CMP Associates Regulation Blog

Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €473 million with the 17 countries of the euro zone (EMU 17) in Mar 2013 and cumulative deficit of €1159 million in Jan-Mar 2013. Depreciation to parity could permit greater competitiveness in improving the trade surplus of €1054 million in Jan-Mar 2013 with Europe non European Union, the trade surplus of €3230 million with the US and trade surplus with non-European Union of €1054 million in Jan-Mar 2013. There is significant rigidity in the trade deficits in Jan-Mar of €3792 million with China and €3099 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.

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

Regions and Countries	Trade Balance Mar 2013 Millions of Euro	Trade Balance Cumulative Jan-Mar 2013 Millions of Euro
EU	607	1,661
EMU 17	-473	-1,159
France	1,085	3,120
Germany	-771	-1,428
Spain	57	308
UK	762	2,031
Non EU	2,630	1,054
Europe non EU	828	1,168
USA	1,340	3,230
China	-946	-3,792
OPEC	-429	-3,099
Total	3,237	2,716

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

Source: Istituto Nazionale di Statistica

Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Mar 2013 relative to Jan-Mar 2012. Growth rates of cumulative imports relative to a year earlier are negative for energy with minus 19.0 percent and minus 13.4 percent for durable goods. The higher rate of growth of exports of minus 0.7 percent in Jan-Mar 2013/Jan-Mar 2012 relative to imports of minus 7.4 percent may reflect weak demand in Italy with GDP declining during seven consecutive quarters from IIIQ2011 through IQ2013 together with softening commodity prices.

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

	Exports Share %	Exports ∆% Jan-Mar 2013/ Jan-Mar 2012	Imports Share %	Imports ∆% Jan-Mar 2013/ Jan-Mar 2012
Consumer Goods	29.3	5.4	25.6	-0.5
Durable	5.8	0.7	2.9	-13.4
Non-Durable	23.5	6.5	22.7	1.1
Capital Goods	31.6	0.3	19.5	-8.5
Inter- mediate Goods	33.6	-3.9	32.6	-3.7
Energy	5.5	-18.4	22.3	-19.0
Total ex Energy	94.5	0.4	77.7	-3.9
Total	100.0	-0.7	100.0	-7.4

Source: Istituto Nazionale di Statistica

Table III-6 provides Italy’s trade balance by product categories in Mar 2013 and cumulative Jan-Mar 2013. Italy’s trade balance excluding energy generated surplus of €7473 million in Mar 2013 and €16,976 million cumulative in Jan-Mar 2013 but the energy trade balance created deficit of €4236 million in Mar 2013 and cumulative €14,261 million in Jan-Mar 2013. The overall surplus in Mar 2013 was €3237 million with cumulative surplus of €2716 million in Jan-Mar 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

	Mar 2013	Cumulative Jan-Mar 2013
Consumer Goods	2,384	5,048
Durable	1,249	3,041
Nondurable	1,135	2,007
Capital Goods	4,175	10,887
Intermediate Goods	913	1,041
Energy	-4,236	-14,261
Total ex Energy	7,473	16,976
Total	3,237	2,716

Source: Istituto Nazionale di Statistica

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/april-2013/stb-producer-price-index--april-2013.html

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 Mar 2013. German exports to other European Union (EU) members are 53.8 percent of total exports in Mar 2013 and 57.8 percent in cumulative Jan-Mar 2013. Exports to the euro area are 37.3 percent in Mar and 38.0 percent cumulative in Jan-Mar. Exports to third countries are 40.8 percent of the total in Mar and 42.1 percent cumulative in Jan-Mar. There is similar distribution for imports. Exports to non-euro countries are decreasing 2.2 percent in Mar 2013, increasing 0.3 percent cumulative in Jan-Mar 2013 while exports to the euro area are decreasing 7.0 percent in Mar 2013, and decreasing 3.9 percent cumulative in Jan-Mar 2013. Exports to third countries, accounting for 40.8 percent of the total in Mar 2013, are decreasing 2.6 percent in Mar 2013 and decreasing 0.2 percent cumulative in Jan-Mar 2013, accounting for 42.1 percent of the cumulative total in Jan-Mar 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 ∆%

	Mar 2013 € Billions	Mar 12-Month ∆%	Cumulative Jan-Mar 2012 € Billions	Cumulative Jan-Mar 2013/ Jan-Mar 2012 ∆%
Total Exports	94.6	-4.2	271.8	-1.5
A. EU Members	53.8 % 56.9	-5.4	157.2 % 57.8	-2.5
Euro Area	35.3 % 37.3	-7.0	103.3 % 38.0	-3.9
Non-euro Area	18.5 % 19.6	-2.2	53.9 % 19.8	0.3
B. Third Countries	40.8 % 43.1	-2.6	114.5 % 42.1	-0.2
Total Imports	75.8	-6.9	222.5	-3.5
C. EU Members	50.4 % 66.5	-3.7	143.7 % 64.5	-1.4
Euro Area	35.5 % 46.8	-4.6	99.9 % 44.9	-2.6
Non-euro Area	15.0 % 19.8	-1.5	43.8 % 19.7	1.5
D. Third Countries	25.3 % 33.4	-12.8	78.8 % 35.4	-7.0

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

Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/05/PE13_159_51.html;jsessionid=31CEB4069FD614D4281C2D321DB67FFC.cae4

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	7.5
Japan	0.2	-0.7	-0.5	4.1
China	7.7	2.4	-2.6
UK	0.6	2.4* CPIH 2.2	1.1 output 0.8** input -0.1	7.8
Euro Zone	-1.0	1.2	0.7	12.2
Germany	-0.3	1.1	0.4	5.4
France	-0.4	0.8	1.9	11.0
Nether-lands	-1.3	2.8	-0.4	6.5
Finland	-2.0	2.4	1.3	8.2
Belgium	-0.5	1.1	3.7	8.4
Portugal	-3.9	0.4	1.5	17.8
Ireland	NA	0.5	2.6	13.5
Italy	-2.3	1.3	0.0	12.0
Greece	-5.3	-0.6	-1.3	NA
Spain	-2.0	1.5	0.5	26.8

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/april-2013/index.html **Core

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_2nd.pdf Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states_28.html). Japan’s GDP grew 0.9 percent in IQ2013 relative to IQ2012 and 0.2 percent relative to a year earlier. Japan’s grew at the seasonally adjusted annual rate (SAAR) of 3.5 percent in IQQ2013 (http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.htm). The UK grew at 0.3 percent in IQ2013 relative to IVQ2012 and GDP increased 0.6 percent in IQ2013 relative to IQ2012 (http://cmpassocregulationblog.blogspot.com/2013/05/united-states-commercial-banks-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states_28.html). The Euro Zone grew at minus 0.2 percent in IQ2013 and minus 1.0 percent in IQ2013 relative to IQ2012 (http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2013/04/thirty-million-unemployed-or_8.html ). These are stagnating or “growth recession” rates, which are positive or about nil growth rates with some contractions that are insufficient to recover employment. The rates of unemployment are quite high: 7.5 percent in the US but 17.6 percent for unemployment/underemployment or job stress of 29.6 million (http://cmpassocregulationblog.blogspot.com/2013/05/twenty-nine-million-unemployed-or.html

and earlier http://cmpassocregulationblog.blogspot.com/2013/04/thirty-million-unemployed-or.html), 4.1 percent for Japan (Section VB and earlier http://cmpassocregulationblog.blogspot.com/2013/05/twenty-nine-million-unemployed-or.html), 7.8 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH at http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/04/world-inflation-waves-squeeze-of.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.1 percent in the US, -0.9 percent for Japan, 2.4 percent for China, 1.2 percent for the Euro Zone and 2.4 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/2013/05/united-states-commercial-banks-assets.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 (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states_28.html), weak hiring with the loss of 10 million full-time jobs (http://cmpassocregulationblog.blogspot.com/2013/05/recovery-without-hiring-collapse-of.html

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, writing on “Fed maps exit from stimulus,” on May 11, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the development of strategy for unwinding quantitative easing and how it can create uncertainty in financial markets. 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 15 quarters from IIIQ2009 to IQ2013. 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). The average of 7.8 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 3.2 percent obtained by diving GDP of $13,103.5 billion in IIIQ2010 by GDP of $12,701.0 billion in IIQ2009 {[$13.103.5/$12,701.0 -1]100 = 3.2%], or accumulating the quarter on quarter growth rates (http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states_28.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent and at 7.7 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states_28.html). Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.

First, total nonfarm payroll employment seasonally adjusted (SA) increased 165,000 in Apr 2013 and private payroll employment rose 176,000. The average number of nonfarm jobs created in Jan-Apr 2012 was 224,750 while the average number of nonfarm jobs created in Jan-Apr 2013 was 195,750, or decline by 12.9 percent. The average number of private jobs created in the US in Jan-Apr 2012 was 229,000 while the average in Jan-Apr 2013 was 203,250, or decline by 11.2 percent. 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 four months from Jan to Mar 2013 was 195,750, 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 28.6 million unemployed or underemployed. The difference between the average increase of 203,250 new private nonfarm jobs per month in the US from Jan to Mar 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 90,083 monthly new jobs net of absorption of new entrants in the labor force. There are 28.6 million in job stress in the US currently. The provision of 90,083 new jobs per month net of absorption of new entrants in the labor force would require 318 months to provide jobs for the unemployed and underemployed (28.637 million divided by 90,083) or 26.5 years (318 divided by 12). The civilian labor force of the US in Apr 2013 not seasonally adjusted stood at 154.739 million with 11.014 million unemployed or effectively 18.581 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 162.306 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 0.9 years (1 million divided by product of 90,083 by 12, which is 1,080,996). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.737 million (0.05 times labor force of 154.739 million) for new net job creation of 3.277 million (11.014 million unemployed minus 7.737 million unemployed at rate of 5 percent) that at the current rate would take 3.0 years (3.277 million divided by 1.080996). Under the calculation in this blog there are 18.581 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 162.306 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 9.7 years (18.581 million minus 0.05(162.306 million) or 10.466 million divided by 1.080996, using LF PART 66.2% and Total UEM (in Table I-4 http://cmpassocregulationblog.blogspot.com/2013/05/twenty-nine-million-unemployed-or.html). 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 147.315 million in Jul 2007 to 143.724 million in Apr 2013, by 3.591 million, or decline of 2.4 percent, while the noninstitutional population increased from 231.958 million in Jul 2007 to 245.175 million in Apr 2013, by 13.217 million or increase of 5.7 percent, using not seasonally adjusted data. There is actually not sufficient job creation in merely absorbing 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/2013/05/word-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 28.6 million people corresponding to 17.6 percent of the effective labor force of the United States (http://cmpassocregulationblog.blogspot.com/2013/05/twenty-nine-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 revised 2.4 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 2.4 percent to one quarter is 0.59 percent {[(1.024)^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 1.0059) - 1]100 = 4.3%}. This is equivalent to growth from IQ2011 to IQ2013 obtained by dividing the seasonally-adjusted annual rate (SAAR) of IQ2013 of $13,746.2 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 {[($13,746.2/$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 1.0059)^4/9 -1]100 = 1.9%], or {[($13,746.2/$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 May 1, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130501a.htm):

“Release Date: May 1, 2013

For immediate release

Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. 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. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. 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.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.“

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.”

Increase or Reduction of Asset Purchases. Market participants focused on slightly different wording about increasing asset purchases: “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. 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.” Will there be an increase in asset purchases?

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 (http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states_28.htm 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/2013/05/twenty-nine-million-unemployed-or.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). The Bureau of Economic Analysis (BEA) provides the second estimate of IQ2013 GDP with the second estimate for IQ2013 to be released on Jun 26 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm See Section I (http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states_28.htm 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 (and earlier at http://cmpassocregulationblog.blogspot.com/2013/05/twenty-nine-million-unemployed-or.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html. The next report on “Personal Income and Outlays” for May will be released at 8:30 AM on Jun 27, 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 Apr 13 was released on May 3 and analyzed in this blog (http://cmpassocregulationblog.blogspot.com/2013/05/twenty-nine-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 the fed funds rate in the range of 3.0 to 4.5 percent.

Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board

Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012

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

The Bureau of Economic Analysis (BEA) provides the annual revision of the national income and product accounts since Jan 2009 through May 2009 in the report on personal income and outlays for Jun 2012 released on Jul 31, 2012 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0612.pdf), including prices of personal consumption expenditures (PCE) and for Jul 2012 released on Aug 30 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0712.pdf) and the release for Apr 2013 (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0413.pdf). There are waves of inflation similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html) in inflation of personal consumption expenditures (PCE) in Table IV-5. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. Return of risk aversion causes collapse in prices. The first wave is in Jan-Apr 2011 when headline PCE inflation grew at the average annual equivalent rate of 4.0 percent and PCE inflation excluding food and energy (PCEX) at 2.1 percent. The drivers of inflation were increases in food prices (PCEF) at the annual equivalent rate of 7.4 percent and of energy prices (PCEE) at 29.8 percent. This behavior will prevail under zero interest rates and relaxed risk aversion because of carry trades from zero interest rates to leveraged positions in commodity futures. The second wave occurred in May-Jun 2011 when risk aversion from the European sovereign risk crisis interrupted the carry trade. PCE prices increased 1.8 percent in annual equivalent and 2.4 percent excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep 2011 of headline PCE inflation of 2.4 percent with subdued PCE inflation excluding food and energy of 1.6 percent while PCE food rose at 6.2 percent and PCE energy increased at 13.6 percent. In the fourth wave in Oct-Dec 2011, increased risk aversion explains the fall of the annual equivalent rate of inflation to 0.8 for headline PCE inflation and 1.6 percent for PCEX excluding food and energy. PCEF of prices of food rose at the annual equivalent rate of 1.6 percent in Oct-Dec 2011 while PCEE of prices of energy fell at the annual equivalent rate of 13.5 percent. In the fifth wave in Jan-Mar 2012, headline PCE in annual equivalent was 3.3 percent and 2.4 percent excluding food and energy (PCEX). Energy prices of personal consumption (PCEE) increased at the annual equivalent rate of 21.3 percent because of the jump of 3.6 percent in Feb 2012 followed by 1.0 percent in Mar 2012. In the sixth wave, renewed risk aversion caused reversal of carry trades with headline PCE inflation falling at the annual equivalent rate of 1.2 percent in Apr-May 2012 while PCE inflation excluding food and energy increased at the annual equivalent rate of 1.2 percent. In the seventh wave, further shocks of risk aversion resulted in headline PCE annual equivalent inflation at 1.2 percent in Jun-Jul 2012 with core PCE excluding food and energy at 1.8 percent. In the eighth wave, temporarily relaxed risk aversion with zero interest rates resulted in central PCE inflation at 4.3 percent annual equivalent in Aug-Sep 2012 with PCEX excluding food and energy at 0.0 percent while PCEE energy jumped at 85.8 percent annual equivalent. Relaxed risk aversion was induced by the program of outright monetary transactions (OTM) of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). In the ninth wave, prices collapsed with reversal of carry trade positions in a new episode of risk aversion with central PCE at annual equivalent 0.6 percent in Oct 2012 to Jan 2013 and PCEX at 1.5 percent while energy prices fell at minus 17.5 percent. In the tenth wave, central PCE increased at annual equivalent 4.9 percent in Feb 2013, PCEX at 1.2 percent and PCEE at 96.7 percent. In the eleventh wave, renewed risk aversion resulted in decline in annual equivalent of general PCE prices at 1.2 percent in Mar-Apr 2013 while PCEX was increased at 0.6 percent and energy prices fell at 35.2 percent.

Table IV-5, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures, Seasonally Adjusted Monthly ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2013
Apr	-0.3	-1.0	-0.3	0.1	0.0	0.1	-4.4
Mar	-0.1	-0.6	-0.2	0.1	0.1	0.1	-2.7
∆% AE Mar-Apr	-2.4	-9.2	-3.0	1.2	0.6	1.2	-35.2
Feb	0.4	0.9	-0.1	0.1	0.1	0.2	5.8
∆% AE Feb	4.9	11.4	-1.2	1.2	1.2	2.4	96.7
Jan	0.1	-0.2	0.1	0.2	0.2	0.0	-1.9
2012
Dec	0.0	-0.3	-0.2	0.2	0.0	0.2	-0.9
Nov	-0.1	-0.8	-0.1	0.2	0.1	0.2	-3.7
Oct	0.2	0.1	-0.2	0.2	0.2	0.2	0.2
∆% AE Oct-Jan	0.6	-3.5	-1.2	2.4	1.5	1.8	-17.5
Sep	0.3	0.7	-0.2	0.1	0.0	-0.1	4.8
Aug	0.4	0.8	-0.2	0.1	0.0	0.1	5.8
∆% AE Aug-Sep	4.3	9.4	-2.4	1.2	0.0	0.0	85.8
Jul	0.1	0.0	-0.3	0.1	0.1	0.0	-0.2
Jun	0.1	-0.1	-0.1	0.2	0.2	0.2	-1.5
∆% AE Jun-Jul	1.2	-0.6	-2.4	1.8	1.8	1.2	-9.8
May	-0.2	-0.8	0.0	0.1	0.1	-0.1	-4.7
Apr	0.0	-0.3	-0.2	0.2	0.1	0.1	-1.8
∆% AE Apr- May	-1.2	-6.4	-1.2	1.8	1.2	0.0	-32.8
Mar	0.2	0.3	-0.1	0.2	0.2	0.1	1.0
Feb	0.3	0.6	0.0	0.2	0.1	0.0	3.6
Jan	0.3	0.3	0.1	0.2	0.3	0.1	0.3
∆% AE Jan- Mar	3.3	4.9	0.0	2.4	2.4	0.8	21.3
2011
Dec	0.1	-0.2	-0.2	0.2	0.2	0.2	-1.4
Nov	0.1	-0.1	-0.3	0.1	0.1	0.0	-0.5
Oct	0.0	-0.2	-0.1	0.1	0.1	0.2	-1.7
∆% AE Oct- Dec	0.8	-2.0	-2.4	1.6	1.6	1.6	-13.5
Sep	0.2	0.2	-0.4	0.1	0.0	0.5	1.5
Aug	0.2	0.3	-0.2	0.2	0.2	0.6	0.8
Jul	0.2	0.3	-0.1	0.2	0.2	0.4	0.9
∆% AE Jul-Sep	2.4	3.3	-2.8	2.0	1.6	6.2	13.6
Jun	0.1	0.1	0.2	0.1	0.2	0.3	-1.2
May	0.2	0.2	0.1	0.2	0.2	0.4	0.1
∆% AE May-Jun	1.8	1.8	1.8	1.8	2.4	4.3	-6.4
Apr	0.3	0.5	0.2	0.2	0.2	0.3	1.9
Mar	0.4	0.8	0.0	0.2	0.1	0.8	3.5
Feb	0.3	0.6	0.2	0.2	0.2	0.7	2.5
Jan	0.3	0.5	0.1	0.1	0.2	0.6	0.9
∆% AE Jan-Apr	4.0	7.4	1.5	2.1	2.1	7.4	29.8
2010
Dec	0.2	0.6	-0.4	0.0	0.0	0.2	4.2
Nov	0.1	0.2	-0.2	0.1	0.1	0.1	0.8
Oct	0.2	0.5	-0.2	0.1	0.1	0.2	3.1
Sep	0.1	0.2	-0.1	0.1	0.1	0.2	0.8
Aug	0.2	0.3	0.1	0.1	0.1	0.1	1.5
Jul	0.2	0.2	-0.3	0.1	0.1	0.1	1.8
Jun	0.0	-0.2	-0.3	0.1	0.1	-0.1	-1.0
May	0.0	-0.4	-0.2	0.2	0.1	0.0	-2.1
Apr	0.0	-0.3	-0.2	0.1	0.1	0.2	-0.8
Mar	0.2	-0.1	0.1	0.3	0.2	0.2	-0.6
Feb	0.1	-0.2	-0.3	0.2	0.1	0.1	-1.0
Jan	0.2	0.3	-0.1	0.2	0.1	0.1	1.8

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The charts of PCE inflation are also instructive. Chart IV-1 provides the monthly change of headline PCE price index. There is significant volatility in the monthly changes but excluding outliers fluctuations have been in a tight range between 1999 and 2013 around 0.2 percent per month.

Chart IV-1, US, Percentage Change of PCE Price Index from Prior Month, 1999-2013

Source: US Bureau of Economic Analysis

There is much less volatility in the PCE index excluding food and energy shown in Chart IV-2 with monthly percentage changes from 1999 to 2013. With the exception of 2001, there are no negative changes and again changes around 0.2 percent when excluding outliers.

Chart IV-2, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2013

Source: US Bureau of Economic Analysis

Fluctuations in the PCE index of food are much wider as shown in Chart IV-3 by monthly percentage changes from 1999 to 2013. There are also multiple negative changes and positive changes even exceeding 1.0 percent in three months.

Chart IV-3, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2013

Source: US Bureau of Economic Analysis

The band of fluctuation of the PCE price index of energy in Chart IV-4 is much wider. An interesting feature is the abundance of negative changes and large percentages.

Chart IV-4, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2013

Source: US Bureau of Economic Analysis

Table IV-6 provides 12-month rates of PCE inflation since 2000. Headline 12-month PCE inflation has increased from 1.5 percent in Jan 2011 to 2.8 percent in Aug 2011 and 2.9 percent in Sep 2011, declining to 0.7 percent in Apr 2013. PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, has increased from 1.1 percent in Jan 2011 to 1.9 percent in Dec 2011 and 1.1 percent in Apr 2013, which is still below or at the tolerable maximum of 2.0-2.5 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy. The final row of Table IV-6 provides average rates of 12-month change of PCE prices in Dec. The average for central PCE prices is 2.1 per cent per year from 2000 to 2012 and 1.8 percent for core PCE. PCE food grew at the average rate of 2.5 percent from 2000 to 2012 and energy PCE at 5.8 percent with significant oscillations.

Table IV-6, US, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2013
Apr	0.7	-1.1	-1.8	1.7	1.1	1.1	-4.2
Mar	1.0	-0.5	-1.7	1.8	1.2	1.1	-1.6
Feb	1.4	0.4	-1.7	1.8	1.3	1.2	2.3
Jan	1.3	0.1	-1.6	1.9	1.4	1.0	0.1
2012
Dec	1.5	0.6	-1.6	1.9	1.4	1.2	2.4
Nov	1.5	0.7	-1.6	2.0	1.5	1.2	1.9
Oct	1.8	1.4	-1.7	1.9	1.6	0.9	5.3
Sep	1.6	1.1	-1.6	1.9	1.5	0.9	3.2
Aug	1.4	0.6	-1.8	1.9	1.5	1.5	0.0
Jul	1.3	0.1	-1.8	2.0	1.7	2.0	-4.7
Jun	1.5	0.4	-1.6	2.1	1.8	2.4	-3.6
May	1.5	0.6	-1.3	2.0	1.7	2.4	-3.3
Apr	1.9	1.6	-1.2	2.1	1.9	2.9	1.5
Mar	2.2	2.5	-0.8	2.1	2.0	3.2	5.4
Feb	2.4	2.9	-0.7	2.2	1.9	3.9	8.0
Jan	2.4	3.0	-0.5	2.2	1.9	4.6	6.8
2011
Dec	2.4	3.1	-0.5	2.1	1.9	5.1	7.4
Nov	2.6	4.0	-0.6	1.9	1.7	5.0	13.5
Oct	2.6	4.2	-0.5	1.8	1.6	5.2	15.1
Sep	2.9	4.9	-0.7	1.9	1.6	5.1	20.7
Aug	2.8	4.9	-0.4	1.8	1.6	4.8	19.8
Jul	2.8	4.8	-0.2	1.8	1.5	4.3	20.6
Jun	2.7	4.7	-0.4	1.7	1.4	4.0	21.6
May	2.6	4.5	-0.9	1.7	1.4	3.6	22.0
Apr	2.4	3.8	-1.2	1.6	1.2	3.2	19.4
Mar	2.1	3.0	-1.6	1.6	1.1	3.0	16.1
Feb	1.8	2.1	-1.6	1.7	1.2	2.4	11.5
Jan	1.5	1.3	-2.0	1.7	1.1	1.8	7.7
2010
Dec	1.5	1.1	-2.2	1.7	1.1	1.3	8.6
Nov	1.4	0.6	-2.0	1.7	1.2	1.3	4.4
Oct	1.5	0.8	-1.7	1.8	1.2	1.3	6.3
Sep	1.6	0.5	-1.3	2.1	1.5	1.2	4.1
Aug	1.7	0.6	-0.9	2.2	1.6	0.7	4.0
Dec 2009	2.3	4.1	-0.7	1.4	1.6	-1.6	20.5
Dec 2008	0.6	-3.8	-2.4	2.8	1.8	6.8	-23.7
Dec 2007	3.5	3.6	-1.9	3.5	2.5	5.0	18.6
Dec 2006	2.3	0.5	-2.0	3.2	2.3	1.3	3.7
Dec 2005	3.0	1.7	-1.4	3.7	2.3	1.7	16.3
Dec 2004	3.0	2.6	-0.7	3.2	2.2	2.3	18.0
Dec 2003	2.0	-0.1	-3.9	3.2	1.5	3.6	9.4
Dec 2002	2.2	0.6	-2.8	3.0	1.8	1.0	12.7
Dec 2001	1.0	-2.0	-2.4	2.8	1.7	2.4	-13.8
Dec 2000	2.4	1.5	-1.3	2.9	1.8	2.8	14.1
Average ∆%2000-2012	2.1	1.0	-20.3*	2.7	1.8	2.5	5.8

*Percentage change from 2000 to 2011.

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The headline PCE index is shown in Chart IV-5 from 1999 to 2013. There is an evident upward trend with the carry-trade bump of the global recession after IVQ2008.

Chart IV-5, US, Price Index of Personal Consumption Expenditures 1999-2013

Source: US Bureau of Economic Analysis

http://www.bls.gov/cpi/data.htm

The consumer price index in Chart IV-6 mirrors the behavior of the PCE price index in Chart IV-5. There is the same upward trend with the carry-trade bump in 2008 during the global recession.

Chart IV-6, US, Consumer Price Index, NSA, 1999-2013

Source: US Bureau of Labor Statistics

The PCE price index excluding food and energy is shown in Chart IV-7. There is less pronounced long-term trend with fewer bumps because of excluding more volatile commodity items.

Chart IV-7, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2013

Source: US Bureau of Economic Analysis

http://www.bls.gov/cpi/data.htm

The core consumer price index, excluding food and energy, is shown in Chart IV-8. There is also an upward trend but with fluctuations.

Chart IV-8, US, Consumer Price Index Excluding Food and Energy, NSA, 1999-2012

Source: US Bureau of Labor Statistics

The PCE price index of food is shown in Chart IV-9. There is a more pronounced upward trend and sharper fluctuations.

Chart IV-9, US, Price Index of Personal Consumption Expenditures Food 1999-2013

Source: US Bureau of Economic Analysis

There is similar behavior in the consumer price index of food in Chart IV-10. There is an upward trend from 1999 to 2011 with a major bump in 2009 when commodity futures positions were unwound. Zero interest rates with bouts of risk aversion dominate the trend into 2011. Risk aversion softens the trend toward the end of 2011 and in 2012-2013.

Chart IV-10, US, Consumer Price Index, Food, NSA, 1999-2013

Source: US Bureau of Labor Statistics

The most pronounced trend of PCE price indexes is that of energy in Chart IV-11. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price trends and fluctuations.

Chart IV-11, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2013

Source: US Bureau of Economic Analysis

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

Chart IV-12 provides the consumer price index of energy commodities. Unconventional monetary policy of zero or near zero interest rates causes upward trends in commodity prices reflected in (1) increase from 2003 to 2007; (2) sharp increase during the global contraction in 2008; (3) collapse from 2008 into 2009 as positions in commodity futures were unwound in a flight to government obligations; (4) new upward trend after 2010; and (5) episodes of decline during risk aversion shocks such as the more recent segment during the worsening European debt crisis in Nov and Dec of 2011 and with new strength of commodity prices in the beginning of 2012 followed by softness in another episode of risk aversion and increases during risk appetite.

Chart IV-12, US, Consumer Price Index, Energy, NSA, 1999-2013

Source: US Bureau of Labor Statistics http://www.bls.gov/cpi/data.htm

Chart IV-13 of the US Energy Information Administration provides prices of the crude oil futures contract. Unconventional monetary policy of very low interest rates and quantitative easing with suspension of the 30-year bond to lower mortgage rates caused a sharp upward trend of oil prices. There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. Prices collapsed in the flight to government obligations. Risk appetite with zero interest rates resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. All price indexes are affected by unconventional monetary policy.

Chart IV-13, US, Crude Oil Futures Contract

Source: US Energy Information Administration

Unconventional monetary policy of zero interest rates and quantitative easing has been used in Japan and now also in the US. Table IV-7 provides the consumer price index of Japan, with inflation of minus 0.7 percent in 12 months ending in Apr 2013, increase of 0.3 percent NSA (not-seasonally-adjusted) in Apr 2013 and increase of 0.2 percent SA (seasonally adjusted) in the month of Apr 2013. Inflation of consumer prices in the first four months of 2012 annualizes at 0.0 percent SA and 3.0 percent NSA. Inflation in Mar-Apr 2013 not seasonally adjusted annualizes at 3.0 percent. 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 12-month rates of inflation in the first four months of 2013 are negative. 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-7, Japan, Consumer Price Index, All Items ∆%

	∆% Month SA	∆% Month NSA	∆% 12-Month NSA
Apr 2013	0.2	0.3	-0.7
Mar	-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	-0.8
2000		3.4	-0.7
1999		2.2	-0.3
1998		1.6	0.6
1997		2.3	1.9
1996		3.0	0.1
1995		2.8	-0.1
1994		2.6	0.6
1993		3.0	1.3
1992		3.0	1.7
1991		4.2	3.3
1990		5.4	3.1
1989		4.8	2.2
1988		4.1	0.8
1987		3.6	0.0
1986		1.9	0.7
1985		3.6	2.0
1984		4.3	2.4
1983		3.2	1.8
1982		6.2	2.8
1981		10.3	4.8
1980		13.5	7.8
1979		11.3	3.6
1978		7.6	4.4
1977		6.5	8.0
1976		5.8	9.5
1975		9.1	11.8
1974		11.0	23.1
1973		6.2	11.8
1972		3.2	4.6
1971		4.4	6.7

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

http://www.stat.go.jp/english/data/cpi/index.htm http://www.bls.gov/cpi/home.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-14. 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-14, 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-15 provides the US consumer price index NSA from 1914 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-15, 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-16 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-16, Japan, CPI All Items, All Japan, 12-Month ∆%, 1971-2012

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

Chart IV-17 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-17, US, Consumer Price Index, All Items, NSA, 12-Month Percentage Change 1914-2013

Source: US Bureau of Labor Statistics

Chart IV-18 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.

Chart IV-18, US, Consumer Price Index Excluding Food and Energy, NSA, 1957-2013

Source: US Bureau of Labor Statistics

Chart IV-19 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-19, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 1958-2013

Source: US Bureau of Labor Statistics

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

More detail on the consumer price index of Japan in Apr is shown in Table IV-8. Items rich in commodities, such as 2.4 percent in fuel, light and water charges with increase of 0.6 percent in the month of Apr, have driven inflation in the 12 months ending in Apr 2013. There is similar behavior in the preliminary estimate for May for the Ku Area of Tokyo with increase of 2.1 percent of fuel, light and water charges and increase of 7.6 percent in 12 months. There are increases of 0.5 percent of CPI transport and communications and 0.3 percent of CPI excluding fresh food in Apr 2013 relative to Mar 2013. There is mild deflation in the CPI excluding food, alcoholic beverages and energy with minus 0.6 percent in the 12 months ending in Apr 2013 and increase of 0.4 percent in Apr 2013. The CPI excluding imputed rent increased 0.4 percent in Apr 2013 and fell 0.7 percent in 12 months. The all-items CPI estimate for May 2013 of the Ku-Area of Tokyo increased 0.1 percent in May 2013 and decreased 0.2 percent in 12 months.

Table IV-8, Japan, Consumer Price Index, ∆%

2013	Apr 2013/Mar 2013 ∆%	Year ∆%
CPI All Items	0.3	-0.7
CPI Excluding Fresh Food	0.3	-0.4
CPI Excluding Food, Alcoholic Beverages and Energy	0.4	-0.6
CPI Goods	0.2	-1.4
CPI Services	0.4	0.0
CPI Excluding Imputed Rent	0.4	-0.7
CPI Fuel, Light, Water Charges	0.6	2.4
CPI Transport & Communications	0.5	-0.1
CPI Ku-Area Tokyo All Items	0.1	-0.2
Fuel, Light, Water Charges Ku Area Tokyo	2.1	7.6

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

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

There are waves of inflation of producer prices in France as everywhere in the world economy (http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html), as shown in Table IV-9. There was a first wave of sharply increasing inflation in the first four months of 2011 originating in the surge of commodity prices driven by carry trades from zero interest rates to commodity futures risk positions. Producer price inflation in the first four months of 2011 was at the annual equivalent rate of 10.4 percent. In the second wave, producer prices fell 0.2 percent in May and another 0.1 percent in Jun for annual equivalent inflation in May-Jun 2011 of minus 1.8 percent. In the third wave from Jul to Sep 2011, annual equivalent producer price inflation was 3.7 percent. In the fourth wave Oct-Dec 2011, annual equivalent producer price inflation was 2.8 percent. In the fifth wave Jan-Mar 2012, average annual inflation rose to 6.2 percent during carry trades from zero interest rates to commodity futures. In the sixth wave in Apr-Jun 2012, annual equivalent inflation fell at the rate of 5.1 percent during unwinding of carry trades because of increasing risk aversion. In the seventh wave, carry trades returned under more relaxed risk aversion with producer price inflation in France at 8.7 percent in annual equivalent in Jul-Oct 2012. In the eighth wave, return of risk aversion caused unwinding carry trade and annual equivalent inflation of minus 4.1 percent in Nov-Dec 2012. In the ninth wave, inflation returned with annual equivalent 3.7 percent in Jan-Mar 2013. In the tenth wave, annual equivalent inflation was minus 10.3 percent in Apr 2013. The bottom part of Table IV-12 shows producer price inflation at 3.2 percent in the 12 months ending in Dec 2005 and again at 4.6 percent in the 12 months ending in Dec 2007. Producer prices fell in 2009 during the global contraction and decline of commodity prices but returned at 4.3 percent in the 12 months ending in Dec 2010.

Table IV-9, France, Producer Price Index for the French Market, ∆%

	Month	12 Months
Apr 2013	-0.9	0.6
AE ∆% Apr	-10.3
Mar	0.1	1.6
Feb	0.4	1.9
Jan	0.4	2.1
AE ∆% Jan-Mar	3.7
Dec 2012	-0.5	2.2
Nov	-0.2	2.4
AE ∆% Nov-Dec	-4.1
Oct	0.5	3.0
Sep	0.3	3.0
Aug	1.4	3.0
Jul	0.6	1.6
AE ∆% Jul-Oct	8.7
Jun	-0.6	1.6
May	-0.8	2.1
Apr	0.1	2.8
AE ∆% Apr-Jun	-5.1
Mar	0.5	3.6
Feb	0.5	4.0
Jan	0.5	4.2
AE ∆% Jan-Mar	6.2
Dec 2011	-0.2	4.5
Nov	0.4	5.2
Oct	0.5	5.3
AE ∆% Oct-Dec	2.8
Sep	0.3	5.4
Aug	0.0	5.6
Jul	0.6	5.7
AE ∆% Jul-Sep	3.7
Jun	-0.1	5.4
May	-0.2	5.7
AE ∆% May-Jun	-1.8
Apr	1.0	6.0
Mar	0.8	5.7
Feb	0.7	5.2
Jan	0.8	4.6
AE ∆% Jan-Apr	10.4
Dec 2010		4.3
Dec 2009		-2.9
Dec 2008		0.8
Dec 2007		4.6
Dec 2006		2.6
Dec 2005		3.2

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20130531

Chart IV-20 of the Institut National de la Statistique et des Études Économiques of France provides the producer price index for the internal market in France from Jan 1999 to Apr 2013. The index also captures the low price environment of the early 2000s that was used as an argument of fear of deflation. 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. During the first round of unconventional monetary policy of low interest rates and withdrawal of duration in bond markets by suspension of auctions of the 30-year Treasury bond, inflation accelerated from 2004 to 2007. When policy interest rates were moved toward zero in 2008, carry trades during a global recession caused sharp increases in commodity prices and price indexes worldwide. Inflation collapsed in the risk panic from the latter part of 2008 into the first part of 2009. Carry trades induced by zero interest rates have caused a trend of inflation with oscillations during period of risk aversion (http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html).

Chart IV-20, France, Producer Prices for the Internal Market, Jan 1999-Apr 2013, 2010=100

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20130531

France’s producer price index for the domestic market is shown in Table IV-10 for Apr 2013. The segment of prices of coke and refined petroleum decreased 5.2 percent in Apr 2013 and decreased 11.4 percent in 12 months. Manufacturing prices, with the highest weight in the index, decreased 0.5 percent in Apr and fell 0.4 percent in 12 months. Mining prices decreased 2.4 percent in Apr and increased 3.6 percent in 12 months. Waves of inflation originating in carry trades from unconventional monetary policy of zero interest rates (http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html) tend to deteriorate sales prices of productive activities relative to prices of inputs and commodities with adverse impact on operational margins and thus on production, investment and hiring.

Table IV-10, France, Producer Price Index for the Domestic Market, %

Apr 2013	Weight	Month ∆%	12 Months ∆%
Total	1000	-0.9	0.6
Mining	234	-2.4	3.6
Mfg	766	-0.5	-0.4
Food Products, Beverages, Tobacco	209	-0.2	3.5
Coke and Refined Petroleum	52	-5.2	-11.4
Electrical, Electronic	51	0.6	0.1
Transport	72	-0.1	-0.5
Other Mfg	382	-0.1	-0.5

Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20130531

Chart IV-20 of the Institut National de la Statistique et des Études Économiques of France provides the behavior of the producer price index of France for the various segments: import prices, foreign markets, domestic market and all markets. All the components rose to the peak in 2008 driven by carry trades from zero interest rates of unconventional monetary policy that was of such an impulse as to drive increases in commodity prices during the global recession. Prices collapsed with the flight out of financial risk assets such as commodity positions to government obligations. Commodity price increases returned with zero interest rates and subdued risk aversion. The shock of confidence of the current European sovereign risk moderated exposures to financial risk that influenced the flatter curve of France’s producer prices followed by another mild trend of increase and moderation in Dec 2011 and then renewed inflation in the first quarter of 2012 with a new pause in Apr 2012, decline in May-Jun 2012, the jump in Jul-Oct 2012 and the decline in Nov-Dec 2012 followed by increase in Jan-Feb 2013. Prices stabilized in Mar 2013 and collapsed in Apr 2013.

Chart IV-20, France, Producer Price Index (PPI)

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20130531

Italy’s producer price inflation in Table IV-11 also has the same waves in 2011 and into 2012-2013 observed for many countries (http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html). The annual equivalent producer price inflation in the first wave Jan-Apr 2011 was 10.7 percent, which was driven by increases in commodity prices resulting from the carry trades from zero interest rates to risk financial assets, in particular leveraged positions in commodities. In the second wave, producer price inflation was 1.8 percent in annual equivalent rate in May-Jun 2011. In the third wave, annual equivalent inflation was 4.9 percent in Jul-Sep 2011. With the return of risk aversion in the fourth wave coinciding with the worsening sovereign debt crisis in Europe, annual equivalent inflation was 2.0 percent in Oct-Dec 2011. Inflation accelerated in the fifth wave in Jan and Feb 2012 to annual equivalent 8.1 percent. In the sixth wave, annual equivalent inflation in Mar-Apr was at 6.8 percent. In the seventh wave, risk aversion originating in world economic slowdown and financial turbulence softened carry trades with annual equivalent inflation falling to minus 0.6 percent in May-Jun 2012. In the eighth wave, more aggressive carry trades into commodity futures exposures resulted in increase of inflation at annual equivalent 9.4 percent in Jul-Aug 2012. In the ninth wave, risk aversion caused unwinding carry trades with annual equivalent inflation of minus 5.2 percent in Sep 2012-Jan 2013. Inflation returned in the tenth wave at 1.2 percent annual equivalent in Feb-Mar 2013. In the eleventh wave, industrial prices fell at annual equivalent 5.8 percent in Apr 2013.

Table IV-11, Italy, Industrial Prices, Internal Market

	Month ∆%	12-Month ∆%
Apr 2013	-0.5	-1.1
AE ∆% Apr	-5.8
Mar	0.0	0.0
Feb	0.2	0.5
AE ∆% Feb-Mar	1.2
Jan	-0.6	0.7
Dec 2012	-0.3	2.4
Nov	-0.3	2.8
Oct	-0.7	3.5
Sep	-0.3	4.2
AE ∆% Sep-Jan	-5.2
Aug	1.1	4.5
Jul	0.4	3.8
AE ∆% Jul-Aug	9.4
Jun	0.0	4.2
May	-0.1	4.4
AE ∆% May-Jun	-0.6
Apr	0.6	4.6
Mar	0.5	4.8
AE ∆% Mar-Apr	6.8
Feb	0.5	5.2
Jan	0.8	5.2
AE ∆% Jan-Feb	8.1
Dec 2011	0.1	5.5
Nov	0.4	6.0
Oct	0.0	6.1
AE ∆% Oct-Dec	2.0
Sep	0.0	5.3
Aug	0.4	5.4
Jul	0.8	5.2
AE ∆% Jul-Sep	4.9
Jun	0.2	4.6
May	0.1	4.6
AE ∆% May-Jun	1.8
Apr	0.9	5.1
Mar	0.9	5.0
Feb	0.4	4.5
Jan	1.2	5.3
AE ∆% Jan-Apr	10.7
Year
2012		4.2
2011		5.1
2010		3.1
2009		-5.4
2008		5.8
2007		3.3
2006		5.3
2005		4.0
2004		2.8
2003		1.6
2002		0.1
2001		2.0

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/91461

Chart IV-21 of the Istituto Nazionale di Statistica provides 12-month percentage changes of the producer price index of Italy. Rates of change in 12 months stabilized from Jul to Nov 2011 and then fell to 3.5 percent in Jan 2012 with increases of 0.7 percent in the month of Jan 2013 and 0.5 percent in Feb 2013 followed by stability in Mar 2013. Inflation turned negative in Apr 2013.

Chart IV-21, Italy, Producer Price Index 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

Monthly and 12-month inflation of the producer price index of Italy and individual components is provided in Table IV-12. Energy prices decreased 1.4 percent in Apr 2013 and fell 4.5 percent in 12 months. Producer-price inflation is nil for most components in the month of Apr 2013 with the exception of 0.1 percent for capital good and 0.1 percent for the index excluding energy. There is higher inflation in 12 months of 1.6 percent for nondurable goods than 0.2 percent for durable goods.

Table IV-12, Italy, Industrial Prices, Internal Market, ∆%

	Apr 2013/ Mar 2013	Apr 2013/ Apr 2012
Total	-0.5	-1.1
Consumer Goods	-0.2	1.5
Durable Goods	-0.1	0.2
Nondurable	-0.3	1.6
Capital Goods	0.1	0.4
Intermediate	-0.2	-0.4
Energy	-1.4	-4.5
Total Excluding Energy	0.1	0.2

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/91461

The first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-13. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May 2011 at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep 2011, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in Oct-Nov 2011 jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was 1.2 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation increased to 3.0 percent in Jul-Aug 2012. In the ninth wave, inflation collapsed to zero in Sep-Oct 2012 and was minus 0.8 percent in annual equivalent in Sep-Nov 2012. In the tenth wave, annual equivalent inflation in Dec 2012 to May 2013 was 1.6 percent. Economies are shocked worldwide by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion (http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html).

Table IV-13, Italy, Consumer Price Index

	Month	12 Months
May 2013	0.1	1.2
Apr	0.0	1.1
Mar	0.2	1.6
Feb	0.1	1.9
Jan	0.2	2.2
Dec 2012	0.2	2.3
AE ∆% Dec 2012-May 2013	1.6
Nov 2012	-0.2	2.5
Oct	0.0	2.6
Sep	0.0	3.2
AE ∆% Sep-Nov	-0.8
Aug	0.4	3.2
Jul	0.1	3.1
AE ∆% Jul-Aug	3.0
June	0.2	3.3
May	0.0	3.2
AE ∆% May-Jun	1.2
Apr	0.5	3.3
Mar	0.5	3.3
Feb	0.4	3.3
AE ∆% Feb-Apr	5.7
Jan	0.3	3.2
Dec 2011	0.4	3.3
AE ∆% Dec-Jan	4.3
Nov	-0.1	3.3
Oct	0.6	3.4
AE ∆% Oct-Nov	3.0
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Sep	2.4
Jun	0.1	2.7
May	0.1	2.6
AE ∆% May-Jun	1.2
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9
Annual
2012		3.0
2011		2.8
2010		1.5
2009		0.8
2008		3.3
2007		1.8
2006		2.1

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/91594

Consumer price inflation in Italy by segments in the estimate by ISTAT for May 2013 is provided in Table IV-14. Total consumer price inflation in May 2013 was 0.1 percent and 1.2 percent in 12 months. Inflation of goods was minus 0.1 percent in May 2013 and 0.8 percent in 12 months. Prices of durable goods decreased 0.2 percent in May and decreased 0.1 percent in 12 months, as typical in most countries. Prices of energy decreased 1.6 percent in May and decreased 2.3 percent in 12 months. Food prices increased 0.6 percent in May and increased 3.0 percent in 12 months. Prices of services increased 0.2 percent in May and rose 1.7 percent in 12 months. Transport prices, also influenced by commodity prices, increased 0.5 percent in May and increased 3.3 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion (http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html).

Table IV-14, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%

May 2013	Weights	Month ∆%	12-Month ∆%
General Index	1,000,000	0.1	1.2
I Goods	559,402	-0.1	0.8
Food	168,499	0.6	3.0
Energy	94,758	-1.6	-2.3
Durable	89,934	-0.2	-0.1
Nondurable	71,031	0.1	1.5
II Services	440,598	0.2	1.7
Housing	71,158	0.1	2.0
Communications	20,227	-0.2	-2.7
Transport	81,266	0.5	3.3

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/91594

Chart IV-17 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy with marginal increase followed by decline to 2.5 percent in Nov 2012, 2.3 percent in Dec 2012, 2.2 percent in Jan 2013, 1.9 percent in Feb 2013 and 1.6 percent in Mar 2013. Consumer prices increased 1.1 percent in the 12 months ending in Apr 2013 and 1.2 percent in the 12 months ending in May 2013.

Chart, IV-21, Italy, Consumer Price Index, 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

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 from IQ2012 to IQ2013 available now for all countries. Growth is weak throughout most of the world. Japan’s GDP increased 1.3 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 5.3 percent in IQ2012. Growth of 4.0 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan’s GDP contracted 0.9 percent in IIIQ2012 at the SAAR of minus 3.5 percent and increased 0.3 percent relative to a year earlier. Japan’s GDP grew 0.3 percent in IVQ2012 at the SAAR of 1.0 percent and increased 0.5 percent relative to a year earlier. Japan grew 0.9 percent in IQ2013 at the SAAR of 3.5 percent and 0.2 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 decreased 0.1 in IQ2012 relative to a year earlier. Euro area GDP contracted 0.2 percent IIQ2012 and fell 0.5 percent relative to a year earlier. In IIIQ2012, euro area GDP fell 0.1 percent and declined 0.7 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. In IQ2013, the GDP of the euro area fell 0.2 percent and decreased 1.0 percent relative to a year earlier. Germany’s GDP increased 0.6 percent in IQ2012 and 1.8 percent relative to a year earlier. In IIQ2012, Germany’s GDP increased 0.2 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 0.7 percent in IVQ2012 and increased 0.0 percent relative to a year earlier. In IQ2013, Germany’s GDP increased 0.1 percent and fell 1.4 percent relative to a year earlier. Growth of US GDP in IQ2012 was 0.5 percent, at SAAR of 2.0 percent and higher by 2.4 percent relative to IQ2011. US GDP increased 0.5 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 2.4 percent SAAR, 0.6 percent relative to the prior quarter and 1.8 percent relative to the same quarter in 2013 (Section) with weak hiring (http://cmpassocregulationblog.blogspot.com/2013/05/recovery-without-hiring-collapse-of.html and earlier http://cmpassocregulationblog.blogspot.com/2013/04/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 seven consecutive quarters from IIIQ2011 to IQ2013. Italy’s GDP fell 1.0 percent in IQ2012 and declined 1.7 percent relative to IQ2011. Italy’s GDP fell 0.6 percent in IIQ2012 and declined 2.5 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. In IQ2013, Italy’s GDP contracted 0.5 percent and fell 2.3 percent relative to a year earlier. France’s GDP changed 0.0 percent in IQ2012 and increased 0.3 percent relative to a year earlier. France’s GDP decreased 0.2 percent in IIQ2012 and increased 0.1 percent relative to a year earlier. In IIIQ2012, France’s GDP increased 0.1 percent and increased 0.0 percent relative to a year earlier. France’s GDP fell 0.2 percent in IVQ2012 and declined 0.3 percent relative to a year earlier. In IQ2013, France GDP fell 0.2 percent and declined 0.4 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: 1.3 SAAR: 5.3	3.4
China	1.6	8.1
Euro Area	-0.1	-0.1
Germany	0.6	1.8
France	0.0	0.3
Italy	-1.0	-1.7
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	4.0
China	1.9	7.6
Euro Area	-0.2	-0.5
Germany	0.2	0.5 1.0 CA
France	-0.2	0.1
Italy	-0.6	-2.5
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: –3.5	0.3
China	2.1	7.4
Euro Area	-0.1	-0.7
Germany	0.2	0.4
France	0.1	0.0
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: 0.3 SAAR: 1.0	0.5
China	2.0	7.9
Euro Area	-0.6	-0.9
Germany	-0.7	0.0
France	-0.2	-0.3
Italy	-0.9	-2.8
United Kingdom	-0.3	0.2
	IQ2013/IVQ2012	IQ2013/IQ2012
United States	QOQ: 0.6 SAAR: 2.4	1.8
Japan	QOQ: 0.9 SAAR: 3.5	0.2
China	1.6	7.7
Euro Area	-0.2	-1.0
Germany	0.1	-1.4
France	-0.2	-0.4
Italy	-0.5	-2.3
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 at http://cmpassocregulationblog.blogspot.com/2013/05/united-states-commercial-banks-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2013/04/world-inflation-waves-squeeze-of.html 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 and earlier 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 Apr 2013, Japan’s exports grew 3.8 percent in 12 months while imports increased 9.4 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 Apr 2013, China exports increased 14.7 percent relative to a year earlier and imports 16.8 percent. Germany’s exports increased 0.5 percent in the month of Mar 2013 and decreased 4.2 percent in the 12 months ending in Mar 2013 while imports increased 0.8 percent in the month of Mar and decreased 6.9 percent in the 12 months ending in Mar. Net trade contributed 0.4 percentage points to growth of GDP in IQ2012, contributed 1.3 percentage points in IIQ2012, contributed 1.4 percentage points in IIIQ2012, contributed 0.7 percentage points in IVQ2012 and contributed 1.0 percentage points in 2012. Net trade deducted 0.1 percentage points from Germany’s GDP growth. 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. In IQ2013, net trade deducted 0.1 percentage points from UK’s GDP growth. France’s exports increased 0.5 percent in Mar 2013 while imports decreased 1.1 percent and net trade added 0.2 percentage points to GDP growth in IIQ2012, adding 0.2 percentage points in IIIQ2012 and 0.2 percentage points in IVQ2012. Net trade deducted 0.2 percentage points from France’s GDP growth in IQ2013. US exports decreased 0.9 percent in Mar 2013 and goods exports increased 2.2 percent in Jan-Mar 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 0.21 percentage points from US GDP growth. US imports decreased 2.5 percent in Mar 2013 and goods imports decreased 0.1 percent in Jan-Mar 2013 relative to a year earlier. In the six months ending in Apr 2013, United States national industrial production accumulated increase of 2.0 percent at the annual equivalent rate of 4.1 percent, which is higher than 1.9 percent growth in 12 months. Excluding 1.3 percent growth in Nov 2012 in the rebound from hurricane Sandy, growth in the five months from Dec 2012 to Apr 2013 accumulated to 0.7 percent or 1.7 percent annual equivalent. Business equipment decreased 0.5 percent in Apr 2013, growing 3.4 percent in the 12 months ending in Apr 2013 and at the annual equivalent rate of 5.6 percent in the six months ending in Apr 2013 and 0.9 percent annual equivalent in the five months ending in Apr 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 decreased 0.5 percentage point to 77.8 percent, a rate 0.1 percentage point above its level of a year earlier but 2.4 percentage points below its long-run (1972--2012) average.” United States industry is apparently decelerating with some strength at the margin. Manufacturing decreased 0.4 percent in Apr 2013 seasonally adjusted, increasing 2.1 percent not seasonally adjusted in 12 months. Manufacturing grew cumulatively 2.1 percent in the six months ending in Apr 2013 or at the annual equivalent rate of 4.3 percent. Excluding the increase of 1.4 percent in Nov 2012 because of recovery from hurricane Sandy, manufacturing accumulated growth of 0.7 percent from Dec 2012 to Apr 2013 or at the annual equivalent rate of 1.7 percent. Manufacturing fell 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increased 16.8 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. Manufacturing grew 18.5 percent from the trough in Apr 2009 to Apr 2013. Manufacturing output in Apr 2013 is 7.4 percent below the peak in Jun 2007. 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	-0.9 Mar	2.2 Jan-Mar	-2.5 Jan	-0.1 Jan-Mar
Japan		Apr 2013 3.8 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		Apr 2013 9.4 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		14.7 Apr 10.0 Mar 13 17.3 Jan-Apr 13		16.8 Apr 14.1 Mar 13 10.6 Jan-Apr 13
Euro Area	0.1 12-M Mar	1.3 Jan-Mar	-9.9 12-Mar	-5.2 Jan-Mar
Germany	0.5 Mar CSA	-4.2 Mar	0.8 Mar CSA	-6.9 Mar
France Mar	1.4	-0.4	-1.1	-3.1
Italy Mar	1.2	-6.0	0.2	-10.6
UK	3.5 Mar	-2.0 Jan-Mar13 12/Jan-Mar 13	2.6 Mar	-1.0 Jan-Mar 13/Jan-Mar 12
Net Trade % Points GDP Growth	% Points
USA	IQ2013 -0.21 IVQ2012 +0.33 IIIQ2012 +0.38 IIQ2012 +0.23 IQ2012 +0.06
Japan	-1.1 IIQ2012 -2.8 IIIQ2012 -0.6 IVQ2012
Germany	0.4 IQ2012 1.3 IIQ2012 1.4 IIIQ2012 0.7 IVQ2012 1.0 2012 IQ2013 -0.1
France	0.2 IIQ2012 0.1 IIIQ2012 0.2 IVQ2012 -0.2 IQ2013
UK	-0.7 IQ2012 -0.8 IIQ2012 +0.4 IIIQ2012 -0.2 IVQ2012 -0.1 IQ2013

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 Apr 2013. The share of Asia in Japan’s trade is more than one half, 54.5 percent of exports and 43.4 percent of imports. Within Asia, exports to China are 17.3 percent of total exports and imports from China 21.6 percent of total imports. While exports to China increased 0.3 percent in the 12 months ending in Apr 2013, imports from China increased 13.3 percent. The largest export market for Japan in Apr 2013 is the US with share of 19.1 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 9.7 percent in imports. Rates of growth of exports of Japan in Mar 2013 are low or negative for several countries and regions with the exception of growth of 14.8 percent for exports to the US, 12.0 for exports to Mexico, 20.7 percent for exports to Brazil and 16.9 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 3.8 percent in Apr 2013 while imports increased 9.4 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Apr 2013 are positive for most trading partners. Imports from Asia increased 13.1 percent in the 12 months ending in Apr 2013 while imports from China increased 13.3 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

Apr 2013	Exports Millions Yen	12 months ∆%	Imports Millions Yen	12 months ∆%
Total	5,777,409	3.8	6,657,345	9.4
Asia	3,151,351	4.3	2,888,002	13.1
China	998,409	0.3	1,440,866	13.3
USA	1,101,287	14.8	538,297	0.8
Canada	67,974	-5.1	113,225	42.4
Brazil	47,383	20.7	71,162	-9.3
Mexico	82,091	12.0	34,516	31.7
Western Europe	568,417	-3.5	644,944	11.4
Germany	144,476	-1.3	175,918	18.4
France	59,019	12.5	95,282	12.1
UK	82,661	-5.9	50,925	1.0
Middle East	196,158	6.1	1,341,440	1.6
Australia	147,004	16.9	397,067	8.4

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

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

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 fell to 51.9 in Apr from 53.0 in Mar, indicating expansion at a moderate rate (http://www.markiteconomics.com/Survey/PressRelease.mvc/d2e650432b25425ab2bfac6532ac0dda).This index has remained above the contraction territory of 50.0 during 45 consecutive months. The employment index decreased to 50.4 in Apr relative to 51.4 in Mar with input prices rising at slower rate (http://www.markiteconomics.com/Survey/PressRelease.mvc/d2e650432b25425ab2bfac6532ac0dda).David Hensley, Director of Global Economic Coordination at JP Morgan, finds slowdown across manufacturing and services with output growing at the lowest rate in six months (http://www.markiteconomics.com/Survey/PressRelease.mvc/d2e650432b25425ab2bfac6532ac0dda). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, decreased marginally to 50.5 in Apr from 51.1 in Mar, which is the fourth consecutive reading above 50 (http://www.markiteconomics.com/Survey/PressRelease.mvc/2b14d16a09f7424aa7baed58f4f284ff). New export business increased marginally for the second consecutive month after eleven consecutive monthly declines. The HSBC Brazil Composite Output Index, compiled by Markit, increased marginally from 51.0 in Mar to 51.5 in Apr, indicating improvement but with business activity growing accelerating in services but slowing in manufacturing (http://www.markiteconomics.com/Survey/PressRelease.mvc/53f380f4e26742e8b5bb6ddda8a09652). The HSBC Brazil Services Business Activity index, compiled by Markit, increased from 50.3 in Mar to 51.3 in Apr (http://www.markiteconomics.com/Survey/PressRelease.mvc/53f380f4e26742e8b5bb6ddda8a09652). Andre Loes, Chief Economist, Brazil, at HSBC, finds recovering economy but within a modest forecast (http://www.markiteconomics.com/Survey/PressRelease.mvc/53f380f4e26742e8b5bb6ddda8a09652). The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) decreased from 51.8 in Mar to 50.8 in Apr (http://www.markiteconomics.com/Survey/PressRelease.mvc/7622c1409310421184b7f7f5314594e1). Andre Loes, Chief Economist, Brazil at HSBC, finds continuing expansion in Brazil’s manufacturing with greater strength in Jan 2013, supporting the view that the economy of Brazil is experiencing moderate recovery (http://www.markiteconomics.com/Survey/PressRelease.mvc/7622c1409310421184b7f7f5314594e1).

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^™) decreased to 52.1 in Apr from 54.6 in Mar (http://www.markiteconomics.com/Survey/PressRelease.mvc/caf2295d7e5642779cb9b6bf7c81c0d3). The index of new exports orders was unchanged from 51.8 in Apr 2013 from 51.8 in Mar 2013 while total new orders fell from 55.4 in Mar to 51.5 in Apr. Chris Williamson, Chief Economist at Markit, finds that weakness of new orders of manufacturing in the US suggest slower growth than in the preceding first quarter of 2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/caf2295d7e5642779cb9b6bf7c81c0d3). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business^® decreased 0.6 percentage points from 51.3 in Mar to 50.7 in Apr (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders increased 0.9 percentage points from 51.4 in Mar to 52.3 in Apr. The index of exports decreased 2.0 percentage points from 56.0 in Mar to 54.0 in Apr, remaining in expansion territory. The Non-Manufacturing ISM Report on Business^® PMI decreased 1.3 percentage points from 54.4 in Mar to 53.1 in Apr, indicating production growth during 45 consecutive months, while the index of new orders decreased 0.1 percentage points from 54.6 in Mar to 54.5 in Apr (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	Apr 12 months NSA ∆%: 1.1; ex food and energy ∆%: 1.7 Apr month SA ∆%: -0.4; ex food and energy ∆%: 0.1 Blog 5/19/13
Producer Price Index	Apr 12-month NSA ∆%: 0.6; ex food and energy ∆% 1.7 Apr month SA ∆% = -0.7; ex food and energy ∆%: 0.1 Blog 5/19/13
PCE Inflation	Apr 12-month NSA ∆%: headline 0.7; ex food and energy ∆% 1.1 Blog 6/2/13
Employment Situation	Household Survey: Apr Unemployment Rate SA 7.5% Blog calculation People in Job Stress Apr: 28.6 million NSA, 17.6% of Labor Force Establishment Survey: Nov Nonfarm Jobs +165,000; Private +176,000 jobs created Mar 12-month Average Hourly Earnings Inflation Adjusted ∆%: 0.4 Blog 5/5/13
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 Mar 2013 3.869 million lower by 0.746 million than 4.615 million in Mar 2007 Blog 5/12/13
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 2.4 Blog 6/2/13
Real Private Fixed Investment	SAAR IQ2013 4.1 ∆% IVQ2007 to IIIQ2012: minus 8.8% Blog 6/2/13
Personal Income and Consumption	Apr month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.1 Real Personal Consumption Expenditures (RPCE): 0.1 12-month Apr NSA ∆%: RDPI: 1.0; RPCE ∆%: 2.1 Blog 6/2/13
Quarterly Services Report	IVQ12/IVQ11 SA ∆%: Information 5.4 Financial & Insurance 6.2 Blog 3/10/13
Employment Cost Index	Compensation Private IQ2013 SA ∆%: 0.3 Jan 13 months ∆%: 1.7 Blog 5/5/13
Industrial Production	Apr month SA ∆%: -0.5 Apr 12 months SA ∆%: 1.9 Manufacturing Apr SA ∆% -0.4 Apr 12 months SA ∆% 1.3, NSA 2.1 Capacity Utilization: 77.8 Blog 5/19/13
Productivity and Costs	Nonfarm Business Productivity IQ2013∆% SAAE 0.7; IQ2013/IQ2012 ∆% 0.9; Unit Labor Costs SAAE IQ2013 ∆% 0.5; IQ2013/IQ2012 ∆%: 0.6 Blog 5/5/2013
New York Fed Manufacturing Index	General Business Conditions From Apr 3.05 to May -1.43 New Orders: From Apr 2.20 to May -1.17 Blog 5/19/13
Philadelphia Fed Business Outlook Index	General Index from Apr 1.3 to May -5.2 New Orders from Apr -1.0 to May -7.9 Blog 5/19/13
Manufacturing Shipments and Orders	New Orders SA Mar ∆% -4.0 Ex Transport -2.0 Jan-Mar NSA New Orders -0.2 Ex transport -0.1 Blog 5/5/13
Durable Goods	Apr New Orders SA ∆%: minus 3.3; ex transport ∆%: 1.3 Jan-Apr 13/Jan-Apr 12 New Orders NSA ∆%: 0.7; ex transport ∆% 0.7 Blog 5/26/13
Sales of New Motor Vehicles	Jan-Apr 2013 4,974,000; Jan-Apr 2012 4,652,005. Apr 13 SAAR 14.92 million, Mar 13 SAAR 15.27 million, Apr 2012 SAAR 14.12 million Blog 5/5/13
Sales of Merchant Wholesalers	Jan-Mar 2013/Jan-Mar 2012 NSA ∆%: Total 1.2; Durable Goods: 0.5; Nondurable Goods: 1.8 Blog 5/12/13
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Mar 13/Mar 12 NSA ∆%: Sales Total Business 0.1; Manufacturers 0.2 Retailers 1.7; Merchant Wholesalers -1.5 Blog 5/19/13
Sales for Retail and Food Services	Jan-Apr 2013/Jan-Apr 2012 ∆%: Retail and Food Services 3.3; Retail ∆% 3.2 Blog 5/19/13
Value of Construction Put in Place	Mar SAAR month SA ∆%: -1.7 Mar 12-month NSA: 4.9 Jan-Mar 2013 ∆% 4.7 Blog 5/5/13
Case-Shiller Home Prices	Mar 2013/Mar 2012 ∆% NSA: 10 Cities 10.3; 20 Cities: 10.9 ∆% Mar SA: 10 Cities 1.4 ; 20 Cities: 1.1 Blog 6/2/13
FHFA House Price Index Purchases Only	Mar SA ∆% 1.3; 12 month NSA ∆%: 7.2 Blog 5/26/13
New House Sales	Apr 2013 month SAAR ∆%: minus 2.3 Jan-Apr 2013/Jan-Apr 2012 NSA ∆%: 26.8 Blog 5/26/13
Housing Starts and Permits	Apr Starts month SA ∆%: -16.5 ; Permits ∆%: +14.3 Jan-Apr 2013/Jan-Apr 2012 NSA ∆% Starts 28.9; Permits ∆% 27.3 Blog 5/19/13
Trade Balance	Balance Mar SA -$38,829 million versus Feb -$42,960 million Exports Mar SA ∆%: -0.9 Imports Mar SA ∆%: -2.5 Goods Exports Jan-Mar 2013/2012 NSA ∆%: 0.5 Goods Imports Jan-Mar 2013/2012 NSA ∆%: -2.8 Blog 5/12/13
Export and Import Prices	Apr 12-month NSA ∆%: Imports -2.6; Exports -0.9 Blog 5/19/13
Consumer Credit	Mar ∆% annual rate: 3.4 Blog 5/12/13
Net Foreign Purchases of Long-term Treasury Securities	Mar Net Foreign Purchases of Long-term Treasury Securities: -$13.5 billion Major Holders of Treasury Securities: China $1251 billion; Japan $1105 billion; Total Foreign US Treasury Holdings Feb $5758 billion Blog 5/19/13
Treasury Budget	Fiscal Year 2013/2012 ∆% Apr: Receipts 15.9; Outlays minus 0.6; Individual Income Taxes 20.0 Deficit Fiscal Year 2011 $1,297 billion Deficit Fiscal Year 2012 $1,089,353 million Blog 5/12/2013
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	Apr 2013 SAAR ∆%: Securities 1.0 Loans 5.1 Cash Assets 9.0 Deposits 2.4 Blog 5/26/13
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:

5/26/13 http://cmpassocregulationblog.blogspot.com/2013/05/united-states-commercial-banks-assets.html

5/19/13 http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html

5/12/13 http://cmpassocregulationblog.blogspot.com/2013/05/recovery-without-hiring-collapse-of.html

5/5/13 http://cmpassocregulationblog.blogspot.com/2013/05/twenty-nine-million-unemployed-or.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

Table VA-1 shows the euphoria of prices during the housing boom and the subsequent decline. House prices rose 94.8 percent in the 10-city composite of the Case-Shiller home price index and 77.8 percent in the 20-city composite between Mar 2000 and Mar 2005. Prices rose around 100 percent from Mar 2000 to Mar 2006, increasing 118.8 percent for the 10-city composite and 99.8 percent for the 20-city composite. House prices rose 37.5 percent between Mar 2003 and Mar 2005 for the 10-city composite and 32.1 percent for the 20-city composite propelled by low fed funds rates of 1.0 percent between Jun 2003 and Jun 2004 and then only increasing by 0.25 basis points at every meeting of the Federal Open Market Committee (FOMC) until Jun 2006, reaching 5.25 percent. Simultaneously, the suspension of auctions of the 30-year Treasury bond caused decline of yields of mortgage-backed securities with intended decrease in mortgage rates. Similarly, between Mar 2003 and Mar 2006 the 10-city index gained 54.5 percent and the 20-city index increased 48.4 percent. House prices have fallen from Mar 2006 to Mar 2013 by 27.8 percent for the 10-city composite and 27.0 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in Mar 2013, house prices increased 10.3 percent in the 10-city composite and increased 10.9 percent in the 20-city composite. Table VA-1 also shows that house prices increased 57.9 percent between Mar 2000 and Mar 2013 for the 10-city composite and increased 45.8 percent for the 20-city composite. House prices are close to the lowest level since peaks during the boom before the financial crisis and global recession. The 10-city composite fell 28.6 percent from the peak in Jun 2006 to Mar 2013 and the 20-city composite fell 28.0 percent from the peak in Jul 2006 to Mar 2013. The final part of Table VA-4 provides average annual percentage rates of growth of the house price indexes of Standard & Poor’s Case-Shiller. The average annual growth rate between Dec 1987 and Dec 2012 for the 10-city composite was 3.3 percent. Data for the 20-city composite are available only beginning in Jan 2000. House prices accelerated in the 1990s with the average rate of the 10-city composite of 5.0 percent between Dec 1992 and Dec 2000 while the average rate for the period Dec 1987 to Dec 2000 was 3.8 percent. Although the global recession affecting the US between IVQ2007 (Dec) and IIQ2009 (Jun) caused decline of house prices of slightly above 30 percent, the average annual growth rate of the 10-city composite between Dec 2000 and Dec 2012 was 2.8 percent while the rate of the 20-city composite was 2.3 percent.

Table VA-1, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
∆% Mar 2000 to Mar 2003	41.7	34.6
∆% Mar 2000 to Mar 2005	94.8	77.8
∆% Mar 2003 to Mar 2005	37.5	32.1
∆% Mar 2000 to Mar 2006	118.8	99.8
∆% Mar 2003 to Mar 2006	54.5	48.4
∆% Mar 2005 to Mar 2013	-18.9	-18.0
∆% Mar 2006 to Mar 2013	-27.8	-27.0
∆% Mar 2009 to Mar 2013	6.6	6.1
∆% Mar 2010 to Mar 2013	3.4	3.7
∆% Mar 2011 to Mar 2013	7.0	8.0
∆% Mar 2012 to Mar 2013	10.3	10.9
∆% Mar 2000 to Mar 2013	57.9	45.8
∆% Peak Jun 2006 Mar 2013	-28.6
∆% Peak Jul 2006 Mar 2013		-28.0
Average ∆% Dec 1987-Dec 2012	3.3	NA
Average ∆% Dec 1987-Dec 2000	3.8	NA
Average ∆% Dec 1992-Dec 2000	5.0	NA
Average ∆% Dec 2000-Dec 2012	2.8	2.3

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

With the exception of Apr 2011, house prices seasonally adjusted declined in every month for both the 10-city and 20-city Case-Shiller composites from Dec 2010 to Jan 2012, as shown in Table V-2. The most important seasonal factor in house prices is school changes for wealthier homeowners with more expensive houses. Without seasonal adjustment, house prices fell from Dec 2010 throughout Mar 2011 and then increased in every month from Apr to Aug 2011 but fell in every month from Sep 2011 to Feb 2012. The not seasonally adjusted index increases from Apr 2012 to Sep 2012 for both the 10- and 20-city composites while the seasonally adjusted index also increases in every month from Apr 2012 to Sep 2012. The index without seasonal adjustment fell 0.3 percent in Nov 2012 for the 10-city composite and fell 0.2 percent for the 20-city composite while the seasonally adjusted index increased 0.6 percent for the 10-city composite and 0.7 percent for the 20-city composite. The seasonally adjusted index increased 1.0 percent for the 10-city composite and 0.9 percent for the 20-city composite in Dec 2012 while the not seasonally adjusted index increased 0.2 percent for the 10-city composite and 0.2 percent for the 20-city composite. In Jan 2013, the index seasonally adjusted increased 0.9 percent for the 10-city composite and 1.0 percent for the 20-city composite while the not seasonally adjusted index increased 0.0 percent for the 10-city composite and 0.1 percent for the 20-city composite. In Mar 2013, the seasonally adjusted index increased 1.4 percent in Mar 2013 for the seasonally adjusted index and 1.1 percent for the 20-city composite while the not seasonally adjusted index increased 1.4 percent for the 10-city composite and 1.4 percent for the 20-city composite. Declining house prices cause multiple adverse effects of which two are quite evident. (1) There is a disincentive to buy houses in continuing price declines. (2) More mortgages could be losing fair market value relative to mortgage debt. Another possibility is a wealth effect that consumers restrain purchases because of the decline of their net worth in houses.

Table VA-2, US, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted and Not Seasonally Adjusted, ∆%

	10-City Composite SA	10-City Composite NSA	20-City Composite SA	20-City Composite NSA
Mar 2013	1.4	1.4	1.1	1.4
Feb	1.5	0.4	1.3	0.3
Jan	0.9	0.1	1.1	0.1
Dec 2012	1.0	0.2	0.9	0.2
Nov	0.6	-0.3	0.7	-0.2
Oct	0.6	-0.2	0.7	-0.1
Sep	0.4	0.3	0.5	0.3
Aug	0.4	0.8	0.5	0.9
Jul	0.2	1.5	0.3	1.6
Jun	0.9	2.1	0.9	2.3
May	0.8	2.2	0.9	2.4
Apr	1.2	1.4	1.5	1.4
Mar	-0.1	-0.1	-0.2	0.0
Feb	0.1	-0.9	0.2	-0.8
Jan	-0.2	-1.1	-0.1	-1.0
Dec 2011	-0.5	-1.2	-0.4	-1.2
Nov	-0.6	-1.4	-0.6	-1.3
Oct	-0.6	-1.3	-0.6	-1.3
Sep	-0.5	-0.6	-0.5	-0.7
Aug	-0.3	0.1	-0.3	0.1
Jul	-0.3	0.9	-0.3	1.0
Jun	-0.2	1.0	-0.1	1.2
May	-0.3	1.0	-0.3	1.0
Apr	0.4	0.6	0.6	0.6
Mar	-0.8	-1.0	-1.1	-1.0
Feb	-0.3	-1.3	-0.2	-1.2
Jan	-0.2	-1.1	-0.2	-1.1
Dec 2010	-0.2	-0.9	-0.2	-1.0

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

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.”

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 moderately with the Markit Composite Output PMI^™ Index decreasing from 53.2 in Mar to 51.8 in Apr (http://www.markiteconomics.com/Survey/PressRelease.mvc/00f4933645f042f98ebcece4b088a884). Paul Smith, economist at Markit and author of the report, finds that the survey data suggest continuing growth of the economy of Japan after strong performance in IQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/00f4933645f042f98ebcece4b088a884). The Markit Business Activity Index of Services decreased from 54.0 in Mar, which is the highest level since Sep 2007 when the survey began, to 51.7 in Apr (http://www.markiteconomics.com/Survey/PressRelease.mvc/00f4933645f042f98ebcece4b088a884). Paul Smith, Senior Economist at Markit and author of the report, finds continuing confidence in demand for services (http://www.markiteconomics.com/Survey/PressRelease.mvc/00f4933645f042f98ebcece4b088a884). Markit/JMMA Purchasing Managers’ Index^™ (PMI™), seasonally adjusted, increased from 50.4 in Mar to 51.1 in Apr for the second consecutive and highest reading above 50.0 since May 2012 (http://www.markiteconomics.com/Survey/PressRelease.mvc/18ffdfb11432422bbaa05b971dbe5a15). Foreign and domestic business continued improvement with yen devaluation supporting foreign demand but with increases in input costs. Paul Smith, Senior Economist at Markit and author of the report, finds survey data consistent with quarterly growth of manufacturing around 2 percent (http://www.markiteconomics.com/Survey/PressRelease.mvc/18ffdfb11432422bbaa05b971dbe5a15).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	Apr ∆% +0.3 12 months ∆% 0.0 Blog 5/19/13
Consumer Price Index	Apr NSA ∆% 0.3; Apr 12 months NSA ∆% -0.7 Blog 6/2/13
Real GDP Growth	IQ2013 ∆%: 0.9 on IVQ2012; IQ2013 SAAR 3.5; ∆% from quarter a year earlier: 0.2 % Blog 5/19/13
Employment Report	Apr Unemployed 2.91 million Change in unemployed since last year: minus 240 thousand Unemployment rate: 4.1% Blog 6/2/13
All Industry Indices	Mar month SA ∆% -0.3 12-month NSA ∆% -1.0 Blog 5/26/13
Industrial Production	Apr SA month ∆%: 1.7 12-month NSA ∆% -2.3 Blog 6/2/13
Machine Orders	Total Mar ∆% 27.8 Private ∆%: 22.3 Mar ∆% Excluding Volatile Orders 14.2 Blog 5/19/13
Tertiary Index	Mar month SA ∆% -1.3 Mar 12 months NSA ∆% -0.1 Blog 5/19/13
Wholesale and Retail Sales	Apr 12 months: Total ∆%: -0.2 Wholesale ∆%: -0.2 Retail ∆%: -0.1 Blog 6/2/13
Family Income and Expenditure Survey	Apr 12-month ∆% total nominal consumption 0.8, real 1.5 Blog 6/2/13
Trade Balance	Exports Apr 12 months ∆%: 3.8 Imports Apr 12 months ∆% 9.4 Blog 5/26/13

Links to blog comments in Table JPY:

5/26/13 http://cmpassocregulationblog.blogspot.com/2013/05/united-states-commercial-banks-assets.html

5/19/13 http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html

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

In Apr 2013, industrial production in Japan increased 1.7 percent and decreased 2.3 percent in the 12 months ending in Apr 2013, as shown in Table VB-1. In the nine months Apr-Dec 2012, industrial production fell cumulative 7.2 or at the annual equivalent rate of 9.5 percent. As a result, growth of industrial production in 12 months fell from 14.2 percent in Mar 2012 to minus 7.9 percent in Dec 2012. Japan’s industrial production increased during five consecutive months by revised 2.4 percent in Dec 2012, revised 0.3 percent in Jan 2013, 0.6 percent in Feb 2013, 0.9 percent in Mar 2013 and 1.7 percent in Apr 2013, reducing the percentage decline in 12 months from minus 7.9 percent in Dec 2012 to minus 2.3 percent in Apr 2013. Monthly industrial production had climbed in every month since the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, with exception of Sep 2011 but fell again in Nov by 1.7 percent. Industrial production was higher in 12 months for the first month in Aug 2011 by 1.6 percent and again in Oct by 0.9 percent but fell 2.9 percent in Nov and 3.0 percent in Dec 2011 relative to a year earlier. Industrial production fell 21.9 percent in 2009 after falling 3.4 percent in 2008 but recovered by 16.4 percent in 2010. The annual average in calendar year 2011 fell 2.3 percent largely because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 and fell again 0.3 percent in 2012.

Table VB-1, Japan, Industrial Production ∆%

	∆% Month SA	∆% 12 Months NSA
Apr 2013	1.7	-2.3
Mar	0.9	-6.7
Feb	0.6	-10.5
Jan	0.3	-5.8
Dec 2012	2.4	-7.9
Nov	-1.4	-5.5
Oct	1.6	-4.5
Sep	-4.1	-8.1
Aug	-1.6	-4.6
Jul	-1.0	-0.8
Jun	0.4	-1.5
May	-3.4	6.0
Apr	-0.2	12.9
Mar	1.3	14.2
Feb	-1.6	1.5
Jan	0.9	-1.6
Dec 2011	2.3	-3.0
Nov	-1.7	-2.9
Oct	1.8	0.9
Sep	-1.9	-2.4
Aug	0.9	1.6
Jul	1.1	-1.7
Jun	3.8	-0.6
May	5.8	-4.6
Apr	2.4	-12.7
Mar	-16.2	-12.4
Feb	1.1	4.5
Jan	1.2	6.1
Dec 2010	2.4	5.9
Calendar Year
2012		-0.3
2011		-2.3
2010		16.4
2009		-21.9
2008		-3.4

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

The employment report for Japan in Apr 2013 is in Table VB-2. The rate of unemployment seasonally adjusted decreased to 4.2 percent in Sep 2012 from 4.3 percent in Jul 2012 and remained at 4.2 percent in Oct 2012, declining to 4.1 percent in Nov 2012, increasing to 4.2 percent in Dec 2012, stabilizing at 4.2 percent in Jan 2013 and increasing to 4.3 percent in Feb 2013. The seasonally adjusted rate of unemployment fell to 4.1 percent in Apr 2012. The rate of unemployment not seasonally adjusted stood at 4.4 percent in Apr 2013 and 0.4 percentage points lower from a year earlier. The employment rate stood at 57.0 percent in Apr 2013 and increased 0.5 percentage points from a year earlier.

Table VB-2, Japan, Employment Report Apr 2013

Apr 2013 Unemployed	2.91 million
Change since last year	-240 thousand; ∆% –7.6
Unemployment rate	4.1% SA -0.0; NSA 4.4%, -0.4 from earlier year
Population ≥ 15 years	110.83 million
Change since last year	∆% -0.1
Labor Force	66.03 million
Change since last year	∆% 0.2
Employed	63.12 million
Change since last year	∆% 0.6
Labor force participation rate	59.6
Change since last year	0.2
Employment rate	57.0%
Change since last year	0.5

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

Chart VB-1 of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides the unemployment rate of Japan from 2010 to 2013. The sharp decline in Sep 2011 was the best reading in 2011 but the rate increased in the final quarter of the year, declining in Feb 2012 and stabilizing in Mar 2012 but increasing to 4.6 percent in Apr 2012 and declining again to 4.4 percent in May 2012 and 4.3 percent in both Jun and Jul 2012 with further decline to 4.2 percent in Aug, Sep and Oct 2012, 4.1 percent in Nov 2012, 4.2 percent in Dec 2012, 4.2 percent in Jan 2013, 4.3 percent in Feb 2013 and 4.1 percent in Mar-Apr 2013.

Chart VB-1, Japan, Unemployment Rate

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

http://www.stat.go.jp/english/data/roudou/results/month/index.htm

During the “lost decade” of the 1990s from 1991 to 2002 (Pelaez and Pelaez, The Global Recession Risk (2007), 82-3), Japan’s GDP grew at the average yearly rate of 1.0 percent, the CPI at 0.1 percent and the implicit deflator at minus 0.8 percent. Japan’s growth rate from the mid 1970s to 1992 was 4 percent (Ito 2004). Table VB-3 provides Japan’s rates of unemployment, participation in labor force and employment for 1968, 1975, 1980 and 1985 and yearly from 1990 to 2012. The rate of unemployment jumped from 2.1 percent in 1991 to 5.4 percent in 2002, which was a year of global economic weakness. The participation rate dropped from 64.0 percent in 1992 to 61.2 percent in 2002 and the employment rate fell from 62.4 percent in 1992 to 57.9 percent in 2002. The rate of unemployment rose from 3.9 percent in 2007 to 5.1 percent in 2010, falling to 4.6 percent in 2011 and 4.3 percent in 2012, while the participation rate fell from 60.4 percent to 59.6 percent, falling to 59.3 percent in 2011 and 59.1 in 2012, and the employment rate fell from 58.1 percent to 56.6 percent in 2010 and 56.5 percent in 2011 and 2012. The global recession adversely affected labor markets in advanced economies.

Table VB-3, Japan, Rates of Unemployment, Participation in Labor Force and Employment, %

	Unemployment Rate	Participation Rate	Employment Rate
1968	1.2	65.9	65.1
1975	1.9	63.0	61.9
1980	2.0	63.3	62.0
1985	2.6	63.0	61.4
1990	2.1	63.3	61.9
1991	2.1	63.8	62.4
1992	2.2	64.0	62.6
1993	2.5	63.8	62.2
1994	2.9	63.6	61.8
1995	3.2	63.4	61.4
1996	3.4	63.5	61.4
1997	3.4	63.7	61.5
1998	4.1	63.3	60.7
1999	4.7	62.9	59.9
2000	4.7	62.4	59.5
2001	5.0	62.0	58.9
2002	5.4	61.2	57.9
2003	5.3	60.8	57.6
2004	4.7	60.4	57.6
2005	4.4	60.4	57.7
2006	4.1	60.4	57.9
2007	3.9	60.4	58.1
2008	4.0	60.2	57.8
2009	5.1	59.9	56.9
2010	5.1	59.6	56.6
2011	4.6	59.3	56.5
2012	4.3	59.1	56.5

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

The survey of household income and consumption of Japan in Table VB-4 is showing noticeable improvement in recent months relative to earlier months, which can be appreciated in the chart in the link in parentheses but followed by decline in Nov 2011, renewed strength in Dec 2011, another decline in Jan 2012 and increase in Feb and Mar 2012 with stabilization in Apr and May 2012 but sharp decline into Jun 2012 with recovery in Jul and Aug 2012, interrupted in Sep-Oct 2012 and new increases in Nov 2012, Jan 2013, Feb 2013, Mar 2013 and Apr 2013 (http://www.stat.go.jp/english/data/kakei/156.htm). Total consumption increased 1.5 percent in real terms in Apr 2013 and increased 0.8 percent in nominal terms relative to a year earlier. There are several segments of decreasing real consumption: fuels, light and water charges declining 7.3 percent in real terms and 5.1 percent in nominal terms and education declining 12.5 percent in real terms and 12.0 percent in nominal terms. Real household income increased 2.9 percent; real disposable income increased 0.5 percent; and real consumption expenditures increased 1.1 percent.

Table VB-4, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

Apr 2013	Nominal	Real
Households of Two or More Persons
Total Consumption	0.8	1.5
Excluding Housing, Vehicles & Remittance		1.0*
Food	0.9	2.7
Housing	18.8	19.2
Fuel, Light & Water Charges	-5.1	-7.3
Furniture & Household Utensils	7.0	10.2
Clothing & Footwear	0.6	0.6
Medical Care	2.7	3.4
Transport and Communications	-2.1	-2.0
Education	-12.0	-12.5
Culture & Recreation	3.2	5.6
Other Consumption Expenditures	3.1	-3.8*
Workers’ Households
Income	2.2	2.9
Disposable Income	-0.2	0.5
Consumption Expenditures	0.4	1.1

*Real: nominal deflated by CPI excluding imputed rent

Source: http://www.stat.go.jp/english/data/kakei/156.htm

Percentage changes in 12 months of nominal and real consumption expenditures in Japan are provided in Table VB-5. Real consumption expenditures increased 1.5 percent in the 12 months ending in Apr 2013 and 0.8 percent in nominal terms. There was sharp decline in nominal consumption of 8.8 percent in Mar 2011 and 8.2 percent in real consumption because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Dec was the first month in 2011 with increases in 12 months in both nominal and real consumption expenditures followed by Feb 2012 through Aug 2012. Nominal and real consumption fell in both Sep and Oct 2012 and increased in Nov 2012. Real consumption fell 0.7 percent in the 12 months ending in Dec 2012 and nominal consumption fell 0.8 percent. Real consumption expenditures increased 2.4 percent in the 12 months ending in Jan 2013 and 2.1 percent in nominal terms. Nominal consumption increased 0.8 percent in Feb 2013 and nominal consumption increased 0.1 percent.

Real consumption increased 5.2 percent in the 12 months ending in Mar 2013 and nominal consumption 4.1 percent. Consumption was an important driver of GDP growth in Japan in IQ2012. Real GDP grew at the seasonally adjusted annual rate (SAAR) of 5.3 percent in IQ2012 with private consumption contributing 2.0 percentage points for the highest contribution to growth (Table VB-2 at http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of_1079.html). There was deceleration in IIQ2012 with growth of GDP at SAAR of minus 0.9 percent and contribution of 0.5 percentage points of personal consumption. In IIIQ2012, Japan’s GDP contracted at the SAAR of 3.5 percent and personal consumption deducted 1.0 percentage points. Japan’s GDP grew at the SAAR of 1.0 percent in IVQ2012 with personal consumption contributing 1.1 percentage points. Japan’s GDP growth in IQ2013 was at 3.5 percent SAAR with highest contribution of 2.3 percentage points by personal consumption expenditures.

Table VB-5, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

	Nominal Consumption Expenditures ∆% Relative to a Year Earlier	Real Consumption Expenditures ∆% Relative to a Year Earlier
Apr 2013	0.8	1.5
Mar	4.1	5.2
Feb	0.1	0.8
Jan	2.1	2.4
Dec 2012	-0.8	-0.7
Nov	0.1	0.2
Oct	-0.5	-0.1
Sep	-1.2	-0.9
Aug	1.4	1.8
Jul	1.2	1.7
Jun	1.5	1.6
May	4.3	4.0
Apr	3.2	2.6
Mar	4.1	3.4
Feb	2.7	2.3
Jan	-2.1	-2.3
Dec 2011	0.3	0.5
Nov	-3.8	-3.2
Oct	-0.6	-0.4
Sep	-1.9	-1.9
Aug	-3.9	-4.1
Jul	-1.8	-2.1
Jun	-3.9	-3.5
May	-1.6	-1.2
Apr	-2.5	-2.0
Mar	-8.8	-8.2
Feb	-0.1	0.5
Jan	-0.9	-0.3
Dec 2010	-3.2	-3.3
Dec 2009	0.3	2.1

Source: http://www.stat.go.jp/english/data/kakei/156.htm

Japan is experiencing weak internal demand as in most advanced economies, interrupted by strong growth in IQ2012 but renewed weakening at the end of IIQ2012, beginning of IIIQ2012 and in IVQ2012. Table VB-6 provides Japan’s wholesale and retail sales. Retail sales fell 0.1 percent in the 12 months ending in Apr 2013 and had increased 0.9 percent in the 12 months ending in Nov 2012 but only 0.2 percent in the 12 months ending in Dec 2012, falling 1.1 percent in the 12 months ending in Jan 2013 and declining 2.2 percent in Feb 2013. Total sales decreased 0.2 percent in the 12 months ending in Apr 2013. Retail sales are recovering from deep drops in Mar and Apr 2011 following the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Retail sales have been increasing in 12-month percentage changes from Dec 2011 through May 2012 but fell again by 1.3 percent in Jul 2012, increasing 1.3 percent in Aug 2012 and 0.4 percent in Sep 2012 but declining 1.2 percent in Oct 2012, rebounding by 0.9 percent in Nov 2012 and only 0.2 percent in Dec 2012 but contracting 1.1 percent in Jan 2013 and 2.2 percent in Feb 2013. In Mar 2013, retail sales contracted 0.3 percent relative to a year earlier.

Table VB-6, Japan, Wholesale and Retail Sales 12 Month ∆%

	Total	Wholesale	Retail
Apr 2013	-0.2	-0.2	-0.1
Mar	-1.3	-1.8	-0.3
Feb	-1.6	-1.3	-2.2
Jan	-0.3	0.1	-1.1
Dec 2012	-1.7	-2.5	0.2
Nov	-0.9	-1.6	0.9
Oct	-1.6	-1.8	-1.2
Sep	-3.6	-5.1	0.4
Aug	-2.7	-4.4	1.3
Jul	-3.1	-4.0	-1.3
Jun	-2.6	-3.6	-0.2
May	2.7	2.6	3.0
Apr	1.8	0.4	5.0
Mar	3.2	0.9	9.3
Feb	-0.1	-1.3	3.1
Jan	-2.1	-3.8	1.6
Dec 2011	-0.8	-2.0	2.5
Nov	-2.3	-2.4	-2.2
Oct	1.1	0.8	1.9
Sep	0.3	0.8	-1.1
Aug	3.1	5.2	-2.6
Jul	2.3	3.0	0.6
Jun	3.1	3.8	1.2
May	1.3	2.3	-1.3
Apr	-2.6	-1.7	-4.8
Mar	-1.3	1.2	-8.3
Feb	5.3	7.2	0.1
Jan	3.3	4.6	0.1
Dec 2010	3.5	5.7	-2.1
Calendar Year
2012	-0.9	-2.0	1.8
2011	1.0	1.9	-1.0
2010	2.4	2.3	2.6
2009	-20.5	-25.6	-2.3
2008	1.2	1.5	0.3

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. The index fell to 54.5 in Apr 2013.

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

	Total Index	New Orders	Interm. Input Prices	Subs Prices	Exp
Apr 2013	54.5	50.9	51.1	47.6	62.5
Mar	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. The index fell again to 54.5 in Apr 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, 50.9 in Mar 2013 and 50.6 in Apr 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, 52.3 in Mar 2013 and 51.7 in Apr 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, 49.8 in Mar 2013 and 49.0 in Apr 2013.

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

	IPM	PI	NOI	INV	EMP	SDEL
Apr 2013	50.6	52.6	51.7	47.5	49.0	50.8
Mar	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, 50.9 in Mar 2013 and 50.6 in Apr 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