0.4%

132.62

0.8%

1.5%

131.92

0.3%

-0.5%

WTI $ B

87.98

-3.2%

88.76

0.9%

0.0%

89.31

1.5%

0.6%

91.60

4.1%

2.6%

93.26

6.0%

1.8%

93.00

5.7%

-0.3%

Brent $/B

99.46

-3.5%

100.50

1.0%

100.32

0.9%

-0.2%

101.90

2.5%

1.6%

103.05

3.6%

1.1%

102.85

3.4%

-0.2%

Gold $/OZ

1402.8

-5.5%

1425.5

1.6%

1413.6

0.8%

-0.8%

1430.9

2.0%

1.2%

1466.0

4.5%

2.5%

1453.60

3.6%

-0.8%

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. Financial markets in Japan and worldwide were shocked by new bold measures of “quantitative and qualitative monetary easing” by the Bank of Japan (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The objective of policy is to “achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The main elements of the new policy are as follows:

Monetary Base Control. Most central banks in the world pursue interest rates instead of monetary aggregates, injecting bank reserves to lower interest rates to desired levels. The Bank of Japan (BOJ) has shifted back to monetary aggregates, conducting money market operations with the objective of increasing base money, or monetary liabilities of the government, at the annual rate of 60 to 70 trillion yen. The BOJ estimates base money outstanding at “138 trillion yen at end-2012) and plans to increase it to “200 trillion yen at end-2012 and 270 trillion yen at end 2014” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
Maturity Extension of Purchases of Japanese Government Bonds. Purchases of bonds will be extended even up to bonds with maturity of 40 years with the guideline of extending the average maturity of BOJ bond purchases from three to seven years. The BOJ estimates the current average maturity of Japanese government bonds (JGB) at around seven years. The BOJ plans to purchase about 7.5 trillion yen per month (http://www.boj.or.jp/en/announcements/release_2013/rel130404d.pdf). Takashi Nakamichi, Tatsuo Ito and Phred Dvorak, wiring on “Bank of Japan mounts bid for revival,” on Apr 4, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323646604578401633067110420.html ), find that the limit of maturities of three years on purchases of JGBs was designed to avoid views that the BOJ would finance uncontrolled government deficits.
Seigniorage. The BOJ is pursuing coordination with the government that will take measures to establish “sustainable fiscal structure with a view to ensuring the credibility of fiscal management” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
Diversification of Asset Purchases. The BOJ will engage in transactions of exchange traded funds (ETF) and real estate investment trusts (REITS) and not solely on purchases of JGBs. Purchases of ETFs will be at an annual rate of increase of one trillion yen and purchases of REITS at 30 billion yen.

The European sovereign debt crisis continues to shake financial markets and the world economy. Debt resolution within the international financial architecture requires that a country be capable of borrowing on its own from the private sector. Mechanisms of debt resolution have included participation of the private sector (PSI), or “bail in,” that has been voluntary, almost coercive, agreed and outright coercive (Pelaez and Pelaez, International Financial Architecture: G7, IMF, BIS, Creditors and Debtors (2005), Chapter 4, 187-202). Private sector involvement requires losses by the private sector in bailouts of highly indebted countries. The essence of successful private sector involvement is to recover private-sector credit of the highly indebted country. Mary Watkins, writing on “Bank bailouts reshuffle risk hierarchy,” published on Mar 19, 2013, in the Financial Times (http://www.ft.com/intl/cms/s/0/7666546a-9095-11e2-a456-00144feabdc0.html#axzz2OSpbvCn8) analyzes the impact of the bailout or resolution of Cyprus banks on the hierarchy of risks of bank liabilities. Cyprus banks depend mostly on deposits with less reliance on debt, raising concerns in creditors of fixed-income debt and equity holders in banks in the euro area. Uncertainty remains as to the dimensions and structure of losses in private sector involvement or “bail in” in other rescue programs in the euro area. Alkman Granitsas, writing on “Central bank details losses at Bank of Cyprus,” on Mar 30, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324000704578392502889560768.html), analyzes the impact of the agreement with the €10 billion agreement with IMF and the European Union on the banks of Cyprus. The recapitalization plan provides for immediate conversion of 37.5 percent of all deposits in excess of €100,000 to shares of special class of the bank. An additional 22.5 percent will be frozen without interest until the plan is completed. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):

“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.

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). Matt Jarzemsky, writing on Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14,198.10 reached on Oct 11, 2007. The DJIA closed at 14712.55

on Fri Apr 26, 2013, which is higher by 3.9 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 3.6 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial are approaching or exceeding historical highs. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.

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.

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 4.270 percent on Apr 26, 2013 and that of the ten-year sovereign bond of Italy at 4.026 percent (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 Apr 26, 2013, the yield of the two-year Treasury fell to 0.209 percent and that of the ten-year Treasury decreased to 1.663 percent while the two-year bond of Germany stabilized at 0.00 percent and the ten-year decreased to 1.21 percent; and the dollar appreciated to USD 1.3028/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 1.5 percent in the 12 months ending in Mar 2013 (http://cmpassocregulationblog.blogspot.com/2013/04/world-inflation-waves-squeeze-of.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
4/26/13	0.209	1.663	0.00	1.21	1.3028
4/19/13	0.232	1.702	0.02	1.25	1.3052
4/12/13	0.228	1.719	0.02	1.26	1.3111
4/5/13	0.228	1.706	0.01	1.21	1.2995
3/29/13	0.244	1.847	-0.02	1.29	1.2818
3/22/13	0.242	1.931	0.03	1.38	1.2988
3/15/13	0.246	1.992	0.05	1.46	1.3076
3/8/13	0.256	2.056	0.09	1.53	1.3003
3/1/13	0.236	1.842	0.03	1.41	1.3020
2/22/13	0.252	1.967	0.13	1.57	1.3190
2/15/13	0.268	2.007	0.19	1.65	1.3362
2/8/13	0.252	1.949	0.18	1.61	1.3365
2/1/13	0.26	2.024	0.25	1.67	1.3642
1/25/13	0.278	1.947	0.26	1.64	1.3459
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

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 together with the overnight fed funds rate and the yield of the corporate bond with Moody’s rating of Baa. The riskier yield of the Baa corporate bond exceeds the relatively riskless yields of the Treasury securities. The beginning yields in Chart III-1A for July 31, 2001, are 3.67 percent for one month, 3.79 percent for two years, 5.07 percent for ten years, 3.82 percent for the fed funds rate and 7.85 percent for the Baa corporate bond. On July 30, 2007, yields inverted with the one month at 4.95 percent, the two-year at 4.59 percent and the ten year at 5.82 percent with the yield of the Baa corporate bond at 6.70 percent. Another interesting point is for Oct 31, 2008, with the yield of the Baa jumping to 9.54 percent and the Treasury yields declining: one month 0.12 percent, two years 1.56 percent and ten years 4.01 percent during a flight to the dollar and government securities analyzed by Cochrane and Zingales (2009). Another spike in the series is for Apr 4, 2006 with the yield of the corporate Baa bond at 8.63 and the Treasury yields of 0.12 percent for one month, 0.94 for two years and 2.95 percent for ten years. 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 Apr 25, 2013, with the one-month yield at 0.04 percent, the two-year at 0.23 percent, the ten-year at 1.74 percent, the fed funds rate at 0.13 percent and the corporate Baa bond at 4.55 percent.

Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields, Overnight Fed Funds Rate and Yield of Moody’s Baa Corporate Bond, Jul 31, 2001-Apr 25, 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:

clip_image004[1]

Where R_τ is expected revenue in the time horizon from τ =1 to T; C_τ 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]

declines.

There was strong performance in equity indexes with many indexes increasing in Table III-1 in the week ending on Apr 26, 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 0.1 percent on Apr 26, increasing 1.1 percent in the week. Germany’s Dax decreased 0.2 percent on Fri Apr 26 and increased 4.8 percent in the week. Dow Global changed 0.0 percent on Apr 26 and increased 2.5 percent in the week. Japan’s Nikkei Average decreased 0.3 percent on Fri Apr 26 and increased 4.3 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 and monetary stimulus by a new board of the Bank of Japan. Dow Asia Pacific TSM increased 0.3 percent on Apr 26 and increased 3.0 percent in the week. Shanghai Composite that decreased 0.2 percent on Mar 8 and decreased 1.7 percent in the week of Mar 8, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2177.91 on Fri Apr 26 for decline of 1.0 percent and decrease of 3.0 percent in the week of Apr 26. 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 mostly stronger in the week of Apr 26, 2013. The DJ UBS Commodities Index decreased 0.5 percent on Fri Apr 26 and increased 0.3 percent in the week, as shown in Table III-1. WTI increased 5.7 percent in the week of Apr 26 while Brent increased 3.4 percent in the week. Gold decreased 0.8 percent on Fri Apr 26 and increased 3.6 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 €869,916 million on Apr 19, 2013 with some repayment of loans already occurring. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has reached €1,483,045 million in the statement of Apr 19, 2013, with marginal reduction. There is high credit risk in these transactions with capital of only €88,917 million as analyzed by Cochrane (2012Aug31).

Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR

	Dec 31, 2010	Dec 28, 2011	Apr 19, 2013
1 Gold and other Receivables	367,402	419,822	435,317
2 Claims on Non Euro Area Residents Denominated in Foreign Currency	223,995	236,826	253,657
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	34,864
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	21,216
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	869,916
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	97,728
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	613,129
8 General Government Debt Denominated in Euro	34,954	33,928	29,894
9 Other Assets	278,719	336,574	261,542
TOTAL ASSETS	2,004, 432	2,733,235	2,617,263
Memo Items
Sum of 5 and 7	1,004,174	1,489,759	1,483,045
Capital and Reserves	78,143	85,748	88,917

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/fs130423.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 surpluses 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 40.5 percent of the total. Exports to the non-European Union area with share of 46.3 percent in Italy’s total exports are growing at 9.1 percent in Jan-Feb 2013 relative to Jan-Feb 2012 while those to EMU are growing at minus 3.1 percent.

Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%

Feb 2013	Exports % Share	∆% Jan-Feb 2013/ Jan-Feb 2012	Imports % Share	Imports ∆% Jan-Feb 2013/ Jan-Feb 2012
EU	53.7	-2.3	52.9	-2.7
EMU 17	40.5	-3.1	42.7	-2.6
France	11.1	-1.2	8.3	-5.3
Germany	12.5	-4.9	14.6	-7.8
Spain	4.7	-8.4	4.4	-2.4
UK	4.9	0.9	2.5	2.9
Non EU	46.3	9.1	47.1	-8.9
Europe non EU	13.9	5.2	11.3	11.9
USA	6.8	9.7	3.3	-19.3
China	2.3	4.8	6.5	-7.1
OPEC	5.7	20.0	10.8	-16.9
Total	100.0	2.5	100.0	-5.8

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/87669

Table III-4 provides Italy’s trade balance by product categories in Feb 2013 and cumulative Jan-Feb 2013. Italy’s trade balance excluding energy generated surplus of €5648 million in Feb 2013 and €9498 million cumulative in Jan-Feb 2013 but the energy trade balance created deficit of €4562 million in Feb 2013 and cumulative €10,025 million in Jan-Feb 2013. The overall surplus in Feb 2013 was €1086 million with cumulative deficit of €527 million in Jan-Feb 2013. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.

Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro

Regions and Countries	Trade Balance Jan 2013 Millions of Euro	Trade Balance Cumulative Jan-Feb 2013 Millions of Euro
EU	380	1,048
EMU 17	-395	-692
France	1,034	2,036
Germany	-411	-657
Spain	94	251
UK	561	1,270
Non EU	706	-1,575
Europe non EU	533	341
USA	1,218	1,890
China	-1,226	-2,845
OPEC	-1,235	-2,670
Total	1,086	-527

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/87669

Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Feb 2013 relative to Jan-Feb 2012. Growth rates of cumulative imports relative to a year earlier are negative for energy with minus 16.3 percent, minus 14.5 percent for durable goods. The higher rate of growth of exports of 2.5 percent in Jan-Feb 2013/Jan-Feb 2012 relative to imports of minus 5.8 percent may reflect weak demand in Italy with GDP declining during six consecutive quarters from IIIQ2011 through IVQ2012 together with softening commodity prices.

Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%

	Exports Share %	Exports ∆% Jan-Feb 2013/ Jan-Feb 2012	Imports Share %	Imports ∆% Jan-Feb 2013/ Jan-Feb 2012
Consumer Goods	29.3	7.7	25.6	0.6
Durable	5.8	3.3	2.9	-14.5
Non Durable	23.5	8.8	22.7	2.6
Capital Goods	31.6	4.2	19.5	-8.6
Inter- mediate Goods	33.6	-0.7	32.6	-1.1
Energy	5.5	-13.3	22.3	-16.3
Total ex Energy	94.5	3.5	77.7	-2.5
Total	100.0	2.5	100.0	-5.8

Note: % Share for Jan-Nov 2012.

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/87669

Table III-6 provides Italy’s trade balance by product categories in Feb 2013 and cumulative Jan-Feb 2013. Italy’s trade balance excluding energy generated surplus of €5648 million in Feb 2013 and €9498 million cumulative in Jan-Feb 2013 but the energy trade balance created deficit of €4562 million in Feb 2013 and cumulative €10,025 million in Jan-Feb 2013. The overall surplus in Feb 2013 was €1086 million with cumulative deficit of €527 million in Jan-Feb 2013. 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

	Jan 2013	Cumulative Jan 2013
Consumer Goods	1,669	2,665
Durable	991	1,793
Nondurable	678	872
Capital Goods	3,637	6,708
Intermediate Goods	343	125
Energy	-4,562	-10,025
Total ex Energy	5,648	9,498
Total	1,086	-527

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/87669

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, 2011, 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 exceeding 100 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/pubs/ft/weo/2013/01/weodata/index.aspx) 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 2013.

Table III-7, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2013 USD Billions	Primary Net Lending Borrowing % GDP 2013	General Government Net Debt % GDP 2013
World	74,172
Euro Zone	12,752	-0.04	73.9
Portugal	218	-1.4	115.0
Ireland	222	-3.2	106.2
Greece	244	--	155.4
Spain	1,388	-3.5	79.1
Major Advanced Economies G7	34,068	-3.8	91.5
United States	16,238	-4.6	89.0
UK	2,423	-5.0	86.1
Germany	3,598	1.8	54.1
France	2,739	-1.4	86.5
Japan	5,150	-9.0	143.4
Canada	1,844	-2.4	35.9
Italy	2,076	2.7	102.3
China	9,020	-2.1*	21.3**

*Net Lending/borrowing**Gross Debt

Source: IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx

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 2013” to the column “GDP USD Billions.” The total debt of France and Germany in 2013 is $4315.7 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 $4087.3 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 $8403.0 billion, which would be equivalent to 132.6 percent of their combined GDP in 2013. 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 233.5 percent if including debt of France and 167.7 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	9,423.7
B Germany	1,946.5		$8403.0 as % of $3598 =233.5% $6033.8 as % of $3598 =167.7%
C France	2,369.2
B+C	4,315.7	GDP $6,337.0 Total Debt $8403.0 Debt/GDP: 132.6%
D Italy	2,123.7
E Spain	1,097.9
F Portugal	250.7
G Greece	379.2
H Ireland	235.8
Subtotal D+E+F+G+H	4,087.3

Source: calculation with IMF data IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx

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 Feb 2013. German exports to other European Union (EU) members are 58.1 percent of total exports in Feb 2013 and 58.4 percent in cumulative Jan-Feb 2013. Exports to the euro area are 38.1 percent in Feb and 38.4 percent cumulative in Jan-Feb. Exports to third countries are 41.9 percent of the total in Jan-Feb and 41.6 percent cumulative in Jan-Feb. There is similar distribution for imports. Exports to non-euro countries are decreasing 1.9 percent in Feb 2013 and increasing 1.2 percent cumulative in Jan-Feb 2013 while exports to the euro area are decreasing 4.1 percent in Feb 2013 and decreasing 2.0 percent cumulative in Jan-Feb 2013. Exports to third countries, accounting for 41.9 percent of the total in Jan 2013, are decreasing 1.9 percent in Jan 2013 and increasing 1.2 percent cumulative in Jan-Feb 2013, accounting for 41.6 percent of the cumulative total in Jan-Feb 2013. 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 ∆%

	Feb 2013 € Billions	Feb 12-Month ∆%	Cumulative Jan-Feb 2012 € Billions	Cumulative Jan-Feb 2013/ Jan-Feb 2012 ∆%
Total Exports	88.7	-2.8	177.2	0.0
A. EU Members	51.5 % 58.1	-3.4	103.5 % 58.4	-0.8
Euro Area	33.8 % 38.1	-4.1	68.1 % 38.4	-2.0
Non-euro Area	17.7 % 19.9	-1.9	35.4 % 20.0	1.6
B. Third Countries	37.2 % 41.9	-1.9	73.7 % 41.6	1.2
Total Imports	71.9	-5.9	146.8	-1.6
C. EU Members	46.4 % 62.6	-4.5	93.3 % 63.6	-0.1
Euro Area	32.1 % 43.1	-5.7	64.4 % 43.9	-1.6
Non-euro Area	14.3 % 19.5	-1.5	28.9 % 19.7	3.3
D. Third Countries	25.5 % 37.4	-8.3	53.5 % 36.4	-4.0

Notes: Total Exports = A+B; Total Imports = C+D

Source: https://www.destatis.de/EN/PressServices/Press/pr/2013/04/PE13_130_51.html;jsessionid=7C55A5AC7F08380B900542EE84791700.cae1

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:

(M_t + B_t)/P_t = E_t∫(1/R_t_{, t+τ})s_t_+τdτ (4)

Equation (4) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_t_{, t+τ}, of the future primary surpluses s_t_+τ, which are equal to T_t_+τ – G_t_+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 R_t_{, t+τ}. The second equation of Cochrane (2011Jan, 5) is:

M_tV(i_t, ·) = P_tY_t (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	1.8	1.5	1.1	7.6
Japan	0.5	-0.9	-0.5	4.3
China	7.7	2.1	-1.9
UK	0.6	2.8* CPIH 2.6	2.0 output 1.3** input 0.4	7.9
Euro Zone	-0.9	1.7	1.3	12.0
Germany	0.4	1.8	1.2	5.4
France	-0.3	1.1	1.9	10.8
Nether-lands	-0.9	3.2	0.4	6.2
Finland	-1.4	2.5	1.1	8.1
Belgium	-0.4	1.3	4.2	8.1
Portugal	-3.8	0.7	1.9	17.5
Ireland	0.8	0.6	1.5	14.2
Italy	-2.7	1.8	0.5	11.6
Greece	-6.0	-0.2	1.0	NA
Spain	-1.9	2.6	2.1	26.3

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/march-2013/index.html**Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/march-2013/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 1.8 percent in IQ2013 relative to IQ2012 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp1q13_adv.pdf Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Japan’s GDP grew 0.3 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 10.6 percent in IIIQ2011, increasing at the SAAR of 0.4 percent in IVQ 2011, increasing at the SAAR of 6.1 percent in IQ2012 and decreasing at 0.9 percent in IIQ2012 but contracting at the SAAR of 3.7 percent in IIIQ2012 and increasing at the SAAR of 0.2 percent in IVQ2012 (see Section VB http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.htm and earlier at

and earlier at http://cmpassocregulationblog.blogspot.com/2013/03/united-states-commercial-banks-assets.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.5 percent in the US, -0.9 percent for Japan, 2.1 percent for China, 1.7 percent for the Euro Zone and 2.8 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/2013/04/world-inflation-waves-squeeze-of.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 (http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html and earlier http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html), weak hiring with the loss of 10 million full-time jobs (http://cmpassocregulationblog.blogspot.com/2013/04/recovery-without-hiring-ten-million.html and earlier http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (http://cmpassocregulationblog.blogspot.com/2013/04/thirty-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.htm); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html 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.”

Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):

Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.

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 1.6 to 2.1 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 US economic growth has been at only 2.1 percent on average in the cyclical expansion in the 14 quarters from IIIQ2009 to IVQ2012. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.

First, the number of nonfarm jobs and private jobs created has been declining in 2012 from 311,000 in Jan 2012 to 87,000 in Jun, 138,000 in Sep, 160,000 in Oct, 247,000 in Nov and 219,000 in Dec 2012 for total nonfarm jobs and from 323,000 in Jan 2012 to 78,000 in Jun, 118,000 in Sep, 217,000 in Oct, 256,000 in Nov and 224,000 in Dec 2012 for private jobs. Average new nonfarm jobs in the quarter Dec 2011 to Feb 2012 were 270,667 per month, declining to average 159,909 per month in the eleven months from Mar 2012 to Jan 2013. Average new private jobs in the quarter Dec 2011 to Feb 2012 were 279,000 per month, declining to average 167,727 per month in the eleven months from Mar 2012 to Jan 2013. The number of 164,000 new private new jobs created in Jan 2013 is lower than the average 167,727 per month created from Mar 2012 to Jan 2013. New farm jobs created in Feb 2013 were 268,000 and 254,000 in private jobs, which exceeds the average for the prior eleven months. In Mar 2013 the US economy created 88,000 new farm jobs, which is 52 percent of the average of 169,000 jobs per month created in the past 12 months (page 2 http://www.bls.gov/news.release/pdf/empsit.pdf). The US labor force increased from 153.617 million in 2011 to 154.975 million in 2012 by 1.358 million or 113,167 per month. The average increase of nonfarm jobs in the six months from Oct 2012 to Mar 2013 was 188,333, which is a rate of job creation inadequate to reduce significantly unemployment and underemployment in the United States because of 113,167 new entrants in the labor force per month with 29.6 million unemployed or underemployed. The difference between the average increase of 188,333 new private nonfarm jobs per month in the US from Oct 2012 to Mar 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 75,166 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 75,166 new jobs per month net of absorption of new entrants in the labor force would require 393 months to provide jobs for the unemployed and underemployed (29.550 million divided by 75,166) or 32.8 years (393 divided by 12). The civilian labor force of the US in Mar 2013 not seasonally adjusted stood at 154.512 million with 11.815 million unemployed or effectively 19.490 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them for effective labor force of 162.187 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.1 years (1 million divided by product of 75,166 by 12, which is 901,992). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.726 million (0.05 times labor force of 154.512 million) for new net job creation of 4.089 million (11.815 million unemployed minus 7.726 million unemployed at rate of 5 percent) that at the current rate would take 4.5 years (4.089 million divided by 901.992). Under the calculation in this blog there are 19.490 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 162.187 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 11.381 million jobs net of labor force growth that at the current rate would take 12.6 years (19.490 million minus 0.05(162.187 million) or 11.381 million divided by 901,992, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in the US fell from 147.118 million in Nov 2007 to 142.698 million in Mar 2013, by 4.420 million, or decline of 3.0 percent, while the noninstitutional population increased from 232.939 million in Nov 2007 to 244.995 million in Mar 2013, by 12.056 million or increase of 5.2 percent, using not seasonally adjusted data. There is actually not sufficient job creation to merely absorb new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs.

Second, the economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.4 percent on an annual basis in 2010 and 1.8 percent in 2011 to 2.2 percent in 2012. Calculations below show that actual growth is around 1.9 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). United States real GDP grew at the rate of 3.2 percent between 1929 and 2012 and at 3.2 percent between 1947 and 2012 (http://www.bea.gov/iTable/index_nipa.cfm see http://cmpassocregulationblog.blogspot.com/2013/04/world-inflation-waves-squeeze-of.html). Growth is not only mediocre but also sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 29.6 million people corresponding to 18.2 percent of the effective labor force of the United States (http://cmpassocregulationblog.blogspot.com/2013/04/thirty-million-unemployed-or.html). In the four quarters of 2011, the four quarters of 2012 and the first quarter of 2013, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.1 percent in the first quarter of 2011 (IQ2011), 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011, 4.1 percent in IVQ2011, 2.0 percent in IQ2012, 1.3 percent in IIQ2012, revised 3.1 percent in IIIQ2012, 0.4 percent in IVQ2012 and 2.5 percent in IQ2013. The annual equivalent rate of growth of GDP for the four quarters of 2011, the four quarters of 2012 and the first quarter of 2013 is 1.9 percent, obtained as follows. Discounting 0.1 percent to one quarter is 0.025 percent {[(1.001)^1/4 -1]100 = 0.025}; discounting 2.5 percent to one quarter is 0.62 percent {[(1.025)^1/4 – 1]100}; discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)^1/4 – 1]100}; discounting 4.1 percent to one quarter is 1.0 {[(1.04)^1/4 -1]100; discounting 2.0 percent to one quarter is 0.50 percent {[(1.020)^1/4 -1]100); discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)^1/4 -1]100}; discounting 3.1 percent to one quarter is 0.77 {[(1.031)^1/4 -1]100); discounting 0.4 percent to one quarter is 0.1 percent {[(1.004)^1/4 – 1]100}; and discounting 2.5 percent to one quarter is 0.62 percent {[(1.025)^1/4 -1}100}. Real GDP growth in the four quarters of 2011, the four quarters of 2012 and the first quarter of 2013 accumulated to 4.3 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0077 x 1.001 x 1.0062) - 1]100 = 4.3%}. This is equivalent to growth from IQ2011 to IVQ2012 obtained by dividing the seasonally-adjusted annual rate (SAAR) of IQ2013 of $13,750.1 billion by the SAAR of IVQ2010 of $13,181.2 (http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 and Table I-6 below) and expressing as percentage {[($13,750.1/$13,181.2) - 1]100 = 4.3%}. The growth rate in annual equivalent for the four quarters of 2011, the four quarters of 2012 and the first quarter of 2013 is 1.9 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0077 x 1.001 x 1.0062)^4/9 -1]100 = 1.9%], or {[($13,750.1/$13,181.2)]^4/9-1]100 = 1.9%} dividing the SAAR of IVQ2012 by the SAAR of IVQ2010 in Table I-6 below, obtaining the average for nine quarters and the annual average for one year of four quarters. Growth in the four quarters of 2012 accumulates to 1.7 percent {[(1.02)^1/4(1.013)^1/4(1.031)^1/4(1.004)^1/4 -1]100 = 1.7%}. This is equivalent to dividing the SAAR of $13,665.4 billion for IVQ2012 in Table I-6 by the SAAR of $13,441.0 billion in IVQ2011 except for a rounding discrepancy to obtain 1.7 percent {[($13,665.4/$13,441.0) – 1]100 = 1.7%}. The US economy is still close to a standstill especially considering the GDP report in detail.

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 policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm) practically unchanged in the statement at the conclusion of its meeting on Jan 30, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130130a.htm) and at its meeting on Mar 20, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130320a.htm):

“Release Date: Mar 20, 2013

For immediate release

Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. 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 expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see 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 decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities 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 of 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. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

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. 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.

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”

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 decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

Advance Guidance on “6 ¼ 2 ½ “Rule. Policy will be accommodative even after the economy recovers satisfactorily: “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.”

Monitoring and Policy Focus on Jobs. The FOMC reconsiders its policy continuously in accordance with available information: “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 Mar 20, 2013. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.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 IQ2013 is analyzed in Section I (and earlier at http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html) and the PCE inflation data from the report on personal income and outlays in Section IV (http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html and earlier http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). The Bureau of Economic Analysis (BEA) provides the first estimate of IQ2013 GDP with the second estimate for IQ2013 to be released on May 30 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm See Section I and earlier at http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.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 Section IV http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html and the report 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 Mar will be released at 8:30 AM on Apr 29, 2013 (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 report for Jan 2013 was released on Feb 1, 2013 and analyzed in this blog (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). The report for Feb 2013 was released on Mar 8, 2013 (http://www.bls.gov/ces/) and analyzed in this blog on Mar 10, 2013 (http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.htm). The report for Mar 2013 was released on Apr 5, 2013 (http://www.bls.gov/ces/) and analyzed in this blog in the comment on Apr 7 (http://cmpassocregulationblog.blogspot.com/2013/04/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 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 Mar 20, 2012 and the second row “PR” the projection of the Dec 12, 2012 meeting. There are three major changes in the view.

1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2013 from 2.3 to 3.0 percent at the meeting in Dec 2012 to 2.3 to 2.8 percent at the meeting on Mar 20, 2013.

2. Rate of Unemployment “UNEM%.” The FOMC reduced the forecast of the rate of unemployment from 7.4 to 7.7 percent at the meeting on Dec 12, 2012 to 7.3 to 7.5 percent at the meeting on Mar 20, 2013.

3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.3 to 2.0 percent at the meeting on Dec 12, 2012 to 1.3 to 1.7 percent at the meeting on Mar 20, 2013.

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 that changed from 1.6 to 1.9 percent at the meeting on Dec 12, 2012 to 1.5 to 1.6 percent at the meeting on Mar 20, 2013.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, Dec 2012 and Mar 2012

	∆% GDP	UNEM %	∆% PCE Inflation	∆% Core PCE Inflation
Central Tendency
2013 Dec PR	2.3 to 2.8 2.3 to 3.0	7.3 to 7.5 7.4 to 7.7	1.3 to 1.7 1.3 to 2.0	1.5 to 1.6 1.6 to 1.9
2014 Dec PR	2.9 to 3.4 3.0 to 3.5	6.7 to 7.0 6.8 to 7.3	1.5 to 2.0 1.5 to 2.0	1.7 to 2.0 1.6 to 2.0
2015 Dec	2.9 to 3.7 3.0 to 3.7	6.0 to 6.5 6.0 to 6.6	1.7 to 2.0 1.7 to 2.0	1.8 to 2.1 1.8 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
2013 Dec PR	2.0 to 3.0 2.0 to 3.2	6.9 to 7.6 6.9 to 7.8	1.3 to 2.0 1.3 to 2.0	1.5 to 2.0 1.5 to 2.0
2014 Dec PR	2.6 to 3.8 2.8 to 4.0	6.1 to 7.1 6.1 to 7.4	1.4 to 2.1 1.4 to 2.2	1.5 to 2.1 1.5 to 2.0
2015 Dec PR	2.5 to 3.8 2.5 to 4.2	5.7 to 6.5 5.7 to 6.8	1.6 to 2.6 1.5 to 2.2	1.7 to 2.6 1.7 to 2.2
Longer Run Dec PR	2.0 to 3.0 2.2 to 3.0	5.0 to 6.0 5.0 to 6.0	2.0 2.0

Notes: UEM: unemployment; PR: Projection

Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.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/fomcprojtabl20130320.pdf). There are 18 participants expecting the rate to remain at 0 to ¼ percent in 2013 and one to be higher in the interval below 1.0 percent. 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

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

Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.pdf

Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2013 to 2015. It is evident from Table IV-4 that the prevailing view of 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
2013	1
2014	4
2015	13
2016	1

Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.pdf

Unconventional monetary policy of zero interest rates and quantitative easing has been used in Japan and now also in the US. Table IV-5 provides the consumer price index of Japan, with inflation of minus 0.9 percent in 12 months ending in Mar 2013, increase of 0.2 percent NSA (not-seasonally-adjusted) in Mar 2013 and decline of 0.2 percent SA (seasonally adjusted) in the month of Mar 2013. Inflation of consumer prices in the first four months of 2012 annualizes at 1.2 percent SA and 3.0 percent NSA. Annual equivalent inflation in the first three months of 2012 is 1.6 percent SA and 3.7 percent NSA. There are negative percentage changes in most of the 12-month rates in 2011 with the exception of Jul and Aug both with 0.2 percent and stability in Sep. All monthly and 12-month rates of inflation are nonnegative in the first four months of 2012. There are ten years of deflation, three of zero inflation and only five of inflation in the annual rate of inflation from 1995 to 2012. This experience is entirely different from that of the US that shows long-term inflation. There is only one annual negative change of the CPI all items of the US in Table IV-7, minus 0.4 percent in 2009 but following 3.8 percent in 2008 because of carry trades from policy rates moving to zero in 2008 during a global contraction that were reversed because of risk aversion in late 2008 and early 2009, causing decreasing commodity prices. Both the US and Japan experienced high rates of inflation during the US Great Inflation of the 1970s (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). It is difficult to justify unconventional monetary policy because of risks of deflation similar to that experienced in Japan. Fear of deflation as had occurred during the Great Depression and in Japan was used as an argument for the first round of unconventional monetary policy with 1 percent interest rates from Jun 2003 to Jun 2004 and quantitative easing in the form of withdrawal of supply of 30-year securities by suspension of the auction of 30-year Treasury bonds with the intention of reducing mortgage rates. For fear of deflation see Pelaez and Pelaez, International Financial Architecture (2005), 18-28, and Pelaez and Pelaez, The Global Recession Risk (2007), 83-95. 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

Table IV-5, Japan, Consumer Price Index, All Items ∆%

	∆% Month SA	∆% Month NSA	∆% 12-Month NSA
Mar 2013	-0.2	0.2	-0.9
Feb	-0.1	-0.2	-0.7
Jan	-0.1	0.0	-0.3
Dec 2012	0.2	0.0	-0.1
Nov	0.0	-0.4	-0.2
Oct	-0.1	0.0	-0.4
Sep	0.1	0.1	-0.3
Aug	-0.1	0.1	-0.4
Jul	-0.1	-0.3	-0.4
Jun	-0.2	-0.5	-0.2
May	-0.3	-0.3	0.2
Apr	0.0	0.1	0.4
Mar	0.1	0.5	0.5
Feb	0.1	0.2	0.3
Jan	0.2	0.2	0.1
Dec 2011	0.1	0.0	-0.2
Nov	-0.2	-0.6	-0.5
Oct	0.1	0.1	-0.2
Sep	-0.1	0.0	0.0
Aug	-0.1	0.2	0.2
Jul	0.3	0.0	0.2
Jun	-0.1	-0.2	-0.4
May	0.1	0.0	-0.4
Apr	-0.1	0.1	-0.5
Mar	-0.1	0.3	-0.5
Feb	0.0	0.0	-0.5
Jan	-0.1	-0.1	-0.6
Dec 2010	-0.2	–0.3	0.0
		CPI All Items USA	CPI All Items Japan
Annual
2012		2.1	0.0
2011		3.2	-0.3
2010		1.6	-0.7
2009		-0.4	-1.4
2008		3.8	1.4
2007		2.8	0.0
2006		3.2	0.3
2005		3.4	-0.3
2004		2.7	0.0
2003		2.3	-0.3
2002		1.6	-0.9
2001		2.8	-0.7
2000		3.4	-0.7
1999		2.2	-0.3
1998		1.6	0.6
1997		2.3	1.8
1996		3.0	0.1
1995		2.8	-0.1
1994		2.6	0.7
1993		3.0	1.3
1992		3.0	1.6
1991		4.2	3.3
1990		5.4	3.1
1989		4.8	2.3
1988		4.1	0.7
1987		3.6	0.1
1986		1.9	0.6
1985		3.6	2.0
1984		4.3	2.3
1983		3.2	1.9
1982		6.2	2.8
1981		10.3	4.9
1980		13.5	7.7
1979		11.3	3.7
1978		7.6	4.2
1977		6.5	8.1
1976		5.8	9.4
1975		9.1	11.7
1974		11.0	23.2
1973		6.2	11.7
1972		3.2	4.9
1971		4.4	6.3

Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications http://www.stat.go.jp/english/data/cpi/index.htm

Japan provides the consumer price index for all items and regions of Japan monthly from 1971 to 2012 with 2010=100, shown in Chart IV-1. There was inflation in Japan during the 1970s and 1980s similar to other countries and regions. The index shows stability after the 1990s with sporadic cases of deflation. Slower growth with sporadic inflation has been characterized as a “lost decade” in Japan (see Pelaez and Pelaez, The Global Recession Risk (2007), 82-115).

Chart IV-1, Japan, Consumer Price Index All Items, All Japan, Index 2010=100, Monthly, 1970-2012

Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications http://www.stat.go.jp/english/data/cpi/index.htm

Chart IV-2 provides the US consumer price index NSA from 1913 to 2013. The dominating characteristic is the increase in slope during the Great Inflation from the middle of the 1960s through the 1970s. There is long-term inflation in the US and no evidence of deflation risks.

Chart IV-2, US, Consumer Price Index, All Items, NSA, 1914-2013

Source: US Bureau of Labor Statistics

http://www.stat.go.jp/english/data/cpi/index.htm

Chart IV-3 of the Statistics Bureau of the Ministry of Internal Affairs and Communications of Japan provides 12-month percentage changes of the consumer price index for all items and regions of Japan monthly from 1971 to 2012. Japan experienced the same inflation waves of the United States during the Great Inflation of the 1970s followed by similar low inflation after the inflation-control increase of interest rates in the early 1980s. Numerous cases of negative inflation or deflation are observed after the 1990s.

Chart IV-3, Japan, CPI All Items, All Japan, 12-Month ∆%, 1971-2012

Sources: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

Chart IV-4 provides 12-month percentage changes of the US consumer price index from 1914 to 2013. There are actually three waves of inflation in the second half of the 1960s, in the mid 1970s and again in the late 1970s. Table IV-5

provides similar inflation waves in the economy of Japan with 11.8 percent in 1973, 23.1 percent in 1974 and 11.8 percent in 1975. The Great Inflation of the 1970s is analyzed in various comments of this blog (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html 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 in 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 rates then stabilized in the US in a range with only two episodes above 5 percent. There are isolated cases of deflation concentrated over extended periods only during the 1930s. There is no case in United States economic history for unconventional monetary policy because of fear of deflation. There are cases of long-term deflation without lost decades or depressions.

Delfim Netto (1958) partly reprinted in Pelaez (1973) conducted two classical nonparametric tests (Mann 1945, Wallis and Moore 1941; see Kendall and Stuart 1968) with coffee-price data in the period of free markets from 1857 to 1906 with the following conclusions (Pelaez, 1976a, 280):

“First, the null hypothesis of no trend was accepted with high confidence; secondly, the null hypothesis of no oscillation was rejected also with high confidence. Consequently, in the nineteenth century international prices of coffee fluctuated but without long-run trend. This statistical fact refutes the extreme argument of structural weakness of the coffee trade.”

The conventional theory that the terms of trade of Brazil deteriorated over the long term is without reality (Pelaez 1976a, 280-281):

“Moreover, physical exports of coffee by Brazil increased at the high average rate of 3.5 per cent per year. Brazil's exchange receipts from coffee-exporting in sterling increased at the average rate of 3.5 per cent per year and receipts in domestic currency at 4.5 per cent per year. Great Britain supplied nearly all the imports of the coffee economy. In the period of the free coffee market, British export prices declined at the rate of 0.5 per cent per year. Thus, the income terms of trade of the coffee economy improved at the relatively satisfactory average rate of 4.0 per cent per year. This is only a lower bound of the rate of improvement of the terms of trade. While the quality of coffee remained relatively constant, the quality of manufactured products improved significantly during the fifty-year period considered. The trade data and the non-parametric tests refute conclusively the long-run hypothesis. The valid historical fact is that the tropical export economy of Brazil experienced an opportunity of absorbing rapidly increasing quantities of manufactures from the "workshop" countries. Therefore, the coffee trade constituted a golden opportunity for modernization in nineteenth-century Brazil.”

Imlah (1958) provides decline of British export prices at 0.5 percent in the nineteenth century and there were no lost decades, depressions or unconventional monetary policies in the highly dynamic economy of England that provided the world’s growth impulse. The experience of the United Kingdom with deflation and economic growth is relevant and rich. Yearly percentage changes of the composite index of prices of the United Kingdom of O’Donoghue and Goulding (2004) provide strong evidence. There are 73 declines of inflation in the 145 years from 1751 to 1896. Prices declined in 50.3 percent of 145 years. Some price declines were quite sharp and many occurred over several years. O’Donoghue and Goulding (2004) also provide inflation data for the UK from 1929 to 1934. Deflation was much sharper in continuous years in earlier periods than during the Great Depression. The United Kingdom could not have led the world in modern economic growth if there were meaningful causality from deflation to depression.

Chart IV-4, US, Consumer Price Index, All Items, NSA, 12-Month Percentage Change 1914-2013

Source: US Bureau of Labor Statistics

Chart IV-5 provides the US consumer price index excluding food and energy from 1957 (when it first becomes available) to 2013. There is long-term inflation in the US without episodes of deflation that would justify symmetric inflation targets to increase inflation from low levels.

IV-5, US, Consumer Price Index Excluding Food and Energy, NSA, 1957-2013

Source: US Bureau of Labor Statistics

Chart IV-6 provides 12-month percentage changes of the consumer price index excluding food and energy from 1958 (when it first becomes available) to 2013. There are three waves of inflation in the 1970s during the Great Inflation. There is no episode of deflation.

Chart IV-6, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 1958-2013

Source: US Bureau of Labor Statistics

http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx

More detail on the consumer price index of Japan in Nov is shown in Table IV-6. Inflation in the 12 months ending in Mar 2013 has been driven by items rich in commodities such as 2.3 percent in fuel, light and water charges with change of 0.0 percent in the month of Mar 2013. There is similar behavior in the preliminary estimate for Apr for the Ku Area of Tokyo with increase of 1.3 percent of fuel, light and water charges and increase of 5.3 percent in 12 months. There are increases of 0.3 percent of CPI transport and communications and 0.3 percent of CPI excluding fresh food in Mar 2013 relative to Feb 2013. There is mild deflation in the CPI excluding food, alcoholic beverages and energy with minus 0.8 percent in the 12 months ending in Mar 2013 and increase of 0.4 percent in Mar 2013. The CPI excluding imputed rent increased 0.2 percent in Mar 2013 and fell 1.0 percent in 12 months. The all-items CPI estimate for Apr 2013 of the Ku-Area of Tokyo increased 0.3 percent in Apr 2013 and increased 0.7 percent in 12 months.

Table IV-6, Japan, Consumer Price Index, ∆%

2013	Mar 2013/Feb 2013 ∆%	Year ∆%
CPI All Items	0.2	-0.9
CPI Excluding Fresh Food	0.3	-0.5
CPI Excluding Food, Alcoholic Beverages and Energy	0.4	-0.8
CPI Goods	0.3	-1.7
CPI Services	0.1	-0.2
CPI Excluding Imputed Rent	0.2	-1.0
CPI Fuel, Light, Water Charges	0.0	2.3
CPI Transport & Communications	0.3	-0.2
CPI Ku-Area Tokyo All Items	0.3	-0.7
Fuel, Light, Water Charges Ku Area Tokyo	1.3	5.3

Note: Ku-area Tokyo CPI data preliminary for Apr 2013

Sources: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications http://www.stat.go.jp/english/data/cpi/index.htm

V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx) to show GDP in dollars in 2012 and the growth rate of real GDP of the world and selected regional countries from 2013 to 2016. 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 2013 but accelerating to 4.0 percent in 2014, 4.4 percent in 2015 and 4.5 percent in 2016. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,932 billion of world output of $71,707 billion, or 47.3 percent, but are projected to grow at much lower rates than world output, 2.1 percent on average from 2013 to 2016 in contrast with 4.1 percent for the world as a whole. While the world would grow 17.2 percent in the four years from 2013 to 2016, the G7 as a whole would grow 8.8 percent. The difference in dollars of 2012 is rather high: growing by 17.2 percent would add $12.3 trillion of output to the world economy, or roughly, two times the output of the economy of Japan of $5,964 but growing by 8.8 percent would add $6.3 trillion of output to the world, or about the output of Japan in 2012. 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 2012 of $27,290 billion, or 38.1 percent of world output. The EMDEs would grow cumulatively 25.2 percent or at the average yearly rate of 5.8 percent, contributing $6.9 trillion from 2013 to 2016 or the equivalent of somewhat less than the GDP of $8,227 billion of China in 2012. The final four countries in Table 1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output in 2012 adds to $14,470 billion, or 20.2 percent of world output, which is equivalent to 42.6 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 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015	Real GDP ∆% 2016
World	71,707	3.3	4.0	4.4	4.5
G7	33,932	1.3	2.2	2.5	2.5
Canada	1,819	1.5	2.4	2.5	2.4
France	2,609	-0.1	0.9	1.5	1.7
DE	3,401	0.6	1.5	1.3	1.3
Italy	2,014	-1.5	0.5	1.2	1.4
Japan	5,964	1.6	1.4	1.1	1.2
UK	2,441	0.7	1.5	1.8	1.9
US	15,685	1.9	2.9	3.6	3.4
Euro Area	12,198	-0.3	1.1	1.4	1.6
DE	3,401	0.6	1.5	1.3	1.3
France	2,609	-0.1	0.9	1.5	1.7
Italy	2,014	-1.5	0.5	1.2	1.4
POT	213	-2.3	0.6	1.5	1.8
Ireland	210	1.1	2.2	2.7	2.7
Greece	249	-4.2	0.6	2.9	3.7
Spain	1,352	-1.6	0.7	1.4	1.5
EMDE	27,290	5.3	5.7	6.0	6.1
Brazil	2,396	3.0	4.0	4.1	4.2
Russia	2,022	3.4	3.8	3.7	3.6
India	1,825	5.7	6.2	6.6	6.9
China	8,227	8.0	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/pubs/ft/weo/2013/01/weodata/index.aspx

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx). Table I-2 is constructed with the WEO database to provide rates of unemployment from 2012 to 2016 for major countries and regions. In fact, unemployment rates for 2012 in Table I-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. The rates of unemployment are particularly high for the countries with sovereign debt difficulties in Europe: 15.7 percent for Portugal (POT), 14.7 percent for Ireland, 24.2 percent for Greece, 25.0 percent for Spain and 10.6 percent for Italy, which is lower but still high. The G7 rate of unemployment is 7.4 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 2012	% Labor Force 2013	% Labor Force 2014	% Labor Force 2015	% Labor Force 2016
World	NA	NA	NA	NA	NA
G7	7.4	7.4	7.3	7.0	6.6
Canada	7.3	7.3	7.2	7.1	7.0
France	10.2	11.2	11.6	11.4	10.9
DE	5.5	5.6	5.7	5.6	5.6
Italy	10.6	12.0	12.4	12.0	11.2
Japan	4.4	4.1	4.1	4.1	4.1
UK	8.0	7.8	7.8	7.4	6.9
US	8.1	7.7	7.5	6.9	6.3
Euro Area	11.4	12.3	12.3	11.9	11.4
DE	5.5	5.6	5.7	5.6	5.6
France	10.2	11.2	11.6	11.4	10.9
Italy	10.6	12.0	12.4	12.0	11.2
POT	15.7	18.3	18.5	18.1	17.5
Ireland	14.7	14.2	13.8	12.9	11.9
Greece	24.2	27.0	26.1	24.0	21.0
Spain	25.0	27.0	26.5	25.6	24.7
EMDE	NA	NA	NA	NA	NA
Brazil	5.5	6.0	6.5	6.5	6.5
Russia	6.0	5.5	5.5	5.5	5.5
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/pubs/ft/weo/2013/01/weodata/index.aspx

Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog for IQ2012, IIQ2012 and IVQ2012 available now for all countries and IQ2013 for a few countries. Growth is weak throughout most of the world. Japan’s GDP increased 1.5 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 fell 0.2 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of minus 0.9 percent, which is much lower than 6.1 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 3.7 percent and increased 0.4 percent relative to a year earlier. Japan’s GDP grew 0.0 percent in IVQ2012 at the SAAR of 0.2 percent and increased 0.5 percent relative to a year earlier. China grew at 1.9 percent in IIQ2012, which annualizes to 7.8 percent and 7.6 percent relative to a year earlier. China grew at 2.1 percent in IIIQ2012, which annualizes at 8.7 percent and 7.4 percent relative to a year earlier. In IVQ2012, China grew at 2.0 percent, which annualizes at 8.2 percent, and 7.9 percent in IVQ2012 relative to IVQ2011. In IQ2013, China grew at 1.6 percent, which annualizes at 6.6 percent and 7.7 percent relative to a year earlier. 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 7.9 percent in IVQ2012 relative to IVQ2011. 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, 7.4 percent in IIIQ2012 relative to IIIQ2011, 7.9 percent in IVQ2012 relative to year earlier and 7.7 percent in IQ2013. GDP fell 0.1 percent in the euro area in IQ2012 and increased 0.3 in IQ2012 relative to a year earlier. Euro area GDP contracted 0.2 percent IIQ2012 and fell 0.8 percent relative to a year earlier. In IIIQ2012, euro area GDP fell 0.1 percent and declined 0.8 percent relative to a year earlier. In IVQ2012, euro area GDP fell 0.6 percent relative to the prior quarter and fell 0.9 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. Germany’s GDP contracted 0.6 percent in IVQ2012 and increased 0.1 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 0.5 percent in IQ2012 at the SAAR of 2.0 percent and grew 2.4 percent relative to a year earlier. 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. In IVQ2012, GDP grew 0.0 percent,

0.4 percent at SAAR and 1.7 percent relative to IVQ2011. In IQ2013, US GDP grew at 2.5 percent SAAR, 0.6 percent relative to the prior quarter and 1.8 percent relative to the same quarter in 2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html) with weak hiring (http://cmpassocregulationblog.blogspot.com/2013/04/recovery-without-hiring-ten-million.html and earlier http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). In IQ2012, UK GDP fell 0.1 percent, increasing 0.5 percent relative to a year earlier. UK GDP fell 0.4 percent in IIQ2012 and changed 0.0 percent relative to a year earlier. UK GDP increased 0.9 percent in IIIQ2012 and increased 0.4 percent relative to a year earlier. UK GDP fell 0.3 percent in IVQ2012 relative to IIIQ2012 and increased 0.2 percent relative to a year earlier. UK GDP increased 0.3 percent in IQ2013 and 0.6 percent relative to a year earlier. Italy has experienced decline of GDP in six consecutive quarters from IIIQ2011 to IVQ2012. Italy’s GDP fell 0.9 percent in IQ2012 and declined 1.6 percent relative to IQ2011. Italy’s GDP fell 0.7 percent in IIQ2012 and declined 2.6 percent relative to a year earlier. In IIIQ2012, Italy’s GDP fell 0.2 percent and declined 2.6 percent relative to a year earlier. The GDP of Italy contracted 0.9 percent in IVQ2012 and fell 2.8 percent relative to a year earlier. France’s GDP fell 0.1 percent in IQ2012 and increased 0.5 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 0.2 percent and increased 0.1 percent relative to a year earlier. France’s GDP fell 0.3 percent in IVQ2012 and declined 0.3 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: 1.5 SAAR: 6.1	3.4
China	1.6	8.1
Euro Area	-0.1	0.3
Germany	0.5	1.7
France	-0.1	0.5
Italy	-0.9	-1.6
United Kingdom	-0.1	0.5
	IIQ2012/IQ2012	IIQ2012/IIQ2011
United States	QOQ: 0.3 SAAR: 1.3	2.1
Japan	QOQ: -0.2 SAAR: -0.9	3.9
China	1.9	7.6
Euro Area	-0.2	-0.8
Germany	0.3	0.5 1.0 CA
France	-0.1	0.1
Italy	-0.7	-2.6
United Kingdom	-0.4	0.0
	IIIQ2012/ IIQ2012	IIIQ2012/ IIIQ2011
United States	QOQ: 0.8 SAAR: 3.1	2.6
Japan	QOQ: –0.9 SAAR: –3.7	0.4
China	2.1	7.4
Euro Area	-0.1	-0.8
Germany	0.2	0.4
France	0.2	0.1
Italy	-0.2	-2.6
United Kingdom	0.9	0.4
	IVQ2012/IIIQ2012	IVQ2012/IVQ2011
United States	QOQ: 0.1 SAAR: 0.4	1.7
Japan	QOQ: 0.0 SAAR: 0.2	0.5
China	2.0	7.9
Euro Area	-0.6	-0.9
Germany	-0.6	0.1
France	-0.3	-0.3
Italy	-0.9	-2.8
United Kingdom	-0.3	0.2
	IQ2013/IVQ2012	IQ2013/IQ2012
United States	QOQ: 0.6 SAAR: 2.5	1.8
China	1.6	7.7
UK	0.3	0.6

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 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 and earlier http://cmpassocregulationblog.blogspot.com/2013/03/united-states-commercial-banks-assets.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html and earlier 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 http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In Mar 2013, Japan’s exports grew 1.1 percent in 12 months while imports increased 5.5 percent. The second part of Table V-4 shows that net trade deducted 1.1 percentage points from Japan’s growth of GDP in IIQ2012, deducted 2.8 percentage points from GDP growth in IIIQ2012 and deducted 0.6 percentage points from GDP growth in IVQ2012. In Mar 2013, China exports increased 10.0 percent relative to a year earlier and imports 14.1 percent. Germany’s exports decreased 1.5 percent in the month of Feb 2013 and decreased 2.8 percent in the 12 months ending in Feb 2013 while imports decreased 3.8 percent in the month of Feb and decreased 5.9 percent in the 12 months ending in Feb. Net trade contributed 0.4 percentage points to growth of GDP in IQ2012, contributed 1.4 percentage points in IIQ2012, contributed 1.6 percentage points in IIIQ2012, contributed 0.8 percentage points in IVQ2012 and contributed 1.0 percentage points in 2012. Net trade deducted 0.7 percentage points from UK value added in IQ2012, deducted 0.8 percentage points in IIQ2012, added 0.4 percentage points in IIIQ2012 and subtracted 0.2 percentage points in IVQ2012. France’s exports decreased 1.9 percent in Feb 2013 while imports decreased 0.8 percent and net trade deducted 0.4 percentage points from GDP growth in IIQ2012, adding 0.3 percentage points in IIIQ2012 and 0.2 percentage points in IVQ2012. US exports increased 0.8 percent in Feb 2013 and goods exports increased 2.2 percent in Jan-Feb 2013 relative to a year earlier but net trade added 0.38 percentage points to GDP growth in IIIQ2012 and added 0.33 percentage points in IVQ2012. In IQ2013, net trade deducted 0.50 percentage points from US GDP growth. US imports increased 0.0 percent in Feb 2013 and goods imports decreased 0.1 percent in Jan-Feb 2013 relative to a year earlier. In the six months ending in Mar 2013, United States national industrial production accumulated increase of 2.6 percent at the annual equivalent rate of 5.3 percent, which is higher than 3.5 percent growth in 12 months. Business equipment decreased 1.1 percent in Oct, increased 2.4 percent in Nov, increased 0.4 percent in Dec, fell 1.4 percent in Jan, increased 1.9 percent in Feb 2013 and 0.1 percent in Mar, growing 5.1 percent in the 12 months ending in Feb 2013 and at the annual equivalent rate of 4.6 percent in the six months ending in Mar 2013. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm) “ The rate of capacity utilization for total industry moved up in March to 78.5 percent, a rate that is 1.2 percentage points above its level of a year earlier but 1.7 percentage points below its long-run (1972--2012) average.” United States industry is apparently decelerating with some strength at the margin.

Manufacturing decreased 0.1 percent in Mar 2013 seasonally adjusted, increasing 2.1 percent not seasonally adjusted in 12 months, and increased 2.3 percent in the six months ending in Mar 2013 or at the annual equivalent rate of 4.7 percent. Manufacturing fell by 22.1 from the peak in Jun 2007 to the trough in Apr 2009 and increased 16.7 percent from the trough in Apr 2009 to Dec 2012. Manufacturing fell 7.0 percent from the peak in Jun 2007 to Mar 2013 and increased 19.4 from the trough in Apr 2008 to Mar 2013. 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 M ∆%	Exports 12 M ∆%	Imports M ∆%	Imports 12 M ∆%
USA	0.8 Feb	2.2 Jan-Feb	0.0 Jan	-0.1 Jan-Feb
Japan		Mar 2013 1.1 Feb 2013 -2.9 Jan 2013 6.4 Dec -5.8 Nov -4.1 Oct -6.5 Sep -10.3 Aug -5.8 Jul -8.1		Mar 2013 5.5 Feb 2013 7.3 Jan 2013 7.3 Dec 1.9 Nov 0.8 Oct -1.6 Sep 4.1 Aug -5.4 Jul 2.1
China		10.0 Mar 13 18.4 Jan-Mar 13		14.1 Mar 13 8.4 Jan-Mar 13
Euro Area	-1.1 12-M Feb	1.9 Jan-Feb	-7.1 12-M Feb	-2.7 Jan-Feb
Germany	-1.5 Feb CSA	-2.8 Feb	-3.8 B CSA	-5.9 Feb
France Feb	-1.9	-3.6	-0.8	-4.2
Italy Feb	-3.0	-2.8	-2.6	-9.6
UK	1.9 Dec	-3.9 Oct-Dec 12/Oct-Dec 11	0.9 Dec	-0.4 Oct-Dec 12/Oct-Dec 11
Net Trade % Points GDP Growth	% Points
USA	IQ2013 -0.50 IVQ2012 +0.33 IIIQ2012 +0.38
Japan	-1.1 IIQ2012 -2.8 IIIQ2012 -0.6 IVQ2012
Germany	0.4 IQ2012 1.4 IIQ2012 1.6 IIIQ2012 0.8 IVQ2012 1.0 2012
France	-0.4 IIQ2012 0.3 IIIQ2012 0.2 IVQ2012
UK	-0.7 IQ2012 -0.8 IIQ2012 +0.4 IIIQ2012 -0.2 IVQ2012

Sources: Country Statistical Agencies http://www.census.gov/foreign-trade/ http://www.bea.gov/iTable/index_nipa.cfm

The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table V-5 for Mar 2013. The share of Asia in Japan’s trade is more than one half, 54.2 percent of exports and 43.2 percent of imports. Within Asia, exports to China are 17.7 percent of total exports and imports from China 20.2 percent of total imports. While exports to China fell 2.5 percent in the 12 months ending in Mar 2013, imports from China increased 1.0 percent. The second largest export market for Japan in Mar 2013 is the US with share of 17.5 percent of total exports and share of imports from the US of 8.1 percent in total imports. Western Europe has share of 9.8 percent in Japan’s exports and of 10.5 percent in imports. Rates of growth of exports of Japan in Mar 2013 are negative for several countries and regions with the exception of growth of 7.0 percent for exports to the US, 22.3 for exports to Mexico, 3.6 percent for exports to Brazil and 1.0 percent for exports to Australia. 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 increase of Japan’s exports by 1.1 percent in Mar 2013 while imports increased 5.5 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Mar 2013 are positive for most trading partners. Imports from Asia increased 3.8 percent in the 12 months ending in Mar 2013 while imports from China increased 1.0 percent. Data are in millions of yen, which has effects of recent depreciation of the yen relative to the United States dollar (USD).

Table V-5, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Mar 2013	Exports Millions Yen	12 months ∆%	Imports Millions Yen	12 months ∆%
Total	6,271,355	1.1	6,633,776	5.5
Asia	3,399,786	0.3	2,863,414	3.8
China	1,108,606	-2.5	1,342,491	1.0
USA	1,096,769	7.0	535,136	-0.4
Canada	78,247	-7.9	91,097	5.0
Brazil	50,166	3.6	86,684	10.4
Mexico	88,090	22.3	31,335	-6.8
Western Europe	615,009	-4.7	696,019	10.8
Germany	153,886	-1.4	185,366	0.4
France	49,858	-16.6	103,961	30.1
UK	80,750	-12.4	47,673	-14.4
Middle East	224,218	-7.1	1,313,653	2.7
Australia	150,352	1.0	399,424	6.1

Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm

World trade projections of the IMF are in Table V-6. There is increasing growth of the volume of world trade of goods and services from 3.6 percent in 2013 to 6.1 percent in 2015 and 5.7 percent in 2018. World trade would be slower for advanced economies while emerging and developing economies (EMDE) experience faster growth. World economic slowdown would more challenging with lower growth of world trade.

Table V-6, IMF, Projections of World Trade, ∆%

	2013	2014	2015	Average ∆% 2013-2018
World Trade Volume (Goods and Services)	3.6	5.3	6.1	5.7
Oil Price USD/Barrel	102.60	97.58	NA	NA
Commodity Price Index	181.84	174.06	NA	NA
Commodity Industrial Inputs Price 2005=100	170.04	164.66	NA	NA
Imports Goods & Services
G7	1.8	4.0	4.7	4.3
EMDE	6.2	7.3	7.9	7.5
Exports Goods & Services
G7	2.2	4.4	4.9	4.5
EMDE	4.8	6.5	7.6	7.1

Notes: Commodity Price Index includes Fuel and Non-fuel Prices; Commodity Industrial Inputs Price includes agricultural raw materials and metal prices; Oil price is average of WTI, Brent and Dubai

Source: International Monetary Fund World Economic Outlook databank

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 marginally to 53.1 in Mar from 52.9 in Feb, indicating expansion at a moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10974).This index has remained above the contraction territory of 50.0 during 44 consecutive months and the average for IQ2013 at 53.0 is slightly higher than 52.9 in IVQ2012. The employment index decreased to 51.4 in Mar relative to 52.3 in Feb with input prices rising at slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10974) David Hensley, Director of Global Economic Coordination at JP Morgan, finds continuing growth with slowing new orders and slow employment growth raising doubts on the sustainability of growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10974). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, increased marginally to 51.2 in Mar from 50.9 in Feb, which is the third consecutive reading above 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10951). New export business increased marginally for the first month after eleven consecutive monthly declines. The HSBC Brazil Composite Output Index, compiled by Markit, decreased from 52.9 in Feb to 51.0 in Mar, indicating improvement but with business activity growing at lower rates in both manufacturing and services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10948). The HSBC Brazil Services Business Activity index, compiled by Markit, decreased from 52.1 in Feb to 50.3 in Mar ((http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10948). Andre Loes, Chief Economist, Brazil, at HSBC, finds recovering economy but within a modest forecast for 2013 lowered from 3 percent to 2.6 percent ((http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10948). The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) decreased from a 22-month high in Jan 2012 at 53.2 to 52.5 in Feb 2013 and 51.2 in Mar 2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10871). The average of 52.5 in IQ2013 was higher than the average of 51.2 for IVQ2012. Andre Loes, Chief Economist, Brazil at HSBC, finds continuing expansion in Brazil’s manufacturing with greater strength in IQ2013 than in IVQ2012 and the highest reading in IQ2011, supporting the view that the economy of Brazil is experiencing moderate recovery (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10871).

VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted fell to 52.0 in Apr from 54.6 in Mar, which is the lowest reading in six months (http://www.markiteconomics.com/Survey/PressRelease.mvc/8b5f686e481f42199fa60c1ae997959c).New export orders registered 52.2 in Apr from 51.8 in Mar, indicating expansion at a moderate rate while output fell from 56.6 in Mar to 53.6 in Apr. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with growth at only 2.0 percent annual rythm in the beginning of IIQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/8b5f686e481f42199fa60c1ae997959c). The Markit US Manufacturing Purchasing Managers’ Index^™ (PMI^™) increased to 54.6 in Mar from 54.3 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10933). The index of new exports orders increased from 48.5 in Feb 2013 to 51.8 in Mar 2013 while total new orders were unchanged from 54.4 in Feb to 55.4 in Mar. Chris Williamson, Chief Economist at Markit, finds that manufacturing in the US is moving to growth of 2 percent in IQ2013 and could support growth of the US economy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10933). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business^® decreased 2.9 percentage points from 54.2 in Feb to 51.3 in Mar (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders decreased 6.4 percentage points from 57.8 in Feb to 51.4 in Mar. The index of exports increased 2.5 percentage points from 53.5 in Feb to 56.0 in Mar, remaining in expansion territory. The Non-Manufacturing ISM Report on Business^® PMI decreased 1.6 percentage points from 56.0 in Feb to 54.4 in Mar, indicating production growth during 44 consecutive months, while the index of new orders decreased 3.6 percentage points from 58.2 in Feb to 54.6 in Mar (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	Mar 12 months NSA ∆%: 1.5; ex food and energy ∆%: 1.9 Mar month SA ∆%: -0.2; ex food and energy ∆%: 0.1 Blog 4/21/13
Producer Price Index	Mar 12-month NSA ∆%: 1.1; ex food and energy ∆% 1.7 Mar month SA ∆% = -0.6; ex food and energy ∆%: 0.2 Blog 4/21/13
PCE Inflation	Jan 12-month NSA ∆%: headline 1.2; ex food and energy ∆% 1.3 Blog 3/31/13
Employment Situation	Household Survey: Feb Unemployment Rate SA 7.6% Blog calculation People in Job Stress Mar: 29.6 million NSA, 18.2% of Labor Force Establishment Survey: Nov Nonfarm Jobs +88,000; Private +95,000 jobs created Feb 12-month Average Hourly Earnings Inflation Adjusted ∆%: 0.1 Blog 4/7/13
Nonfarm Hiring	Nonfarm Hiring fell from 63.8 million in 2006 to 52.0 million in 2012 or by 11.8 million Private-Sector Hiring Feb 2013 3.632 million lower by 0.789 million than 4.421 million in Feb 2006 Blog 4/14/13
GDP Growth	BEA Revised National Income Accounts IQ2012/IQ2011 ∆%: 2.4 IIQ2012/IIQ2011 2.1 IIIQ2012/IIIQ2011 2.6 IVQ2012/IVQ2011 1.7 IQ2013/IQ2012 1.8 IQ2012 SAAR 2.0 IIQ2012 SAAR 1.3 IIIQ2012 SAAR 3.1 IVQ2012 SAAR 0.4 IQ2013 SAAR 2.5 Blog 3/31/13 4/28/13
Real Private Fixed Investment	SAAR IQ2013 4.1 ∆% IVQ2007 to IIIQ2012: minus 8.8% Blog 4/28/13
Personal Income and Consumption	Feb month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.7 Real Personal Consumption Expenditures (RPCE): 0.3 12-month Feb NSA ∆%: RDPI: 0.9; RPCE ∆%: 2.0 Blog 3/31/2013
Quarterly Services Report	IVQ12/IVQ11 SA ∆%: Information 5.4 Financial & Insurance 6.2 Blog 3/10/13
Employment Cost Index	Compensation Private IVQ2012 SA ∆%: 0.5 Dec 12 months ∆%: 2.2 Blog 2/10/13
Industrial Production	Mar month SA ∆%: 0.4 Mar 12 months SA ∆%: 3.5 Manufacturing Mar SA ∆% -0.1 Mar 12 months SA ∆% 2.5, NSA 2.1 Capacity Utilization: 78.5 Blog 4/21/13
Productivity and Costs	Nonfarm Business Productivity IVQ2012∆% SAAE -1.9; IVQ2012/IVQ2011 ∆% 0.5; Unit Labor Costs SAAE IVQ2012 ∆% 4.6; IVQ2012/IVQ2011 ∆%: 2.1 Blog 3/10/2013
New York Fed Manufacturing Index	General Business Conditions From Feb 10.04 to Mar 9.24 New Orders: From Feb 13.31 to Mar +8.18 Blog 3/24/13
Philadelphia Fed Business Outlook Index	General Index from Feb -12.5 to Mar 2.0 New Orders from Feb -7.8 to Mar 0.5 Blog 3/24/13
Manufacturing Shipments and Orders	New Orders SA Feb ∆% 3.0 Ex Transport 0.3 Jan-Feb NSA New Orders 0.7 Ex transport 0.9 Blog 4/7/13
Durable Goods	Mar New Orders SA ∆%: minus 5.7; ex transport ∆%: minus 1.4 Jan-Mar 13/Jan-Mar 12 New Orders NSA ∆%: minus 0.1; ex transport ∆% 0.2 Blog 4/28/13
Sales of New Motor Vehicles	Jan-Mar 2013 3,688,662; Jan-Mar 2012 3,467,496. Mar 13 SAAR 15.27 million, Feb 13 SAAR 15.38 million, Mar 2012 SAAR 14.12 million Blog 4/7/13
Sales of Merchant Wholesalers	Jan-Feb 2013/Jan-Feb 2012 NSA ∆%: Total 1.7; Durable Goods: 0.4; Nondurable Goods: 2.7 Blog 4/14/13
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Feb 13/Feb 12 NSA ∆%: Sales Total Business 0.1; Manufacturers 0.0 Retailers 0.9; Merchant Wholesalers -0.3 Blog 4/14/13
Sales for Retail and Food Services	Jan-Mar 2013/Jan-Mar 2012 ∆%: Retail and Food Services 2.8; Retail ∆% 2.7 Blog 4/14/13
Value of Construction Put in Place	Feb SAAR month SA ∆%: 1.2 Feb 12-month NSA: 6.9 Jan-Feb 2013 ∆% 6.6 Blog 4/7/13
Case-Shiller Home Prices	Jan 2013/Jan 2012 ∆% NSA: 10 Cities 7.3; 20 Cities: 8.1 ∆% Jan SA: 10 Cities 1.0 ; 20 Cities: 1.0 Blog 3/31/13
FHFA House Price Index Purchases Only	Feb SA ∆% 0.7; 12 month NSA ∆%: 7.0 Blog 4/28/13
New House Sales	Mar 2013 month SAAR ∆%: minus 1.5 Jan-Mar 2013/Jan-Mar 2012 NSA ∆%: 19.6 Blog 4/28/13
Housing Starts and Permits	Mar Starts month SA ∆%: 7.0 ; Permits ∆%: -3.9 Jan-Mar 2013/Jan-Mar 2012 NSA ∆% Starts 35.9; Permits ∆% 22.3 Blog 4/21/13
Trade Balance	Balance Feb SA -$42,960 million versus Jan -$44,460 million Exports Feb SA ∆%: 0.8 Imports Feb SA ∆%: 0.0 Goods Exports Jan-Feb 2013/2012 NSA ∆%: 2.2 Goods Imports Jan-Feb 2013/2012 NSA ∆%: -0.1 Blog 4/14/13
Export and Import Prices	Mar 12-month NSA ∆%: Imports -2.7; Exports 0.3 Blog 4/14/13
Consumer Credit	Feb ∆% annual rate: 7.8 Blog 4/7/13
Net Foreign Purchases of Long-term Treasury Securities	Feb Net Foreign Purchases of Long-term Treasury Securities: -$17.8 billion Major Holders of Treasury Securities: China $1223 billion; Japan $1097 billion; Total Foreign US Treasury Holdings Feb $5657 billion Blog 4/21/13
Treasury Budget	Fiscal Year 2013/2012 ∆% Mar: Receipts 112.4; Outlays minus 2.5; Individual Income Taxes 14.7 Deficit Fiscal Year 2011 $1,297 billion Deficit Fiscal Year 2012 $1,089,353 million Blog 4/14/2013
CBO Budget and Economic Outlook	2012 Deficit $1089 B 7.0% GDP Debt 11,280 B 72.5% GDP 2013 Deficit $845 B, Debt 12,229 B 76.3% GDP Blog 8/26/12 11/18/12 2/10/13
Commercial Banks Assets and Liabilities	Mar 2013 SAAR ∆%: Securities -4.3 Loans 2.1 Cash Assets 85.5 Deposits 7.6 Blog 4/28/13
Flow of Funds	2012 ∆ since 2007 Assets -$868.9 MM Real estate -$3562.7 MM Financial +$2204.3 MM Net Worth -$46.6 MM Blog 3/17/13
Current Account Balance of Payments	IVQ2012 +$6793 MM %GDP 2.8 Blog 3/17/13

Links to blog comments in Table USA:

4/21/13 http://cmpassocregulationblog.blogspot.com/2013/04/world-inflation-waves-squeeze-of.html

4/14/13 http://cmpassocregulationblog.blogspot.com/2013/04/recovery-without-hiring-ten-million.html

4/7/13 http://cmpassocregulationblog.blogspot.com/2013/04/thirty-million-unemployed-or.htm

03/31/13 http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html

3/24/13 http://cmpassocregulationblog.blogspot.com/2013/03/united-states-commercial-banks-assets.html

3/17/13 http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html

3/10/13 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html

2/10/13 http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html

11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html

Manufacturers’ shipments of durable goods increased 0.4 percent in Mar 2013 after increasing 0.7 percent in Feb 2013 and decreasing 0.7 percent in Jan 2013. New orders decreased 5.7 percent in Mar 2013 after increasing 4.3 percent in Feb 2013 and decreasing 3.7 percent in Jan 2013, as shown in Table VA-1. These data are very volatile. Volatility is illustrated by decrease of 12.9 percent in Nov 2012 after increase of orders for nondefense aircraft of 2642.2 percent in Sep 2012 after decrease of 97.2 percent in Aug and increases of 51.1 percent in Jul 2012 and 32.5 percent in Jun 2012. Nondefense aircraft new orders fell 48.2 in Mar 2013 after increasing 86.4 percent in Feb 2013 and decreasing 23.8 percent in Jan 2013. New orders excluding transportation equipment decreased 1.4 percent in Mar 2013, decreasing 1.7 percent in Feb 2013 and increasing 3.0 percent in Dec 2012. Capital goods new orders, indicating investment, decreased 12.6 percent in Mar 2013 and increased 10.2 percent in Feb 2013 after decrease of 11.4 percent in Jan 2013. New orders of nondefense capital goods decreased 10.6 percent in Mar 2013 and increased 7.1 percent in Feb 2013 and 2.0 percent in Jan 2013. Excluding more volatile aircraft, capital goods orders increased 0.2 percent in Mar 2013, falling 4.8 percent in Feb 2013 and increasing 6.7 percent in Jan 2013.

Table VA-1, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

	Mar 2013 ∆%	Feb 2013 ∆%	Jan 2013 ∆%
Total
S	0.4	0.7	-0.7
NO	-5.7	4.3	-3.7
Excluding Transport
S	-0.2	0.3	-0.2
NO	-1.4	-1.7	3.0
Excluding Defense
S	0.3	0.6	-0.2
NO	-4.7	3.4	1.3
Machinery
S	0.6	1.8	0.4
NO	-1.4	-4.7	15.8
Computers & Electronic Products
S	2.9	0.0	-3.1
NO	1.0	-2.3	-5.0
Computers
S	10.7	-1.6	-15.8
NO	5.0	3.1	-14.9
Transport Equipment
S	2.1	1.7	-1.8
NO	-15.0	20.0	-17.7
Motor Vehicles
S	0.3	4.3	0.5
NO	0.2	4.7	0.9
Nondefense Aircraft
S	13.1	-11.0	-6.5
NO	-48.2	86.4	-23.8
Capital Goods
S	1.9	0.1	-2.7
NO	-12.6	10.2	-11.4
Nondefense Capital Goods
S	2.1	-0.5	-1.6
NO	-10.6	7.1	2.0
Capital Goods ex Aircraft
S	0.3	1.2	-0.7
NO	0.2	-4.8	6.7

Note: Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation

Source: US Census Bureau http://www.census.gov/manufacturing/m3/

Chart VA-1 provides monthly changes in durable goods new orders. There is significant volatility in these data, preventing identification of trends.

Chart VA-1, US, Manufacturers’ Durable Goods New Orders 2010-2011

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr021.html

Additional perspective on manufacturers’ shipments and new orders of durable goods is provided by Table VA-2. Values are cumulative millions of dollars in Jan-Mar 2013 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Mar 2013 total $666.7 billion and new orders total $666.7 billion, growing respectively by 2.5 percent and minus 0.1 percent relative to the same period in 2012. Excluding transportation equipment, shipments grew 0.9 percent and new orders increased 0.2 percent. Excluding defense, shipments grew 2.8 percent and new orders grew 1.3 percent. Important information not in Table VA-2 is the large share of nondurable goods: with shipments of $3 trillion in 2012, growing by 2.0 percent, and new orders of $3 trillion, growing by 2.0 percent, in part driven by higher prices for food and energy. Durable goods were lower in value in 2012, with shipments of $2.7 trillion, growing by 7.0 percent, and new orders of $2.6 trillion, growing by 4.1 percent. Capital goods have relatively high value of $228.6 billion for shipments, growing 0.4 percent, and new orders $242.6 billion, growing minus 5.8 percent. Excluding aircraft, capital goods shipments reached $187.3 billion, growing by 0.4 percent, and new orders $198.6 billion, growing 0.5 percent. Data weakened significantly in 2013.

Table VA-2, US, Value of Manufacturers’ Shipments and New Orders of Durable Goods, NSA, Millions of Dollars

Jan-Mar 2013	Shipments	∆% 2013/ 2012	New Orders	∆% 2013/ 2012
Total	666,705	2.5	666,659	-0.1
Excluding Transport	470,093	0.9	468,752	0.2
Excluding Defense	635,988	2.8	639,602	1.3
Machinery	97,945	5.2	103,275	3.4
Computers & Electronic Products	78,135	-2.9	60,042	-11.1
Computers & Related Products	6,348	-22.4	6,424	-21.2
Transport Equipment	196,612	6.4	197,907	-0.9
Motor Vehicles	138,118	9.5	138,464	9.8
Nondefense Aircraft	27,473	3.8	33,945	-16.0
Capital Goods	228,614	0.4	242,646	-5.8
Nondefense Capital Goods	204,395	0.6	221,557	-3.5
Capital Goods ex Aircraft	187,319	0.4	198,586	-0.5

Note: Transport: transportation

Source: US Census Bureau http://www.census.gov/manufacturing/m3/

Chart VA-2 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-2, US, Output of Durable Manufacturing, 1972-2013

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/default.htm

Manufacturing jobs decreased 3,000 in Mar 2013 relative to Feb 2013, seasonally adjusted and increased 25,000 in Mar 2013 relative to Feb 2013, not seasonally adjusted, as shown in Table I-10 at http://cmpassocregulationblog.blogspot.com/2013/04/thirty-million-unemployed-or.html. Manufacturing jobs not seasonally adjusted increased 80,000 from Mar 2012 to Mar 2013 or at the average monthly rate of 6,667. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. In the six months ending in Mar 2013, United States national industrial production accumulated increase of 2.6 percent at the annual equivalent rate of 5.3 percent, which is higher than 3.5 percent growth in 12 months. Business equipment decreased 1.1 percent in Oct, increased 2.4 percent in Nov, increased 0.4 percent in Dec, fell 1.4 percent in Jan, increased 1.9 percent in Feb 2013 and 0.1 percent in Mar, growing 5.1 percent in the 12 months ending in Feb 2013 and at the annual equivalent rate of 4.6 percent in the six months ending in Mar 2013. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm) “ The rate of capacity utilization for total industry moved up in March to 78.5 percent, a rate that is 1.2 percentage points above its level of a year earlier but 1.7 percentage points below its long-run (1972--2012) average.” United States industry is apparently decelerating with some strength at the margin.

Table II-13 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 IVQ2012 and 86.4 percent in IIIQ2012. Most of US national income is in the form of services. In Mar 2013, there were 134.485 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 112.205 million NSA in Mar 2013 accounted for 83.4 percent of total nonfarm jobs of 134.485 million, of which 11.902 million, or 10.6 percent of total private jobs and 8.9 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 93.961 million NSA in Mar 2013, or 69.9 percent of total nonfarm jobs and 83.7 percent of total private-sector jobs. Manufacturing has share of 11.1 percent in US national income in IVQ2011 and 11.1 percent in IIIQ2012, as shown in Table I-13. 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 VA-3, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IIIQ2012	% Total	SAAR IVQ2012	% Total
National Income WCCA	13,976.7	100.0	14,122.2	100.0
Domestic Industries	13,733.6	98.3	13,855.6	98.1
Private Industries	12,075.0	86.4	12,192.5	86.3
Agriculture	138.6	1.0	138.9	1.0
Mining	205.3	1.5	214.7	1.5
Utilities	216.6	1.6	209.5	1.5
Construction	589.3	4.2	603.5	4.3
Manufacturing	1548.9	11.1	1563.1	11.1
Durable Goods	892.8	6.4	893.8	6.3
Nondurable Goods	656.1	4.7	669.3	4.7
Wholesale Trade	837.8	6.0	857.8	6.1
Retail Trade	957.4	6.9	972.8	6.9
Transportation & WH	415.5	3.0	415.8	2.9
Information	504.4	3.6	490.5	3.5
Finance, Insurance, RE	2330.6	16.7	2352.0	16.7
Professional, BS	2003.4	14.3	2029.0	14.4
Education, Health Care	1385.6	9.9	1395.5	9.9
Arts, Entertainment	539.4	3.9	544.4	3.9
Other Services	402.3	2.9	405.1	2.9
Government	1658.6	11.9	1663.0	11.8
Rest of the World	243.1	1.7	266.6	1.9

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

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/gor1304b.pdf). For fiscal 2013, the forecast is of growth of GDP between 2.4 and 3.0 percent, with the all items CPI less fresh food of 0.4 to 0.8 percent. The critical difference is forecast of the CPI excluding fresh food of 2.7 to 3.6 percent in 2014 and 1.6 to 2.9 percent in 2015. The new monetary policy of the Bank of Japan aims to increase inflation to 2 percent. These forecasts are biannual in Apr and Oct. The Cabinet Office, Ministry of Finance and Bank of Japan released on Jan 22, 2013, a “Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth” (http://www.boj.or.jp/en/announcements/release_2013/k130122c.pdf) with the important change of increasing the inflation target of monetary policy from 1 percent to 2 percent:

“The Bank of Japan conducts monetary policy based on the principle that the policy shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy, and is responsible for maintaining financial system stability. The Bank aims to achieve price stability on a sustainable basis, given that there are various factors that affect prices in the short run.

The Bank recognizes that the inflation rate consistent with price stability on a sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan's economy make progress. Based on this recognition, the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index.

Under the price stability target specified above, the Bank will pursue monetary easing and aim to achieve this target at the earliest possible time. Taking into consideration that it will take considerable time before the effects of monetary policy permeate the economy, the Bank will ascertain whether there is any significant risk to the sustainability of economic growth, including from the accumulation of financial imbalances.”

The Bank of Japan also provided explicit analysis of its view on price stability in a “Background note regarding the Bank’s thinking on price stability” (http://www.boj.or.jp/en/announcements/release_2013/data/rel130123a1.pdf http://www.boj.or.jp/en/announcements/release_2013/rel130123a.htm/). The Bank of Japan also amended “Principal terms and conditions for the Asset Purchase Program” (http://www.boj.or.jp/en/announcements/release_2013/rel130122a.pdf): “Asset purchases and loan provision shall be conducted up to the maximum outstanding amounts by the end of 2013. From January 2014, the Bank shall purchase financial assets and provide loans every month, the amount of which shall be determined pursuant to the relevant rules of the Bank.”

Financial markets in Japan and worldwide were shocked by new bold measures of “quantitative and qualitative monetary easing” by the Bank of Japan (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The objective of policy is to “achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The main elements of the new policy are as follows:

Monetary Base Control. Most central banks in the world pursue interest rates instead of monetary aggregates, injecting bank reserves to lower interest rates to desired levels. The Bank of Japan (BOJ) has shifted back to monetary aggregates, conducting money market operations with the objective of increasing base money, or monetary liabilities of the government, at the annual rate of 60 to 70 trillion yen. The BOJ estimates base money outstanding at “138 trillion yen at end-2012) and plans to increase it to “200 trillion yen at end-2012 and 270 trillion yen at end 2014” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
Maturity Extension of Purchases of Japanese Government Bonds. Purchases of bonds will be extended even up to bonds with maturity of 40 years with the guideline of extending the average maturity of BOJ bond purchases from three to seven years. The BOJ estimates the current average maturity of Japanese government bonds (JGB) at around seven years. The BOJ plans to purchase about 7.5 trillion yen per month (http://www.boj.or.jp/en/announcements/release_2013/rel130404d.pdf). Takashi Nakamichi, Tatsuo Ito and Phred Dvorak, wiring on “Bank of Japan mounts bid for revival,” on Apr 4, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323646604578401633067110420.html ), find that the limit of maturities of three years on purchases of JGBs was designed to avoid views that the BOJ would finance uncontrolled government deficits.
Seigniorage. The BOJ is pursuing coordination with the government that will take measures to establish “sustainable fiscal structure with a view to ensuring the credibility of fiscal management” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
Diversification of Asset Purchases. The BOJ will engage in transactions of exchange traded funds (ETF) and real estate investment trusts (REITS) and not solely on purchases of JGBs. Purchases of ETFs will be at an annual rate of increase of one trillion yen and purchases of REITS at 30 billion yen.

Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year

Fiscal Year Date of Forecast	Real GDP	CPI All Items Less Fresh Food	Excluding Effects of Consumption Tax Hikes
2012
Apr 2013	+1.0 to +1.0 [+1.0]	-0.2
Jan 2013	+1.0 to +1.1 [+1.0]	-0.2 to –0.1 [-0.2]
2013
Apr 2013	+2.4 to +3.0 [+2.9]	+0.4 to +0.8 [+0.7]
Jan 2013	+1.9 to +2.5 [+2.3]	+0.3 to +0.6 [+0.4]
2014
Apr 2013	+1.0 to +1.5 [+1.4]	+2.7 to +3.6 [+3.4]	+0.7 to +1.6 [+1.4]
Jan 2013	+0.6 to +1.0 [+0.8]	+2.5 to +3.0 [+2.9]	+0.5 to +1.0 [+0.9]
2015
Apr 2013	+1.4 to +1.9 [+1.6]	+1.6 to +2.9 [+2.6]	+0.9 to +2.2 [+1.9]

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/gor1304a.pdf

Private-sector activity in Japan expanded strongly with the Markit Composite Output PMI^™ Index increasing from 50.2 in Feb to 53.2 in Mar, which is the highest reading in a year (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10950). Paul Smith, economist at Markit and author of the report, finds that the survey data suggest growth of the economy of Japan possibly even higher than 0,5 percent in IQ2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10824). The Markit Business Activity Index of Services increased from 51.1 in Feb to 54.0 in Mar, which is the highest level since Sep 2007 when the survey began (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10950). Paul Smith, Senior Economist at Markit and author of the report, finds signs of growth in the beginning of 2013 with confidence in demand for services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10950). Markit/JMMA Purchasing Managers’ Index^™ (PMI™), seasonally adjusted, increased from 48.5 in Feb to 50.4 in Mar for the first reading above 50.0 since May 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10885). Foreign business grew at the fastest rate in more than two years with respondents attributing growth to devaluation of the yen and strength in Asia. Andrew Harker, Senior Economist at Markit and author of the report, finds resumption of growth in manufacturing in Japan in Mar 2013 both in new orders and output (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10885).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 Blog 8/9/11 Table 26
Corporate Goods Prices	Feb ∆% +0.1 12 months ∆% minus 0.5 Blog 4/14/13
Consumer Price Index	Mar NSA ∆% 0.2; Mar 12 months NSA ∆% -0.9 Blog 4/28/13
Real GDP Growth	IVQ2012 ∆%: 0.0 on IIIQ2012; IVQ2012 SAAR 0.2; ∆% from quarter a year earlier: 0.5 % Blog 3/10/13
Employment Report	Feb Unemployed 2.77 million Change in unemployed since last year: minus 120 thousand Unemployment rate: 4.2% Blog 3/31/13
All Industry Indices	Feb month SA ∆% 0.6 12-month NSA ∆% -2.5 Blog 4/28/13
Industrial Production	Feb SA month ∆%: -0.1 12-month NSA ∆% -11.0 Blog 3/31/13
Machine Orders	Total Feb ∆% 4.6 Private ∆%: 0.1 Feb ∆% Excluding Volatile Orders 7.5 Blog 4/14/13
Tertiary Index	Feb month SA ∆% 1.1 Feb 12 months NSA ∆% 0.2 Blog 4/14/13
Wholesale and Retail Sales	Feb 12 months: Total ∆%: -1.6 Wholesale ∆%: -1.3 Retail ∆%: -2.3 Blog 3/31/13
Family Income and Expenditure Survey	Feb 12-month ∆% total nominal consumption 0.1, real 0.8 Blog 3/31/13
Trade Balance	Exports Mar 12 months ∆%: 1.1 Imports Mar 12 months ∆% 5.5 Blog 4/21/13

Links to blog comments in Table JPY:

4/21/13 http://cmpassocregulationblog.blogspot.com/2013/04/world-inflation-waves-squeeze-of.html

4/14/13 http://cmpassocregulationblog.blogspot.com/2013/04/recovery-without-hiring-ten-million.html

03/31/13 http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html

3/10/13 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html

8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP changed 0.0 percent in IVQ2012 (Table VB-1 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or_11.html), industry decreased 1.9 percent, the tertiary sector increased 0.5 percent, government decreased 0.2 percent and construction increased 2.1 percent. The report shows that the all industry index increased 0.3 percent in IVQ2012. Industry deducted 0.33 percentage points from growth of the all industry index and the tertiary index contributed 0.33 percentage points. Japan had already experienced a very weak quarter in IVQ2010, with decline of the all industry index of 0.2 percent and decline of GDP of 0.4 percent (Table VB-1 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or_11.html), when it was unexpectedly hit by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.5 percent in IIQ2011 relative to IQ2011 but recovery at 3.3 percent in IIIQ2011. Industrial production fell 4.2 percent from IQ2011 into IIQ2011 but grew 5.4 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.3 percent in IQ2011 caused by decline of industrial production by 1.5 percent and services by 1.0 percent with GDP falling revised 1.8 percent (Table VB-1 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or_11.html).

Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
2012
IVQ2012	2.1	-1.9	0.5	-0.2	0.3	0.0
Cont to IVQ % Change	0.10	-0.33	0.33	-0.02
IIIQ	1.6	-4.2	0.1	0.0	-0.5	-0.9
IIQ	-1.5	-2.0	0.0	-0.1	-0.1	-0.2
IQ	5.7	1.3	0.0	0.1	-0.1	1.5
2011
IVQ	-1.5	0.4	0.5	0.2	0.5	0.1
IIIQ	3.3	5.4	1.5	0.2	2.1	2.5
IIQ	-7.5	-4.2	-0.5	0.1	-0.9	-0.9

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/english/statistics/index.html

There are more details in Table VB-2. In Feb 2013, the all industry activity index increased 0.6 percent in Feb 2013 with industry growing 0.6 percent and services 1.1 percent while construction increased 1.7 percent and government decreased 0.9 percent. Industry contributed 0.10 percentage points and services 0.74 percentage points while construction added 0.08 percentage points and government deducted 0.11 percentage points. Weakness in Sep and Aug 2011 had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov followed by strong rebound in Dec 2011 that was interrupted in Jan-Mar 2012 with modest growth in Apr, new decline in May 2012, moderate increase in Jun 2012 and new decline of 0.5 percent in Jul 2012, nil growth in Aug 2012, decline of 0.4 percent in Sep 2012 and increase of 0.3 percent in Oct 2012 interrupted by decline of 0.4 percent in Nov 2012 with increase of 1.7 percent in Dec 2012 followed by decline of 1.6 percent in Jan 2013. The highest risk to Japan is if weakening world growth would affect Japanese exports.

Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%

	CON	IND	TERT	GOVT	ALL IND
Feb 2013	1.7	0.6	1.1	-0.9	0.6
Cont to Jan % Change	0.08	0.10	0.74	-0.11
Jan	2.7	0.3	-1.5	1.3	-1.6
Dec 2012	-0.4	2.4	1.3	-0.6	1.7
Nov	4.8	-1.4	-0.5	0.2	-0.4
Oct	-2.7	1.6	0.2	0.6	0.3
Sep	2.6	-4.1	0.2	-1.2	-0.4
Aug	-0.3	-1.6	0.3	0.4	0.0
Jul	-2.7	-1.0	-0.6	0.0	-0.5
Jun	1.0	0.4	0.1	0.2	0.3
May	9.5	-3.4	0.9	-0.1	-0.2
Apr	-5.5	-0.2	-0.2	0.1	0.1
Mar	-5.4	1.3	-0.6	-0.1	-0.3
Feb	4.2	-1.6	0.0	-0.4	-0.1
Jan	5.6	0.9	-0.6	0.5	-0.7
Dec 2011	-1.4	2.3	1.6	-0.2	1.7
Nov	0.3	-1.7	-0.8	0.1	-0.9
Oct	-2.6	1.8	0.6	0.1	0.6
Sep	1.6	-1.9	-0.2	0.2	-0.1
Aug	1.1	0.9	0.1	-0.1	0.2
Jul	0.1	1.1	0.4	-0.2	0.5
Jun	-0.1	3.8	1.2	0.2	1.5
May	6.5	5.8	0.9	0.7	1.6
Apr	-5.1	2.4	2.1	-0.9	2.0
Mar	-10.6	-16.2	-5.4	0.7	-6.6
Feb	2.3	1.1	0.3	0.0	0.1
Jan	6.3	1.2	0.5	-0.5	0.6
Dec 2010	-0.5	2.4	-0.2	0.3	0.1
Nov	-1.4	1.6	0.6	-0.4	0.3
Oct	0.1	-1.4	0.2	-0.1	0.0
Sep	-1.9	-0.8	-0.4	-0.1	-0.4
Aug	1.6	-0.1	0.1	0.1	-0.5
Jul	0.8	0.3	0.7	0.1	1.1
Jun	-2.1	-1.5	0.1	-0.1	0.2
May	6.3	-0.1	-0.3	0.0	0.0
Apr	-3.1	0.6	1.6	-0.2	0.9

Sources: http://www.meti.go.jp/english/statistics/index.html

Percentage changes from a year earlier in calendar years and relative to the same quarter a year earlier of the all industry activity indices are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The all industry activity index decreased 0.2 percent in IVQ2012 and GDP increased 0.5 percent relative to a year earlier (Table VB-4 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or_11.html). Industry decreased 5.9 percent relative to a year earlier while the tertiary sector increased 0.8 percent, deducting combined 0.54 percentage points to growth of the all industry activity index of minus 0.2 percent while construction added 0.38 percentage points and government deducted 0.05 percentage points. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy. The all-industry index increased 1.2 percent in 2012 and real GDP increased 2.0 percent. Industry fell 0.3 percent, deducting 0.06 percentage points, while the tertiary sector increased 1.4 percent, adding 0.94 percentage points. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201, declining world trade and revaluation of the yen in fear of world financial risks interrupted the recovery of the Japanese economy from the global recession.

Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
Calendar Year
2012	4.3	-0.3	1.4	0.1	1.2	2.0
Cont to 2012 % Change	0.19	-0.06	0.94	0.01
2011	-2.0	-2.3	0.1	-0.2	-0.5	-0.6
2010	-7.0	16.4	1.3	-0.7	3.1	4.7
2009	-5.6	-21.9	-5.2	0.1	-7.7	-5.5
2008	-7.6	-3.4	-1.0	-1.4	-1.9	-1.0
2012
IVQ	7.8	-5.9	0.8	-0.4	-0.2	0.5
Cont to IVQ % Change	0.38	-1.06	0.52	-0.05
IIIQ	4.2	-4.6	0.5	0.3	-0.2	0.4
IIQ	5.8	5.3	2.2	0.4	2.6	3.9
IQ	-0.3	4.8	2.4	0.1	2.4	3.4
2011
IVQ	-2.8	-1.6	0.6	0.6	0.0	-0.3
IIIQ	-3.2	-0.9	0.3	-0.1	-0.1	-0.5
IIQ	-5.1	-5.8	-0.5	-0.4	-1.6	-1.6
IQ	2.3	-1.3	-0.3	-1.0	-0.5	0.0
2010
IVQ	-0.6	5.9	1.6	-0.8	2.1	3.3
IIIQ	-3.2	14.0	1.8	-0.6	3.2	6.0
IIQ	-11.3	21.3	1.4	-0.7	3.5	4.4
IQ	-12.4	28.0	0.8	-0.5	3.9	4.9

Source: http://www.meti.go.jp/english/statistics/index.html

Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index decreased 2.5 percent in Feb 2013 relative to Feb 2012. Industry fell 10.5 percent in Feb 2013 relative to a year earlier, subtracting 1.94 percentage points to growth of the all industry activity index. The tertiary sector decreased 1.6 percent, deducting 1.02 percentage points. Construction added 0.23 percentage points to the index and government added 0.15 percentage points.

Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND
Feb 2013	4.7	-10.5	-1.6	1.2	-2.5
Cont to Jan % Change	0.23	-1.94	-1.02	0.15
Jan	7.2	-5.8	0.2	-0.3	-0.7
Dec 2012	9.9	-7.9	0.0	0.3	-0.9
Nov	8.8	-5.5	1.0	0.0	0.1
Oct	4.6	-4.5	1.4	-1.4	0.2
Sep	4.1	-8.1	0.1	0.6	-1.2
Aug	3.5	-4.6	0.6	0.8	-0.1
Jul	4.9	-0.8	0.9	-0.3	0.6
Jun	7.6	-1.5	0.8	0.8	0.6
May	6.4	6.0	3.2	-0.6	3.3
Apr	3.7	12.9	2.6	0.8	4.1
Mar	4.1	14.2	4.2	0.6	5.5
Feb	-1.6	1.5	2.4	-0.7	1.6
Jan	-3.4	-1.6	0.4	0.4	-0.1
Dec 2011	-3.0	-3.0	1.2	0.8	0.2
Nov	-1.2	-2.9	-0.3	0.8	-0.7
Oct	-4.0	0.9	0.9	0.2	0.5
Sep	-0.4	-2.4	0.1	0.1	-0.3
Aug	-4.3	1.6	0.8	-1.1	0.4
Jul	-4.8	-1.7	0.1	0.5	-0.4
Jun	-4.6	-0.6	1.0	0.3	0.4
May	-6.5	-4.6	-0.2	-0.8	-1.3
Apr	-4.1	-12.7	-2.3	-0.6	-4.0
Mar	-2.8	-12.4	-3.4	0.0	-4.6
Feb	4.4	4.5	2.0	-1.4	2.1
Jan	5.9	6.1	1.0	-1.4	1.8
Dec 2010	-0.5	5.9	1.8	-0.7	2.1
Nov	-0.5	7.0	2.5	-1.9	2.7
Oct	-1.1	5.0	0.5	0.3	1.3
Sep	-2.8	12.1	1.3	-0.6	2.7
Aug	-1.7	15.5	2.3	-1.1	3.8
Jul	-5.3	14.6	1.6	-0.1	3.3
Jun	-8.3	16.6	1.0	-0.7	3.0
May	-8.1	20.7	1.2	-0.9	3.4
Apr	-17.0	27.0	1.9	-0.4	-

Source: http://www.meti.go.jp/english/statistics/index.html

VC China. China estimates an index of nonmanufacturing purchasing managers on the basis of a sample of 1200 nonmanufacturing enterprises across the country (http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm). Table CIPMNM provides this index and components. The index fell from 58.0 in Mar to 55.2 in May but climbed to 56.7 in Jun, which is lower than 58.0 in Mar and 57.3 in Feb but higher than in any other of the months in 2012. In Jul 2012 the index fell marginally to 55.6 and then to 56.3 in Aug and 53.7 in Sep but rebounded to 55.5 in Oct and 55.6 in Nov 2012. Improvement continued with 56.1 in Dec 2012 and 56.2 in Jan 2013, declining marginally to 54.5 in Feb 2013 and 55.6 in Mar 2013.

Table CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted

	Total Index	New Orders	Interm. Input Prices	Subs Prices	Exp
Mar 2013	55.6	52.0	55.3	50.0	62.4
Feb	54.5	51.8	56.2	51.1	62.7
Jan	56.2	53.7	58.2	50.9	61.4
Dec 2012	56.1	54.3	53.8	50.0	64.6
Nov	55.6	53.2	52.5	48.4	64.6
Oct	55.5	51.6	58.1	50.5	63.4
Sep	53.7	51.8	57.5	51.3	60.9
Aug	56.3	52.7	57.6	51.2	63.2
Jul	55.6	53.2	49.7	48.7	63.9
Jun	56.7	53.7	52.1	48.6	65.5
May	55.2	52.5	53.6	48.5	65.4
Apr	56.1	52.7	57.9	50.3	66.1
Mar	58.0	53.5	60.2	52.0	66.6
Feb	57.3	52.7	59.0	51.2	63.8
Jan	55.7	52.2	58.2	51.1	65.3

Notes: Interm.: Intermediate; Subs: Subscription; Exp: Business Expectations

Source: National Bureau of Statistics of China

Chart CIPMNM provides China’s nonmanufacturing purchasing managers’ index. There was slowing of the general index in Apr 2012 after the increase in Jan-Mar 2012 and further decline to 55.2 in May 2012 but increase to 56.7 in Jun 2012 with marginal decline to 55.6 in Jul 2012 and 56.3 in Aug 2012 and sharper drop to 53.7 in Sep 2012, rebounding to 55.5 in Oct 2012, 55.6 in Nov 2012, 56.1 in Dec 2012 and 55.6 in Mar 2013.

Chart CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

Table CIPMMFG provides the index of purchasing managers of manufacturing seasonally adjusted of the National Bureau of Statistics of China. The general index (IPM) rose from 50.5 in Jan 2012 to 53.3 in Apr and declined to 50.1 in Jul and to the contraction zone at 49.2 in Aug and 49.8 in Sep, climbing above 50.0 to 50.2 in Oct, 50.6 in Nov-Dec 2012 and 50.9 in Mar 2013. The index of new orders (NOI) fell from 54.5 in Apr 2012 to 49.0 in Jul and 48.7 in Aug, climbing above 50.0, 51.2 in Nov 2012-Dec 2012 and 52.3 in Mar 2013. The index of employment also fell from 51.0 in Apr to 49.1 in Aug and further down to 48.7 in Nov 2012, 49.9 in Dec 2012 and 49.8 in Mar 2013.

Table CIPMMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted

	IPM	PI	NOI	INV	EMP	SDEL
Mar 2013	50.9	52.7	52.3	47.5	49.8	51.1
Feb	50.1	51.2	50.1	49.5	47.6	48.3
Jan	50.4	51.3	51.6	50.1	47.8	50.0
Dec 2012	50.6	52.0	51.2	47.3	49.0	48.8
Nov	50.6	52.5	51.2	47.9	48.7	49.9
Oct	50.2	52.1	50.4	47.3	49.2	50.1
Sep	49.8	51.3	49.8	47.0	48.9	49.5
Aug	49.2	50.9	48.7	45.1	49.1	50.0
Jul	50.1	51.8	49.0	48.5	49.5	49.0
Jun	50.2	52.0	49.2	48.2	49.7	49.1
May	50.4	52.9	49.8	45.1	50.5	49.0
Apr	53.3	57.2	54.5	48.5	51.0	49.6
Mar	53.1	55.2	55.1	49.5	51.0	48.9
Feb	51.0	53.8	51.0	48.8	49.5	50.3
Jan	50.5	53.6	50.4	49.7	47.1	49.7

IPM: Index of Purchasing Managers; PI: Production Index; NOI: New Orders Index; EMP: Employed Person Index; SDEL: Supplier Delivery Time Index

Source: National Bureau of Statistics of China

China estimates the manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm). Chart CIPMMFG provides the manufacturing index of purchasing managers. There is deceleration from 51.2 in Sep 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012 but then declined to 50.4 in May 2012 and 50.1 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011. The index then fell to contraction at 49.2 in Aug 2012 and improved to 49.8 in Sep with movement to 50.2 in Oct 2012, 50.6 in Nov 2012 and 50.9 in Mar 2013 above the neutral zone of 50.0.

Chart CIPMMFG, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

Growth of China’s GDP in IQ2013 relative to the same period in 2012 was 7.7 percent, as shown in Table VC-GDP. Secondary industry accounts for 45.9 percent of GDP of which industry alone for 41.1 percent in IQ2013 and construction with the remaining 4.8 percent in the first three quarters of 2012. Tertiary industry accounts for 47.8 percent of GDP in the IQ2013 and primary industry for 6.3 percent. China’s growth strategy consisted of rapid increases in productivity in industry to absorb population from agriculture where incomes are lower (Pelaez and Pelaez, The Global Recession Risk (2007), 56-80). The bottom block of Table VC-1 provides quarter-on-quarter growth rates of GDP and their annual equivalent. China’s GDP growth decelerated significantly from annual equivalent 9.9 percent in IIQ2011 to 7.4 percent in IVQ2011 and 6.6 percent in IQ2012, rebounding to 7.8 percent in IIQ2012, 8.7 percent in IIIQ2012 and 8.2 percent in IVQ2012. Annual equivalent growth in IQ2013 fell to 6.6 percent.

Table VC-GDP, China, Quarterly Growth of GDP, Current CNY 100 Million and Inflation Adjusted ∆%

Cumulative GDP IQ2013	Value Current CNY 100 Million	2013 Year-on-Year ∆%
GDP	118855	7.7
Primary Industry	7427	3.4
Farming	7427	3.4
Secondary Industry	54569	7.8
Industry	48832	7.5
Construction	5737	9.8
Tertiary Industry	56859	8.3
Transport, Storage, Post	6563	7.0
Wholesale, Retail Trades	11914	10.5
Hotel & Catering Services	2419	4.5
Financial Intermediation	8099	11.5
Real Estate	8383	7.8
Other	19481	6.8
Growth in Quarter Relative to Prior Quarter	∆% on Prior Quarter	∆% Annual Equivalent
2012
IQ2013	1.6	6.6
IVQ2012	2.0	8.2
IIIQ2012	2.1	8.7
IIQ2012	1.9	7.8
IQ2012	1.6	6.6
2011
IVQ2011	1.8	7.4
IIIQ2011	2.3	9.6
IIQ2011	2.4	9.9
IQ2011	2.3	9.5

Source: National Bureau of Statistics of China

Growth of China’s GDP in IQ2013 relative to the same period in 2012 was 7.7 percent, as shown in Table VC-GDPA. Secondary industry accounts for 45.9 percent of GDP of which industry alone for 41.1 percent in IQ2013 and construction with the remaining 4.8 percent in the first three quarters of 2012. Tertiary industry accounts for 47.8 percent of GDP in the IQ2013 and primary industry for 6.3 percent. China’s growth strategy consisted of rapid increases in productivity in industry to absorb population from agriculture where incomes are lower (Pelaez and Pelaez, The Global Recession Risk (2007), 56-80). The bottom block of Table VC-1 provides quarter-on-quarter growth rates of GDP and their annual equivalent. China’s GDP growth decelerated significantly from annual equivalent 9.9 percent in IIQ2011 to 7.4 percent in IVQ2011 and 6.6 percent in IQ2012, rebounding to 7.8 percent in IIQ2012, 8.7 percent in IIIQ2012 and 8.2 percent in IVQ2012. Annual equivalent growth in IQ2013 fell to 6.6 percent.

Table VC-GDPA, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter

	IQ 2013
GDP	7.7
Primary Industry	3.4
Secondary Industry	7.8
Tertiary Industry	8.3
GDP ∆% Relative to a Prior Quarter	1.6
	IQ 2011	IIQ 2011	IIIQ 2011	IVQ 2011	IQ 2012	IIQ 2012	IIIQ 2012	IVQ 2012
GDP	9.7	9.5	9.1	8.9	8.1	7.6	7.4	7.9
Primary Industry	3.5	3.2	3.8	4.5	3.8	4.3	4.2	4.5
Secondary Industry	11.1	11.0	10.8	10.6	9.1	8.3	8.1	8.1
Tertiary Industry	9.1	9.2	9.0	8.9	7.5	7.7	7.9	8.1
GDP ∆% Relative to a Prior Quarter	2.3	2.4	2.3	1.8	1.6	1.9	2.1	2.0
	IQ 2010	IIQ 2010	IIIQ 2010	IVQ 2010
GDP	12.1	11.2	10.7	12.1
Primary Industry	3.8	3.6	4.0	3.8
Secondary Industry	14.5	13.3	12.6	14.5
Tertiary Industry	10.5	9.9	9.7	10.5

Source: National Bureau of Statistics of China