Duration Dumping, Steepening Yield Curve and Peaking Valuations of Risk Financial Assets, Collapse of United States Dynamism of Income Growth and Employment Creation, United States Commercial Banks Assets and Liabilities, United States Housing Collapse, World Economic Slowdown and Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013
Executive Summary
IA United States Commercial Banks Assets and Liabilities
IA1 Transmission of Monetary Policy
IA2 Functions of Banks
IA3 United States Commercial Banks Assets and Liabilities
IB Collapse of United States Dynamism of Income Growth and Employment Creation
II United States Housing Collapse
III World Financial Turbulence
IIIA Financial Risks
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
IV Global Inflation
V World Economic Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
Appendixes
Appendix I The Great Inflation
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIG Appendix on Deficit Financing of Growth and the Debt Crisis
IIIGA Monetary Policy with Deficit Financing of Economic Growth
IIIGB Adjustment during the Debt Crisis of the 1980s
III World Financial Turbulence. Financial markets are being shocked by multiple factors including:
(1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment, decline of wealth of households over the business cycle by 5.2 percent adjusted for inflation while growing 651.8 percent adjusted for inflation from IVQ1945 to IVQ2012 and unsustainable fiscal deficit/debt threatening prosperity that can cause risk premium on Treasury debt with Himalayan interest rate hikes; and (4) the outcome of the sovereign debt crisis in Europe.
This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk financial assets during the week. There are various appendixes for convenience of reference of material related to the debt crisis of the euro area. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.
IIIA Financial Risks. Financial turbulence, attaining unusual magnitude in recent months, characterized the expansion from the global recession since IIIQ2009. Table III-1, updated with every comment in this blog, provides beginning values on Fri Jul 19 and daily values throughout the week ending on Jul 26, 2013 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Jul 19 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Jul 19, 2013”, first row “USD/EUR 1.3141 -0.6%,” provides the information that the US dollar (USD) depreciated 0.6 percent to USD 1.3141/EUR in the week ending on Fri Jul 19 relative to the exchange rate on Fri Jul 12. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).
The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3141/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Jul 19, depreciating to USD 1.3186/EUR on Mon Jul 22, 2013, or by 0.3 percent. The dollar depreciated because more dollars, $1.3186, were required on Mon Jul 22 to buy one euro than $1.3141 on Jul 19. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3141/EUR on Jul 19; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Jul 19, to the last business day of the current week, in this case Fri Jul 26, such as depreciation to USD 1.3279/EUR by Jul 26; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD depreciated (denoted by negative sign) by 1.1 percent from the rate of USD 1.3141/EUR on Fri Jul 19 to the rate of USD 1.3279/EUR on Fri Jul 26 {[(1.3279/1.3141) – 1]100 = 1.1%} and depreciated (denoted by negative sign) by 0.6 percent from the rate of USD 1.3200 on Wed Jul 24 to USD 1.3277/EUR on Thu Jul 25 {[(1.3277/1.3200) -1]100 = 0.6%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk assets to the safety of dollar-denominated assets during risk aversion and return to higher yielding risk assets during risk appetite.
III-I, Weekly Financial Risk Assets Jul 22 to Jul 26, 2013
| Fri Jul 19, 2013 | M 22 | Tue 23 | Wed 24 | Thu 25 | Fri 26 |
| USD/EUR 1.3141 -0.6% | 1.3186 -0.3% -0.3% | 1.3224 -0.6% -0.3% | 1.3200 -0.4% -0.2% | 1.3277 -1.0% -0.6% | 1.3279 -1.1% 0.0% |
| JPY/ USD 100.64 -1.4% | 99.67 1.0% 1.0% | 99.43 1.2% 0.2% | 100.26 0.4% -0.8% | 99.29 1.3% 1.0% | 98.28 2.3% 1.0% |
| CHF/ USD 0.9411 0.6% | 0.9361 0.5% 0.5% | 0.9348 0.7% 0.1% | 0.9374 0.4% -0.3% | 0.9299 1.2% 0.8% | 0.9285 1.3% 0.2% |
| CHF/ EUR 1.2367 0.0% | 1.2344 0.2% 0.2% | 1.2362 0.0% -0.1% | 1.2375 -0.1% -0.1% | 1.2347 0.2% 0.2% | 1.2331 0.3% 0.1% |
| USD/ AUD 0.9175 1.0899 1.4% | 0.9249 1.0812 0.8% 0.8% | 0.9296 1.0757 1.3% 0.5% | 0.9166 1.0919 -0.2% -1.5% | 0.9245 1.0817 0.8% 0.9% | 0.9265 1.0793 1.0% 0.2% |
| 10 Year T Note 2.480 | 2.481 | 2.501 | 2.583 | 2.574 | 2.565 |
| 2 Year T Note 0.300 | 0.304 | 0.308 | 0.350 | 0.322 | 0.315 |
| German Bond 2Y 0.08 10Y 1.52 | 2Y 0.10 10Y 1.51 | 2Y 0.13 10Y 1.55 | 2Y 0.16 10Y 1.64 | 2Y 0.15 10Y 1.67 | 2Y 0.15 10Y 1.66 |
| DJIA 15543.74 0.5% | 15545.55 0.0% 0.0% | 15567.74 0.2% 0.1% | 15542.24 0.0% -0.2% | 15555.61 0.1% 0.1% | 15558.83 0.1% 0.0% |
| DJ Global 2232.71 1.4% 0.2% | 2246.68 0.6% 0.6% | 2252.04 0.9% 0.2% | 2255.33 1.0% 0.1% | 2250.98 0.8% -0.2% | 2250.40 0.8% 0.0% |
| DJ Asia Pacific 1379.62 0.1% | 1391.27 0.8% 0.8% | 1402.02 1.6% 0.8% | 1399.03 1.4% -0.2% | 1391.32 0.8% -0.6% | 1384.91 0.4% -0.5% |
| Nikkei 14589.91 0.6% | 14658.04 0.5% 0.5% | 14778.51 1.3% 0.8% | 14731.28 1.0% -0.3% | 14562.93 -0.2% -1.1% | 14129.98 -3.2% -3.0% |
| Shanghai 1992.65 -2.3% | 2004.76 0.6% 0.6% | 2043.88 2.6% 1.9% | 2033.33 2.0% -0.5% | 2021.17 1.4% -0.6% | 2010.85 0.9% -0.5% |
| DAX 8331.57 1.4% | 8331.06 0.0% 0.0% | 8314.23 -0.2% -0.2% | 8379.11 0.6% 0.8% | 8298.98 -0.4% -1.0% | 8244.91 -1.0% -0.7% |
| DJ UBS Comm. 129.66 0.9% | 129.86 0.2% 0.2% | 129.68 0.0% -0.1% | 128.497 -0.9% -0.9% | 127.78 -1.4% -0.6% | 126.62 -2.3% -0.9% |
| WTI $ B 108.38 2.3% | 107.23 -1.1% -1.1% | 107.36 -0.9% 0.1% | 105.30 -2.8% -1.9% | 105.62 -2.5% 0.3% | 104.70 -3.4% -0.9% |
| Brent $/B 108.38 2.3% | 108.48 0.1% 0.1% | 108.41 0.0% -0.1% | 107.14 -1.1% -1.2% | 107.75 -0.6% 0.6% | 107.16 -1.1% -0.5% |
| Gold $/OZ 1295.5 1.4% | 1343.8 3.7% 3.7% | 1345.2 3.8% 0.1% | 1322.3 2.1% -1.7% | 1333.5 2.9% 0.8% | 1333.4 2.9% 0.0% |
Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss
Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce
Sources: http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
There is initial discussion of current and recent risk-determining events followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate.
First, risk determining events. Prior risk determining events are in an appendix below following Table III-1A. Current focus is on “tapering” quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at 0 to ¼ percent; and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Market are overreacting to the so-called “tapering” of outright purchases of $85 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent for which there is no end in sight as evident in the FOMC statement for Jun 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130619a.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. 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” (emphasis added).
In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:
“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.
The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”
Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σy and prices σp. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).
The President of the European Central Bank (ECB) Mario Draghi explained the indefinite period of low policy rates during the press conference following the meeting on Jul 4, 2013 (http://www.ecb.int/press/pressconf/2013/html/is130704.en.html):
“Yes, that is why I said you haven’t listened carefully. The Governing Council has taken the unprecedented step of giving forward guidance in a rather more specific way than it ever has done in the past. In my statement, I said “The Governing Council expects the key…” – i.e. all interest rates – “…ECB interest rates to remain at present or lower levels for an extended period of time.” It is the first time that the Governing Council has said something like this. And, by the way, what Mark Carney [Governor of the Bank of England] said in London is just a coincidence.”
The statement of the meeting of the Monetary Policy Committee of the Bank of England on Jul 4, 2013, may be leading toward the same forward guidance (http://www.bankofengland.co.uk/publications/Pages/news/2013/007.aspx):
“At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.”
A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html). Matt Jarzemsky, writing on Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14,164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14,198.10 reached on Oct 11, 2007. The DJIA closed at 15,558.83
on Fri Jul 26, 2013, which is higher by 9.8 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 9.6 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial are approaching or exceeding historical highs.
The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. There are high costs and risks of this policy because indefinite financial repression induces carry trades with high leverage, risks and illiquidity.
Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, 2012, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, 2012, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10, 2012 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24, 2012. The yield of the ten-year sovereign bond of Spain traded at 4.613 percent on Jul 26, 2013, and that of the ten-year sovereign bond of Italy at 4.408 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Diminishing aversion is captured by increase of the yield of the two- and ten-year Treasury notes and the two- and ten-year government bonds of Germany. Table III-1A provides yields of US and German governments bonds and the rate of USD/EUR. Yields of US and German government bonds decline during shocks of risk aversion and the dollar strengthens in the form of fewer dollars required to buy one euro. The yield of the US ten-year Treasury note fell from 2.202 percent on Aug 26, 2011 to 1.459 percent on Jul 20, 2012, reminiscent of experience during the Treasury-Fed accord of the 1940s that placed a ceiling on long-term Treasury debt (Hetzel and Leach 2001), while the yield of the ten-year government bond of Germany fell from 2.16 percent to 1.17 percent. In the week of Jul 26, 2013, the yield of the two-year Treasury increased to 0.315 percent and that of the ten-year Treasury to 2.565 percent while the two-year bond of Germany increased to 0.15 percent and the ten-year increased to 1.66 percent; and the dollar depreciated to USD 1.3279/EUR. The zero interest rates for the monetary policy rate of the US, or fed funds rate, induce carry trades that ensure devaluation of the dollar if there is no risk aversion but the dollar appreciates in flight to safe haven during episodes of risk aversion. Unconventional monetary policy induces significant global financial instability, excessive risks and low liquidity. The ten-year Treasury yield of 2.480 is higher than consumer price inflation of 1.8 percent in the 12 months ending in Jun 2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and.html) and the expectation of higher inflation if risk aversion diminishes. The one-year Treasury yield of 0.104 percent is well below the 12-month consumer price inflation of 1.8 percent. Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. The lower part of Table III-1A provides the same flight to government securities of the US and Germany and the USD during the financial crisis and global recession and the beginning of the European debt crisis in the spring of 2010 with the USD trading at USD 1.192/EUR on Jun 7, 2010.
Table III-1A, Two- and Ten-Year Yields of Government Bonds of the US and Germany and US Dollar/EUR Exchange rate
| US 2Y | US 10Y | DE 2Y | DE 10Y | USD/ EUR | |
| 7/26/13 | 0.315 | 2.565 | 0.15 | 1.66 | 1.3279 |
| 7/19/13 | 0.300 | 2.480 | 0.08 | 1.52 | 1.3141 |
| 7/12/13 | 0.345 | 2.585 | 0.10 | 1.56 | 1.3068 |
| 7/5/13 | 0.397 | 2.734 | 0.11 | 1.72 | 1.2832 |
| 6/28/13 | 0.357 | 2.486 | 0.19 | 1.73 | 1.3010 |
| 6/21/13 | 0.366 | 2.542 | 0.26 | 1.72 | 1.3122 |
| 6/14/13 | 0.276 | 2.125 | 0.12 | 1.51 | 1.3345 |
| 6/7/13 | 0.304 | 2.174 | 0.18 | 1.54 | 1.3219 |
| 5/31/13 | 0.299 | 2.132 | 0.06 | 1.50 | 1.2996 |
| 5/24/13 | 0.249 | 2.009 | 0.00 | 1.43 | 1.2932 |
| 5/17/13 | 0.248 | 1.952 | -0.03 | 1.32 | 1.2837 |
| 5/10/13 | 0.239 | 1.896 | 0.05 | 1.38 | 1.2992 |
| 5/3/13 | 0.22 | 1.742 | 0.00 | 1.24 | 1.3115 |
| 4/26/13 | 0.209 | 1.663 | 0.00 | 1.21 | 1.3028 |
| 4/19/13 | 0.232 | 1.702 | 0.02 | 1.25 | 1.3052 |
| 4/12/13 | 0.228 | 1.719 | 0.02 | 1.26 | 1.3111 |
| 4/5/13 | 0.228 | 1.706 | 0.01 | 1.21 | 1.2995 |
| 3/29/13 | 0.244 | 1.847 | -0.02 | 1.29 | 1.2818 |
| 3/22/13 | 0.242 | 1.931 | 0.03 | 1.38 | 1.2988 |
| 3/15/13 | 0.246 | 1.992 | 0.05 | 1.46 | 1.3076 |
| 3/8/13 | 0.256 | 2.056 | 0.09 | 1.53 | 1.3003 |
| 3/1/13 | 0.236 | 1.842 | 0.03 | 1.41 | 1.3020 |
| 2/22/13 | 0.252 | 1.967 | 0.13 | 1.57 | 1.3190 |
| 2/15/13 | 0.268 | 2.007 | 0.19 | 1.65 | 1.3362 |
| 2/8/13 | 0.252 | 1.949 | 0.18 | 1.61 | 1.3365 |
| 2/1/13 | 0.26 | 2.024 | 0.25 | 1.67 | 1.3642 |
| 1/25/13 | 0.278 | 1.947 | 0.26 | 1.64 | 1.3459 |
| 1/18/13 | 0.252 | 1.84 | 0.18 | 1.56 | 1.3321 |
| 1/11/13 | 0.247 | 1.862 | 0.13 | 1.58 | 1.3343 |
| 1/4/13 | 0.262 | 1.898 | 0.08 | 1.54 | 1.3069 |
| 12/28/12 | 0.252 | 1.699 | -0.01 | 1.31 | 1.3218 |
| 12/21/12 | 0.272 | 1.77 | -0.01 | 1.38 | 1.3189 |
| 12/14/12 | 0.232 | 1.704 | -0.04 | 1.35 | 1.3162 |
| 12/7/12 | 0.256 | 1.625 | -0.08 | 1.30 | 1.2926 |
| 11/30/12 | 0.248 | 1.612 | 0.01 | 1.39 | 1.2987 |
| 11/23/12 | 0.273 | 1.691 | 0.00 | 1.44 | 1.2975 |
| 11/16/12 | 0.24 | 1.584 | -0.03 | 1.33 | 1.2743 |
| 11/9/12 | 0.256 | 1.614 | -0.03 | 1.35 | 1.2711 |
| 11/2/12 | 0.274 | 1.715 | 0.01 | 1.45 | 1.2838 |
| 10/26/12 | 0.299 | 1.748 | 0.05 | 1.54 | 1.2942 |
| 10/19/12 | 0.296 | 1.766 | 0.11 | 1.59 | 1.3023 |
| 10/12/12 | 0.264 | 1.663 | 0.04 | 1.45 | 1.2953 |
| 10/5/12 | 0.26 | 1.737 | 0.06 | 1.52 | 1.3036 |
| 9/28/12 | 0.236 | 1.631 | 0.02 | 1.44 | 1.2859 |
| 9/21/12 | 0.26 | 1.753 | 0.04 | 1.60 | 1.2981 |
| 9/14/12 | 0.252 | 1.863 | 0.10 | 1.71 | 1.3130 |
| 9/7/12 | 0.252 | 1.668 | 0.03 | 1.52 | 1.2816 |
| 8/31/12 | 0.225 | 1.543 | -0.03 | 1.33 | 1.2575 |
| 8/24/12 | 0.266 | 1.684 | -0.01 | 1.35 | 1.2512 |
| 8/17/12 | 0.288 | 1.814 | -0.04 | 1.50 | 1.2335 |
| 8/10/12 | 0.267 | 1.658 | -0.07 | 1.38 | 1.2290 |
| 8/3/12 | 0.242 | 1.569 | -0.02 | 1.42 | 1.2387 |
| 7/27/12 | 0.244 | 1.544 | -0.03 | 1.40 | 1.2320 |
| 7/20/12 | 0.207 | 1.459 | -0.07 | 1.17 | 1.2158 |
| 7/13/12 | 0.24 | 1.49 | -0.04 | 1.26 | 1.2248 |
| 7/6/12 | 0.272 | 1.548 | -0.01 | 1.33 | 1.2288 |
| 6/29/12 | 0.305 | 1.648 | 0.12 | 1.58 | 1.2661 |
| 6/22/12 | 0.309 | 1.676 | 0.14 | 1.58 | 1.2570 |
| 6/15/12 | 0.272 | 1.584 | 0.07 | 1.44 | 1.2640 |
| 6/8/12 | 0.268 | 1.635 | 0.04 | 1.33 | 1.2517 |
| 6/1/12 | 0.248 | 1.454 | 0.01 | 1.17 | 1.2435 |
| 5/25/12 | 0.291 | 1.738 | 0.05 | 1.37 | 1.2518 |
| 5/18/12 | 0.292 | 1.714 | 0.05 | 1.43 | 1.2780 |
| 5/11/12 | 0.248 | 1.845 | 0.09 | 1.52 | 1.2917 |
| 5/4/12 | 0.256 | 1.876 | 0.08 | 1.58 | 1.3084 |
| 4/6/12 | 0.31 | 2.058 | 0.14 | 1.74 | 1.3096 |
| 3/30/12 | 0.335 | 2.214 | 0.21 | 1.79 | 1.3340 |
| 3/2/12 | 0.29 | 1.977 | 0.16 | 1.80 | 1.3190 |
| 2/24/12 | 0.307 | 1.977 | 0.24 | 1.88 | 1.3449 |
| 1/6/12 | 0.256 | 1.957 | 0.17 | 1.85 | 1.2720 |
| 12/30/11 | 0.239 | 1.871 | 0.14 | 1.83 | 1.2944 |
| 8/26/11 | 0.20 | 2.202 | 0.65 | 2.16 | 1.450 |
| 8/19/11 | 0.192 | 2.066 | 0.65 | 2.11 | 1.4390 |
| 6/7/10 | 0.74 | 3.17 | 0.49 | 2.56 | 1.192 |
| 3/5/09 | 0.89 | 2.83 | 1.19 | 3.01 | 1.254 |
| 12/17/08 | 0.73 | 2.20 | 1.94 | 3.00 | 1.442 |
| 10/27/08 | 1.57 | 3.79 | 2.61 | 3.76 | 1.246 |
| 7/14/08 | 2.47 | 3.88 | 4.38 | 4.40 | 1.5914 |
| 6/26/03 | 1.41 | 3.55 | NA | 3.62 | 1.1423 |
Note: DE: Germany
Source:
http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
http://www.federalreserve.gov/releases/h15/data.htm
Appendix: Prior Risk Determining Events. Current risk analysis concentrates on deciphering what the Federal Open Market Committee (FOMC) may decide on quantitative easing. The week of May 24 was dominated by the testimony of Chairman Bernanke to the Joint Economic Committee of the US Congress on May 22, 2013 (http://www.federalreserve.gov/newsevents/testimony/bernanke20130522a.htm), followed by questions and answers and the release on May 22, 2013 of the minutes of the meeting of the Federal Open Market Committee (FOMC) from Apr 30 to May 1, 2013 (http://www.federalreserve.gov/monetarypolicy/fomcminutes20130501.htm). Monetary policy emphasizes communication of policy intentions to avoid that expectations reverse outcomes in reality (Kydland and Prescott 1977). Jon Hilsenrath, writing on “In bid for clarity, Fed delivers opacity,” on May 23, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323336104578501552642287218.html?KEYWORDS=articles+by+jon+hilsenrath), analyzes discrepancies in communication by the Fed. The annotated chart of values of the Dow Jones Industrial Average (DJIA) during trading on May 23, 2013 provided by Hinselrath, links the prepared testimony of Chairman Bernanke at 10:AM, following questions and answers and the release of the minutes of the FOMC at 2PM. Financial markets strengthened between 10 and 10:30AM on May 23, 2013, perhaps because of the statement by Chairman Bernanke in prepared testimony (http://www.federalreserve.gov/newsevents/testimony/bernanke20130522a.htm):
“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets. Moreover, renewed economic weakness would pose its own risks to financial stability.”
In that testimony, Chairman Bernanke (http://www.federalreserve.gov/newsevents/testimony/bernanke20130522a.htm) also analyzes current weakness of labor markets:
“Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down. Moreover, nearly 8 million people are working part time even though they would prefer full-time work. High rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers' skills and--particularly relevant during this commencement season--by preventing many young people from gaining workplace skills and experience in the first place. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.”
Hilsenrath (op. cit. http://online.wsj.com/article/SB10001424127887323336104578501552642287218.html?KEYWORDS=articles+by+jon+hilsenrath) analyzes the subsequent decline of the market from 10:30AM to 10:40AM as Chairman Bernanke responded questions with the statement that withdrawal of stimulus would be determined by data but that it could begin in one of the “next few meetings.” The DJIA recovered part of the losses between 10:40AM and 2PM. The minutes of the FOMC released at 2PM on May 23, 2013, contained a phrase that troubled market participants (http://www.federalreserve.gov/monetarypolicy/fomcminutes20130501.htm): “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.” The DJIA closed at 15,387.58 on May 21, 2013 and fell to 15,307.17 at the close on May 22, 2013, with the loss of 0.5 percent occurring after release of the minutes of the FOMC at 2PM when the DJIA stood at around 15,400. The concern about exist of the Fed from stimulus affected markets worldwide as shown in declines of equity indexes in Table III-1 with delays because of differences in trading hours. This behavior shows the trap of unconventional monetary policy with no exit from zero interest rates without risking financial crash and likely adverse repercussions on economic activity.
Financial markets worldwide were affected by the reduction of policy rates of the European Central Bank (ECB) on May 2, 2013. (http://www.ecb.int/press/pr/date/2013/html/pr130502.en.html):
“2 May 2013 - Monetary policy decisions
At today’s meeting, which was held in Bratislava, the Governing Council of the ECB took the following monetary policy decisions:
- The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 0.50%, starting from the operation to be settled on 8 May 2013.
- The interest rate on the marginal lending facility will be decreased by 50 basis points to 1.00%, with effect from 8 May 2013.
- The interest rate on the deposit facility will remain unchanged at 0.00%.”
Financial markets in Japan and worldwide were shocked by new bold measures of “quantitative and qualitative monetary easing” by the Bank of Japan (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The objective of policy is to “achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The main elements of the new policy are as follows:
- Monetary Base Control. Most central banks in the world pursue interest rates instead of monetary aggregates, injecting bank reserves to lower interest rates to desired levels. The Bank of Japan (BOJ) has shifted back to monetary aggregates, conducting money market operations with the objective of increasing base money, or monetary liabilities of the government, at the annual rate of 60 to 70 trillion yen. The BOJ estimates base money outstanding at “138 trillion yen at end-2012) and plans to increase it to “200 trillion yen at end-2012 and 270 trillion yen at end 2014” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Maturity Extension of Purchases of Japanese Government Bonds. Purchases of bonds will be extended even up to bonds with maturity of 40 years with the guideline of extending the average maturity of BOJ bond purchases from three to seven years. The BOJ estimates the current average maturity of Japanese government bonds (JGB) at around seven years. The BOJ plans to purchase about 7.5 trillion yen per month (http://www.boj.or.jp/en/announcements/release_2013/rel130404d.pdf). Takashi Nakamichi, Tatsuo Ito and Phred Dvorak, wiring on “Bank of Japan mounts bid for revival,” on Apr 4, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323646604578401633067110420.html ), find that the limit of maturities of three years on purchases of JGBs was designed to avoid views that the BOJ would finance uncontrolled government deficits.
- Seigniorage. The BOJ is pursuing coordination with the government that will take measures to establish “sustainable fiscal structure with a view to ensuring the credibility of fiscal management” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Diversification of Asset Purchases. The BOJ will engage in transactions of exchange traded funds (ETF) and real estate investment trusts (REITS) and not solely on purchases of JGBs. Purchases of ETFs will be at an annual rate of increase of one trillion yen and purchases of REITS at 30 billion yen.
The European sovereign debt crisis continues to shake financial markets and the world economy. Debt resolution within the international financial architecture requires that a country be capable of borrowing on its own from the private sector. Mechanisms of debt resolution have included participation of the private sector (PSI), or “bail in,” that has been voluntary, almost coercive, agreed and outright coercive (Pelaez and Pelaez, International Financial Architecture: G7, IMF, BIS, Creditors and Debtors (2005), Chapter 4, 187-202). Private sector involvement requires losses by the private sector in bailouts of highly indebted countries. The essence of successful private sector involvement is to recover private-sector credit of the highly indebted country. Mary Watkins, writing on “Bank bailouts reshuffle risk hierarchy,” published on Mar 19, 2013, in the Financial Times (http://www.ft.com/intl/cms/s/0/7666546a-9095-11e2-a456-00144feabdc0.html#axzz2OSpbvCn8) analyzes the impact of the bailout or resolution of Cyprus banks on the hierarchy of risks of bank liabilities. Cyprus banks depend mostly on deposits with less reliance on debt, raising concerns in creditors of fixed-income debt and equity holders in banks in the euro area. Uncertainty remains as to the dimensions and structure of losses in private sector involvement or “bail in” in other rescue programs in the euro area. Alkman Granitsas, writing on “Central bank details losses at Bank of Cyprus,” on Mar 30, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324000704578392502889560768.html), analyzes the impact of the agreement with the €10 billion agreement with IMF and the European Union on the banks of Cyprus. The recapitalization plan provides for immediate conversion of 37.5 percent of all deposits in excess of €100,000 to shares of special class of the bank. An additional 22.5 percent will be frozen without interest until the plan is completed. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):
“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.
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.
An important risk event is the reduction of growth prospects in the euro zone discussed by European Central Bank President Mario Draghi in “Introductory statement to the press conference,” on Dec 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is121206.en.html):
“This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.
The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”
Reuters, writing on “Bundesbank cuts German growth forecast,” on Dec 7, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/8e845114-4045-11e2-8f90-00144feabdc0.html#axzz2EMQxzs3u), informs that the central bank of Germany, Deutsche Bundesbank reduced its forecast of growth for the economy of Germany to 0.7 percent in 2012 from an earlier forecast of 1.0 percent in Jun and to 0.4 percent in 2012 from an earlier forecast of 1.6 percent while the forecast for 2014 is at 1.9 percent.
The major risk event during earlier weeks was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 and 5.366 percent for the ten-year of Spain and 4.527 percent for the ten-year of Italy on Fri Nov 14, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Vanessa Mock and Frances Robinson, writing on “EU approves Spanish bank’s restructuring plans,” on Nov 28, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578146520774638316.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the European Union regulators approved restructuring of four Spanish banks (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia), which helped to calm sovereign debt markets. Harriet Torry and James Angelo, writing on “Germany approves Greek aid,” on Nov 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578150532603095790.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the German parliament approved the plan to provide Greece a tranche of €44 billion in promised financial support, which is subject to sustainability analysis of the bond repurchase program later in Dec 2012. A hurdle for sustainability of repurchasing debt is that Greece’s sovereign bonds have appreciated significantly from around 24 percent for the bond maturing in 21 years and 20 percent for the bond maturing in 31 years in Aug 2012 to around 17 percent for the 21-year maturity and 15 percent for the 31-year maturing in Nov 2012. Declining years are equivalent to increasing prices, making the repurchase more expensive. Debt repurchase is intended to reduce bonds in circulation, turning Greek debt more manageable. Ben McLannahan, writing on “Japan unveils $11bn stimulus package,” on Nov 30, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/adc0569a-3aa5-11e2-baac-00144feabdc0.html#axzz2DibFFquN), informs that the cabinet in Japan approved another stimulus program of $11 billion, which is twice larger than another stimulus plan in late Oct and close to elections in Dec. Henry Sender, writing on “Tokyo faces weak yen and high bond yields,” published on Nov 29, 2012 in the Financial Times (http://www.ft.com/intl/cms/s/0/9a7178d0-393d-11e2-afa8-00144feabdc0.html#axzz2DibFFquN), analyzes concerns of regulators on duration of bond holdings in an environment of likelihood of increasing yields and yen depreciation.
First, Risk-Determining Events. The European Council statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:
“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”
Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.
There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.
(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):
“6 September 2012 - Technical features of Outright Monetary Transactions
As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:
Conditionality
A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of Outright Monetary Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be fully sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.
Securities Markets Programme
Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”
Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):
“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.
Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):
“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.
The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”
Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).
Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year, two-year, one-month Treasury constant maturity yields together with the overnight fed funds rate, and the yield of the corporate bond with Moody’s rating of Baa. The riskier yield of the Baa corporate bond exceeds the relatively riskless yields of the Treasury securities. The beginning yields in Chart III-1A for July 31, 2001, are 3.67 percent for one month, 3.79 percent for two years, 5.07 percent for ten years, 3.82 percent for the fed funds rate and 7.85 percent for the Baa corporate bond. On July 30, 2007, yields inverted with the one month at 4.95 percent, the two-year at 4.59 percent and the ten year at 5.82 percent with the yield of the Baa corporate bond at 6.70 percent. Another interesting point is for Oct 31, 2008, with the yield of the Baa jumping to 9.54 percent and the Treasury yields declining: one month 0.12 percent, two years 1.56 percent and ten years 4.01 percent during a flight to the dollar and government securities analyzed by Cochrane and Zingales (2009). Another spike in the series is for Apr 4, 2006 with the yield of the corporate Baa bond at 8.63 and the Treasury yields of 0.12 percent for one month, 0.94 for two years and 2.95 percent for ten years. During the beginning of the flight from risk financial assets to US government securities (see Cochrane and Zingales 2009), the one-month yield was 0.07 percent, the two-year yield 1.64 percent and the ten-year yield 3.41. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe. The final point of Chart III1-A is for Jul 25, 2013, with the one-month yield at 0.02 percent, the two-year at 0.32 percent, the ten-year at 2.65 percent, the fed funds rate at 0.09 percent and the corporate Baa bond at 5.30 percent. There is an evident increase in the yields of the 10-year Treasury constant maturity and the Moody’s Baa corporate bond.
Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields, Overnight Fed Funds Rate and Yield of Moody’s Baa Corporate Bond, Jul 31, 2001-Jul 25, 2013
Note: US Recessions in shaded areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/
Alexandra Scaggs, writing on “Tepid profits, roaring stocks,” on May 16, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323398204578487460105747412.html), analyzes stabilization of earnings growth: 70 percent of 458 reporting companies in the S&P 500 stock index reported earnings above forecasts but sales fell 0.2 percent relative to forecasts of increase of 0.5 percent. Paul Vigna, writing on “Earnings are a margin story but for how long,” on May 17, 2013, published in the Wall Street Journal (http://blogs.wsj.com/moneybeat/2013/05/17/earnings-are-a-margin-story-but-for-how-long/), analyzes that corporate profits increase with stagnating sales while companies manage costs tightly. More than 90 percent of S&P components reported moderate increase of earnings of 3.7 percent in IQ2013 relative to IQ2012 with decline of sales of 0.2 percent. Earnings and sales have been in declining trend. In IVQ2009, growth of earnings reached 104 percent and sales jumped 13 percent. Net margins reached 8.92 percent in IQ2013, which is almost the same at 8.95 percent in IIIQ2006. Operating margins are 9.58 percent. There is concern by market participants that reversion of margins to the mean could exert pressure on earnings unless there is more accelerated growth of sales. Vigna (op. cit.) finds sales growth limited by weak economic growth. Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. Future company cash flows derive from investment projects. Real private fixed investment fell from $2,111.5 billion in IVQ2007 to $1920.4 billion in IQ2013 or by 9.1 percent compared with growth of 24.1 percent of gross private domestic investment from IQ1980 to IVQ1985 (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html). Undistributed profits of US corporations swelled 306.9 percent from $118.0 billion IQ2007 to $480.2 billion in IQ2013 and changed signs from minus $22.1 billion in IVQ2007 (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html). Corporate profits with inventory valuation and capital consumption adjustment fell $27.8 billion relative to IVQ2012 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp1q13_3rd.pdf), from $2013.0 billion in IVQ2012 to $1985.2 billion in IQ2013 at the quarterly rate of minus 1.4 percent. Uncertainty originating in fiscal, regulatory and monetary policy causes wide swings in expectations and decisions by the private sector with adverse effects on investment, real economic activity and employment. The investment decision of US business is fractured. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:
![clip_image001[1]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjV9x5CBEhMfa_qtcEse45qHJ0m_qaehlku-SzpgaWC4e0uX9AGjCwZrYI5_46OQKqWrqvIoxCgtvLYaPkG8JeV9T0OxGPkO392L5MT6OFcHAFrt7QK_5ZceoXC_ASZowfHT-gsapxwccI/s1600-h/clip_image001%25255B1%25255D%25255B2%25255D.gif "clip_image001[1]"){kind=small}
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
declines.
There was mixed performance in equity indexes with several indexes in Table III-1 increasing in the week ending on Jul 19, 2013, after wide swings caused by reallocations of investment portfolios worldwide. Stagnating revenues, corporate cash hoarding and declining investment are causing reevaluation of discounted net earnings with deteriorating views on the world economy and United States fiscal sustainability but investors have been driving indexes higher. DJIA changed 0.0 percent on Jul 26, increasing 0.1 percent in the week. Germany’s Dax decreased 0.7 percent on Fri Jul 26 and decreased 1.0 percent in the week. Dow Global changed 0.0 percent on Jul 26 and increased 0.8 percent in the week. Japan’s Nikkei Average decreased 3.0 percent on Fri Jul 26 and decreased 3.2 percent in the week as the yen continues to be oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration and monetary stimulus by a new board of the Bank of Japan. Dow Asia Pacific TSM decreased 0.5 percent on Jul 16 and increased 0.4 percent in the week. Shanghai Composite that decreased 0.2 percent on Mar 8 and decreased 1.7 percent in the week of Mar 8, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2010.85 on Fri Jul 26 for decrease of 0.5 percent and increase of 0.9 percent in the week of Jul 19. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.
Commodities were mixed in the week of Jul 26, 2013. The DJ UBS Commodities Index decreased 0.9 percent on Fri Jul 26 and increased 2.3 percent in the week, as shown in Table III-1. WTI decreased 3.4 percent in the week of Jul 26 while Brent decreased 1.1 percent in the week. Gold changed 0.0 percent on Fri Jul 26 and increased 2.9 percent in the week.
Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the long-term refinancing operations (LTROs). Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increased from €546,747 million on Dec 31, 2010, to €879,130 million on Dec 28, 2011 and €804,371 million on Jul 19, 2013 with some repayment of loans already occurring. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has reached €1,410.935 million in the statement of Jul 19, 2013, with marginal reduction. There is high credit risk in these transactions with capital of only €90,396 million as analyzed by Cochrane (2012Aug31).
Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR
| Dec 31, 2010 | Dec 28, 2011 | Jul 19, 2013 | |
| 1 Gold and other Receivables | 367,402 | 419,822 | 319,968 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 | 247,212 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 | 26,181 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 | 20,742 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 | 804,371 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 | 88,336 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 | 606,564 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 | 28,356 |
| 9 Other Assets | 278,719 | 336,574 | 257,230 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 | 2,398,959 |
| Memo Items | |||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 | 1,410,935 |
| Capital and Reserves | 78,143 | 81,481 | 90,396 |
Source: European Central Bank
http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html
http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html
http://www.ecb.int/press/pr/wfs/2013/html/fs130723.en.html
IIIE Appendix Euro Zone Survival Risk. Resolution of the European sovereign debt crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surpluses that ensure creditworthiness. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. Growth of the Italian economy would ensure that success. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surpluses that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU), or euro area, are only 40.5 percent of the total in Jan-May 2013. Exports to the non-European Union area with share of 46.3 percent in Italy’s total exports are growing at 4.2 percent in Jan-May 2013 relative to Jan-May 2012 while those to EMU are growing at minus 4.0 percent.
Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Apr 2013 | Exports | ∆% Jan-May 2013/ Jan-May 2012 | Imports | ∆% Jan-May 2013/ Jan-May 2012 |
| EU | 53.7 | -3.2 | 52.9 | -3.0 |
| EMU 17 | 40.5 | -4.0 | 42.7 | -3.0 |
| France | 11.1 | -2.8 | 8.3 | -6.5 |
| Germany | 12.5 | -4.7 | 14.6 | -7.5 |
| Spain | 4.7 | -8.2 | 4.4 | -2.2 |
| UK | 4.9 | -0.2 | 2.5 | -2.2 |
| Non EU | 46.3 | 4.2 | 47.1 | -11.8 |
| Europe non EU | 13.9 | 1.4 | 11.3 | 7.4 |
| USA | 6.8 | -1.3 | 3.3 | -19.1 |
| China | 2.3 | 5.0 | 6.5 | -8.2 |
| OPEC | 5.7 | 13.0 | 10.8 | -27.2 |
| Total | 100.0 | 0.1 | 100.0 | -7.2 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/95677
Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €454 million with the 17 countries of the euro zone (EMU 17) in May 2013 and cumulative deficit of €2065 million in Jan-May 2013. Depreciation to parity could permit greater competitiveness in improving the trade surplus of €2687 million in Jan-May 2013 with Europe non European Union, the trade surplus of €6260 million with the US and trade surplus with non-European Union of €5526 million in Jan-May 2013. There is significant rigidity in the trade deficits in Jan-May 2013 of €5821 million with China and €3683 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 May 2013 Millions of Euro | Trade Balance Cumulative Jan-May 2013 Millions of Euro |
| EU | 890 | 3,114 |
| EMU 17 | -454 | -2,065 |
| France | 1,042 | 5,127 |
| Germany | -342 | -2,049 |
| Spain | 53 | 369 |
| UK | 762 | 3,599 |
| Non EU | 3,005 | 5,526 |
| Europe non EU | 738 | 2,687 |
| USA | 1,817 | 6,260 |
| China | -1,116 | -5,821 |
| OPEC | -64 | -3,683 |
| Total | 3,895 | 8,640 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/95677
Growth rates of Italy’s trade and major products are in Table III-5 for the period Jan-May 2013 relative to Jan-May 2012. Growth rates of cumulative imports relative to a year earlier are negative for energy with minus 19.4 percent and minus 11.4 percent for durable goods. The higher rate of growth of exports of 0.1 percent in Jan-May 2013/Jan-May 2012 relative to imports of minus 7.2 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 | Exports | Imports | Imports | |
| Consumer | 29.3 | 7.1 | 25.6 | 0.6 |
| Durable | 5.8 | 1.4 | 2.9 | -11.4 |
| Non-Durable | 23.5 | 8.6 | 22.7 | 2.2 |
| Capital Goods | 31.6 | 0.1 | 19.5 | -8.3 |
| Inter- | 33.6 | -3.0 | 32.6 | -4.0 |
| Energy | 5.5 | -16.6 | 22.3 | -19.4 |
| Total ex Energy | 94.5 | 1.1 | 77.7 | -3.7 |
| Total | 100.0 | 0.1 | 100.0 | -7.2 |
Note: % Share for 2012 total trade.
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/95677
Table VG-4 provides Italy’s trade balance by product categories in May 2013 and cumulative Jan-May 2013. Italy’s trade balance excluding energy generated surplus of €7807 million in May 2013 and €31,731 million cumulative in Jan-May 2013 but the energy trade balance created deficit of €3911 million in May 2013 and cumulative €22,731 million in Jan-May 2013. The overall surplus in May 2013 was €3895 million with cumulative surplus of €8640 million in Jan-May 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
| May 2013 | Cumulative Jan-May 2013 | |
| Consumer Goods | 1,712 | 8,244 |
| Durable | 1,125 | 5,168 |
| Nondurable | 587 | 3,076 |
| Capital Goods | 5,366 | 20,753 |
| Intermediate Goods | 729 | 2,374 |
| Energy | -3,911 | -22,731 |
| Total ex Energy | 7,807 | 31,731 |
| Total | 3,895 | 8,640 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/95677
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 | Primary Net Lending Borrowing | General Government Net Debt | |
| 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 May 2013. German exports to other European Union (EU) members are 56.7 percent of total exports in May 2013 and 57.2 percent in cumulative Jan-May 2013. Exports to the euro area are 36.6 percent in May and 37.4 percent cumulative in Jan-May. Exports to third countries are 43.3 percent of the total in May and 42.8 percent cumulative in Jan-May. There is similar distribution for imports. Exports to non-euro countries are decreasing 2.4 percent in the 12 months ending in May 2013, increasing 0.9 percent cumulative in Jan-May 2013 while exports to the euro area are decreasing 9.6 percent in the 12 months ending in May 2013, and decreasing 3.6 percent cumulative in Jan-May 2013. Exports to third countries, accounting for 43.3 percent of the total in May 2013, are decreasing 1.6 percent in the 12 months ending in May 2013 and increasing 2.2 percent cumulative in Jan-May 2013, accounting for 42.8 percent of the cumulative total in Jan-May 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 ∆%
| May 2013 | May 12-Month | Cumulative Jan-May 2012 € Billions | Cumulative Jan-May 2013/ | |
| Total | 88.2 | -4.8 | 454.3 | -0.3 |
| A. EU | 50.0 % 56.7 | -7.1 | 259.9 % 57.2 | -2.1 |
| Euro Area | 32.3 % 36.6 | -9.6 | 169.8 % 37.4 | -3.6 |
| Non-euro Area | 17.7 % 20.1 | -2.4 | 90.1 % 19.8 | 0.9 |
| B. Third Countries | 38.2 % 43.3 | -1.6 | 194.4 % 42.8 | 2.2 |
| Total Imports | 75.2 | -2.6 | 374.0 | -1.7 |
| C. EU Members | 49.1 % 65.3 | -0.7 | 242.0 % 64.7 | 0.3 |
| Euro Area | 34.6 % 46.0 | -0.5 | 169.0 % 45.2 | -0.7 |
| Non-euro Area | 14.4 % 19.1 | -1.3 | 73.1 % 19.5 | 2.5 |
| D. Third Countries | 26.1 % 34.7 | -5.9 | 132.0 % 35.3 | -5.0 |
Notes: Total Exports = A+B; Total Imports = C+D
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/PressServices/Press/pr/2013/07/PE13_224_51.html
IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.
First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:
D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)
Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,
{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:
N(t+1) = (1+n)N(t), n>-1 (2)
The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:
B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)
On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.
Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (5)
Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):
“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”
An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.
There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:
(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress
(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality
(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.
IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.
Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 1.6 | 1.8 | 2.5 | 7.6 |
| Japan | 0.4 | 0.2 | 1.2 | 4.1 |
| China | 7.5 | 2.7 | -2.7 | |
| UK | 1.4 | 2.9* CPIH 2.7 | 2.0 output | 7.8 |
| Euro Zone | -1.1 | 1.6 | -0.1 | 12.1 |
| Germany | -0.3 | 1.9 | 0.2 | 5.3 |
| France | -0.4 | 1.0 | -0.2 | 10.4 |
| Nether-lands | -1.4 | 3.2 | -1.2 | 6.6 |
| Finland | -2.2 | 2.3 | 0.7 | 8.4 |
| Belgium | -0.6 | 1.5 | 0.8 | 8.6 |
| Portugal | -4.0 | 1.2 | 0.9 | 17.6 |
| Ireland | NA | 0.7 | 0.7 | 13.6 |
| Italy | -2.4 | 1.4 | -1.1 | 12.2 |
| Greece | -5.6 | -0.3 | -0.9 | NA |
| Spain | -2.0 | 2.2 | 0.8 | 26.9 |
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/june-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 1.6 percent in IQ2013 relative to IQ2012 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp1q13_3rd.pdf http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html). Japan’s GDP grew 0.1 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 4.1 percent in IQQ2013 (http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html and earlier http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html). The UK grew at 0.6 percent in IIQ2013 relative to IQ2013 and GDP increased 1.4 percent in IIQ2013 relative to IIQ2012 (Section VH and earlier http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html). The Euro Zone grew at minus 0.3 percent in IQ2013 and minus 1.1 percent in IQ2013 relative to IQ2012 (http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/twenty-eight-million-unemployed-or.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: 7.6 percent in the US but 17.7 percent for unemployment/underemployment or job stress of 28.7 million (http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/twenty-eight-million-unemployed-or.html), 4.1 percent for Japan (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html
and earlier http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html), 7.8 percent for the UK with high rates of unemployment for young people (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.8 percent in the US, 0.2 percent for Japan, 2.7 percent for China, 1.6 percent for the Euro Zone and 2.9 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/2013/07/tapering-quantitative-easing-policy-and.html). (2) The tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition. (3) Slow growth by repression of savings with de facto interest rate controls (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html), weak hiring with the loss of 10 million full-time jobs (http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html
and earlier http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/twenty-eight-million-unemployed-or.html); (4) The timing, dose, impact and instruments of normalizing monetary and fiscal policies (see http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies. (5) The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.
In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.
Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):
“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.
Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.
The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”
Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:
“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”
The Federal Open Market Committee (FOMC) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):
“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.
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 around 1.8 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 rate (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.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/2013/06/tapering-quantitative-easing-policy-and.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 195,000 in Jun 2013 and private payroll employment rose 202,000. The average number of nonfarm jobs created in Jan-Jun 2012 was 185,167 while the average number of nonfarm jobs created in Jan-Jun 2013 was 201,833, or increase by 9.0 percent. The average number of private jobs created in the US in Jan-Jun 2012 was 191,000 while the average in Jan-Jun 2013 was 205,667, or increase by 7.7 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 five months from Jan to Jun 2013 was 201,833, 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 28.7 million unemployed or underemployed. The difference between the average increase of 201,833 new private nonfarm jobs per month in the US from Jan to Jun 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 88,666 monthly new jobs net of absorption of new entrants in the labor force. There are 28.7 million in job stress in the US currently. Creation of 88,666 new jobs per month net of absorption of new entrants in the labor force would require 324 months to provide jobs for the unemployed and underemployed (28.736 million divided by 88,666) or 27 years (324 divided by 12). The civilian labor force of the US in Jun 2013 not seasonally adjusted stood at 157.089 million with 12.248 million unemployed or effectively 17.714 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 162.555 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 88,666 by 12, which is 1,063,992). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.854 million (0.05 times labor force of 157.089 million) for new net job creation of 4.394 million (12.248 million unemployed minus 7.854 million unemployed at rate of 5 percent) that at the current rate would take 4.1 years (4.394 million divided by 1.063992). Under the calculation in this blog, there are 17.714 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 162.555 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 9.586 million jobs net of labor force growth that at the current rate would take 9.0 years (17.714 million minus 0.05(162.555 million) = 9.586 million divided by 1.063992, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in the US fell from 147.315 million in Jul 2007 to 144.841 million in Jun 2013, by 2.474 million, or decline of 1.7 percent, while the noninstitutional population increased from 231.958 million in Jul 2007 to 245.552 million in Jun 2013, by 13.594 million or increase of 5.9 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 1.8 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 1.8 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 percent {[(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 1.8 percent to one quarter is 0.44 percent {[(1.018)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 1.0044) - 1]100 = 4.2%}. This is equivalent to growth from IQ2011 to IQ2013 obtained by dividing the seasonally-adjusted annual rate (SAAR) of IQ2013 of $13,725.7 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 = 4.1%}. The growth rate in annual equivalent for the four quarters of 2011, the four quarters of 2012 and the first quarter of 2013 is 1.8 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 1.0044)4/9 -1]100 = 1.8%], or {[($13,725.7/$13,181.2)]4/9-1]100 = 1.8%} 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 Jun 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130619a.htm):
“Release Date: June 19, 2013
For immediate release
Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further 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. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but 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 sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. 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; 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 James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and 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.”
Current focus is on tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at 0 to ¼ percent; and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Market are overreacting to the so-called “paring” of outright purchases of $85 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent for which there is no end in sight as evident in the FOMC statement for Jun 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130619a.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. 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” (emphasis added).
In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:
“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.
The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”
Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σy and prices σp. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).
The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. Indefinite financial repression induces carry trades with high leverage, risks and illiquidity.
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/2013/06/tapering-quantitative-easing-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html) and the PCE inflation data from the report on personal income and outlays in Section IV (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html). The Bureau of Economic Analysis (BEA) provides the third estimate of IQ2013 GDP with the first estimate for IIQ2013 to be released on Jul 31 with revisions since 1929 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm See Section I (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in Section IV (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html). The next report on “Personal Income and Outlays” for Jun will be released at 8:30 AM on Aug 2, 2013 with revisions from 1959 to May 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 Jun 2013 was released on Jul 5 and analyzed in this blog (http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/twenty-eight-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, 2013 and the second row “PR” the projection of the Jun 19, 2013 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 2.8 percent at the meeting in Mar 2013 to 2.3 to 2.6 percent at the meeting on Jun 20, 2013. The FOMC increased GDP growth in 2014 from 2.9 to 3.4 percent at the meeting in Mar 2013 to 3.0 to 3.5 percent at the meeting in Jun 2013.
2. Rate of Unemployment “UNEM%.” The FOMC reduced the forecast of the rate of unemployment from 7.3 to 7.5 percent at the meeting on Mar 20, 2013 to 7.2 to 7.3 percent at the meeting on Jun 19, 2013. The projection for 2014 decreased to the range of 6.5 to 6.8 in Jun 2013 from 6.7 to 7.0 in Mar 2013. Projections of the rate of unemployment are moving closer to the desire 6.5 percent or lower with 5.8 to 6.2 percent in 2015 after the meeting on Jun 19, 2013.
3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.3 to 1.7 percent at the meeting on Mar 20, 2012 to 0.8 to 1.2 percent at the meeting on Jun 19, 2013. There are no projections exceeding 2.0 percent.
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 1.5 to 1.6 percent at the meeting on Mar 20, 2013 to 1.2 to 1.3 percent at the meeting on Jun 19, 2013.
Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, Mar 2013 and Jun 19, 2013
| ∆% GDP | UNEM % | ∆% PCE Inflation | ∆% Core PCE Inflation | |
| Central | ||||
| 2013 | 2.3 to 2.6 | 7.2 to 7.3 | 0.8 to 1.2 | 1.2 to 1.3 1.5 to 1.6 |
| 2014 | 3.0 to 3.5 | 6.5 to 6.8 | 1.4 to 2.0 | 1.5 to 1.8 |
| 2015 Mar PR | 2.9 to 3.6 2.9 to 3.7 | 5.8 to 6.2 6.0 to 6.5 | 1.6 to 2.0 1.7 to 2.0 | 1.7 to 2.0 1.8 to 2.1 |
| Longer Run Mar 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 | 2.0 to 2.6 | 6.9 to 7.5 | 0.8 to 1.5 | 1.1 to 1.5 |
| 2014 | 2.2 to 3.6 | 6.2 to 6.9 | 1.4 to 2.0 | 1.5 to 2.1 |
| 2015 Mar PR | 2.3 to 3.8 2.5 to 3.8 | 5.7 to 6.4 5.7 to 6.5 | 1.6 to 2.3 1.6 to 2.6 | 1.7 to 2.3 1.7 to 2.6 |
| Longer Run Mar PR | 2.0 to 3.0 2.0 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/fomcprojtabl20130619.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 2013, 2014, 2015 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 15 participants with three expecting the rate to be in the range of 0.5 to 1.0 percent and one participant expecting rates at 1.0 to 1.5 percent. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014. For 2015, six participants expect rates to be below or at 1.0 percent while nine expect rates from 1.0 to 1.5 percent and four expecting rates in excess of 2.0 percent. In the long term, 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, Jun 19, 2013
| 0 to 0.25 | 0.5 to 1.0 | 1.0 to 1.5 | 1.0 to 2.0 | 2.0 to 3.0 | 3.0 to 4.5 | |
| 2013 | 18 | 1 | ||||
| 2014 | 15 | 3 | 1 | |||
| 2015 | 1 | 5 | 9 | 1 | 3 | |
| Longer Run | 19 |
Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.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. The FOMC states that rates will continue to be low even after return of the economy to potential growth.
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 19, 2013
| Appropriate Year of Increasing Target Fed Funds Rate | Number of Participants |
| 2013 | 1 |
| 2014 | 3 |
| 2015 | 14 |
| 2016 | 1 |
Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.pdf
Unconventional monetary policy of zero interest rates and quantitative easing has been used in Japan and now also in the US. Table IV-5 provides the consumer price index of Japan, with inflation of 0.2 percent in 12 months ending in Jun 2013 and change of 0.0 percent NSA (not-seasonally-adjusted) in Jun 2013. Inflation of consumer prices in the first three months of 2012 annualizes at 0.0 percent NSA. Inflation in Mar-Jun 2013 not seasonally adjusted annualizes at 1.6 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 five months of 2013 are negative. Inflation in the 12 months ending in Jun 2013 was 0.2 percent. 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-5, minus 0.4 percent in 2009 but following 3.8 percent in 2008 because of carry trades from policy rates moving to zero in 2008 during a global contraction that were reversed because of risk aversion in late 2008 and early 2009, causing decreasing commodity prices. Both the US and Japan experienced high rates of inflation during the US Great Inflation of the 1970s (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). It is difficult to justify unconventional monetary policy because of risks of deflation similar to that experienced in Japan. Fear of deflation as had occurred during the Great Depression and in Japan was used as an argument for the first round of unconventional monetary policy with 1 percent interest rates from Jun 2003 to Jun 2004 and quantitative easing in the form of withdrawal of supply of 30-year securities by suspension of the auction of 30-year Treasury bonds with the intention of reducing mortgage rates. For fear of deflation, see Pelaez and Pelaez, International Financial Architecture (2005), 18-28, and Pelaez and Pelaez, The Global Recession Risk (2007), 83-95. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html
Table IV-5, Japan, Consumer Price Index, All Items ∆%
| ∆% Month NSA | ∆% 12-Month NSA | |
| Jun 2013 | 0.0 | 0.2 |
| May | 0.1 | -0.3 |
| Apr | 0.3 | -0.7 |
| Mar | 0.2 | -0.9 |
| Feb | -0.2 | -0.7 |
| Jan | 0.0 | -0.3 |
| Dec 2012 | 0.0 | -0.1 |
| Nov | -0.4 | -0.2 |
| Oct | 0.0 | -0.4 |
| Sep | 0.1 | -0.3 |
| Aug | 0.1 | -0.4 |
| Jul | -0.3 | -0.4 |
| Jun | -0.5 | -0.2 |
| May | -0.3 | 0.2 |
| Apr | 0.1 | 0.4 |
| Mar | 0.5 | 0.5 |
| Feb | 0.2 | 0.3 |
| Jan | 0.2 | 0.1 |
| Dec 2011 | 0.0 | -0.2 |
| Nov | -0.6 | -0.5 |
| Oct | 0.1 | -0.2 |
| Sep | 0.0 | 0.0 |
| Aug | 0.1 | 0.2 |
| Jul | 0.0 | 0.2 |
| Jun | -0.2 | -0.4 |
| May | 0.0 | -0.4 |
| Apr | 0.1 | -0.5 |
| Mar | 0.3 | -0.5 |
| Feb | 0.0 | -0.5 |
| Jan | -0.1 | -0.6 |
| Dec 2010 | –0.3 | 0.0 |
| CPI All Items USA | CPI All Items Japan | |
| Annual | ||
| 2012 | 2.1 | 0.0 |
| 2011 | 3.2 | -0.3 |
| 2010 | 1.6 | -0.7 |
| 2009 | -0.4 | -1.4 |
| 2008 | 3.8 | 1.4 |
| 2007 | 2.8 | 0.0 |
| 2006 | 3.2 | 0.3 |
| 2005 | 3.4 | -0.3 |
| 2004 | 2.7 | 0.0 |
| 2003 | 2.3 | -0.3 |
| 2002 | 1.6 | -0.9 |
| 2001 | 2.8 | -0.7 |
| 2000 | 3.4 | -0.7 |
| 1999 | 2.2 | -0.3 |
| 1998 | 1.6 | 0.6 |
| 1997 | 2.3 | 1.8 |
| 1996 | 3.0 | 0.1 |
| 1995 | 2.8 | -0.1 |
| 1994 | 2.6 | 0.7 |
| 1993 | 3.0 | 1.3 |
| 1992 | 3.0 | 1.6 |
| 1991 | 4.2 | 3.3 |
| 1990 | 5.4 | 3.1 |
| 1989 | 4.8 | 2.3 |
| 1988 | 4.1 | 0.7 |
| 1987 | 3.6 | 0.1 |
| 1986 | 1.9 | 0.6 |
| 1985 | 3.6 | 2.0 |
| 1984 | 4.3 | 2.3 |
| 1983 | 3.2 | 1.9 |
| 1982 | 6.2 | 2.8 |
| 1981 | 10.3 | 4.9 |
| 1980 | 13.5 | 7.7 |
| 1979 | 11.3 | 3.7 |
| 1978 | 7.6 | 4.2 |
| 1977 | 6.5 | 8.1 |
| 1976 | 5.8 | 9.4 |
| 1975 | 9.1 | 11.7 |
| 1974 | 11.0 | 23.2 |
| 1973 | 6.2 | 11.7 |
| 1972 | 3.2 | 4.9 |
| 1971 | 4.4 | 6.3 |
Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications
http://www.stat.go.jp/english/data/cpi/index.htm
Japan provides the consumer price index for all items and regions of Japan monthly from 1971 to 2013 with 2010=100, shown in Chart IV-1. There was inflation in Japan during the 1970s and 1980s similar to other countries and regions. The index shows stability after the 1990s with sporadic cases of deflation. Slower growth with sporadic inflation has been characterized as a “lost decade” in Japan (see Pelaez and Pelaez, The Global Recession Risk (2007), 82-115).
Chart IV-1, Japan, Consumer Price Index All Items, All Japan, Index 2010=100, Monthly, 1970-2013
Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications
http://www.stat.go.jp/english/data/cpi/index.htm
Chart IV-2 provides the US consumer price index NSA from 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-2, US, Consumer Price Index, All Items, NSA, 1914-2013
Source: US Bureau of Labor Statistics
Chart IV-3 of the Statistics Bureau of the Ministry of Internal Affairs and Communications of Japan provides 12-month percentage changes of the consumer price index for all items and regions of Japan monthly from 1971 to 2013. Japan experienced the same inflation waves of the United States during the Great Inflation of the 1970s followed by similar low inflation after the inflation-control increase of interest rates in the early 1980s. Numerous cases of negative inflation or deflation are observed after the 1990s.
Chart IV-3, Japan, CPI All Items, All Japan, 12-Month ∆%, 1971-2013
Sources: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications
http://www.stat.go.jp/english/data/cpi/index.htm
Chart IV-4 provides 12-month percentage changes of the US consumer price index from 1914 to 2013. There are actually three waves of inflation in the second half of the 1960s, in the mid 1970s and again in the late 1970s. Table IV-3 provides similar inflation waves in the economy of Japan with 11.8 percent in 1973, 23.1 percent in 1974 and 11.8 percent in 1975. The Great Inflation of the 1970s is analyzed in various comments of this blog (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and in Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). Inflation rates then stabilized in the US in a range with only two episodes above 5 percent. There are isolated cases of deflation concentrated over extended periods only during the 1930s. There is no case in United States economic history for unconventional monetary policy because of fear of deflation. There are cases of long-term deflation without lost decades or depressions.
Delfim Netto (1958) partly reprinted in Pelaez (1973) conducted two classical nonparametric tests (Mann 1945, Wallis and Moore 1941; see Kendall and Stuart 1968) with coffee-price data in the period of free markets from 1857 to 1906 with the following conclusions (Pelaez, 1976a, 280):
“First, the null hypothesis of no trend was accepted with high confidence; secondly, the null hypothesis of no oscillation was rejected also with high confidence. Consequently, in the nineteenth century international prices of coffee fluctuated but without long-run trend. This statistical fact refutes the extreme argument of structural weakness of the coffee trade.”
The conventional theory that the terms of trade of Brazil deteriorated over the long term is without reality (Pelaez 1976a, 280-281):
“Moreover, physical exports of coffee by Brazil increased at the high average rate of 3.5 per cent per year. Brazil's exchange receipts from coffee-exporting in sterling increased at the average rate of 3.5 per cent per year and receipts in domestic currency at 4.5 per cent per year. Great Britain supplied nearly all the imports of the coffee economy. In the period of the free coffee market, British export prices declined at the rate of 0.5 per cent per year. Thus, the income terms of trade of the coffee economy improved at the relatively satisfactory average rate of 4.0 per cent per year. This is only a lower bound of the rate of improvement of the terms of trade. While the quality of coffee remained relatively constant, the quality of manufactured products improved significantly during the fifty-year period considered. The trade data and the non-parametric tests refute conclusively the long-run hypothesis. The valid historical fact is that the tropical export economy of Brazil experienced an opportunity of absorbing rapidly increasing quantities of manufactures from the "workshop" countries. Therefore, the coffee trade constituted a golden opportunity for modernization in nineteenth-century Brazil.”
Imlah (1958) provides decline of British export prices at 0.5 percent in the nineteenth century and there were no lost decades, depressions or unconventional monetary policies in the highly dynamic economy of England that provided the world’s growth impulse. The experience of the United Kingdom with deflation and economic growth is relevant and rich. Yearly percentage changes of the composite index of prices of the United Kingdom of O’Donoghue and Goulding (2004) provide strong evidence. There are 73 declines of inflation in the 145 years from 1751 to 1896. Prices declined in 50.3 percent of 145 years. Some price declines were quite sharp and many occurred over several years. O’Donoghue and Goulding (2004) also provide inflation data for the UK from 1929 to 1934. Deflation was much sharper in continuous years in earlier periods than during the Great Depression. The United Kingdom could not have led the world in modern economic growth if there were meaningful causality from deflation to depression.
Chart IV-4, US, Consumer Price Index, All Items, NSA, 12-Month Percentage Change 1914-2013
Source: US Bureau of Labor Statistics
Chart IV-5 provides the US consumer price index excluding food and energy from 1957 (when it first becomes available) to 2013. There is long-term inflation in the US without episodes of deflation that would justify symmetric inflation targets to increase inflation from low levels.
Chart IV-5, US, Consumer Price Index Excluding Food and Energy, NSA, 1957-2013
Source: US Bureau of Labor Statistics
Chart IV-6 provides 12-month percentage changes of the consumer price index excluding food and energy from 1958 (when it first becomes available) to 2013. There are three waves of inflation in the 1970s during the Great Inflation. There is no episode of deflation.
Chart IV-6, US, Consumer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 1958-2013
Source: US Bureau of Labor Statistics
More detail on the consumer price index of Japan in Apr is in Table IV-6. Items rich in commodities, such as 5.7 percent in fuel, light and water charges with increase of 1.0 percent in the month of Jun, have driven inflation in the 12 months ending in Jun 2013. There is similar behavior in the preliminary estimate for Jul for the Ku Area of Tokyo with increase of 1.1 percent of fuel, light and water charges and increase of 9.0 percent in 12 months. There is 12-month increase of 1.8 percent of CPI transport and communications. The CPI excluding fresh food, which is the inflation indicator of the Bank of Japan, increased 0.4 percent in the 12 months ending in Jun 2013. There is mild deflation in the CPI excluding food, alcoholic beverages and energy with minus 0.2 percent in the 12 months ending in Jun 2013 and decrease of 0.1 percent in Jun 2013. The CPI excluding imputed rent changed 0.0 percent in Jun 2013 and increased 0.3 percent in 12 months. The all-items CPI estimate for Jul 2013 of the Ku-Area of Tokyo shows increase of 0.2 percent in Jun 2013 and 0.4 percent in 12 months.
Table IV-6, Japan, Consumer Price Index, ∆%
| 2013 | Jun 2013/May 2013 ∆% | Year ∆% |
| CPI All Items | 0.0 | 0.2 |
| CPI Excluding Fresh Food | 0.0 | 0.4 |
| CPI Excluding Food, Alcoholic Beverages and Energy | -0.1 | -0.2 |
| CPI Goods | 0.0 | 0.3 |
| CPI Services | -0.1 | 0.1 |
| CPI Excluding Imputed Rent | 0.0 | 0.3 |
| CPI Fuel, Light, Water Charges | 1.0 | 5.7 |
| CPI Transport & Communications | -0.1 | 1.8 |
| CPI Ku-Area Tokyo All Items | 0.2 | 0.4 |
| Fuel, Light, Water Charges Ku Area Tokyo | 1.1 | 9.0 |
Note: Ku-area Tokyo CPI data preliminary for Jun 2013
Sources: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications
http://www.stat.go.jp/english/data/cpi/index.htm
V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx) to show GDP in dollars in 2012 and the growth rate of real GDP of the world and selected regional countries from 2013 to 2016. The IMF provides an update of the macroeconomic forecast of the world (http://www.imf.org/external/pubs/ft/weo/2013/update/02/). The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the global recession that affected the US economy from IVQ2007 (Dec) to IIQ2009 (Jun) (http://www.nber.org/cycles.html). A new fact is slowing growth in emerging and developing economies. The IMF has lowered its forecast of the world economy to 3.1 percent in 2013 but accelerating to 3.8 percent in 2014 with the unmodified earlier forecasts of 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, 1.2 percent in 2013 and 2.1 percent in 2014 and 2.1 on average from 2013 to 2016 in contrast with 3.9 percent for the world as a whole. While the world would grow 16.8 percent in the four years from 2013 to 2016, the G7 as a whole would grow 8.6 percent. The difference in dollars of 2012 is rather high: growing by 16.8 percent would add $12.0 trillion of output to the world economy, or roughly, two times the output of the economy of Japan of $5,964 but growing by 8.6 percent would add $6.2 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 24.5 percent or at the average yearly rate of 5.6 percent, contributing $6.7 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.
The IMF explains the major factors of the change in forecast (http://www.imf.org/external/pubs/ft/weo/2013/update/02/):
“Global growth is projected to remain subdued at slightly above 3 percent in 2013, the same as in 2012. This is less than forecast in the April 2013 World Economic Outlook (WEO), driven to a large extent by appreciably weaker domestic demand and slower growth in several key emerging market economies, as well as a more protracted recession in the euro area. Downside risks to global growth prospects still dominate: while old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the United States leads to sustained capital flow reversals. Stronger global growth will require additional policy action. Specifically, major advanced economies should maintain a supportive macroeconomic policy mix, combined with credible plans for reaching medium-term debt sustainability and reforms to restore balance sheets and credit channels. Many emerging market and developing economies face a tradeoff between macroeconomic policies to support weak activity and those to contain capital outflows. Macroprudential and structural reforms can help make this tradeoff less stark.”
Table V-1, IMF World Economic Outlook Database Projections of Real GDP Growth
| GDP USD 2012 | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | |
| World | 71,707 | 3.1 | 3.8 | 4.4 | 4.5 |
| G7 | 33,932 | 1.2 | 2.1 | 2.5 | 2.5 |
| Canada | 1,819 | 1.7 | 2.2 | 2.5 | 2.4 |
| France | 2,609 | -0.2 | 0.8 | 1.5 | 1.7 |
| DE | 3,401 | 0.3 | 1.3 | 1.3 | 1.3 |
| Italy | 2,014 | -1.8 | 0.7 | 1.2 | 1.4 |
| Japan | 5,964 | 2.0 | 1.2 | 1.1 | 1.2 |
| UK | 2,441 | 0.9 | 1.5 | 1.8 | 1.9 |
| US | 15,685 | 1.7 | 2.7 | 3.6 | 3.4 |
| Euro Area | 12,198 | -0.3 | 1.1 | 1.4 | 1.6 |
| DE | 3,401 | 0.3 | 1.3 | 1.3 | 1.3 |
| France | 2,609 | -0.2 | 0.8 | 1.5 | 1.7 |
| Italy | 2,014 | -1.8 | 0.7 | 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 | 5.0 | 5.4 | 6.0 | 6.1 |
| Brazil | 2,396 | 2.5 | 3.2 | 4.1 | 4.2 |
| Russia | 2,022 | 2.5 | 3.3 | 3.7 | 3.6 |
| India | 1,825 | 5.6 | 6.3 | 6.6 | 6.9 |
| China | 8,227 | 7.8 | 7.7 | 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 http://www.imf.org/external/pubs/ft/weo/2013/update/02/
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 1.2 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 0.6 percent, which is much lower than 4.8 percent in IQ2012. Growth of 3.9 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan’s GDP contracted 0.9 percent in IIIQ2012 at the SAAR of minus 3.6 percent and increased 0.2 percent relative to a year earlier. Japan’s GDP grew 0.3 percent in IVQ2012 at the SAAR of 1.2 percent and increased 0.4 percent relative to a year earlier. Japan grew 1.0 percent in IQ2013 at the SAAR of 4.1 percent and 0.4 percent relative to a year earlier. China grew at 2.1 percent in IIQ2012, which annualizes to 8.7 percent and 7.6 percent relative to a year earlier. China grew at 2.0 percent in IIIQ2012, which annualizes at 8.2 percent and 7.4 percent relative to a year earlier. In IVQ2012, China grew at 1.9 percent, which annualizes at 7.8 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. In IIQ2013, China grew at 1.7 percent, which annualizes at 7.0 percent and 7.5 percent relative to a year earlier. There is decennial change in leadership in China (http://www.xinhuanet.com/english/special/18cpcnc/index.htm). Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2013. 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 0.3 percent and decreased 1.1 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 1.8 percent SAAR, 0.4 percent relative to the prior quarter and 1.6 percent relative to the same quarter in 2013 (http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html) with weak hiring (http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.htm and earlier http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html). In IQ2012, UK GDP changed 0.0 percent, increasing 0.6 percent relative to a year earlier. UK GDP fell 0.5 percent in IIQ2012 and changed 0.0 percent relative to a year earlier. UK GDP increased 0.7 percent in IIIQ2012 and increased 0.1 percent relative to a year earlier. UK GDP fell 0.2 percent in IVQ2012 relative to IIIQ2012 and changed 0.0 percent relative to a year earlier. UK GDP increased 0.3 percent in IQ2013 and 0.3 percent relative to a year earlier. UK GDP increased 0.6 percent in IIQ2013 and 1.4 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 0.3 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 0.6 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: 1.2 SAAR: 4.8 | 3.4 |
| China | 1.5 | 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 | 0.0 | 0.6 |
| IIQ2012/IQ2012 | IIQ2012/IIQ2011 | |
| United States | QOQ:0.3 SAAR: 1.3 | 2.1 |
| Japan | QOQ: -0.2 | 3.9 |
| China | 2.1 | 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 | -0.5 | 0.0 |
| IIIQ2012/ IIQ2012 | IIIQ2012/ IIIQ2011 | |
| United States | QOQ: 0.8 | 2.6 |
| Japan | QOQ: –0.9 | 0.2 |
| China | 2.0 | 7.4 |
| Euro Area | -0.1 | -0.7 |
| Germany | 0.2 | 0.4 |
| France | 0.1 | 0.0 |
| Italy | -0.3 | -2.6 |
| United Kingdom | 0.7 | 0.1 |
| IVQ2012/IIIQ2012 | IVQ2012/IVQ2011 | |
| United States | QOQ: 0.1 | 1.7 |
| Japan | QOQ: 0.3 SAAR: 1.2 | 0.4 |
| China | 1.9 | 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 | -0.2 | 0.0 |
| IQ2013/IVQ2012 | IQ2013/IQ2012 | |
| United States | QOQ: 0.4 | 1.6 |
| Japan | QOQ: 1.0 SAAR: 4.1 | 0.4 |
| China | 1.6 | 7.7 |
| Euro Area | -0.3 | -1.1 |
| Germany | 0.1 | -1.4 |
| France | -0.2 | -0.4 |
| Italy | -0.6 | -2.4 |
| UK | 0.3 | 0.3 |
| IIQ2013/IQ2013 | IIQ2013/IIQ2012 | |
| China | 1.7 | 7.5 |
| UK | 0.6 | 1.4 |
QOQ: Quarter relative to prior quarter; SAAR: seasonally adjusted annual rate
Source: Country Statistical Agencies http://www.bea.gov/national/index.htm#gdp
There is evidence of deceleration of growth of world trade and even contraction in recent data. Table V-4 provides two types of data: growth of exports and imports in the latest available months and in the past 12 months; and contributions of net trade (exports less imports) to growth of real GDP. Japan provides the most worrisome data (Section VB and earlier http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and_4699.html and earlier 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 Jun 2013, Japan’s exports grew 7.4 percent in 12 months while imports increased 11.8 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 Jun 2013, China exports decreased 3.1 percent relative to a year earlier and imports fell 0.7 percent. Germany’s exports decreased 2.4 percent in the month of May 2013 and decreased 4.8 percent in the 12 months ending in May 2013 while imports increased 1.7 percent in the month of May and decreased 2.6 percent in the 12 months ending in May. 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 0.7 percentage points in IIQ2012, added 0.4 percentage points in IIIQ2012 and subtracted 0.3 percentage points in IVQ2012. In IQ2013, net trade added 0.6 percentage points to UK’s growth of value added. France’s exports decreased 4.3 percent in May 2013 while imports decreased 0.2 percent and net trade added 0.1 percentage points to GDP growth in IIQ2012, adding 0.1 percentage points in IIIQ2012 and 0.1 percentage points in IVQ2012. Net trade deducted 0.2 percentage points from France’s GDP growth in IQ2013. US exports decreased 1.2 percent in Apr 2013 and goods exports increased 0.8 percent in Jan-Apr 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 0.09 percentage points from US GDP growth. US imports increased 2.4 percent in Apr 2013 and goods imports decreased 1.9 percent in Jan-Apr 2013 relative to a year earlier. Industrial production increased 0.3 percent in Jun 2013 after changing 0.0 percent in May 2013 and falling 0.3 percent in Apr 2013, as shown in Table II-1, with all data seasonally adjusted. The report of the Board of Governors of the Federal Reserve System states (http://www.federalreserve.gov/releases/g17/Current/default.htm):
“Industrial production increased 0.3 percent in June after having been unchanged in May. For the second quarter as a whole, industrial production moved up at an annual rate of 0.6 percent. In June, manufacturing production rose 0.3 percent following an increase of 0.2 percent in May. The output at mines advanced 0.8 percent in June, while the output of utilities decreased 0.1 percent. At 99.1 percent of its 2007 average, total industrial production was 2.0 percent above its year-earlier level.”
In the six months ending in Jun 2013, United States national industrial production accumulated increase of 0.9 percent at the annual equivalent rate of 1.8 percent, which is lower than growth of 2.0 percent in 12 months. Excluding growth of 0.7 in Feb 2013, growth in the remaining five months from Jan 2012 to Jun 2013 accumulated to 0.2 percent or 0.5 percent annual equivalent. Industrial production stagnated in two of the past six months and fell in one. Business equipment accumulated growth of 0.9 percent in the six months from Dec 2012 to May 2013 at the annual equivalent rate of 1.8 percent, which is much lower than growth of 2.2 percent in 12 months. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm): “The rate of capacity utilization for total industry edged up 0.1 percentage point to 77.8 percent, a rate that was 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.
Manufacturing increased 0.3 percent in Jun 2013 after increasing 0.2 percent in May 2013 and decreasing 0.3 percent in Apr 2013 seasonally adjusted, increasing 1.7 percent not seasonally adjusted in 12 months ending in Jun 2013, as shown in Table II-2. Manufacturing grew cumulatively 0.5 percent in the six months ending in Jun 2013 or at the annual equivalent rate of 1.0 percent. Excluding the increase of 0.7 percent in Feb 2012, manufacturing accumulated growth of minus 0.2 percent from Jan 2013 to Jun 2013 or at the annual equivalent rate of minus 0.5 percent. Manufacturing output fell by 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increased by 16.8 percent from the trough in Apr 2009 to Dec 2012. Manufacturing grew 21.8 percent from the trough in Apr 2009 to Jun 2013. Manufacturing output in Jun 2013 is 4.8 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 | Exports 12 M ∆% | Imports | Imports 12 M ∆% | |
| USA | -0.3 May | 0.9 Jan-May | 1.9 May | -1.7 Jan-May |
| Japan | Jun 2013 7.4 May 2013 10.1 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 | Jun 2013 11.8 May 2013 10.0 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 | -3.1 Jun 1.0 May 14.7 Apr 10.0 Mar 21.8 Feb | -0.7 Jun -0.3 May 16.8 Apr 14.1 Mar -15.2 Feb | ||
| Euro Area | -0.1 12-M May | 2.5 Jan-May | -5.7 12-M May | -3.9 Jan-May |
| Germany | -2.4 May CSA | -4.8 May | 1.7 May CSA | -2.6 May |
| France May | -4.3 | -4.4 | -0.2 | -2.2 |
| Italy Apr | 0.0 | 4.4 | -0.9 | -2.6 |
| UK | -1.3 Apr | 0.3 Feb-Apr 13 /Feb-Apr 12 | -2.7 Apr | -0.9 Feb-Apr 13/Feb-Apr 12 |
| Net Trade % Points GDP Growth | % Points | |||
| USA | IQ2013 -0.09 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 | 0.1 IIQ2012 0.1 IIIQ2012 0.1 IVQ2012 -0.2 IQ2013 | |||
| UK | -0.7 IQ2012 -0.7 IIQ2012 +0.4 IIIQ2012 -0.3 IVQ2012 0.6 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 Jun 2013. The share of Asia in Japan’s trade is more than one-half for 54.9 percent of exports and 44.3 percent of imports. Within Asia, exports to China are 17.8 percent of total exports and imports from China 21.3 percent of total imports. While exports to China increased 4.8 percent in the 12 months ending in Jun 2013, imports from China increased 14.3 percent. The largest export market for Japan in Jun 2013 is the US with share of 18.7 percent of total exports, which is almost equal to that of China, and share of imports from the US of 9.4 percent in total imports. Western Europe has share of 9.5 percent in Japan’s exports and of 10.6 percent in imports. Rates of growth of exports of Japan in May 2013 are relatively high for several countries and regions with growth of 14.6 percent for exports to the US, 9.6 for exports to Mexico, 10.4 percent for exports to Brazil and 21.5 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. Growth rates of imports in the 12 months ending in Jun 2013 are positive for all trading partners. Imports from Asia increased 10.0 percent in the 12 months ending in Jun 2013 while imports from China increased 14.3 percent. Data are in millions of yen, which may have 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
| Jun 2013 | Exports | 12 months ∆% | Imports Millions Yen | 12 months ∆% |
| Total | 6,061,431 | 7.4 | 6,242,207 | 11.8 |
| Asia | 3,330,000 | 7.4 | 2,762,718 | 10.0 |
| China | 1,080,621 | 4.8 | 1,327,321 | 14.3 |
| USA | 1,133,856 | 14.6 | 589,179 | 18.8 |
| Canada | 76,204 | 12.1 | 91,279 | 5.6 |
| Brazil | 45,894 | 10.4 | 86,816 | 17.3 |
| Mexico | 81,492 | 9.5 | 34,500 | 23.5 |
| Western Europe | 575,348 | 8.4 | 664,680 | 16.1 |
| Germany | 164,936 | 17.3 | 167,493 | 15.1 |
| France | 45,672 | 7.2 | 107,293 | 15.2 |
| UK | 85,134 | 9.2 | 53,281 | 22.5 |
| Middle East | 209,370 | 12.2 | 1,115,449 | 8.0 |
| Australia | 150,485 | 21.5 | 416,161 | 29.2 |
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 revised 3.1 percent in 2013 and 5.4 percent in 2014 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) | 3.1 | 5.4 | 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 | 170.04 | 164.66 | NA | NA |
| Imports Goods & Services | ||||
| G7 | 1.4 | 4.3 | 4.7 | 4.3 |
| EMDE | 6.0 | 7.3 | 7.9 | 7.5 |
| Exports Goods & Services | ||||
| G7 | 2.4 | 4.7 | 4.9 | 4.5 |
| EMDE | 4.3 | 6.3 | 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 http://www.imf.org/external/pubs/ft/weo/2013/update/02/
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, decreased to 51.4 in Jun from 52.9 in May, indicating expansion at a moderate rate (http://www.markiteconomics.com/Survey/PressRelease.mvc/6c45a62f0c5a427c8ecdcf4ffffb6688). This index has remained above the contraction territory of 50.0 during 47 consecutive months but the reading in Jun is the slowest in a year. The employment index increased from 50.3 in May to 51.7 in Jun with input prices rising at higher rate and new orders and output increasing at slower rates (http://www.markiteconomics.com/Survey/PressRelease.mvc/6c45a62f0c5a427c8ecdcf4ffffb6688). David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the index fell below trend in Jun with services slowing especially in the US (http://www.markiteconomics.com/Survey/PressRelease.mvc/6c45a62f0c5a427c8ecdcf4ffffb6688). The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, was unchanged at 50.6 in Jun from 50.6 in May, which is the sixth consecutive reading above 50 (http://www.markiteconomics.com/Survey/PressRelease.mvc/3104066a480f4276bbcefe12f0387391). New export business fell sharply in Jun for the US and China while total new orders increased from 51.3 in May to 51.5 in Jun. The HSBC Brazil Composite Output Index, compiled by Markit, decreased marginally from 51.2 in May to 51.1 in Jun, indicating moderate increase in private sector activity (http://www.markiteconomics.com/Survey/PressRelease.mvc/d6238894628a42bcb1c8ab6ce970cee0). The HSBC Brazil Services Business Activity index, compiled by Markit, was unchanged from 51.0 in May to 51.0 in Jun (http://www.markiteconomics.com/Survey/PressRelease.mvc/d6238894628a42bcb1c8ab6ce970cee0). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the survey data suggest weakness in growth in IIQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/d6238894628a42bcb1c8ab6ce970cee0). The HSBC Brazil Purchasing Managers’ IndexTM (PMI™) was unchanged from 50.4 in May, which was the weakest reading in seven months, to 50.4 in Jun (http://www.markiteconomics.com/Survey/PressRelease.mvc/84c2905cbe394285bcc24f85a426ca6d). Andre Loes, Chief Economist, Brazil at HSBC, finds that companies are facing the fastest rate of growth of input prices since Mar 2011 with the quarterly average of the index of 50.5 at the slowest reading since IIIQ2012 (http://www.markiteconomics.com/Survey/PressRelease.mvc/84c2905cbe394285bcc24f85a426ca6d).
VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™) seasonally adjusted increased to 53.2 in Jul from 51.9 in Jun, for the highest reading in four months (http://www.markiteconomics.com/Survey/PressRelease.mvc/60b7d12f272b42cc9ac764e0cd386ab6).New export orders registered 47.5 in Jun down from 49.8 in Apr, indicating contraction at a faster 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 2.4 percent annual rhythm in IIQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/60b7d12f272b42cc9ac764e0cd386ab6). The Markit US Manufacturing Purchasing Managers’ Index™ (PMI™) decreased to 51.9 in Jun from 52.3 in May (http://www.markiteconomics.com/Survey/PressRelease.mvc/61c3e275eedf42b5abc0566f4adf015e). The index of new exports orders rose from 46.3 in Jun to 52.3 in Jul while total new orders increased from 53.4 in Jun to 55.1 in Jul. Chris Williamson, Chief Economist at Markit, finds that the improvement in the index in Jul could support GDP growth in IIIQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/61c3e275eedf42b5abc0566f4adf015e). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business® increased 1.9 percentage points from 49.0 in May to 50.9 in Jun, which indicates growth in change of direction from contraction (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders increased 3.1 percentage points from 48.8 in May to 51.9 in Jun. The index of exports increased 3.5 percentage points from 51.0 in May to 54.5 in Jun, advancing in expansion territory. The Non-Manufacturing ISM Report on Business® PMI decreased 1.5 percentage points from 53.7 in May to 52.2 in Jun, indicating growth of business activity/production during 47 consecutive months, while the index of new orders decreased 5.2 percentage points from 56.0 in May to 50.8 in Jun (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 | Jun 12 months NSA ∆%: 1.8; ex food and energy ∆%: 1.6 Jun month SA ∆%: 0.5; ex food and energy ∆%: 0.2 |
| Producer Price Index | Jun 12-month NSA ∆%: 2.5; ex food and energy ∆% 1.7 |
| PCE Inflation | May 12-month NSA ∆%: headline 1.0; ex food and energy ∆% 1.1 |
| Employment Situation | Household Survey: May Unemployment Rate SA 7.6% |
| Nonfarm Hiring | Nonfarm Hiring fell from 63.8 million in 2006 to 52.0 million in 2012 or by 11.8 million |
| GDP Growth | BEA Revised National Income Accounts IIQ2012/IIQ2011 2.1 IIIQ2012/IIIQ2011 2.6 IVQ2012/IVQ2011 1.7 IQ2013/IQ2012 1.6 IQ2012 SAAR 2.0 IIQ2012 SAAR 1.3 IIIQ2012 SAAR 3.1 IVQ2012 SAAR 0.4 IQ2013 SAAR 1.8 |
| Real Private Fixed Investment | SAAR IQ2013 3.0 ∆% IVQ2007 to IIIQ2012: minus 9.1% Blog 6/30/13 |
| Personal Income and Consumption | May month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.5 |
| Quarterly Services Report | IQ13/IQ12 SA ∆%: Financial & Insurance 1.8 |
| Employment Cost Index | Compensation Private IQ2013 SA ∆%: 0.3 |
| Industrial Production | Jun month SA ∆%: 0.3 Manufacturing Jun SA ∆% 0.3 Jun 12 months SA ∆% 1.8, NSA 1.7 |
| Productivity and Costs | Nonfarm Business Productivity IQ2013∆% SAAE 0.5; IQ2013/IQ2012 ∆% 0.9; Unit Labor Costs SAAE IQ2013 ∆% -4.3; IQ2013/IQ2012 ∆%: 1.1 Blog 6/9/2013 |
| New York Fed Manufacturing Index | General Business Conditions From Jun 7.84 to Jul 9.46 |
| Philadelphia Fed Business Outlook Index | General Index from Jun 12.5 to Jul 19.8 |
| Manufacturing Shipments and Orders | New Orders SA May ∆% 2.1 Ex Transport 0.6 Jan-May NSA New Orders 0.9 Ex transport 0.4 |
| Durable Goods | Jun New Orders SA ∆%: 4.2; ex transport ∆%: 0.0 |
| Sales of New Motor Vehicles | Jan-Jun 2013 7,829,141; Jan-Jun 2012 7,272,160. Jun 13 SAAR 15.96 million, May 13 SAAR 15.31 million, Jun 2012 SAAR 14.38 million Blog 7/7/13 |
| Sales of Merchant Wholesalers | Jan-May 2013/Jan-May 2012 NSA ∆%: Total 2.4; Durable Goods: 2.6; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | May 13/May 12 NSA ∆%: Sales Total Business 3.3; Manufacturers 1.3 |
| Sales for Retail and Food Services | Jan-Jun 2013/Jan-Jun 2012 ∆%: Retail and Food Services 3.7; Retail ∆% 3.7 |
| Value of Construction Put in Place | May SAAR month SA ∆%: 0.5 May 12-month NSA: 5.4 Jan-May 2013 ∆% 6.2 |
| Case-Shiller Home Prices | Apr 2013/Apr 2012 ∆% NSA: 10 Cities 11.6; 20 Cities: 12.1 |
| FHFA House Price Index Purchases Only | May SA ∆% 0.7; |
| New House Sales | Jun 2013 month SAAR ∆%: 8.3 |
| Housing Starts and Permits | Jun Starts month SA ∆%: minus 9.9 ; Permits ∆%: minus 7.5 |
| Trade Balance | Balance May SA -$45,027 million versus Apr -$40,149 million |
| Export and Import Prices | Jun 12-month NSA ∆%: Imports 0.2; Exports -0.8 |
| Consumer Credit | May ∆% annual rate: 8.3 |
| Net Foreign Purchases of Long-term Treasury Securities | Apr Net Foreign Purchases of Long-term US Securities: minus $37.3 billion |
| Treasury Budget | Fiscal Year 2013/2012 ∆% Jun: Receipts 14.4; Outlays -4.8; Individual Income Taxes 18.0 Deficit Fiscal Year 2012 $1,087 billion Blog 7/14/2013 |
| CBO Budget and Economic Outlook | 2012 Deficit $1089 B 7.0% GDP Debt 11,280 B 72.5% GDP 2013 Deficit $845 B, Debt 12,229 B 76.3% GDP Blog 8/26/12 11/18/12 2/10/13 |
| Commercial Banks Assets and Liabilities | Jun 2013 SAAR ∆%: Securities -8.2 Loans 2.2 Cash Assets 44.8 Deposits 5.9 Blog 7/28/13 |
| Flow of Funds | IQ2013 ∆ since 2007 Assets +$2612.8 MM Real estate -$2733.8 MM Financial +4799.7 MM Net Worth +$3487.4 MM Blog 6/16/13 |
| Current Account Balance of Payments | IQ2013 -83,219 MM %GDP 2.7 Blog 6/16/13 |
Links to blog comments in Table USA:
7/21/2013 http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html
7/14/13 http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html
7/7/13 http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html
6/30/13 http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html
6/16/13 http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html
6/9/13 http://cmpassocregulationblog.blogspot.com/2013/06/twenty-eight-million-unemployed-or.html
5/5/13 http://cmpassocregulationblog.blogspot.com/2013/05/twenty-nine-million-unemployed-or.html
2/10/13 http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
Manufacturers’ shipments of durable goods changed 0.0 percent in Jun 2013, increased 1.3 percent in May 2013 and decreased 0.6 percent in Apr 2013. New orders increased 4.2 percent in Jun 2013, 5.2 percent percent in May 2013 and 3.6 percent in Apr 2013, as shown in Table VA-1. These data are very volatile. Volatility is illustrated by decrease of 12.9 percent in Nov 2012 after increase of orders for nondefense aircraft of 2642.2 percent in Sep 2012 after decrease of 97.2 percent in Aug and increases of 51.1 percent in Jul 2012 and 32.5 percent in Jun 2012. Nondefense aircraft new orders increased 31.4 percent in Jun 2013, 68.1 percent in May 2013 and 18.4 percent in Apr 2013. New orders excluding transportation equipment changed 0.0 percent in Jun 2013 and increased 1.0 percent in May 2013 and 1.8 percent in Apr 2013. Capital goods new orders, indicating investment, increased 9.0 percent in Jun 2013, 13.4 percent in May 2013 and 5.4 percent in Apr 2013. New orders of nondefense capital goods increased 6.3 percent in Jun 2013, 12.9 percent in May 2013 and 3.5 percent in Apr 2013. Capital goods orders excluding more volatile aircraft increased 0.7 percent in Jun 2013, 1.2 percent in May 2013 and 1.2 percent in Apr 2013.
Table VA-1, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%
| Jun 2013 | May 2013 | Apr 2013 ∆% | |
| Total | |||
| S | 0.0 | 1.3 | -0.6 |
| NO | 4.2 | 5.2 | 3.6 |
| Excluding | |||
| S | 0.1 | 0.2 | -0.4 |
| NO | 0.0 | 1.0 | 1.8 |
| Excluding | |||
| S | -0.1 | 1.2 | -0.3 |
| NO | 3.0 | 4.9 | 2.6 |
| Machinery | |||
| S | -1.2 | 1.1 | -2.3 |
| NO | 2.4 | 0.5 | 1.2 |
| Computers & Electronic Products | |||
| S | 0.8 | -1.1 | -3.1 |
| NO | -2.6 | 3.2 | 4.6 |
| Computers | |||
| S | -1.0 | -1.2 | -5.9 |
| NO | -2.1 | -2.1 | -3.7 |
| Transport | |||
| S | -0.3 | 3.9 | -1.0 |
| NO | 12.8 | 14.8 | 8.0 |
| Motor Vehicles | |||
| S | 1.3 | -1.3 | 2.3 |
| NO | 1.3 | -0.8 | 2.3 |
| Nondefense | |||
| S | -6.3 | 30.2 | -10.0 |
| NO | 31.4 | 68.1 | 18.4 |
| Capital Goods | |||
| S | -1.5 | 5.6 | -3.8 |
| NO | 9.0 | 13.4 | 5.4 |
| Nondefense Capital Goods | |||
| S | -2.0 | 6.1 | -3.5 |
| NO | 6.3 | 12.9 | 3.5 |
| Capital Goods ex Aircraft | |||
| S | -0.9 | 1.9 | -2.1 |
| NO | 0.7 | 1.2 | 1.2 |
Note: Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation
Source: US Census Bureau
http://www.census.gov/manufacturing/m3/
Chart VA-1 provides monthly changes in durable goods new orders. There is significant volatility in these data, preventing clear identification of trends.
Chart VA-1, US, Manufacturers’ Durable Goods New Orders 2010-2011
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr021.html
Additional perspective on manufacturers’ shipments and new orders of durable goods is provided by Table VA-2. Values are cumulative millions of dollars in Jan-Jun 2013 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Jun 2013 total $1367.9 billion and new orders total $1368.2 billion, growing respectively by 2.5 percent and 3.7 percent relative to the same period in 2012. Excluding transportation equipment, shipments grew 0.6 percent and new orders increased 1.7 percent. Excluding defense, shipments grew 2.7 percent and new orders grew 5.0 percent. Important information not in Table VA-2 is the large share of nondurable goods: with shipments of $3 trillion in 2012, growing by 2.0 percent, and new orders of $3 trillion, growing by 2.0 percent, in part driven by higher prices for food and energy. Durable goods were lower in value in 2012, with shipments of $2.7 trillion, growing by 7.0 percent, and new orders of $2.6 trillion, growing by 4.1 percent. Capital goods have relatively high value of $494.1 billion for shipments, growing 1.6 percent, and new orders $529.9 billion, growing 3.9 percent. Excluding aircraft, capital goods shipments reached $392.5 billion, growing by 0.9 percent, and new orders $412.2 billion, growing 2.8 percent. Data weakened significantly in 2013.
Table VA-2, US, Value of Manufacturers’ Shipments and New Orders of Durable Goods, NSA, Millions of Dollars
| Jan-Jun 2013 | Shipments | ∆% 2013/ 2012 | New Orders | ∆% 2013/ |
| Total | 1,367,926 | 2.5 | 1,368,210 | 3.7 |
| Excluding Transport | 960,684 | 0.6 | 945,375 | 1.7 |
| Excluding Defense | 1,296,311 | 2.7 | 1,305,313 | 5.0 |
| Machinery | 206,825 | 3.9 | 211,318 | 4.4 |
| Computers & Electronic Products | 161,473 | -4.1 | 125,992 | -6.1 |
| Computers & Related Products | 13,097 | -9.7 | 13,316 | -7.7 |
| Transport Equipment | 407,242 | 7.2 | 422,835 | 8.4 |
| Motor Vehicles | 271,218 | 9.1 | 271,167 | 9.5 |
| Nondefense Aircraft | 64,190 | 7.9 | 89,040 | 29.6 |
| Capital Goods | 494,076 | 1.6 | 529,888 | 3.9 |
| Nondefense Capital Goods | 436,024 | 1.7 | 478,773 | 6.7 |
| Capital Goods ex Aircraft | 392,515 | 0.9 | 412,222 | 2.8 |
Note: Transport: transportation
Source: US Census Bureau
http://www.census.gov/manufacturing/m3/
Chart VA-2 of the Board of Governors of the Federal Reserve System shows that output of durable manufacturing accelerated in the 1980s and 1990s with slower growth in the 2000s perhaps because processes matured. Growth was robust after the major drop during the global recession but appears to vacillate in the final segment.
Chart VA-2, US, Output of Durable Manufacturing, 1972-2013
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/g17/Current/default.htm
Manufacturing jobs fell 6,000 in Jun 2013 relative to May 2013, seasonally adjusted (Table I-10 http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/twenty-eight-million-unemployed-or.html). Manufacturing jobs not seasonally adjusted increased 33,000 from Jun 2012 to Jun 2013 or at the average monthly rate of 2,750. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. In the six months ending in Jun 2013, United States national industrial production accumulated increase of 0.9 percent at the annual equivalent rate of 1.8 percent, which is lower than growth of 2.0 percent in 12 months. Excluding growth of 0.7 in Feb 2013, growth in the remaining five months from Jan 2012 to Jun 2013 accumulated to 0.2 percent or 0.5 percent annual equivalent. Industrial production stagnated in two of the past six months and fell in one. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm: “The rate of capacity utilization for total industry edged up 0.1 percentage point to 77.8 percent, a rate that was 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.”
Manufacturing increased 0.3 percent in Jun 2013 after increasing 0.2 percent in May 2013 and decreasing 0.3 percent in Apr 2013 seasonally adjusted, increasing 1.7 percent not seasonally adjusted in 12 months ending in Jun 2013. Manufacturing grew cumulatively 0.5 percent in the six months ending in Jun 2013 or at the annual equivalent rate of 1.0 percent. Excluding the increase of 0.7 percent in Feb 2012, manufacturing accumulated growth of minus 0.2 percent from Jan 2013 to Jun 2013 or at the annual equivalent rate of minus 0.5 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 grew 21.8 percent from the trough in Apr 2009 to Jun 2013. Manufacturing output in Jun 2013 is 4.8 percent below the peak in Jun 2007.
Table VA-3 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.4 percent in US national income in IVQ2012 and 86.7 percent in IQ2013. Most of US national income is in the form of services. In Jun 2013, there were 136.805 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 114.998 million NSA in Jun 2013 accounted for 84.1 percent of total nonfarm jobs of 136.805 million, of which 12.049 million, or 10.5 percent of total private jobs and 8.8 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 96.069 million NSA in Jun 2013, or 70.2 percent of total nonfarm jobs and 83.5 percent of total private-sector jobs. Manufacturing has share of 11.0 percent in US national income in IQ2013, as shown in Table VA-3. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.
Table VA-3, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total
| SAAR | % Total | SAAR IQ2013 | % Total | |
| National Income WCCA | 14,230.5 | 100.0 | 14,317.3 | 100.0 |
| Domestic Industries | 13,963.9 | 97.9 | 14,070.3 | 98.3 |
| Private Industries | 12,300.8 | 86.4 | 12,408.8 | 86.7 |
| Agriculture | 139.6 | 1.0 | 156.2 | 1.1 |
| Mining | 221.7 | 1.6 | 210.3 | 1.5 |
| Utilities | 211.7 | 1.5 | 218.7 | 1.5 |
| Construction | 606.9 | 4.3 | 625.0 | 4.4 |
| Manufacturing | 1599.8 | 11.2 | 1576.9 | 11.0 |
| Durable Goods | 921.3 | 6.5 | 909.6 | 6.4 |
| Nondurable Goods | 678.4 | 4.8 | 667.3 | 4.7 |
| Wholesale Trade | 857.2 | 6.0 | 877.8 | 6.1 |
| Retail Trade | 973.3 | 6.8 | 974.8 | 6.8 |
| Transportation & WH | 417.9 | 2.9 | 425.4 | 3.0 |
| Information | 496.2 | 3.5 | 522.1 | 3.6 |
| Finance, Insurance, RE | 2377.2 | 16.7 | 2395.0 | 16.7 |
| Professional, BS | 2042.5 | 14.4 | 2053.5 | 14.3 |
| Education, Health Care | 1402.0 | 9.9 | 1408.9 | 9.8 |
| Arts, Entertainment | 548.3 | 3.9 | 553.0 | 3.9 |
| Other Services | 406.6 | 2.9 | 411.3 | 2.9 |
| Government | 1663.0 | 11.7 | 1661.5 | 11.6 |
| Rest of the World | 266.6 | 1.9 | 247.0 | 1.7 |
Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
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/announcements/release_2013/k130711a.pdf). For fiscal 2013, the forecast is of growth of GDP between 2.5 and 3.0 percent, with the all items CPI less fresh food of 0.5 to 0.8 percent. The critical difference is forecast of the CPI excluding fresh food of 2.7 to 3.6 percent in 2014 and 1.6 to 2.9 percent in 2015. The new monetary policy of the Bank of Japan aims to increase inflation to 2 percent. These forecasts are biannual in Apr and Oct. The Cabinet Office, Ministry of Finance and Bank of Japan released on Jan 22, 2013, a “Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth” (http://www.boj.or.jp/en/announcements/release_2013/k130122c.pdf) with the important change of increasing the inflation target of monetary policy from 1 percent to 2 percent:
“The Bank of Japan conducts monetary policy based on the principle that the policy shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy, and is responsible for maintaining financial system stability. The Bank aims to achieve price stability on a sustainable basis, given that there are various factors that affect prices in the short run.
The Bank recognizes that the inflation rate consistent with price stability on a sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan's economy make progress. Based on this recognition, the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index.
Under the price stability target specified above, the Bank will pursue monetary easing and aim to achieve this target at the earliest possible time. Taking into consideration that it will take considerable time before the effects of monetary policy permeate the economy, the Bank will ascertain whether there is any significant risk to the sustainability of economic growth, including from the accumulation of financial imbalances.”
The Bank of Japan also provided explicit analysis of its view on price stability in a “Background note regarding the Bank’s thinking on price stability” (http://www.boj.or.jp/en/announcements/release_2013/data/rel130123a1.pdf http://www.boj.or.jp/en/announcements/release_2013/rel130123a.htm/). The Bank of Japan also amended “Principal terms and conditions for the Asset Purchase Program” (http://www.boj.or.jp/en/announcements/release_2013/rel130122a.pdf): “Asset purchases and loan provision shall be conducted up to the maximum outstanding amounts by the end of 2013. From January 2014, the Bank shall purchase financial assets and provide loans every month, the amount of which shall be determined pursuant to the relevant rules of the Bank.”
Financial markets in Japan and worldwide were shocked by new bold measures of “quantitative and qualitative monetary easing” by the Bank of Japan (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The objective of policy is to “achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The main elements of the new policy are as follows:
- Monetary Base Control. Most central banks in the world pursue interest rates instead of monetary aggregates, injecting bank reserves to lower interest rates to desired levels. The Bank of Japan (BOJ) has shifted back to monetary aggregates, conducting money market operations with the objective of increasing base money, or monetary liabilities of the government, at the annual rate of 60 to 70 trillion yen. The BOJ estimates base money outstanding at “138 trillion yen at end-2012) and plans to increase it to “200 trillion yen at end-2012 and 270 trillion yen at end 2014” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Maturity Extension of Purchases of Japanese Government Bonds. Purchases of bonds will be extended even up to bonds with maturity of 40 years with the guideline of extending the average maturity of BOJ bond purchases from three to seven years. The BOJ estimates the current average maturity of Japanese government bonds (JGB) at around seven years. The BOJ plans to purchase about 7.5 trillion yen per month (http://www.boj.or.jp/en/announcements/release_2013/rel130404d.pdf). Takashi Nakamichi, Tatsuo Ito and Phred Dvorak, wiring on “Bank of Japan mounts bid for revival,” on Apr 4, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323646604578401633067110420.html ), find that the limit of maturities of three years on purchases of JGBs was designed to avoid views that the BOJ would finance uncontrolled government deficits.
- Seigniorage. The BOJ is pursuing coordination with the government that will take measures to establish “sustainable fiscal structure with a view to ensuring the credibility of fiscal management” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Diversification of Asset Purchases. The BOJ will engage in transactions of exchange traded funds (ETF) and real estate investment trusts (REITS) and not solely on purchases of JGBs. Purchases of ETFs will be at an annual rate of increase of one trillion yen and purchases of REITS at 30 billion yen.
Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year
| Fiscal Year | Real GDP | CPI All Items Less Fresh Food | Excluding Effects of Consumption Tax Hikes |
| 2013 | |||
| Jul 2013 | +2.5 to +3.0 [+2.8] | +0.5 to +0.8 [+0.6] | |
| Apr 2013 | +2.4 to +3.0 [+2.9] | +0.4 to +0.8 [+0.7] | |
| 2014 | |||
| Jul 2013 | +0.8 to +1.5 [+1.3] | +2.7 to +3.6 [+3.3] | +0.7 to +1.6 [+1.3] |
| Apr 2013 | +1.0 to +1.5 [+1.4] | +2.7 to +3.6 [+3.4] | +0.7 to +1.6 [+1.4] |
| 2015 | |||
| Jul 2013 | +1.3 to +1.9 [+1.5] | +1.6 to +2.9 [+2.6] | +0.9 to +2.2 [+1.9] |
| 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/announcements/release_2013/k130711a.pdf
Private-sector activity in Japan expanded with the Markit Composite Output PMI™ Index decreasing from the high of the series at 54.1 in May to 52.3 in Jun (http://www.markiteconomics.com/Survey/PressRelease.mvc/c5f4daed191042f198cf2cdb41e04285). Paul Smith, economist at Markit and author of the report, finds that the survey data suggest continuing growth of the economy of Japan with accelerating performance of the economy of Japan in IIQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/c5f4daed191042f198cf2cdb41e04285). The Markit Business Activity Index of Services decreased from the record high of 54.8 in May to 52.1 in Jun (http://www.markiteconomics.com/Survey/PressRelease.mvc/c5f4daed191042f198cf2cdb41e04285). Paul Smith, Senior Economist at Markit and author of the report, finds continuing optimism in services and manufacturing companies in Japan with positive outlook for the economy (http://www.markiteconomics.com/Survey/PressRelease.mvc/c5f4daed191042f198cf2cdb41e04285). Markit/JMMA Purchasing Managers’ Index™ (PMI™), seasonally adjusted, increased from 51.5 in Apr to 52.3 in Jun, which is the highest reading in 28 months, indicating solid growth (http://www.markiteconomics.com/Survey/PressRelease.mvc/07f08c5d1667427d93cb8bfd767d581d). New orders grew at rapid pace with higher strength in domestic demand while export orders increased for a fourth consecutive month but at slower pace. Paul Smith, Senior Economist at Markit and author of the report, finds manufacturing expanding at an annual rate of 5 percent in IIQ2013 that should contribute to GDP growth (http://www.markiteconomics.com/Survey/PressRelease.mvc/07f08c5d1667427d93cb8bfd767d581d).Table JPY provides the country data table for Japan.
Table JPY, Japan, Economic Indicators
| Historical GDP and CPI | 1981-2010 Real GDP Growth and CPI Inflation 1981-2010 |
| Corporate Goods Prices | Jun ∆% +0.1 |
| Consumer Price Index | Jun NSA ∆% 0.0; Jun 12 months NSA ∆% 0.2 |
| Real GDP Growth | IQ2013 ∆%: 1.0 on IVQ2012; IQ2013 SAAR 4.1; |
| Employment Report | May Unemployed 2.79 million Change in unemployed since last year: minus 180 thousand |
| All Industry Indices | May month SA ∆% 1.1 Blog 7/21/13 |
| Industrial Production | May SA month ∆%: 2.0 |
| Machine Orders | Total May ∆% 12.0 Private ∆%: 12.4 May ∆% Excluding Volatile Orders 10.5 |
| Tertiary Index | May month SA ∆% 1.2 |
| Wholesale and Retail Sales | May 12 months: |
| Family Income and Expenditure Survey | May 12-month ∆% total nominal consumption -1.8, real -1.6 Blog 6/30/13 |
| Trade Balance | Exports Jun 12 months ∆%: 7.4 Imports Jun 12 months ∆% 11.8 Blog 7/28/13 |
Links to blog comments in Table JPY:
7/21/2013 http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html
7/14/13 http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html
6/30/13 http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html
6/16/13 http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html
8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
The structure of exports and imports of Japan is in Table VB-1. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities, oscillating under shocks of risk aversion. Mineral fuels account for 31.4 percent of Japan’s imports and increased 2.4 percent in the 12 months ending in Jun 2013 because of alternating carry trades into commodity futures in accordance with risk aversion. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 13.3 percent of Japan’s exports with increase of 7.5 percent in the 12 months ending in Jun 2013. Machinery contributes 19.2 percent of Japan’s exports with increase of 3.5 percent in the 12 months ending in Jun 2013. Electrical machinery contributes 17.4 percent of Japan’s exports with increase of 4.0 percent in the 12 months ending in Jun 2013. Exports of transport equipment with share of 23.3 percent in total exports increased 0.0 percent in the 12 months ending in Jun 2013 but had been increasing sharply largely because of the low level after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The breakdown of transport equipment in Table VB-1 shows increase of the major categories of motor vehicles of 11.7 percent: cars increased 15.1 percent with decrease of 5.6 percent in the minor category of buses and trucks, increase of 0.8 percent for parts of motor vehicles, increase of 1.9 percent for motorcycles and decrease of 46.9 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade with oscillations when risk aversion causes reversal of carry trades from zero interest rates to commodity prices. Data in Table VB-1 are in millions of yen that have been affected by recent depreciation of the yen relative to the USD with invoicing of many products in dollars.
Table VB-1, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens
| Jun 2013 | Value JPY Millions | % of Total | 12 Months ∆% | Contribution Degree % |
| Exports | 6,061,431 | 100.0 | 7.4 | 7.4 |
| Foodstuffs | 34,807 | 0.6 | 16.7 | 0.1 |
| Raw Materials | 102,290 | 1.7 | 13.3 | 0.2 |
| Mineral Fuels | 132,877 | 2.2 | 41.0 | 0.7 |
| Chemicals | 634,757 | 10.5 | 20.6 | 1.9 |
| Manufactured Goods | 807,592 | 13.3 | 7.5 | 1.0 |
| Machinery | 1,166,579 | 19.2 | 3.5 | 0.7 |
| Electrical Machinery | 1,052,834 | 17.4 | 4.0 | 0.7 |
| Transport Equipment | 1,409,837 | 23.3 | 0.0 | 0.0 |
| Motor Vehicles | 912,016 | 15.0 | 11.7 | 1.7 |
| Cars | 780,838 | 12.9 | 15.1 | 1.8 |
| Buses & Trucks | 118,677 | 2.0 | -5.6 | -0.1 |
| Parts of Motor Vehicles | 291,244 | 4.8 | 0.8 | 0.0 |
| Motorcycles | 16,661 | 0.3 | 1.9 | 0.0 |
| Ships | 128,377 | 2.1 | -46.9 | -2.0 |
| Other | 719,858 | 11.9 | 19.8 | 2.1 |
| Imports | 6,242,207 | 100.0 | 11.8 | 11.8 |
| Foodstuffs | 505,552 | 8.1 | 6.2 | 0.5 |
| Raw Materials | 429,868 | 6.9 | 8.7 | 0.6 |
| Mineral Fuels | 1,962,213 | 31.4 | 7.3 | 2.4 |
| Chemicals | 507,287 | 8.1 | 8.0 | 0.7 |
| Manufactured Goods | 502,750 | 8.1 | 9.9 | 0.8 |
| Machinery | 510,317 | 8.2 | 22.5 | 1.7 |
| Electrical Machinery | 830,310 | 13.3 | 19.6 | 2.4 |
| Transport Equipment | 246,512 | 3.9 | 31.0 | 1.0 |
| Other | 747,397 | 12.0 | 13.5 | 1.6 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm
Table VB-2 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2012. Exports grew at the average yearly rate of 3.2 percent while imports grew at 3.3 percent per year in the years from 1979 to 2012. Abstracting from the global recession and the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, exports grew at the average annual rate of 4.8 percent between 1979 and 2007 and imports at 4.0 percent. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980 and the highest deficit in 2012.
Table VB-2, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens
| Years | Exports | Imports | Balance |
| 1950 | 298 | 348 | -50 |
| 1955 | 723 | 889 | -166 |
| 1960 | 1,459 | 1,616 | -157 |
| 1965 | 3,042 | 2,940 | 102 |
| 1970 | 6,954 | 6,797 | 157 |
| 1975 | 16,545 | 17,170 | -625 |
| 1979 | 22,531 | 24,245 | -1,714 |
| 1980 | 29,382 | 31,995 | -2,613 |
| 1981 | 33,468 | 31,464 | 2,004 |
| 1982 | 34,432 | 32,656 | 1,776 |
| 1983 | 34,909 | 30,014 | 4,895 |
| 1984 | 40,325 | 32,321 | 8,004 |
| 1985 | 41,955 | 31,084 | 10,871 |
| 1986 | 35,289 | 21,550 | 13,739 |
| 1987 | 33,315 | 21,736 | 11,579 |
| 1988 | 33,939 | 24,006 | 9,933 |
| 1989 | 37,822 | 28,978 | 8,844 |
| 1990 | 41,456 | 33,855 | 7,601 |
| 1991 | 42,359 | 31,900 | 10,459 |
| 1992 | 43,012 | 29,527 | 13,485 |
| 1993 | 40,202 | 26,826 | 13,376 |
| 1994 | 40,497 | 28,104 | 12,393 |
| 1995 | 41,530 | 31,548 | 9,982 |
| 1996 | 44,731 | 37,993 | 6,738 |
| 1997 | 50,937 | 40,956 | 9,981 |
| 1998 | 50,645 | 36,653 | 13,992 |
| 1999 | 47,547 | 35,268 | 12,279 |
| 2000 | 51,654 | 40,938 | 10,716 |
| 2001 | 48,979 | 42,415 | 6,564 |
| 2002 | 52,108 | 42,227 | 9,881 |
| 2003 | 54,548 | 44,362 | 10,186 |
| 2004 | 61,169 | 49,216 | 11,953 |
| 2005 | 65,656 | 56,949 | 8,707 |
| 2006 | 75,246 | 67,344 | 7,902 |
| 2007 | 83,931 | 73,135 | 10,796 |
| 2008 | 81,018 | 78,955 | 2,063 |
| 2009 | 54,170 | 51,499 | 2,671 |
| 2010 | 67,399 | 60,764 | 6,635 |
| 2011 | 65,546 | 68,111 | -2,565 |
| 2012 | 63,748 | 70,689 | -6,941 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm
The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table VB-3 for Jun 2013. The share of Asia in Japan’s trade is more than one-half for 54.9 percent of exports and 44.3 percent of imports. Within Asia, exports to China are 17.8 percent of total exports and imports from China 21.3 percent of total imports. While exports to China increased 4.8 percent in the 12 months ending in Jun 2013, imports from China increased 14.3 percent. The largest export market for Japan in Jun 2013 is the US with share of 18.7 percent of total exports, which is almost equal to that of China, and share of imports from the US of 9.4 percent in total imports. Western Europe has share of 9.5 percent in Japan’s exports and of 10.6 percent in imports. Rates of growth of exports of Japan in May 2013 are relatively high for several countries and regions with growth of 14.6 percent for exports to the US, 9.6 for exports to Mexico, 10.4 percent for exports to Brazil and 21.5 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. Growth rates of imports in the 12 months ending in Jun 2013 are positive for all trading partners. Imports from Asia increased 10.0 percent in the 12 months ending in Jun 2013 while imports from China increased 14.3 percent. Data are in millions of yen, which may have effects of recent depreciation of the yen relative to the United States dollar (USD).
Table VB-3, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens
| Jun 2013 | Exports | 12 months ∆% | Imports Millions Yen | 12 months ∆% |
| Total | 6,061,431 | 7.4 | 6,242,207 | 11.8 |
| Asia | 3,330,000 | 7.4 | 2,762,718 | 10.0 |
| China | 1,080,621 | 4.8 | 1,327,321 | 14.3 |
| USA | 1,133,856 | 14.6 | 589,179 | 18.8 |
| Canada | 76,204 | 12.1 | 91,279 | 5.6 |
| Brazil | 45,894 | 10.4 | 86,816 | 17.3 |
| Mexico | 81,492 | 9.5 | 34,500 | 23.5 |
| Western Europe | 575,348 | 8.4 | 664,680 | 16.1 |
| Germany | 164,936 | 17.3 | 167,493 | 15.1 |
| France | 45,672 | 7.2 | 107,293 | 15.2 |
| UK | 85,134 | 9.2 | 53,281 | 22.5 |
| Middle East | 209,370 | 12.2 | 1,115,449 | 8.0 |
| Australia | 150,485 | 21.5 | 416,161 | 29.2 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm
VB-4. The significantly large deficits of JPY 906,079 million with the Middle East, JPY 246,700 million with China, JPY 265,676 million with Australia and JPY 89,332 million with Western Europe do not compensate surpluses of JPY 567,282 million with Asia and JPY 544,677 million with the US.
Table VB-4, Japan, Trade Balance, Millions of Yen
| Jun 2013 | Millions of Yen |
| Total | -180,776 |
| Asia | 567,282 |
| China | -246,700 |
| USA | 544,677 |
| Canada | -15,075 |
| Brazil | -40,922 |
| Mexico | 46,922 |
| Western Europe | -89,332 |
| Germany | -2,557 |
| France | -61,621 |
| UK | 31,853 |
| Middle East | -906,079 |
| Australia | -265,676 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm
Long-term economic growth in Japan significantly improved by increasing competitiveness in world markets. Net trade of exports and imports is an important component of the GDP accounts of Japan. Table VB-5 provides quarterly data for net trade, exports and imports of Japan. Net trade had strong positive contributions to GDP growth in Japan in all quarters from IQ2007 to IIQ2009 with exception of IVQ2008, IIIQ2008 and IQ2009. The US recession is dated by the National Bureau of Economic Research (NBER) as beginning in IVQ2007 (Dec) and ending in IIQ2009 (Jun) (http://www.nber.org/cycles/cyclesmain.html). Net trade contributions helped to cushion the economy of Japan from the global recession. Net trade deducted from GDP growth in seven of the nine quarters from IVQ2010 IQ2012. The only strong contribution of net trade was 3.6 percent in IIIQ2011. Net trade added 1.5 percentage points to GDP growth in IQ2013. Private consumption assumed the role of driver of Japan’s economic growth but should moderate as in most mature economies.
Table VB-5, Japan, Contributions to Changes in Real GDP, Seasonally Adjusted Annual Rates (SAAR), %
| Net Trade | Exports | Imports | |
| 2013 | |||
| I | 1.5 | 2.2 | -0.6 |
| 2012 | |||
| I | 0.3 | 1.6 | -1.3 |
| II | -1.2 | 0.0 | -1.2 |
| III | -2.5 | -2.7 | 0.2 |
| IV | -0.3 | -1.7 | 1.5 |
| 2011 | |||
| I | -1.2 | -0.5 | -0.7 |
| II | -4.2 | -4.4 | 0.2 |
| III | 3.6 | 5.5 | -1.9 |
| IV | -2.9 | -1.9 | -1.0 |
| 2010 | |||
| I | 2.1 | 3.5 | -1.3 |
| II | 0.2 | 2.8 | -2.6 |
| III | 0.3 | 1.2 | -0.9 |
| IV | -0.3 | 0.1 | -0.4 |
| 2009 | |||
| I | -4.4 | -16.4 | 12.0 |
| II | 7.4 | 4.8 | 2.7 |
| III | 2.1 | 5.2 | -3.1 |
| IV | 2.8 | 4.1 | -1.3 |
| 2008 | |||
| I | 1.2 | 2.1 | -1.0 |
| II | 0.5 | -1.5 | 2.1 |
| III | -0.1 | 0.1 | -0.2 |
| IV | -11.4 | -10.2 | -1.2 |
| 2007 | |||
| I | 1.1 | 1.7 | -0.5 |
| II | 0.8 | 1.6 | -0.8 |
| III | 2.0 | 1.4 | 0.6 |
| IV | 1.4 | 2.0 | -0.7 |
Source: http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html
There was milder increase in Japan’s export corporate goods price index during the global recession in 2008 but similar sharp decline during the bank balance sheets effect in late 2008, as shown in Chart VB-1 of the Bank of Japan. Japan exports industrial goods whose prices have been less dynamic than those of commodities and raw materials. As a result, the export CGPI on the yen basis in Chart VB-1 trends down with oscillations after a brief rise in the final part of the recession in 2009. The export corporate goods price index on the yen basis fell from 104.9 in Jun 2009 to 94.0 in Jan 2012 or minus 10.4 percent and increased to 106.1 in Jun 2013 for a gain of 12.9 percent relative to Jan 2012 and 1.1 percent relative to Jun 2009. The choice of Jun 2009 is designed to capture the reversal of risk aversion beginning in Sep 2008 with the announcement of toxic assets in banks that would be withdrawn with the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009). Reversal of risk aversion in the form of flight to the USD and obligations of the US government opened the way to renewed carry trades from zero interest rates to exposures in risk financial assets such as commodities. Japan exports industrial products and imports commodities and raw materials.
Chart VB-1, Japan, Export Corporate Goods Price Index, Monthly, Yen Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Chart VB-1A provides the export corporate goods price index on the basis of the contract currency. The export corporate goods price index on the basis of the contract currency increased from 97.9 in Jun 2009 to 103.1 in Apr 2012 or 5.3 percent but dropped to 100.2 in Apr 2013 or minus 2.8 percent relative to Apr 2012 and gained 1.3 percent to 99.2 in Jun 2013 relative to Jun 2009.
Chart VB-1A, Japan, Export Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Japan imports primary commodities and raw materials. As a result, the import corporate goods price index on the yen basis in Chart VB-2 shows an upward trend after declining from the increase during the global recession in 2008 driven by carry trades from fed funds rates collapsing to zero into commodity futures and decline during risk aversion from late 2008 into beginning of 2008 originating in doubts about soundness of US bank balance sheets. More careful measurement should show that the terms of trade of Japan, export prices relative to import prices, declined during the commodity shocks originating in unconventional monetary policy. The decline of the terms of trade restricted potential growth of income in Japan. The import corporate goods price index on the yen basis increased from 93.5 in Jun 2009 to 113.1 in Apr 2012 or 21.0 percent and to 121.4 in Jun 2013 or gain of 7.3 percent relative to Apr 2012 and 29.8 percent relative to Jun 2009.
Chart VB-2, Japan, Import Corporate Goods Price Index, Monthly, Yen Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Chart VB-2A provides the import corporate goods price index on the contract currency basis. The import corporate goods price index on the basis of the contract currency increased from 86.2 in Jun 2009 to 119.5 in Apr 2012 or 38.6 percent and to 112.2 in Jun 2013 or minus 6.1 percent relative to Apr 2012 and gain of 30.2 percent relative to Jun 2009. There is evident deterioration of the terms of trade of Japan: the export corporate goods price index on the basis of the contract currency increased 5.3 percent from Jun 2009 to Apr 2012 while the import corporate goods price index increased 38.6 percent. Prices of Japan’s exports of corporate goods, mostly industrial products, increased only 5.3 percent from Jun 2009 to Apr 2012, while imports of corporate goods, mostly commodities and raw materials increased 38.6 percent. Unconventional monetary policy induces carry trades from zero interest rates to exposures in commodities that squeeze economic activity of industrial countries by increases in prices of imported commodities and raw materials during periods without risk aversion. Reversals of carry trades during periods of risk aversion decrease prices of exported commodities and raw materials that squeeze economic activity in economies exporting commodities and raw materials. Devaluation of the dollar by unconventional monetary policy could increase US competitiveness in world markets but economic activity is squeezed by increases in prices of imported commodities and raw materials. Unconventional monetary policy causes instability worldwide instead of the mission of central banks of promoting financial and economic stability.
Chart VB-2A, Japan, Import Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Table VB-6 provides the Bank of Japan’s Corporate Goods Price indexes of exports and imports on the yen and contract bases from Jan 2008 to Jun 2013. There are oscillations of the indexes that are shown vividly in the four charts above. For the entire period from Jan 2008 to Jun 2013, the export index on the contract currency basis increased 0.0 percent and decreased 8.1 percent on the yen basis. For the entire period from Jan 2008 to Jun 2013, the import index increased 11.4 percent on the contract currency basis and increased 2.0 percent on the yen basis. The charts show sharp deteriorations in relative prices of exports to prices of imports during multiple periods. Price margins of Japan’s producers are subject to periodic squeezes resulting from carry trades from zero interest rates of monetary policy to exposures in commodities.
Table VB-6, Japan, Exports and Imports Corporate Goods Price Index, Contract Currency Basis and Yen Basis
| Month | Exports Contract | Exports Yen | Imports Contract Currency | Imports Yen |
| 2008/01 | 99.2 | 115.5 | 100.7 | 119.0 |
| 2008/02 | 99.8 | 116.1 | 102.4 | 120.6 |
| 2008/03 | 100.5 | 112.6 | 104.5 | 117.4 |
| 2008/04 | 101.6 | 115.3 | 110.1 | 125.2 |
| 2008/05 | 102.4 | 117.4 | 113.4 | 130.4 |
| 2008/06 | 103.5 | 120.7 | 119.5 | 140.3 |
| 2008/07 | 104.7 | 122.1 | 122.6 | 143.9 |
| 2008/08 | 103.7 | 122.1 | 123.1 | 147.0 |
| 2008/09 | 102.7 | 118.3 | 117.1 | 137.1 |
| 2008/10 | 100.2 | 109.6 | 109.1 | 121.5 |
| 2008/11 | 98.6 | 104.5 | 97.8 | 105.8 |
| 2008/12 | 97.9 | 100.6 | 89.3 | 93.0 |
| 2009/01 | 98.0 | 99.5 | 85.6 | 88.4 |
| 2009/02 | 97.5 | 100.1 | 85.7 | 89.7 |
| 2009/03 | 97.3 | 104.2 | 85.2 | 93.0 |
| 2009/04 | 97.6 | 105.6 | 84.4 | 93.0 |
| 2009/05 | 97.5 | 103.8 | 84.0 | 90.8 |
| 2009/06 | 97.9 | 104.9 | 86.2 | 93.5 |
| 2009/07 | 97.5 | 103.1 | 89.2 | 95.0 |
| 2009/08 | 98.3 | 104.4 | 89.6 | 95.8 |
| 2009/09 | 98.3 | 102.1 | 91.0 | 94.7 |
| 2009/10 | 98.0 | 101.2 | 91.0 | 94.0 |
| 2009/11 | 98.4 | 100.8 | 92.8 | 94.8 |
| 2009/12 | 98.3 | 100.7 | 95.4 | 97.5 |
| 2010/01 | 99.4 | 102.2 | 97.0 | 100.0 |
| 2010/02 | 99.7 | 101.6 | 97.6 | 99.8 |
| 2010/03 | 99.7 | 101.8 | 97.0 | 99.2 |
| 2010/04 | 100.5 | 104.6 | 99.9 | 104.6 |
| 2010/05 | 100.7 | 102.9 | 101.7 | 104.9 |
| 2010/06 | 100.1 | 101.6 | 100.0 | 102.3 |
| 2010/07 | 99.4 | 99.0 | 99.9 | 99.8 |
| 2010/08 | 99.1 | 97.3 | 99.5 | 97.5 |
| 2010/09 | 99.4 | 97.0 | 100.0 | 97.2 |
| 2010/10 | 100.1 | 96.4 | 100.5 | 95.8 |
| 2010/11 | 100.7 | 97.4 | 102.6 | 98.2 |
| 2010/12 | 101.2 | 98.3 | 104.4 | 100.6 |
| 2011/01 | 102.1 | 98.6 | 107.2 | 102.6 |
| 2011/02 | 102.9 | 99.5 | 109.0 | 104.3 |
| 2011/03 | 103.5 | 99.6 | 111.8 | 106.3 |
| 2011/04 | 104.1 | 101.7 | 115.9 | 111.9 |
| 2011/05 | 103.9 | 99.9 | 118.8 | 112.4 |
| 2011/06 | 103.8 | 99.3 | 117.5 | 110.5 |
| 2011/07 | 103.6 | 98.3 | 118.3 | 110.2 |
| 2011/08 | 103.6 | 96.6 | 118.6 | 108.1 |
| 2011/09 | 103.7 | 96.1 | 117.0 | 106.2 |
| 2011/10 | 103.0 | 95.2 | 116.6 | 105.6 |
| 2011/11 | 101.9 | 94.8 | 115.4 | 105.4 |
| 2011/12 | 101.5 | 94.5 | 116.1 | 106.2 |
| 2012/01 | 101.8 | 94.0 | 115.0 | 104.2 |
| 2012/02 | 102.4 | 95.8 | 115.8 | 106.4 |
| 2012/03 | 102.9 | 99.2 | 118.3 | 112.9 |
| 2012/04 | 103.1 | 98.7 | 119.5 | 113.1 |
| 2012/05 | 102.2 | 96.3 | 118.1 | 109.9 |
| 2012/06 | 101.4 | 95.0 | 115.2 | 106.7 |
| 2012/07 | 100.6 | 94.0 | 112.0 | 103.6 |
| 2012/08 | 100.8 | 94.1 | 112.4 | 103.6 |
| 2012/09 | 100.9 | 94.0 | 114.7 | 105.2 |
| 2012/10 | 101.0 | 94.7 | 113.8 | 105.2 |
| 2012/11 | 100.9 | 95.9 | 113.3 | 106.6 |
| 2012/12 | 100.7 | 98.0 | 113.6 | 109.7 |
| 2013/01 | 101.0 | 102.5 | 114.0 | 115.5 |
| 2013/02 | 101.5 | 105.9 | 114.9 | 120.4 |
| 2013/03 | 101.3 | 106.7 | 115.2 | 122.2 |
| 2013/04 | 100.2 | 107.5 | 114.3 | 124.0 |
| 2013/05 | 99.6 | 109.1 | 112.7 | 125.4 |
| 2013/06 | 99.2 | 106.1 | 112.2 | 121.4 |
Source: Bank of Japan http://www.boj.or.jp/en/statistics/pi/cgpi_2010/index.htm/
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, 54.3 in May 2013 and 53.9 in Jun 2013.
Table CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| Total Index | New Orders | Interm. | Subs Prices | Exp | |
| Jun 2013 | 53.9 | 50.3 | 55.0 | 50.6 | 61.8 |
| May | 54.3 | 50.1 | 54.4 | 50.7 | 62.9 |
| Apr | 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
http://www.stats.gov.cn/english/
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, 54.3 in May 2013 and 53.9 in Jun 2013.
Chart CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
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 increased to 50.8 in May 2013, falling to 50.1 in Jun 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 new orders increased to 51.8 in May 2013, falling to 50.4 in Jun 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. The index of employment fell to 48.8 in May 2013 and 48.7 in Jun 2013.
Table CIPMMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| IPM | PI | NOI | INV | EMP | SDEL | |
| Jun 2013 | 50.1 | 52.0 | 50.4 | 47.4 | 48.7 | 50.3 |
| May | 50.8 | 53.3 | 51.8 | 47.6 | 48.8 | 50.8 |
| Apr | 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
http://www.stats.gov.cn/english/
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. The index increased to 50.8 in May 2013 and fell to 50.1 in Jun 2013.
Chart CIPMMFG, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
Cumulative growth of China’s GDP in IIQ2013 relative to the same period in 2012 was 7.6 percent, as shown in Table VC-GDP. Secondary industry accounts for 47.2 percent of GDP of which industry alone for 41.0 percent in IQ2013 and construction with the remaining 6.2 percent in the first three quarters of 2012. Tertiary industry accounts for 45.3 percent of cumulative GDP in IIQ2013 and primary industry for 7.5 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 10.4 percent in IIQ2011 to 7.4 percent in IVQ2011 and 6.2 percent in IQ2012, rebounding to 8.7 percent in IIQ2012, 8.2 percent in IIIQ2012 and 7.8 percent in IVQ2012. Annual equivalent growth in IQ2013 fell to 6.6 percent and to 7.0 percent in IIQ2013.
Table VC-GDP, China, Quarterly Growth of GDP, Current CNY 100 Million and Inflation Adjusted ∆%
| Cumulative GDP IIQ2013 | Value Current CNY 100 Million | 2013 Year-on-Year Constant Prices ∆% |
| GDP | 248009 | 7.6 |
| Primary Industry | 18622 | 3.0 |
| Farming | 18622 | 3.0 |
| Secondary Industry | 117037 | 7.6 |
| Industry | 101601 | 7.3 |
| Construction | 15436 | 9.6 |
| Tertiary Industry | 112350 | 8.3 |
| Transport, Storage, Post | 12995 | 6.8 |
| Wholesale, Retail Trades | 23291 | 10.2 |
| Hotel & Catering Services | 4824 | 4.7 |
| Financial Intermediation | 16036 | 10.8 |
| Real Estate | 16127 | 7.5 |
| Other | 39077 | 7.4 |
| Growth in Quarter Relative to Prior Quarter | ∆% on Prior Quarter | ∆% Annual Equivalent |
| 2013 | ||
| IIQ2013 | 1.7 | 7.0 |
| IQ2013 | 1.6 | 6.6 |
| 2012 | ||
| IVQ2012 | 1.9 | 7.8 |
| IIIQ2012 | 2.0 | 8.2 |
| IIQ2012 | 2.1 | 8.7 |
| IQ2012 | 1.5 | 6.2 |
| 2011 | ||
| IVQ2011 | 1.8 | 7.4 |
| IIIQ2011 | 2.2 | 9.1 |
| IIQ2011 | 2.5 | 10.4 |
| IQ2011 | 2.3 | 9.5 |
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
Growth of China’s GDP in IIQ2013 relative to the same period in 2012 was 7.5 percent, as shown in Table VC-GDPA. Secondary industry accounts for 47.2 percent of GDP of which industry alone for 41.0 percent in cumulative IIQ2013 and construction with the remaining 7.5 percent in the first two quarters of 2013. Tertiary industry accounts for 45.3 percent of GDP in the cumulative to IIQ2013 and primary industry for 7.5 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). GDP growth decelerated from 12.1 percent in IQ2010 and 11.2 percent in IIQ2010 to 7.7 percent in IQ2013 and 7.5 percent in IIQ2013.
Table VC-GDPA, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter
| IQ 2013 | IIQ 2013 | |||||||
| GDP | 7.7 | 7.5 | ||||||
| Primary Industry | 3.4 | 3.0 | ||||||
| Secondary Industry | 7.8 | 7.6 | ||||||
| Tertiary Industry | 8.3 | 8.3 | ||||||
| GDP ∆% Relative to a Prior Quarter | 1.6 | 1.7 | ||||||
| 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 http://www.stats.gov.cn/english/
Chart VC-GDP of the National Bureau of Statistics of China provides annual value and growth rates of GDP. China’s GDP growth in 2012 is still high at 7.8 percent but at the lowest rhythm in five years
Chart VC-GDP, China, Gross Domestic Product, Million Yuan and ∆%, 2008-2012
Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/
The HSBC Flash China Manufacturing Purchasing Managers’ Index™ (PMI™) compiled by Markit (http://www.markiteconomics.com/Survey/PressRelease.mvc/69676b0fae3d429b89c74bcf671abde4) is moving at slower pace. The overall Flash HSBC China Manufacturing PMI™ decreased from 48.2 in Jun to 47.7 in Jul, which is moderately below the contraction frontier of 50.0, while the Flash HSBC China Manufacturing Output Index decreased from 48.6 in Jun to 48.2 in Jul, moving into moderate contraction territory. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that weakness in the index suggests need for further stimulus to support growth (http://www.markiteconomics.com/Survey/PressRelease.mvc/69676b0fae3d429b89c74bcf671abde4). The HSBC China Services PMI™, compiled by Markit, shows marginal weakness in business activity in China with the HSBC Composite Output, combining manufacturing and services, decreasing from 50.9 in May to 49.8 in Jun with the first output reduction in ten months (http://www.markiteconomics.com/Survey/PressRelease.mvc/cae4f011435d4230b6cfb98dcde4e488). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that combined manufacturing and services data suggest downward effects on growth from both manufacturing and services (http://www.markiteconomics.com/Survey/PressRelease.mvc/cae4f011435d4230b6cfb98dcde4e488). The HSBC Business Activity index increased from 51.2 in May to 51.3 in Jun (http://www.markiteconomics.com/Survey/PressRelease.mvc/cae4f011435d4230b6cfb98dcde4e488). Hongbin Ku, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds slowing services (http://www.markiteconomics.com/Survey/PressRelease.mvc/cae4f011435d4230b6cfb98dcde4e488). The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, decreased to 48.2 in Jun from 49.2 in May, indicating moderate contraction in manufacturing for the second consecutive month after six prior consecutive months of improvement (http://www.markiteconomics.com/Survey/PressRelease.mvc/43d33bc53a2142e8b5c3dde180f3b9d4). New export orders decreased for the third consecutive month at the fastest rate since Sep 2012. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds weakening manufacturing because of declining orders and increasing inventories with weak lending because of the credit squeeze (http://www.markiteconomics.com/Survey/PressRelease.mvc/43d33bc53a2142e8b5c3dde180f3b9d4). Table CNY provides the country data table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Jun 12-month ∆%: minus 2.7 Jun month ∆%: -0.6 |
| Consumer Price Index | Jun month ∆%: 0.0 Jun 12 months ∆%: 2.7 |
| Value Added of Industry | Jun month ∆%: 0.68 Jan-Jun 2013/Jan-Jun 2012 ∆%: 9.3 |
| GDP Growth Rate | Year IIQ2013 ∆%: 7.5 |
| Investment in Fixed Assets | Jun month ∆%: 1.51 Total Jan-Jun 2013 ∆%: 20.1 Real estate development: 20.3 |
| Retail Sales | Jun month ∆%: 1.26 Jan-Jun ∆%: 12.7 |
| Trade Balance | Jun balance $27.13 billion Cumulative Jun: $108.55 billion |
Links to blog comments in Table CNY:
7/21/2013 http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html
7/14/13 http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html
VD Euro Area. Table VD-EUR provides yearly growth rates of the combined GDP of the members of the European Monetary Union (EMU) or euro area since 1996. Growth was very strong at 3.2 percent in 2006 and 3.0 percent in 2007. The global recession had strong impact with growth of only 0.4 percent in 2008 and decline of 4.4 percent in 2009. Recovery was at lower growth rates of 2.0 percent in 2010 and 1.5 percent in 2011. EUROSTAT forecasts growth of GDP of the euro area of minus 0.6 percent in 2012 and minus 0.4 percent in 2013 but 1.2 percent in 2014.
Table VD-EUR, Euro Area, Yearly Percentage Change of Harmonized Index of Consumer Prices, Unemployment and GDP ∆%
| Year | HICP ∆% | Unemployment | GDP ∆% |
| 1999 | 1.2 | 9.6 | 2.9 |
| 2000 | 2.2 | 8.7 | 3.8 |
| 2001 | 2.4 | 8.1 | 2.0 |
| 2002 | 2.3 | 8.5 | 0.9 |
| 2003 | 2.1 | 9.0 | 0.7 |
| 2004 | 2.2 | 9.3 | 2.2 |
| 2005 | 2.2 | 9.2 | 1.7 |
| 2006 | 2.2 | 8.5 | 3.2 |
| 2007 | 2.1 | 7.6 | 3.0 |
| 2008 | 3.3 | 7.6 | 0.4 |
| 2009 | 0.3 | 9.6 | -4.4 |
| 2010 | 1.6 | 10.1 | 2.0 |
| 2011 | 2.7 | 10.2 | 1.5 |
| 2012* | 2.5 | 11.4 | -0.6 |
| 2013* | -0.4 | ||
| 2014* | 1.2 |
*EUROSTAT forecast Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
The GDP of the euro area in 2011 in current US dollars in the dataset of the World Economic Outlook (WEO) of the International Monetary Fund (IMF) is $13,114.4 billion (http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/index.aspx). The sum of the GDP of France is $2778.1 billion with the GDP of Germany of $3607.4 billion, Italy of $2198.7 billion and Spain $1479.6 billion is $10,063.8 billion or 76.7 percent of total euro area GDP. The four largest economies account for slightly more than three quarters of economic activity of the euro area. Table VD-EUR1 is constructed with the dataset of EUROSTAT, providing growth rates of the euro area as a whole and of the largest four economies of Germany, France, Italy and Spain annually from 1996 to 2011 with the estimate of 2012 and forecasts for 2013 and 2014 by EUROSTAT. The impact of the global recession on the overall euro area economy and on the four largest economies was quite strong. There was sharp contraction in 2009 and growth rates have not rebounded to earlier growth with exception of Germany in 2010 and 2011.
Table VD-EUR1, Euro Area, Real GDP Growth Rate, ∆%
| Euro Area | Germany | France | Italy | Spain | |
| 2014* | 1.2 | 1.8 | 1.1 | 0.7 | 0.9 |
| 2013* | -0.4 | 0.4 | -0.1 | -1.3 | -1.5 |
| 2012 | -0.6 | 0.7 | 0.0* | -2.4 | -1.4* |
| 2011 | 1.5 | 3.0 | 2.0 | 0.4 | 0.4 |
| 2010 | 2.0 | 4.2 | 1.7 | 1.7 | -0.3 |
| 2009 | -4.4 | -5.1 | -3.1 | -5.5 | -3.7 |
| 2008 | 0.4 | 1.1 | -0.1 | -1.2 | 0.9 |
| 2007 | 3.0 | 3.3 | 2.3 | 1.7 | 3.5 |
| 2006 | 3.2 | 3.7 | 2.5 | 2.2 | 4.1 |
| 2005 | 1.7 | 0.7 | 1.8 | 0.9 | 3.6 |
| 2004 | 2.2 | 1.2 | 2.5 | 1.7 | 3.3 |
| 2003 | 0.7 | -0.4 | 0.9 | 0.0 | 3.1 |
| 2002 | 0.9 | 0.0 | 0.9 | 0.5 | 2.7 |
| 2001 | 2.0 | 1.5 | 1.8 | 1.9 | 3.7 |
| 2000 | 3.8 | 3.1 | 3.7 | 3.7 | 5.0 |
| 1999 | 2.9 | 1.9 | 3.3 | 1.5 | 4.7 |
| 1998 | 2.8 | 1.9 | 3.4 | 1.4 | 4.5 |
| 1997 | 2.6 | 1.7 | 2.2 | 1.9 | 3.9 |
| 1996 | 1.5 | 0.8 | 1.1 | 1.1 | 2.5 |
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/
The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI®, combining activity in manufacturing and services, increased from 48.7 in Jun to 50.4 in Jul, interrupting seventeen consecutive contractions with the highest reading in eighteen months. The respondents indicated the highest growth of output since Jun 2011. Chris Williamson, Chief Economist at Markit, finds that the Markit Flash Eurozone PMI index suggests that the euro area could move out of contraction in IIIQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/b9f7cd408c63428ca6cab343f4dbed5d). The Markit Eurozone PMI® Composite Output Index, combining services and manufacturing activity with close association with GDP, increased from 47.7 in May to 48.7 in Jun with aggregate output declining during 17 consecutive months (http://www.markiteconomics.com/Survey/PressRelease.mvc/609476644add42bcb8c486547e55cf4d). Chris Williamson, Chief Economist at Markit, finds that the data are consistent GDP falling in IIQ2012 at 0.2 percent (http://www.markiteconomics.com/Survey/PressRelease.mvc/609476644add42bcb8c486547e55cf4d). The Markit Eurozone Services Business Activity Index increased from 47.2 in May to 48.3 in Jun, indicating contraction (http://www.markiteconomics.com/Survey/PressRelease.mvc/609476644add42bcb8c486547e55cf4d). The Markit Eurozone Manufacturing PMI® increased marginally to 48.8 in Jun from 48.3 in May, which indicates contraction for the twenty-third consecutive month since Aug 2011 but at the highest reading in 16 months (http://www.markiteconomics.com/Survey/PressRelease.mvc/2bc1f71d2a9f427183cd528a3ed7832a). New orders fell at the slowest rate since Jun 2011 with marginal decline in export orders and lower rate of decline internal orders. Chris Williamson, Chief Economist at Markit, finds the survey data consistent with growth in IIIQ2013 if the trend of improvement continues (http://www.markiteconomics.com/Survey/PressRelease.mvc/2bc1f71d2a9f427183cd528a3ed7832a). Table EUR provides the data table for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IQ2013 ∆% -0.3; IQ2013/IQ2012 ∆% -1.1 Blog 7/7/13 |
| Unemployment | May 2013: 12.1% unemployment rate May 2013: 19.992 million unemployed Blog 7/7/13 |
| HICP | Jun month ∆%: 0.1 12 months Apr ∆%: 1.6 |
| Producer Prices | Euro Zone industrial producer prices May ∆%: -0.3 |
| Industrial Production | May month ∆%: -0.3; May 12 months ∆%: -1.3 |
| Retail Sales | May month ∆%: 1.0 |
| Confidence and Economic Sentiment Indicator | Sentiment 91.3 Jun 2013 Consumer minus 18.8 Jun 2013 Blog 6/30/13 |
| Trade | Jan-Apr 2013/Jan-Apr 2012 Exports ∆%: 3.2 Apr 2013 12-month Exports ∆% 9.1 Imports ∆% 1.2 |
Links to blog comments in Table EUR:
7/21/2013 http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html
7/14/13 http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html
7/7/13 http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html
6/30/13 http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html
6/23/13 http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and.html
VE Germany. Table VE-DE provides yearly growth rates of the German economy from 1992 to 2012, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economies. The German economy grew at 4.2 percent in 2010, 3.0 percent in 2011 and 0.7 percent in 2012.
The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):
“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”
Table VE-DE, Germany, GDP Year ∆%
| Price Adjusted Chain-Linked | Price- and Calendar-Adjusted Chain Linked | |
| 2012 | 0.7 | 0.9 |
| 2011 | 3.0 | 3.1 |
| 2010 | 4.2 | 4.0 |
| 2009 | -5.1 | -5.1 |
| 2008 | 1.1 | 0.8 |
| 2007 | 3.3 | 3.4 |
| 2006 | 3.7 | 3.9 |
| 2005 | 0.7 | 0.8 |
| 2004 | 1.2 | 0.7 |
| 2003 | -0.4 | -0.4 |
| 2002 | 0.0 | 0.0 |
| 2001 | 1.5 | 1.6 |
| 2000 | 3.1 | 3.3 |
| 1999 | 1.9 | 1.8 |
| 1998 | 1.9 | 1.7 |
| 1997 | 1.7 | 1.8 |
| 1996 | 0.8 | 0.8 |
| 1995 | 1.7 | 1.8 |
| 1994 | 2.5 | 2.5 |
| 1993 | -1.0 | -1.0 |
| 1992 | 1.9 | 1.5 |
Source: Statistisches Bundesamt Deutschland (Destatis) https://www.destatis.de/EN/PressServices/Press/pr/2013/02/PE13_066_811.html;jsessionid=59DE7E440F9F7393B12C16FDA63BEB66.cae1
The Flash Germany Composite Output Index of the Markit Flash Germany PMI®, combining manufacturing and services, increased from 50.4 in Jun to 52.8 in Jul, for the highest reading in five months with stronger improvement in services at 52.4 in Jul while manufacturing moved into expansion at 50.3 (http://www.markiteconomics.com/Survey/PressRelease.mvc/813702faa006423d91c19091988c8c89). New export orders for manufacturing decreased for the fifth consecutive month with internal activities compensating for the weakness in markets in China and the euro area. Tim Moore, Senior Economist at Markit, finds improvement in manufacturing and services in the beginning of IIIQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/813702faa006423d91c19091988c8c89). The Markit Germany Composite Output Index of the Markit Germany Services PMI®, combining manufacturing and services with close association with Germany’s GDP, increased from 50.2 in May to 50.4 in Jun (http://www.markiteconomics.com/Survey/PressRelease.mvc/fff41c347a20425bb0c0e63f4a8fe8f6). Tim Moore, Senior Economist at Markit and author of the report, finds risks of standstill in the economy of Germany with minor increases in output and concerned outlook (http://www.markiteconomics.com/Survey/PressRelease.mvc/fff41c347a20425bb0c0e63f4a8fe8f6). The Germany Services Business Activity Index increased from 49.7 in May to 50.4 in Jun (http://www.markiteconomics.com/Survey/PressRelease.mvc/fff41c347a20425bb0c0e63f4a8fe8f6). The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing conditions, decreased from 49.4 in May to 48.6 in Jun, in very moderate contraction territory below 50.0 (http://www.markiteconomics.com/Survey/PressRelease.mvc/1923f6df3e784218afce4dde78ee6c2f). New export orders fell at the fastest rate in 2013 with declines in Asia and Europe. Tim Moore, Senior Economist at Markit and author of the report, finds restrain from weakness in markets, especially in exports, even with reduction of sales prices at the fastest rate in more than three years (http://www.markiteconomics.com/Survey/PressRelease.mvc/1923f6df3e784218afce4dde78ee6c2f).Table DE provides the country data table for Germany.
Table DE, Germany, Economic Indicators
| GDP | IQ2013 0.1 ∆%; I/Q2013/IQ2012 ∆% -1.4 2012/2011: 0.7% GDP ∆% 1992-2012 Blog 8/26/12 5/27/12 11/25/12 2/24/13 5/19/13 5/26/13 |
| Consumer Price Index | Jun month NSA ∆%: 0.1 |
| Producer Price Index | Jun month ∆%: 0.0 CSA, 0.3 |
| Industrial Production | MFG Apr month CSA ∆%: minus 0.7 |
| Machine Orders | MFG May month ∆%: -1.3 |
| Retail Sales | May Month ∆% 0.4 12-Month ∆% 0.8 Blog 6/30/13 |
| Employment Report | Unemployment Rate SA May 5.4% |
| Trade Balance | Exports May 12-month NSA ∆%: minus 4.8 Blog 7/14/13 |
Links to blog comments in Table DE:
7/21/2013 http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html
7/14/13 http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html
7/7/13 http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html
http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html
6/30/13 http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html
5/26/13 http://cmpassocregulationblog.blogspot.com/2013/05/united-states-commercial-banks-assets.html
VF France. Table VF-FR provides growth rates of GDP of France with the estimates of Institut National de la Statistique et des Études Économiques (INSEE). The long-term rate of GDP growth of France from IVQ1949 to IVQ2012 is quite high at 3.2 percent. France’s growth rates were quite high in the four decades of the 1950s, 1960, 1970s and 1980s with an average growth rate of 4.0 percent compounding the average rates in the decades and discounting to one decade. The growth impulse diminished with 1.9 percent in the 1990s and 1.7 percent from 2000 to 2007. The average growth rate from 2000 to 2012, using fourth quarter data, is 1.0 percent because of the sharp impact of the global recession from IVQ2007 to IIQ2009. The growth rate from 2000 to 2012 is 1.0 percent. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in US fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in the G7 in Japan and France in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Lucas (2011May) compares growth of the G7 economies (US, UK, Japan, Germany, France, Italy and Canada) and Spain, finding that catch-up growth with earlier rates for the US and UK stalled in the 1970s.
Table VF-FR, France, Average Growth Rates of GDP Fourth Quarter, 1949-2012
| Period | Average ∆% |
| 1949-2012 | 3.2 |
| 2000-2012 | 1.0 |
| 2000-2011 | 1.1 |
| 2000-2007 | 1.7 |
| 1990-1999 | 1.9 |
| 1980-1989 | 2.5 |
| 1970-1979 | 3.8 |
| 1960-1969 | 5.7 |
| 1950-1959 | 4.2 |
Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=28&date=20130626
The Markit Flash France Composite Output Index increased from 47.4 in Jun to 48.8 in Jul for the highest reading in seventeen months (http://www.markiteconomics.com/Survey/PressRelease.mvc/ff874f59bf1442d3a8c96ef0a33d8ac0). Jack Kennedy, Senior Economist at Markit and author of the report, finds that the data suggest improvement with manufacturing suggestin increase in output while decline of services slowed (http://www.markiteconomics.com/Survey/PressRelease.mvc/ff874f59bf1442d3a8c96ef0a33d8ac0). The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased from 44.6 in May to 47.2 in Jun, indicating contraction of private sector activity at the slowest rate of deterioration in 2013 and the highest reading in ten months (http://www.markiteconomics.com/Survey/PressRelease.mvc/a1f570072f9a426a9ec90e289936095c). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds that composite data for manufacturing and services indicate movement toward stability away from sharper contraction in IQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/a1f570072f9a426a9ec90e289936095c). The Markit France Services Activity index increased from 44.3 in May to 47.2 in Jun for the highest reading in ten months (http://www.markiteconomics.com/Survey/PressRelease.mvc/a1f570072f9a426a9ec90e289936095c). The Markit France Manufacturing Purchasing Managers’ Index® increased to 48.4 in Jun from 46.4 in May, for the highest reading in sixteen consecutive months below the neutral level of 50.0 (http://www.markiteconomics.com/Survey/PressRelease.mvc/4951772002d4429881c48fda4cafcae5). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds slower decline in manufacturing but that the current period of 16 consecutive months of deterioration is the longest since beginning of the survey in 1998 (http://www.markiteconomics.com/Survey/PressRelease.mvc/4951772002d4429881c48fda4cafcae5). Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Jun month ∆% 0.2 |
| PPI | May month ∆%: -1.2 Blog 6/30/13 |
| GDP Growth | IQ2013/IQ2012 ∆%: -0.4 |
| Industrial Production | May ∆%: |
| Consumer Spending | Manufactured Goods |
| Employment | Unemployment Rate: 10.4% |
| Trade Balance | May Exports ∆%: month -4.3, 12 months -4.4 May Imports ∆%: month -0.2, 12 months -2.2 Blog 7/7/13 |
| Confidence Indicators | Historical averages 100 Jul Mfg Business Climate 95 Blog 7/28/13 |
Links to blog comments in Table FR:
7/14/13 http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html
7/7/13 http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html
6/30/13 http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html
6/16/13 http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html
6/9/13 http://cmpassocregulationblog.blogspot.com/2013/06/twenty-eight-million-unemployed-or.html
5/19/13 http://cmpassocregulationblog.blogspot.com/2013/05/word-inflation-waves-squeeze-of.html
Table VF-1 shows the INSEE business climate indicator for manufacturing. The headline synthetic index decreased from 92 in Jan 2013 to 88 in Apr 2013 but rebounded to 92 in May 2013, 93 in Jun 2013 and 95 in Jul 2013. The final row shows general production expectations deteriorating from minus 34 in Feb 2013 to minus 49 in Apr 2013 and improving to minus 46 in May 2013, minus 41 in Jun 2013 and minus 30 in Jul 2013. The indicator of demand and export order levels improved from minus 30 in Feb 2013 to minus 29 in May 2013 and minus 28 in Jun 2013 but deteriorated to minus 31 in Jul 2013.
Table VF-1, France, Manufacturing Business Climate Indicators of INSEE
| Mfg 2013 | Average since 1976 | Apr 13 | May 13 | Jun 13 | Jul 13 |
| Synthetic Index | 100 | 88 | 92 | 93 | 95 |
| Recent Changes in Output | 4 | -17 | -4 | -5 | -1 |
| Finished- Goods Inventory Level | 13 | 10 | 11 | 9 | 10 |
| Demand and Total Order Levels | -18 | -40 | -31 | -29 | -25 |
| Demand and Export Order Levels | -13 | -26 | -29 | -28 | -31 |
| Personal Production Expectations | 5 | -2 | -2 | 0 | 1 |
| General Production Expectations | -9 | -49 | -46 | -41 | -30 |
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20130723
Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011 with upward reversal in 2012 interrupted in Apr through Jul 2012 and a marginal upward move in Aug-Sep 2012 but new decline in Oct 2012, marginally reversed in Nov 2012 with stability in Dec 2012 and decline in Jan 2013 but improvement in Feb 2013 and stability in Mar 2013, deteriorating in Apr 2013 and recovering in May-Jul 2013.
Chart VF-1, France, INSEE Industrial Business Climate Synthetic Index
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20130723
hart VF-4 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov 2011 is showing declining trend in Jan 2012 with slight reversal in Feb followed by significant improvement in Mar and deterioration in Apr through Jul 2012 with new improvement in Aug 2012 followed by decline in Sep-Oct 2012 followed by rebound in Nov 2012 and stability in Dec 2012 to Jan-Mar 2013, deteriorating in Apr-May 2013. The index improved in Jun-Jul 2013.
Chart VF-2, INSEE Business Climate Manufacturing Turning Point Indicator
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20130723
Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France provides the composite climate indicator for French business. There is recovery in Jul 2013.
Chart VF-3, France, Composite Synthetic Index of Business Climate of INSEE
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=105&date=20130723
VG Italy. Table VG-IT provides percentage changes in a quarter relative to the same quarter a year earlier of Italy’s expenditure components in chained volume measures. GDP has been declining at sharper rates from minus 0.5 percent in IVQ2011 to minus 2.8 percent in IVQ2012 and minus 2.4 percent in IQ2013. The aggregate demand components of consumption and gross fixed capital formation (GFCF) have been declining at faster rates.
Table VG-IT, Italy, GDP and Expenditure Components, Chained Volume Measures, Quarter ∆% on Same Quarter Year Earlier
| GDP | Imports | Consumption | GFCF | Exports | |
| 2013 | |||||
| IQ | -2.4 | -5.2 | -2.7 | -7.5 | -0.2 |
| 2012 | |||||
| IVQ | -2.8 | -6.7 | -4.2 | -7.8 | 1.8 |
| IIIQ | -2.6 | -8.1 | -4.3 | -8.2 | 2.5 |
| IIQ | -2.5 | -7.5 | -3.9 | -8.3 | 2.5 |
| IQ | -1.7 | -8.9 | -3.3 | -7.6 | 2.1 |
| 2011 | |||||
| IVQ | -0.5 | -6.9 | -1.8 | -3.3 | 3.1 |
| IIIQ | 0.3 | 0.1 | -0.7 | -2.1 | 5.6 |
| IIQ | 0.9 | 3.1 | 0.6 | -0.6 | 7.0 |
| IQ | 1.3 | 8.8 | 0.9 | 0.6 | 10.9 |
| 2010 | |||||
| IVQ | 2.0 | 15.3 | 1.1 | 0.8 | 13.2 |
| IIIQ | 1.8 | 13.2 | 1.3 | 2.4 | 12.0 |
| IIQ | 1.9 | 13.5 | 0.8 | 1.1 | 12.0 |
| IQ | 1.1 | 7.2 | 0.8 | -2.0 | 7.3 |
| 2009 | |||||
| IVQ | -3.4 | -6.4 | 0.2 | -7.8 | -9.3 |
| IIIQ | -4.9 | -12.2 | -0.8 | -12.6 | -16.4 |
| IIQ | -6.6 | -17.9 | -1.5 | -13.6 | -21.4 |
| IQ | -7.0 | -17.2 | -1.7 | -12.6 | -22.8 |
| 2008 | |||||
| IVQ | -3.0 | -8.2 | -0.9 | -8.3 | -10.3 |
| IIIQ | -1.9 | -5.0 | -0.8 | -4.5 | -3.9 |
| IIQ | -0.2 | -0.1 | -0.3 | -1.5 | 0.4 |
| IQ | 0.5 | 1.7 | 0.1 | -1.0 | 2.9 |
GFCF: Gross Fixed Capital Formation
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/92338
The Markit/ADACI Business Activity Index decreased from 46.5 in May to 45.8 in Jun, indicating contraction of output of Italy’s services sector for 25 consecutive months of decline since Jun 2011 with contraction sharp relative to the history of the index (http://www.markiteconomics.com/Survey/PressRelease.mvc/5bd5c06b053d42a3a8c527b6d68f4a9b). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds acceleration of contraction in May and Jun (http://www.markiteconomics.com/Survey/PressRelease.mvc/5bd5c06b053d42a3a8c527b6d68f4a9b). The Markit/ADACI Purchasing Managers’ Index® (PMI®), increased from 47.3 in May to 49.1 in Jun for 23 consecutive months of contraction of Italy’s manufacturing below 50.0 with the Jun at the highest in five months, indicating only marginal deterioration of overall business while output increased for the first time in 23 months (http://www.markiteconomics.com/Survey/PressRelease.mvc/675369f0f11f4232a9cd0a1dc5c63c8f). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI®, finds that manufacturing has been improving by obtaining foreign orders with internal demand still weak (http://www.markiteconomics.com/Survey/PressRelease.mvc/675369f0f11f4232a9cd0a1dc5c63c8f). Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Jun month ∆%: 0.3 |
| Producer Price Index | May month ∆%: -0.1 Blog 6/30/13 |
| GDP Growth | IQ2013/IVQ2012 SA ∆%: minus 0.6 |
| Labor Report | Apr 2013 Participation rate 63.8% Employment ratio 56.0% Unemployment rate 12.0% Blog 6/2/13 |
| Industrial Production | May month ∆%: 0.1 |
| Retail Sales | Apr month ∆%: -0.1 Apr 12-month ∆%: -2.9 Blog 6/30/13 |
| Business Confidence | Mfg Jun 90.2, Feb 88.6 Construction Jun 71.0, Feb 81.1 Blog 6/30/13 |
| Trade Balance | Balance May SA €3155 million versus Apr €2683 |
Links to blog comments in Table IT:
7/21/2013 http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html
7/14/13 http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html
6/30/13 http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html
6/16/13 http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html
6/2/13 http://cmpassocregulationblog.blogspot.com/2013/06/mediocre-united-states-economic-growth.html
3/17/13 http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html
An important part of the analysis of Blanchard (2011WEOSep, 2012WEOApr) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and competitive companies. The restraints consist of low economic growth with high debt/GDP ratio. Table VG-1 provides growth of retail sales for Italy. Retail sales increased 0.1 percent in May 2013 relative to Apr 2013, decreased 0.5 percent in Mar-Apr 2013 relative to Dec 2012-Feb 2013, decreased 1.1 percent in May 2013 relative to May 2012 and decreased 2.9 percent cumulatively in Jan-May 2013 relative to Jan-May 2012. Food retail sales outperform non-food retail sales.
Table VG-1, Italy, Retail Sales ∆%
| May 2013/ Apr 2013 SA | Mar-Apr 13/ | May 2013/ May 2012 NSA | Jan-May 2013/ | |
| Food | 0.6 | -0.1 | 0.1 | -1.6 |
| Non-food | -0.2 | -0.9 | -1.8 | -3.5 |
| Total | 0.1 | -0.5 | -1.1 | -2.9 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/96576
Chart VG-1 provides 12-month percentage changes of retail sales at current prices. There is improvement in the final segment from Feb to May 2013.
Chart VG-1, Italy, Percentage Changes of Retail Sales in 12 Months
Source: Istituto Nazionale di Statistica
A longer perspective of retail sales in Italy is provided by monthly and 12-month percentage changes in 2011, Jan-Dec 2012, Jan-May 2013 and annual rates for 2011 and 2012 in Table VG-2. Retail sales did not decline very sharply during the global recession but fell 0.8 percent in 2011 and 1.7 percent in 2012. There is an evident declining trend in 2011 with few monthly increases and similar weakness in 2012 with multiple monthly declines. Percentage changes in 12 months have increased to more than 3 percent with decrease of 3.2 percent in the 12 months ending in Mar 2013 but decrease of 2.9 percent in the 12 months ending in Apr 2013. Retail sales increased 0.1 percent in May 2013 and the decline in 12 months eased to minus 1.1 percent.
Table VG-2, Italy, Retail Sales Month and 12-Month ∆%
| Month ∆% SA | 12-Month ∆% NSA | |
| May 2013 | 0.1 | -1.1 |
| Apr | -0.1 | -2.9 |
| Mar | -0.2 | -3.2 |
| Feb | -0.2 | -4.8 |
| Jan | -0.5 | -2.8 |
| Dec 2012 | -0.1 | -3.4 |
| Nov | 0.0 | -2.4 |
| Oct | -0.8 | -3.4 |
| Sep | -0.1 | -1.0 |
| Aug | 0.0 | -0.4 |
| Jul | -0.2 | -3.1 |
| Jun | 0.0 | 0.2 |
| May | -0.1 | -1.1 |
| Apr | -1.1 | -6.3 |
| Mar | 0.2 | 2.3 |
| Feb | -0.4 | 0.7 |
| Jan | 1.0 | -0.9 |
| Dec 2011 | -0.9 | -3.2 |
| Nov | -0.5 | -1.5 |
| Oct | 0.7 | -0.9 |
| Sep | -0.3 | -1.1 |
| Aug | -0.4 | 0.1 |
| July | 0.0 | -1.7 |
| Jun | -0.4 | -0.6 |
| May | -0.5 | -0.3 |
| Apr | 1.0 | 3.3 |
| Mar | -0.3 | -1.9 |
| Feb | -0.3 | 0.1 |
| Jan | -0.2 | -0.5 |
| Dec 2010 | 0.5 | 0.6 |
| 2012 | -1.7 | |
| 2011 | -0.8 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/96576
VH United Kingdom. Annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of 5.2 percent in 2009 after dropping 0.8 percent in 2008. Recovery of 1.7 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 1.1 percent in 2011 and 0.2 percent in 2012.
Table VH-UK, UK, Gross Domestic Product, ∆%
| ∆% on Prior Year | |
| 1998 | 3.6 |
| 1999 | 2.9 |
| 2000 | 4.4 |
| 2001 | 2.2 |
| 2002 | 2.3 |
| 2003 | 3.9 |
| 2004 | 3.2 |
| 2005 | 3.2 |
| 2006 | 2.8 |
| 2007 | 3.4 |
| 2008 | -0.8 |
| 2009 | -5.2 |
| 2010 | 1.7 |
| 2011 | 1.1 |
| 2012 | 0.2 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q1-2013/index.html
The Business Activity Index of the Markit/CIPS UK Services PMI® increased from 54.9 in May to 56.9 in Jun, indicating increase in activity in every month since the beginning of 2013 and at the fastest rate since 27 months (http://www.markiteconomics.com/Survey/PressRelease.mvc/d8b5be871614424e84c8dcd2e5573427). Chris Williamson, Chief Economist at Markit, finds continuing improvement in the UK’s economy that depending on Jun could result in growth of GDP of 0.5 percent in IIQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/d8b5be871614424e84c8dcd2e5573427). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) increased from 51.5 in May to 52.5 in Jun, which is the highest rate of improvement in 25 months (http://www.markiteconomics.com/Survey/PressRelease.mvc/c853fab910d9425083c5eee0326d3fe3). Rob Dobson, Senior Economist at Markit that compiles the Markit/CIPS Manufacturing PMI®, finds manufacturing improving at the highest rates since the beginning of 2011 with improving domestic demand and supporting foreign orders, suggesting growth of output of manufacturing by 0.5 percent in IIQ2013 (http://www.markiteconomics.com/Survey/PressRelease.mvc/c853fab910d9425083c5eee0326d3fe3). Table UK provides the economic indicators for the United Kingdom.
Table UK, UK Economic Indicators
| CPI | Jun month ∆%: -0.2 |
| Output/Input Prices | Output Prices: Jun 12-month NSA ∆%: 2.0; excluding food, petroleum ∆%: 1.0 |
| GDP Growth | IIQ2013 prior quarter ∆% 0.6; year earlier same quarter ∆%: 1.4 |
| Industrial Production | May 2013/May 2012 ∆%: Production Industries minus 2.3; Manufacturing minus 2.9 |
| Retail Sales | Jun month ∆%: 0.2 |
| Labor Market | Mar-May Unemployment Rate: 7.8%; Claimant Count 4.4%; Earnings Growth 1.7% |
| Trade Balance | Balance Apr minus ₤2579 million |
Links to blog comments in Table UK:
7/21/2013 http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html
7/14/13 http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.html
5/26/13 http://cmpassocregulationblog.blogspot.com/2013/05/united-states-commercial-banks-assets.html
4/28/13 http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states_28.html
03/31/13 http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html
The UK Office for National Statistics provides important analysis of the relation of GDP and the labor market (http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2013-q1--july-gdp-update/index.html http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2013-q1--may-labour-market-update/sum-may13-labour.html http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2013-q1--may-labour-market-update/index.html
http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2012-q4--january-gdp-update/sum-jan13.html http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2012-q4--february-labour-market-update/sum-2012-q4---february-labour-update.html). The UK economy grew 0.3 percent in IQ2013 and 0.6 percent in IIQ2013 but output is still 3.3 below the level before the global recession (http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2013-q1--july-gdp-update/index.html). Chart VH-1 of the UK Office for National Statistics (http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2013-q1--july-gdp-update/index.html) shows weakening output but relatively faster increases in employment and hours worked.
Chart VH-1, UK, Employment Level Ages 16 and Over, Total Weekly Hours and GDP, 2008-2012
Source: UK Office for National Statistics
Table VH-LGDP of the UK Office for national Statistics (http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2013-q1--july-gdp-update/index.html http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2013-q1--may-gdp-update/index.html http://www.ons.gov.uk/ons/rel/elmr/gdp-and-the-labour-market/2013-q1--may-labour-market-update/sum-may13-labour.html) provides total weekly hours, output and employment quarterly from 2008 to 2013. Weakening output has been accompanied recently by improvements in hours worked and employment.
Table VH-LGDP, UK, Indices of Quarterly Employment Ages 16 and Over, Total Hours Worked and GDP, 2008-2012
IQ2008 =100
| Index, 2008 Q1 =100 | |||
| Total weekly hours, Aged 16 + | GDP, CVM | Employment, Aged 16 + | |
| YBUS | ABMI | MGRZ | |
| 2008 Q1 | 100.0 | 100.0 | 100.0 |
| Q2 | 98.9 | 99.1 | 100.1 |
| Q3 | 98.9 | 97.6 | 99.6 |
| Q4 | 98.3 | 95.6 | 99.4 |
| 2009 Q1 | 96.7 | 93.2 | 98.9 |
| Q2 | 96.3 | 92.8 | 97.9 |
| Q3 | 95.8 | 92.8 | 97.8 |
| Q4 | 95.8 | 93.2 | 97.9 |
| 2010 Q1 | 95.7 | 93.7 | 97.6 |
| Q2 | 96.5 | 94.6 | 98.2 |
| Q3 | 97.0 | 95.0 | 98.9 |
| Q4 | 97.4 | 94.8 | 98.7 |
| 2011 Q1 | 97.4 | 95.3 | 99.0 |
| Q2 | 96.3 | 95.4 | 99.0 |
| Q3 | 97.1 | 95.9 | 98.5 |
| Q4 | 97.3 | 95.8 | 98.8 |
| 2012 Q1 | 98.0 | 95.8 | 99.2 |
| Q2 | 98.5 | 95.3 | 99.9 |
| Q3 | 99.6 | 96.0 | 100.2 |
| Q4 | 99.8 | 95.8 | 100.8 |
| 2013 Q1 | 100.1 | 96.0 | 100.7 |
| Q2 | 96.6 |
Source: UK Office for National Statistics
The UK Office for National Statistics provides an important revision of the national accounts of the UK (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q1-2013/index.html http://www.ons.gov.uk/ons/dcp171778_314093.pdf pages 5-6 and reference to Hardie and Lee (2013) ‘Impact of changes in the national accounts and
economic commentary for Q1 2013 (193.4 Kb Pdf)’.):
“Revisions resulting from the incorporation of new data, new methodology, replacement of forecasts, improvements to seasonal adjustment and rebalancing of annual supply and use tables have been taken back to the first quarter of 1997. Methodological revisions have been modelled back to 1991 in such a way as to avoid any discontinuities. Data has also been rebased back to the beginning of the time series.”
The new data, additions and revisions are analyzed here. Table VH-1 provides quarter on quarter chained value measures of GDP since 1998 in the first estimate for IIQ2013 (http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2013/index.html). GDP grew 0.6 percent in IIQ2013 relative to IQ2013. Growth of 0.7 percent in IIIQ2012 interrupted three consecutive quarters of weakness in GDP growth. Most advanced economies are underperforming relative to the period before the global recession. The UK Office for National Statistics analyzes the decline in the impulse of growth in the UK because of weakness in markets in the UK and worldwide. The UK Office for National Statistics estimates that GDP in IIQ2013 is lower by 3.3 percent relative to the peak in IQ2008 (http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2013/stb-gdp-preliminary-estimate--q2-2013.html).
Table VH-1, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%
| IQ | IIQ | IIIQ | IV | |
| 2013 | 0.3 | 0.6 | ||
| 2012 | 0.0 | -0.5 | 0.7 | -0.2 |
| 2011 | 0.5 | 0.1 | 0.6 | -0.1 |
| 2010 | 0.5 | 1.0 | 0.4 | -0.2 |
| 2009 | -2.5 | -0.4 | 0.0 | 0.4 |
| 2008 | 0.1 | -0.9 | -1.4 | -2.1 |
| 2007 | 1.0 | 1.3 | 1.2 | 0.1 |
| 2006 | 0.4 | 0.3 | 0.2 | 0.8 |
| 2005 | 0.8 | 1.3 | 1.0 | 1.3 |
| 2004 | 0.7 | 0.4 | 0.1 | 0.7 |
| 2003 | 0.5 | 1.3 | 1.3 | 1.3 |
| 2002 | 0.5 | 0.7 | 0.8 | 1.0 |
| 2001 | 0.8 | 0.7 | 0.5 | 0.1 |
| 2000 | 1.4 | 1.0 | 0.3 | 0.3 |
| 1999 | 0.3 | 0.0 | 1.9 | 1.3 |
| 1998 | 0.8 | 0.8 | 0.7 | 1.0 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2013/index.html
There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VH-2. (1) Growth rates were quite high from 2000 to 2007. (2) There were six consecutive quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 4.3 percent in IVQ2008, 6.8 percent in IQ2009, 6.3 percent in IIQ2009 and 5.0 percent in IIIQ2009. (3) The economy bounced strongly with 2.0 percent in IIQ2010, 2.4 percent in IIIQ2010 and 1.8 percent in IVQ2010. (4) Recovery in 2011 did not continue at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2010. Growth relative to the same quarter a year earlier fell from 1.8 percent in IVQ2010 to 1.7 percent in IQ2011, 0.8 percent in IIQ2011, 1.0 percent in IIIQ2011 and 1.1 percent in IVQ2011 but only 0.6 percent in IQ2012, change of 0.0 percent in IIQ2012 relative to IQ2011, growth of 0.1 percent in IIIQ2012 and 0.0 percent in IVQ2012. Growth increased to 0.3 percent in IQ2013 relative to a year earlier and 0.3 percent in IQ2013 relative to IVQ2012. GDP increased 0.6 percent in IIQ2013 relative to IQ2013 and 1.4 percent in IIQ2013 relative to IIQ2012. In IQ2012, GDP changed 0.0 percent and increased 0.6 percent relative to a year earlier. In IIQ2012, GDP fell 0.5 percent relative to IQ2012 and changed 0.0 percent relative to a year earlier. In IIIQ2012, GDP increased 0.7 percent and grew 0.1 percent relative to the same quarter a year earlier. In IVQ2012, GDP fell 0.2 percent and grew 0.0 percent relative to a year earlier. Fiscal consolidation in an environment of weakening economic growth is much more challenging. In IIQ2013, GDP increased 0.6 percent and 1.4 percent relative to a year earlier.
Table VH-2, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%
| IQ | IIQ | IIIQ | IV | |
| 2013 | 0.3 | 1.4 | ||
| 2012 | 0.6 | 0.0 | 0.1 | 0.0 |
| 2011 | 1.7 | 0.8 | 1.0 | 1.1 |
| 2010 | 0.5 | 2.0 | 2.4 | 1.8 |
| 2009 | -6.8 | -6.3 | -5.0 | -2.5 |
| 2008 | 2.8 | 0.6 | -2.1 | -4.3 |
| 2007 | 2.4 | 3.3 | 4.3 | 3.7 |
| 2006 | 4.0 | 3.0 | 2.3 | 1.8 |
| 2005 | 2.0 | 2.8 | 3.7 | 4.4 |
| 2004 | 4.7 | 3.7 | 2.5 | 1.9 |
| 2003 | 3.2 | 3.8 | 4.3 | 4.5 |
| 2002 | 1.8 | 1.9 | 2.3 | 3.2 |
| 2001 | 2.4 | 2.1 | 2.2 | 2.0 |
| 2000 | 4.7 | 5.7 | 4.1 | 3.0 |
| 1999 | 2.8 | 2.1 | 3.2 | 3.6 |
| 1998 | 4.0 | 3.5 | 3.4 | 3.4 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2013/index.html
Table VH-3 provides annual percentage changes of gross value added and key components. Production fell 9.5 percent in 2009 and its most important component manufacturing fell 10.2 percent. Services fell 3.9 percent in 2009. Services grew in all years from 2010 to 2012 while manufacturing fell 1.7 percent in 2012.
Table VH-3, UK, Gross Value Added by Components, ∆% on Prior Year
| Total Production | MFG | CONST | SERVICES | Gross Value Added | |
| 2010 Weights | 152 | 104 | 63 | 778 | 1000 |
| 1998 | 1.2 | 0.5 | 1.4 | 5.0 | 3.8 |
| 1999 | 1.2 | 0.5 | 1.3 | 3.8 | 3.1 |
| 2000 | 1.8 | 2.1 | 0.8 | 5.6 | 4.5 |
| 2001 | -1.6 | -1.7 | 1.8 | 3.0 | 1.8 |
| 2002 | -1.4 | -2.4 | 5.7 | 2.3 | 2.0 |
| 2003 | -0.6 | -0.5 | 4.9 | 5.2 | 4.1 |
| 2004 | 0.7 | 1.9 | 5.2 | 3.4 | 3.0 |
| 2005 | -0.8 | -0.2 | -2.4 | 5.2 | 3.6 |
| 2006 | 0.2 | 1.8 | 0.7 | 3.4 | 2.7 |
| 2007 | 0.4 | 0.8 | 2.1 | 4.4 | 3.5 |
| 2008 | -2.9 | -2.8 | -2.5 | 0.0 | -0.8 |
| 2009 | -9.5 | -10.2 | -13.3 | -3.9 | -5.2 |
| 2010 | 2.8 | 4.2 | 8.3 | 0.8 | 1.7 |
| 2011 | -1.2 | 1.8 | 2.3 | 1.5 | 1.1 |
| 2012 | -2.4 | -1.7 | -8.3 | 1.3 | 0.2 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2013/index.html
Percentage changes of gross value added and components are in Table VH-4. Gross value added increased 0.6 percent in IIQ2013 with growth of services of 0.6 percent and production of 0.6 while manufacturing expanded 0.4 percent.
Table VH-4, UK, Gross Value Added by Components, ∆% on Previous Quarter
| Total PROD | MFG | CONST | SERV | GVA | |
| 2010 Weights | 152 | 104 | 63 | 778 | 1000 |
| 2000 Q1 | 0.2 | 0.4 | 1.4 | 1.6 | 1.3 |
| 2000 Q2 | 0.2 | 0.2 | -0.7 | 2.0 | 1.5 |
| 2000 Q3 | -0.3 | -0.2 | -1.7 | 0.6 | 0.3 |
| 2000 Q4 | 0.3 | 1.0 | 1.0 | 0.1 | 0.2 |
| 2001 Q1 | -0.5 | -0.7 | -0.4 | 1.5 | 0.8 |
| 2001 Q2 | -1.1 | -1.7 | 2.8 | 0.5 | 0.2 |
| 2001 Q3 | -0.1 | 0.0 | 0.2 | 0.4 | 0.3 |
| 2001 Q4 | -1.3 | -1.6 | 1.1 | 0.3 | 0.0 |
| 2002 Q1 | 0.3 | 0.1 | 1.1 | 0.4 | 0.6 |
| 2002 Q2 | -0.5 | -1.3 | 1.1 | 0.8 | 0.6 |
| 2002 Q3 | 0.0 | 1.0 | 3.6 | 0.9 | 0.9 |
| 2002 Q4 | -0.2 | -1.5 | 1.1 | 1.3 | 1.0 |
| 2003 Q1 | -0.7 | -0.4 | -2.3 | 1.4 | 0.8 |
| 2003 Q2 | -0.2 | 0.4 | 3.0 | 1.5 | 1.3 |
| 2003 Q3 | 0.8 | 0.7 | 2.7 | 1.3 | 1.3 |
| 2003 Q4 | 0.5 | 0.8 | 2.5 | 1.4 | 1.3 |
| 2004 Q1 | 0.2 | 0.9 | 2.9 | 0.4 | 0.5 |
| 2004 Q2 | 0.6 | 0.5 | -1.3 | 0.5 | 0.4 |
| 2004 Q3 | -1.8 | -1.4 | -0.7 | 0.6 | 0.1 |
| 2004 Q4 | 0.7 | 1.3 | -1.0 | 0.9 | 0.7 |
| 2005 Q1 | -0.6 | -0.9 | 0.3 | 1.5 | 1.0 |
| 2005 Q2 | 0.9 | 0.8 | -0.4 | 1.7 | 1.4 |
| 2005 Q3 | -1.3 | -0.6 | -1.8 | 1.7 | 0.9 |
| 2005 Q4 | 0.4 | 0.1 | -0.4 | 1.7 | 1.4 |
| 2006 Q1 | 0.8 | 0.7 | 0.7 | 0.3 | 0.4 |
| 2006 Q2 | -0.6 | 0.9 | 0.8 | 0.3 | 0.2 |
| 2006 Q3 | 0.0 | 0.4 | 0.5 | 0.3 | 0.3 |
| 2006 Q4 | 0.2 | 0.8 | 1.8 | 0.8 | 0.7 |
| 2007 Q1 | 0.2 | -0.5 | 1.0 | 1.3 | 1.1 |
| 2007 Q2 | 0.2 | 0.2 | -0.4 | 1.8 | 1.3 |
| 2007 Q3 | -0.2 | 0.0 | -1.4 | 1.8 | 1.2 |
| 2007 Q4 | 0.4 | 0.2 | 1.3 | 0.0 | 0.1 |
| 2008 Q1 | -0.6 | 0.1 | 0.9 | 0.1 | 0.2 |
| 2008 Q2 | -1.0 | -1.5 | -1.4 | -0.5 | -0.6 |
| 2008 Q3 | -1.5 | -1.6 | -2.7 | -1.3 | -1.5 |
| 2008 Q4 | -4.6 | -4.9 | -5.3 | -1.5 | -2.3 |
| 2009 Q1 | -4.9 | -5.8 | -7.1 | -1.6 | -2.5 |
| 2009 Q2 | -0.1 | 0.1 | -1.9 | -0.6 | -0.6 |
| 2009 Q3 | -0.9 | -0.2 | 0.3 | 0.1 | 0.0 |
| 2009 Q4 | 0.7 | 1.3 | 1.0 | 0.2 | 0.4 |
| 2010 Q1 | 1.3 | 0.9 | 3.1 | 0.3 | 0.5 |
| 2010 Q2 | 1.7 | 2.0 | 5.9 | 0.4 | 1.0 |
| 2010 Q3 | 0.1 | 1.2 | 1.7 | 0.5 | 0.4 |
| 2010 Q4 | 0.7 | 0.8 | -2.2 | -0.3 | -0.2 |
| 2011 Q1 | -1.0 | 0.2 | 1.6 | 0.5 | 0.5 |
| 2011 Q2 | -1.1 | 0.2 | 1.0 | 0.4 | 0.1 |
| 2011 Q3 | -0.3 | -0.4 | -1.1 | 1.0 | 0.6 |
| 2011 Q4 | -0.6 | -0.4 | -0.6 | 0.0 | -0.1 |
| 2012 Q1 | -0.5 | -0.1 | -4.0 | 0.3 | 0.0 |
| 2012 Q2 | -1.1 | -1.3 | -4.5 | -0.1 | -0.5 |
| 2012 Q3 | 0.4 | 0.6 | -1.8 | 1.0 | 0.7 |
| 2012 Q4 | -2.2 | -1.7 | 1.7 | 0.0 | -0.2 |
| 2013 Q1 | 0.3 | -0.2 | -1.8 | 0.5 | 0.3 |
| 2013 Q2 | 0.6 | 0.4 | 0.9 | 0.6 | 0.6 |
Notes: PROD: Production; MFG: Manufacturing; SERV: Services; GVA: Gross Value Added
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q2-2013/index.html
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013
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