CMP Associates Regulation Blog: Recovery without Hiring, Loss of Full-time Jobs, Youth and Middle Age Unemployment, Risks of Steepening Yield Curve and Peaking Valuations of Risk Financial Assets, United States International Trade, Declining Real Salaries, World Economic Slowdown and Global Recession Risk: Part II

Longer Run

Recovery without Hiring, Loss of Full-time Jobs, Youth and Middle Age Unemployment, Risks of Steepening Yield Curve and Peaking Valuations of Risk Financial Assets, United States International Trade, Declining Real Salaries, World Economic Slowdown and Global Recession Risk

Carlos M. Pelaez

Executive Summary

I Recovery without Hiring

IA1 Hiring Collapse

IA2 Labor Underutilization

IA3 Ten Million Fewer Full-time Job

IA4 Youth and Middle-Age Unemployment

II United States International Trade

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 Aug 2 and daily values throughout the week ending on Aug 8, 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 Aug 2 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Aug 2, 2013”, first row “USD/EUR 1.3281 0.0 %,” provides the information that the US dollar (USD) changed 0.0 percent to USD 1.3281/EUR in the week ending on Fri Aug 2 relative to the exchange rate on Fri Jul 26. 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 1.3281/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Aug 2, appreciating to USD 1.3258/EUR on Mon Aug 5, 2013, or by 0.2 percent. The dollar appreciated because fewer dollars, $1.3258, were required on Mon Aug 5 to buy one euro than $1.3281 on Aug 2. 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 1.3281/EUR on Aug; 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 Aug 2, to the last business day of the current week, in this case Fri Aug 9, such as depreciation by 0.5 percent to USD 1.3342/EUR by Aug 2 {[(1.3342/1.3281)-1]100 = 0.0%}; 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 0.5 percent from the rate of USD 1.3281/EUR on Fri Aug 2 to the rate of USD 1.3342/EUR on Fri Aug 9 {[(1.3342/1.3281) – 1]100 = 0.5%} and appreciated (denoted by positive sign) by 0.3 percent from the rate of USD 1.3381 on Thu Aug 8 to USD 1.3342/EUR on Fri Aug 9 {[(1.3342/1.3381) -1]100 = -0.3%}. 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 Aug 5 to Aug 9, 2013

Fri Aug 2, 2013

M 5

Tue 6

W 7

Thu 8

Fri 9

USD/EUR

1.3281

0.0%

1.3258

0.2%

1.3305

-0.2%

-0.4%

1.3337

-0.4%

-0.2%

1.3381

-0.8%

-0.3%

1.3342

-0.5%

0.3%

JPY/ USD

98.95

-0.7%

98.30

0.7%

97.74

1.2%

0.6%

96.34

2.6%

1.4%

96.71

2.3%

-0.4%

96.23

2.7%

0.5%

CHF/ USD

0.9293

-0.1%

0.9274

0.2%

0.9259

0.4%

0.2%

0.9218

0.8%

0.4%

0.9202

1.0%

0.2%

0.9223

0.8%

-0.2%

CHF/ EUR

1.2342

-0.1%

1.2294

0.4%

1.2321

0.2%

-0.2%

1.2292

0.4%

0.%

1.2313

0.2%

-0.2%

1.2304

0.3%

0.1%

USD/ AUD

0.8904

1.1231

-4.1%

0.8929

1.1199

0.3%

0.8986

1.1128

0.9%

0.6%

0.9000

1.1111

1.1%

0.2%

0.9103

1.0985

2.2%

1.1%

0.9196

1.0874

3.2%

1.0%

10 Year T Note

2.597

2.638

2.599

2.589

2.579

2 Year T Note

0.299

0.303

0.307

0.303

0.30

German Bond

2Y 0.15 10Y 1.65

2Y 0.17 10Y 1.69

2Y 0.17 10Y 1.70

2Y 0.16 10Y 1.69

2Y 0.16 10Y 1.68

DJIA

15658.36

0.6%

15612.13

-0.3%

15518.74

-0.9%

-0.6%

15470.67

-1.2%

-0.3%

15498.32

-1.0%

0.2%

15425.51

-1.5%

-0.5%

DJ Global

2277.30

1.2%

2276.47

0.0%

2263.99

-0.6%

2252.51

-1.1%

-0.5%

2268.90

-0.4%

0.7%

2268.48

-0.4%

0.0%

DJ Asia Pacific

1386.06

0.1%

1383.11

-0.2%

1389.43

0.2%

0.5%

1367.45

-1.3%

-1.6%

1370.89

-1.1%

0.3%

1371.84

-1.0%

0.1

Nikkei

14466.16

2.4%

14258.04

-1.4%

14401.06

-0.5%

1.0%

13824.94

-4.4%

-4.0%

13605.56

-5.9%

-1.6%

13615.19

-5.9%

0.1%

Shanghai

2029.42

0.9%

2050.48

1.0%

2060.50

1.5%

0.5%

2046.78

0.9%

-0.7%

2044.90

0.8%

-0.1%

2052.23

1.1%

0.4%

DAX

8406.94

2.0%

8398.38

-0.1%

8299.73

-1.3%

-1.2%

8260.48

-1.7%

-0.5%

8318.32

-1.1%

0.7%

8338.31

-0.8%

0.2%

DJ UBS

Comm.

125.68

-0.7%

125.02

-0.5%

124.28

-1.1%

-0.6%

123.73

-1.6%

-0.4%

125.02

-0.5%

1.0%

125.57

-0.1%

0.4%

WTI $ B

106.85

2.1%

106.47

-0.4%

105.30

-1.5%

-1.1%

104.26

-2.4%

-1.0%

103.74

-2.9%

-0.5%

106.08

-0.7%

2.3%

Brent $/B

108.90

1.6%

108.62

-0.3%

108.21

-0.6%

-0.4%

107.38

-1.4%

-0.8%

106.73

-2.0%

-0.6%

108.21

-0.6%

1.4%

Gold $/OZ

1312.0

-1.6%

1301.70

-0.8%

1282.5

-2.2%

-1.5%

1286.3

-2.0%

0.3%

1311.3

-0.1%

1.9%

1313.5

0.1%

0.2%

Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss

Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce

Sources: http://www.bloomberg.com/markets/

http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

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 σ_y and prices σ_p. 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 15,425.51

on Fri Aug 2, 2013, which is higher by 8.9 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 8.6 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 4.480 percent on Aug 9, 2013, and that of the ten-year sovereign bond of Italy at 4.187 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 Aug 9, 2013, the yield of the two-year Treasury increased to 0.30 percent and that of the ten-year Treasury decreased to 2.579 percent while the two-year bond of Germany increased to 0.16 percent and the ten-year increased to 1.68 percent; and the dollar depreciated to USD 1.3342/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 0.114 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
7/9/13	0.30	2.579	0.16	1.68	1.3342
8/2/13	0.299	2.597	0.15	1.65	1.3281
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

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.

In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:

Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year, two-year and one-month Treasury constant maturity yields together with the overnight fed funds rate, and the yield of the corporate bond with Moody’s rating of Baa. The riskier yield of the Baa corporate bond exceeds the relatively riskless yields of the Treasury securities. The beginning yields in Chart III-1A for July 31, 2001, are 3.67 percent for one month, 3.79 percent for two years, 5.07 percent for ten years, 3.82 percent for the fed funds rate and 7.85 percent for the Baa corporate bond. On July 30, 2007, yields inverted with the one month at 4.95 percent, the two-year at 4.59 percent and the ten year at 5.82 percent with the yield of the Baa corporate bond at 6.70 percent. Another interesting point is for Oct 31, 2008, with the yield of the Baa jumping to 9.54 percent and the Treasury yields declining: one month 0.12 percent, two years 1.56 percent and ten years 4.01 percent during a flight to the dollar and government securities analyzed by Cochrane and Zingales (2009). Another spike in the series is for Apr 4, 2006 with the yield of the corporate Baa bond at 8.63 and the Treasury yields of 0.12 percent for one month, 0.94 for two years and 2.95 percent for ten years. During the beginning of the flight from risk financial assets to US government securities (see Cochrane and Zingales 2009), the one-month yield was 0.07 percent, the two-year yield 1.64 percent and the ten-year yield 3.41. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe. The final point of Chart III1-A is for Aug 8, 2013, with the one-month yield at 0.05 percent, the two-year at 0.30 percent, the ten-year at 2.58 percent, the fed funds rate at 0.09 percent and the corporate Baa bond at 5.31 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-Aug 8, 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:

Where R_τ is expected revenue in the time horizon from τ =1 to T; C_τ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or

declines.

There was mixed performance in equity indexes with several indexes in Table III-1 decreasing in the week ending on Aug 9, 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 decreased 0.5 percent on Aug 9, decreasing 1.5 percent in the week. Germany’s Dax increased 0.2 percent on Fri Aug 9 and decreased 0.8 percent in the week. Dow Global changed 0.0 percent on Aug 9 and decreased 0.4 percent in the week. Japan’s Nikkei Average increased 0.1 percent on Fri Aug 9 and decreased 5.9 percent in the week as the yen continues oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration and monetary stimulus by a new board of the Bank of Japan. Dow Asia Pacific TSM increased 0.1 percent on Aug 9 and decreased 1.0 percent in the week. Shanghai Composite that decreased 0.2 percent on Mar 8 and decreased 1.7 percent in the week of Mar 8, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2052.23 on Fri Aug 9 for increase of 0.4 percent and increase of 1.1 percent in the week of Aug 9. 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 Aug 9, 2013. The DJ UBS Commodities Index increased 0.4 percent on Fri Aug 9 and decreased 0.1 percent in the week, as shown in Table III-1. WTI decreased 0.7 percent in the week of Aug 9 while Brent decreased 0.6 percent in the week. Gold increased 0.2 percent on Fri Aug 9 and increased 0.1 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 €804,920 million on Aug 2, 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 €1,405,632 million in the statement of Aug 2, 2013, with marginal reduction. There is high credit risk in these transactions with capital of only €90,418 million as analyzed by Cochrane (2012Aug31).

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

	Dec 31, 2010	Dec 28, 2011	Aug 2, 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	247,320
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	25,825
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	21,660
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	804,920
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	86,813
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	600,712
8 General Government Debt Denominated in Euro	34,954	33,928	28,356
9 Other Assets	278,719	336,574	255,517
TOTAL ASSETS	2,004, 432	2,733,235	2,391,090
Memo Items
Sum of 5 and 7	1,004,174	1,489,759	1,405,632
Capital and Reserves	78,143	81,481	90,418

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/fs130806.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-Jun 2013. Exports to the non-European Union area with share of 46.3 percent in Italy’s total exports are growing at 3.0 percent in Jan-Jun 2013 relative to Jan-Jun 2012 while those to EMU are growing at minus 4.1 percent.

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

Jun 2013	Exports % Share	∆% Jan-Jun 2013/ Jan-Jun 2012	Imports % Share	∆% Jan-Jun 2013/ Jan-Jun 2012
EU	53.7	-3.1	52.9	-3.0
EMU 17	40.5	-4.1	42.7	-3.1
France	11.1	-3.1	8.3	-6.2
Germany	12.5	-4.5	14.6	-7.4
Spain	4.7	-8.0	4.4	-3.0
UK	4.9	1.0	2.5	-1.4
Non EU	46.3	3.0	47.1	-11.3
Europe non EU	13.9	0.0	11.3	6.9
USA	6.8	-2.3	3.3	-18.6
China	2.3	6.7	6.5	-10.4
OPEC	5.7	10.5	10.8	-27.4
Total	100.0	-0.4	100.0	-7.0

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

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97574

Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €356 million with the 17 countries of the euro zone (EMU 17) in Jun 2013 and cumulative deficit of €2393 million in Jan-Jun 2013. Depreciation to parity could permit greater competitiveness in improving the trade surplus of 3752 million in Jan-Jun 2013 with Europe non European Union, the trade surplus of €7593 million with the US and trade surplus with non-European Union of €8020 million in Jan-Jun 2013. There is significant rigidity in the trade deficits in Jan-Jun 2013 of €6726 million with China and €3998 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 Jun 2013 Millions of Euro	Trade Balance Cumulative Jan-Jun 2013 Millions of Euro
EU	1,124	4,268
EMU 17	-356	-2,393
France	1,080	6,207
Germany	-391	-2,437
Spain	22	391
UK	1,070	4,671
Non EU	2,494	8,020
Europe non EU	1,066	3,752
USA	1,333	7,593
China	-906	-6,726
OPEC	-315	-3,998
Total	3,618	12,288

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

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97574

Growth rates of Italy’s trade and major products are in Table III-5 for the period Jan-Jun 2013 relative to Jan-Jun 2012. Growth rates of cumulative imports relative to a year earlier are negative for energy with minus 17.4 percent and minus 11.3 percent for durable goods. The higher rate of growth of exports of minus 0.4 percent in Jan-Jun 2013/Jan-Jun 2012 relative to imports of minus 7.0 percent may reflect weak demand in Italy with GDP declining during eight consecutive quarters from IIIQ2011 through IIQ2013 together with softening commodity prices.

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

	Exports Share %	Exports ∆% Jan-Jun 2013/ Jan-Jun 2012	Imports Share %	Imports ∆% Jan-Jun 2013/ Jan-Jun 2012
Consumer Goods	29.3	6.2	25.6	0.1
Durable	5.8	0.8	2.9	-11.3
Non-Durable	23.5	7.5	22.7	1.6
Capital Goods	31.6	0.7	19.5	-7.7
Inter- mediate Goods	33.6	-3.9	32.6	-4.7
Energy	5.5	-18.7	22.3	-17.4
Total ex Energy	94.5	0.6	77.7	-4.0
Total	100.0	-0.4	100.0	-7.0

Note: % Share for 2012 total trade.

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97574

Table III-6 provides Italy’s trade balance by product categories in Jun 2013 and cumulative Jan-Jun 2013. Italy’s trade balance excluding energy generated surplus of €8285 million in Jun 2013 and €39,687 million cumulative in Jan-Jun 2013 but the energy trade balance created deficit of €4667 million in Jun 2013 and cumulative €27,399 million in Jan-Jun 2013. The overall surplus in Jun 2013 was €3618 million with cumulative surplus of €12,288 million in Jan-Jun 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

	Jun 2013	Cumulative Jan-Jun 2013
Consumer Goods	2,017	10,262
Durable	1,155	6,323
Nondurable	862	3,939
Capital Goods	5,419	26,173
Intermediate Goods	849	3,252
Energy	-4,667	-27,399
Total ex Energy	8,285	39,687
Total	3,618	12,288

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97574

Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30, 2011, the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt exceeding 100 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The prospects of survival of the euro zone are dire. Table III-7 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2013.

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

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

*Net Lending/borrowing**Gross Debt

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

The data in Table III-7 are used for some very simple calculations in Table III-8. The column “Net Debt USD Billions” in Table III-8 is generated by applying the percentage in Table III-7 column “General Government Net Debt % GDP 2013” to the column “GDP USD Billions.” The total debt of France and Germany in 2013 is $4315.7 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $4087.3 billion, adding rows D+E+F+G+H in column “Net Debt USD billions.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-8. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8403.0 billion, which would be equivalent to 132.6 percent of their combined GDP in 2013. Under this arrangement, the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 233.5 percent if including debt of France and 167.7 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.

Table III-8, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	9,423.7
B Germany	1,946.5		$8403.0 as % of $3598 =233.5% $6033.8 as % of $3598 =167.7%
C France	2,369.2
B+C	4,315.7	GDP $6,337.0 Total Debt $8403.0 Debt/GDP: 132.6%
D Italy	2,123.7
E Spain	1,097.9
F Portugal	250.7
G Greece	379.2
H Ireland	235.8
Subtotal D+E+F+G+H	4,087.3

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

There is extremely important information in Table VE-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 Jun 2013. German exports to other European Union (EU) members are 57.8 percent of total exports in Jun 2013 and 57.3 percent in cumulative Jan-Jun 2013. Exports to the euro area are 37.7 percent in Jun and 37.4 percent cumulative in Jan-Jun. Exports to third countries are 42.2 percent of the total in Jun and 42.7 percent cumulative in Jan-Jun. There is similar distribution for imports. Exports to non-euro countries are increasing 2.2 percent in the 12 months ending in Jun 2013, increasing 1.1 percent cumulative in Jan-Jun 2013 while exports to the euro area are decreasing 1.4 percent in the 12 months ending in Jun 2013 and decreasing 3.1 percent cumulative in Jan-Jun 2013. Exports to third countries, accounting for 42.2 percent of the total in Jun 2013, are decreasing 4.6 percent in the 12 months ending in Jun 2013 and increasing 1.0 percent cumulative in Jan-Jun 2013, accounting for 42.7 percent of the cumulative total in Jan-Jun 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 ∆%

	Jun 2013 € Billions	Jun 12-Month ∆%	Cumulative Jan-Jun 2012 € Billions	Cumulative Jan-Jun 2013/ Jan-Jun 2012 ∆%
Total Exports	92.8	-2.1	547.4	-0.6
A. EU Members	53.6 % 57.8	-0.1	313.7 % 57.3	-1.7
Euro Area	35.0 % 37.7	-1.4	205.0 % 37.4	-3.1
Non-euro Area	18.6 % 20.0	2.2	108.7 % 19.9	1.1
B. Third Countries	39.2 % 42.2	-4.6	233.7 % 42.7	1.0
Total Imports	75.9	-1.2	449.7	-1.6
C. EU Members	49.1 % 64.7	-0.3	291.0 % 64.7	0.1
Euro Area	34.8 % 45.8	-0.5	203.5 % 45.3	-0.8
Non-euro Area	14.3 % 18.8	0.0	87.4 % 19.4	2.1
D. Third Countries	26.7 % 35.2	-2.7	158.7 % 35.3	-4.6

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

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2013/08/PE13_262_

IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.

First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:

D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)

Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,

{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:

N(t+1) = (1+n)N(t), n>-1 (2)

The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:

B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)

On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.

Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

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

Equation (4) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_t_{, t+τ}, of the future primary surpluses s_t_+τ, which are equal to T_t_+τ – G_t_+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_t_{, t+τ}. The second equation of Cochrane (2011Jan, 5) is:

M_tV(i_t, ·) = P_tY_t (5)

Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):

“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”

An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.

There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:

(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress

(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality

(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.

Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	1.6	1.8	2.5	7.6
Japan	0.4	0.2	1.2	3.9
China	7.5	2.7	-2.3
UK	1.4	2.9* CPIH 2.7	2.0 output 1.0** input 4.2	7.8
Euro Zone	-1.1	1.6	0.3	12.1
Germany	-0.3	1.9	0.6	5.3
France	-0.4	1.0	0.2	10.4
Nether-lands	-1.4	3.2	-0.2	6.6
Finland	-2.2	2.3	1.7	8.4
Belgium	-0.6	1.5	0.9	8.6
Portugal	-4.0	1.2	1.4	17.6
Ireland	NA	0.7	1.8	13.6
Italy	-2.4	1.4	-0.7	12.2
Greece	-5.6	-0.3	0.8	NA
Spain	-2.0	2.2	1.3	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

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

Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/; country statistical sources http://www.census.gov/aboutus/stat_int.html

Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 1.4 percent in IIQ2013 relative to IIQ2012 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.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 (http://cmpassocregulationblog.blogspot.com/2013/07/duration-dumping-steepening-yield-curve.html 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: 7.4 percent in the US but 17.4 percent for unemployment/underemployment or job stress of 28.3 million (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html

and earlier http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-million-unemployed-or.html), 3.9 percent for Japan (Section VB and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.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/2013/08/risks-of-steepening-yield-curve-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/2013/08/risks-of-steepening-yield-curve-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html), weak hiring with the loss of 10 million full-time jobs (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.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/2013/08/risks-of-steepening-yield-curve-and.html and earlier http://cmpassocregulationblog.blogspot.com/2013/07/twenty-nine-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 2.2 percent on average in the cyclical expansion in the 15 quarters from IIIQ2009 to IIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf). The average of 7.7 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 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier 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 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier 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, the average number of nonfarm jobs created in Jan-Jul 2012 was 185,571 while the average number of nonfarm jobs created in Jan-Jul 2013 was 192,429, or increase by 3.7 percent. The average number of private jobs created in the US in Jan-Jul 2012 was 189,000 while the average in Jan-Jul 2013 was 195,571, or increase by 3.5 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 Jul 2013 was 192,429, 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 28.3 million unemployed or underemployed. The difference between the average increase of 192,429 new private nonfarm jobs per month in the US from Jan to Jul 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 79,262 monthly new jobs net of absorption of new entrants in the labor force. There are 28.3 million in job stress in the US currently. Creation of 79,622 new jobs per month net of absorption of new entrants in the labor force would require 357 months to provide jobs for the unemployed and underemployed (28.315 million divided by 79,262) or 30 years (357 divided by 12). The civilian labor force of the US in Jul 2013 not seasonally adjusted stood at 157.196 million with 12.083 million unemployed or effectively 17.577 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 162.690 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.1 years (1 million divided by product of 79,262 by 12, which is 951,144). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.860 million (0.05 times labor force of 157.196 million) for new net job creation of 4.223 million (12.083 million unemployed minus 7.860 million unemployed at rate of 5 percent) that at the current rate would take 4.4 years (4.223 million divided by 0.951144). Under the calculation in this blog, there are 17.577 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 162.690 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 9.9 years (17.577 million minus 0.05(162.690 million) = 9.443 million divided by 0.951144, 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 145.113 million in Jul 2013, by 2.202 million, or decline of 1.5 percent, while the civilian noninstitutional or economically active population increased from 231.958 million in Jul 2007 to 245.756 million in Jul 2013, by 13.798 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. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions.

Second, revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html

http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.

Long-term. US GDP grew at the average yearly rate of 3.3 percent from 1929 to 2012 and at 3.2 percent from 1947 to 2012.
Cycles. The combined contraction of GDP in the two almost consecutive recessions in the early 1980s is 4.6 percent. The contraction of US GDP from IVQ2007 to IIQ2009 during the global recession was 4.3 percent. The critical difference in the expansion is growth at average 7.8 percent in annual equivalent in the first four quarters of recovery from IQ1983 to IVQ1983. The average rate of growth of GDP in four cyclical expansions in the postwar period is 7.7 percent. In contrast, the rate of growth in the first four quarters from IIIQ2009 to IIQ2010 was only 2.7 percent. Average annual equivalent growth in the expansion from IQ1983 to IQ1986 was 5.7 percent. In contrast, average annual equivalent growth in the expansion from IIIQ2009 to IIQ2013 was only 2.7 percent. The US appears to have lost its dynamism of income growth and employment creation.

Table Summary, Long-term and Cyclical Growth of GDP, Real Disposable Income and Real Disposable Income per Capita

	GDP
Long-Term
1929-2012	3.3
1947-2012	3.2
Cyclical Contractions ∆%
IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982	-4.6
IVQ2007 to IIQ2009	-4.3
Cyclical Expansions Average Annual Equivalent ∆%
IQ1983 to IQ1986	5.7
First Four Quarters IQ1983 to IVQ1983	7.8
IIIQ2009 to IIQ2013	2.2
First Four Quarters IIIQ2009 to IIQ2010	2.7
	Real Disposable Income	Real Disposable Income per Capita
Long-Term
1929-2012	3.2	2.0
1947-1999	3.7	2.3
Whole Cycles
1980-1989	3.5	2.6
2006-2012	1.4	0.6

Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf

The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html

http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace from 1.4 to 1.8 percent per year. Table Summary GDP provides the data.

1. Average Annual Growth in the Past Six Quarters. GDP growth in the four quarters of 2012 to IIQ2013 accumulated to 2.7 percent. This growth is equivalent to 1.8 percent per year, obtained by dividing GDP in IIQ2013 of $16,648.7 by GDP in IVQ2011 of $15,242.1 and compounding by 4/6: {[($15,648.7/$15,242.1)^4/6 -1]100 = 1.8.

2. Average Annual Growth in the First Two Quarters of 2013. GDP growth in the first two quarters of 2013 accumulated to 0.7 percent that is equivalent to 1.4 percent in a year. This is obtained by dividing GDP in IIQ2013 of $15648.7 by GDP in IVQ2012 to $15,583.9 and compounding by 4/2: {[($15,648.7/$15,539.6)^4/2 -1]100 =1.4%}. The US economy grew 1.4 percent in IIQ2013 relative to the same quarter a year earlier in IIQ2012. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012.

Table Summary GDP, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,996.1	NA	NA	1.9
IVQ2011	15,242.1	1.6	1.2	2.0
IQ2012	15,381.6	2.6	0.9	3.3
IIQ2012	15,427.7	2.9	0.3	2.8
IIIQ2012	15,534.0	3.6	0.7	3.1
IVQ2012	15,539.6	3.6	0.0	2.0
IQ2013	15,583.9	3.9	0.3	1.3
IIQ2013	15,648.7	4.4	0.4	1.4
Cumulative ∆% IQ2012 to IIQ2013	2.7		2.6
Annual Equivalent ∆%	1.8		1.7

Source: US Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf

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 Jul 31, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130619a.htm):

“Release Date: July 31, 2013

For immediate release

Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. 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 been strengthening, but mortgage rates have risen somewhat and 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 pick up from its recent 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 recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

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 today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

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

There are several important issues in this statement.

Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

Open-ended Quantitative Easing or QE_∞. Earlier programs are continued with an additional open-ended $85 billion of bond purchases per month: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

Advance Guidance on “6 ¼ 2 ½ “Rule. Policy will be accommodative even after the economy recovers satisfactorily: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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):

In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:

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 IIQ2013 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 first estimate of IIQ2013 GDP released on Jul 31 with revisions since 1929 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html

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/2013/08/risks-of-steepening-yield-curve-and.html 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 report on “Personal Income and Outlays” for Jun was released at 8:30 AM on Aug 2, 2013 with revisions from 1959 to May 2013 (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html

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 Jul 2013 was released on Aug 2 and analyzed in this blog (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html

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 Tendency
2013 Mar PR	2.3 to 2.6 2.3 to 2.8	7.2 to 7.3 7.3 to 7.5	0.8 to 1.2 1.3 to 1.7	1.2 to 1.3 1.5 to 1.6
2014 Mar PR	3.0 to 3.5 2.9 to 3.4	6.5 to 6.8 6.7 to 7.0	1.4 to 2.0 1.5 to 2.0	1.5 to 1.8 1.7 to 2.0
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 Mar PR	2.0 to 2.6 2.0 to 3.0	6.9 to 7.5 6.9 to 7.6	0.8 to 1.5 1.3 to 2.0	1.1 to 1.5 1.5 to 2.0
2014 Mar PR	2.2 to 3.6 2.6 to 3.8	6.2 to 6.9 6.1 to 7.1	1.4 to 2.0 1.4 to 2.1	1.5 to 2.1 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

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

China is experiencing similar inflation behavior as the advanced economies in several prior months in the form of declining commodity prices but differs in decreasing inflation of producer prices relative to a year earlier. As shown in Table IV-5, inflation of the price indexes for industry in Jul 2013 is minus 0.3 percent; 12-month inflation is minus 2.3 percent in Jul; and cumulative inflation in Jan-Jul 2013 relative to Jan-Jul 2012 is minus 2.2 percent. Inflation of segments in Jul 2013 in China is provided in Table IV-5 in column “Month Jul 2013 ∆%.” There were decreases of prices of mining & quarrying of 1.0 percent in Jun and decrease of 6.0 percent in 12 months. Prices of consumer goods changed 0.0 percent in Jul and increased 0.0 percent in 12 months. Prices of inputs in the purchaser price index decreased 0.4 percent in Jul and declined 2.2 percent in 12 months. Fuel and power decreased 0.6 percent in Jul and declined 3.4 percent in 12 months. An important category of inputs for exports is textile raw materials, decreasing 0.1 percent in Jul and increasing 0.2 percent in 12 months.

Table IV-5, China, Price Indexes for Industry ∆%

	Month Jul 2013 ∆%	12-Month Jul 2013 ∆%	Jan-Jul 2013/Jan-Jul 2012 ∆%
I Producer Price Indexes	-0.3	-2.3	-2.2
Means of Production	-0.4	-3.0	-3.0
Mining & Quarrying	-1.0	-6.0	-6.8
Raw Materials	-0.6	-3.2	-3.6
Processing	-0.3	-2.6	-2.4
Consumer Goods	0.0	0.0	0.3
Food	0.0	0.4	0.8
Clothing	0.0	1.0	1.3
Daily Use Articles	-0.1	-0.5	0.1
Durable Consumer Goods	-0.1	-0.9	-0.8
II Purchaser Price Indexes	-0.4	-2.2	-2.3
Fuel and Power	-0.6	-3.4	-3.9
Ferrous Metals	-0.6	-5.9	-5.8
Nonferrous Metals	-1.7	-5.8	-3.9
Raw Chemical Materials	-0.5	-2.4	-3.2
Wood & Pulp	0.0	-0.6	-0.6
Building Materials	-0.3	-1.4	-1.7
Other Industrial Raw Materials	-0.2	-1.0	-0.9
Agricultural	0.3	1.8	1.7
Textile Raw Materials	-0.1	0.2	-0.5

Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/

China’s producer price inflation follows waves similar to those around the world but with declining trend since May 2012, as shown in Table IV-6. In the first wave, annual equivalent inflation was 6.4 percent in Jan-Jun 2011, driven by carry trades from zero interest rates to commodity futures. In the second wave, risk aversion unwound carry trades, resulting in annual equivalent inflation of minus 3.1 percent in Jul-Nov 2011. In the third wave, renewed risk aversion resulted in annual equivalent inflation of minus 2.4 percent in Dec 2011-Jan 2012. In the fourth wave, new carry trades resulted in annual equivalent inflation of 2.4 percent in Feb-Apr 2012. In the fifth wave, annual equivalent inflation is minus 5.8 percent in May-Sep 2012. There are declining producer prices in China in Aug-Sep 2012 in contrast with increases worldwide. In a sixth wave, producer prices increased 0.2 percent in Oct 2012, which is equivalent to 2.4 percent in a year. In an eighth wave, annual equivalent inflation was minus 1.2 percent in Nov-Dec 2012. In the ninth wave, annual equivalent inflation in Jan-Feb 2013 is 2.4 percent. In the tenth wave, annual equivalent inflation was minus 4.9 percent in Mar-Jul 2013.

Table IV-6, China, Month and 12-Month Rate of Change of Producer Price Index, ∆%

	12-Month ∆%	Month ∆%
Jul 2013	-2.3	-0.3
Jun	-2.7	-0.6
May	-2.9	-0.6
Apr	-2.6	-0.6
Mar	-1.9	0.0
AE ∆% Mar-Jul		-4.9
Feb	-1.6	0.2
Jan	-1.6	0.2
AE ∆% Jan-Feb		2.4
Dec 2012	-1.9	-0.1
Nov	-2.2	-0.1
AE ∆% Nov-Dec		-1.2
Oct	-2.8	0.2
AE ∆% Oct		2.4
Sep	-3.6	-0.1
Aug	-3.5	-0.5
Jul	-2.9	-0.8
Jun	-2.1	-0.7
May	-1.4	-0.4
AE ∆% May-Sep		-5.8
Apr	-0.7	0.2
Mar	-0.3	0.3
Feb	0.0	0.1
AE ∆% Feb-Apr		2.4
Jan	0.7	-0.1
Dec 2011	1.7	-0.3
AE ∆% Dec-Jan		-2.4
Nov	2.7	-0.7
Oct	5.0	-0.7
Sep	6.5	0.0
Aug	7.3	0.1
Jul	7.5	0.0
AE ∆% Jul-Nov		-3.1
Jun	7.1	0.0
May	6.8	0.3
Apr	6.8	0.5
Mar	7.3	0.6
Feb	7.2	0.8
Jan	6.6	0.9
AE ∆% Jan-Jun		6.4
Dec 2010	5.9	0.7

AE: Annual Equivalent

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/

Chart IV-1 of the National Bureau of Statistics of China provides monthly and 12-month rates of inflation of the price indexes for the industrial sector. Negative monthly rates in Oct, Nov, Dec 2011, Jan, Mar, Apr, May, Jun, Jul, Aug, Sep, Nov and Dec 2012 pulled down the 12-month rates to 5.0 percent in Oct 2011, 2.7 percent in Nov, 1.7 percent in Dec, 0.7 percent in Jan 2012, 0.0 percent in Feb, minus 0.3 percent in Mar, minus 0.7 percent in Apr, minus 1.4 percent in May, 2.1 in Jun, minus 2.9 percent in Jul, minus 3.5 percent in Aug, minus 3.6 percent in Sep. The increase of 0.2 percent in Oct 2012 pulled up the 12-month rate to minus 2.8 percent and the rate eased to minus 2.2 percent in Nov 2012 and minus 1.9 percent in Dec 2012. Increases of 0.2 percent in Jan and Feb 2013 pulled the 12-month rate to minus 1.6 percent while no change in Mar 2013 brought down the 12-month rate to minus 1.9 percent. Declines of prices of 0.6 percent in Apr, May and Jun 2013 pushed the 12-month rate to minus 2.7 percent. Producer prices fell 2.3 percent in the 12 month ending in Jul 2013.

Chart IV-1, China, Producer Prices for the Industrial Sector Month and 12 months ∆%

Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/

Chart IV-2 of the National Bureau of Statistics of China provides monthly and 12-month inflation of the purchaser product indices for the industrial sector. Decreasing monthly inflation with four successive contractions from Oct 2011 to Jan 2012 and May-Aug 2012 pulled down the 12-month rate to minus 4.1 percent in Aug and Sep. Consecutive increases of 0.1 percent in Sep and Oct 2012 raised the 12-month rate to minus 3.3 percent in Oct 2012. The rate eased to minus 2.8 in Nov 2012 with decrease of 0.2 percent in Nov 2012 and minus 2.4 percent in Dec 2012 with monthly decrease of 0.1 percent. Increase of 0.3 percent in Jan 2013 and 0.2 in Feb 2013 pulled the 12-month rate to minus 1.9 percent. Decrease of prices of 0.1 percent in Mar 2013 brought down the 12-month rate to minus 2.0 percent. Declining prices of 0.6 percent in Apr and May 2013 and 0.5 percent in Jun 2013 pushed down the 12-month rate to minus 2.6 percent. The index fell 2.2 percent in the 12 months ending in Jul 2013.

Chart IV-2, China, Purchaser Product Indices for Industrial Sector, Month and 12 months ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/

China is highly conscious of food price inflation because of its high weight in the basket of consumption of the population. Consumer price inflation in China in Jul 2013 was 0.1 percent and 2.7 percent in 12 months, as shown in Table IV-7. Food prices increased 0.0 percent in Jul 2013, increasing 5.0 percent in 12 months because of inclement winter weather in prior months. Adjustment occurred in May with decline of food prices by 1.6 percent and increase of 3.8 percent in 12 months and 3.8 percent in Jan-May 2013 relative to a year earlier. Another area of concern is housing inflation, which was 0.3 percent in Jul but increased 2.9 percent in 12 months. Prices of services increased 0.6 percent in Jul and gained 2.7 percent in 12 months.

Table IV-7, China, Consumer Price Index

2013	Jul 2013 Month ∆%	Jul 2013 12-Month ∆%	Jan-Jul 2013 ∆%/ Jan-Jul 2012
Consumer Prices	0.1	2.7	2.4
Urban	0.1	2.6	2.4
Rural	0.0	2.9	2.6
Food	0.0	5.0	4.1
Non-food	0.2	1.6	1.6
Consumer Goods	-0.1	2.7	2.3
Services	0.6	2.7	2.8
Commodity Categories:
Food	0.0	5.0	4.1
Tobacco, Liquor	0.0	0.2	0.7
Clothing	-0.6	2.2	2.3
Household	0.1	1.4	1.5
Healthcare & Personal Articles	0.0	1.2	1.5
Transportation & Communication	0.3	-0.1	-0.5
Recreation, Education, Culture & Services	0.8	1.3	1.4
Residence	0.3	2.8	2.9

Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/

Month and 12-month rates of change of consumer prices are provided in Table IV-8. There are waves of consumer price inflation in China similar to those around the world (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html). In the first wave, consumer prices increased at the annual equivalent rate of 8.3 percent in Jan-Mar 2011, driven by commodity price increases resulting from unconventional monetary policy of zero interest rates. In the second wave, risk aversion unwound carry trades with annual equivalent inflation falling to the rate of 2.0 percent in Apr-Jun 2011. In the third wave, inflation returned at 2.9 percent with renewed interest in commodity exposures in Jul-Nov 2011. In the fourth wave, inflation returned at a high 5.8 percent annual equivalent in Dec 2011 to Mar 2012. In the fifth wave, annual equivalent inflation was minus 3.9 percent in Apr to Jun 2012. In the sixth wave, annual equivalent inflation rose to 4.1 percent in Jul-Sep 2012. In the seventh wave, inflation was minus 1.2 percent annual equivalent in Oct 2012 and 0.0 percent in Oct-Nov 2012. In the eighth wave, annual equivalent inflation was 12.2 percent in Dec 2012-Feb 2013 primarily because of winter weather that caused increases in food prices. In the ninth wave, collapse of food prices resulted in annual equivalent inflation of minus 10.3 percent in Mar 2013. In the tenth wave, annual equivalent inflation returned at 2.4 percent in Apr 2013. In the eleventh wave, annual equivalent inflation was minus 3.5 percent in May-Jun 2013. In the twelfth wave, inflation rose at annual equivalent 1.2 percent in Jul 2013. Inflation volatility originating in unconventional monetary policy clouds investment and consumption decisions by business and households.

Table IV-8, China, Month and 12-Month Rates of Change of Consumer Price Index ∆%

	Month ∆%	12-Month ∆%
Jul 2013	0.1	2.7
AE ∆% Jul	1.2
Jun	0.0	2.7
May	-0.6	2.1
AE ∆% May-Jun	-3.5
Apr	0.2	2.4
AE ∆% Apr	2.4
Mar 2013	-0.9	2.1
AE ∆% Mar	-10.3
Feb	1.1	3.2
Jan	1.0	2.0
Dec 2012	0.8	2.5
AE ∆% Dec-Feb	12.2
Nov	0.1	2.0
Oct	-0.1	1.7
AE ∆% Oct-Nov	0.0
Sep	0.3	1.9
Aug	0.6	2.0
Jul	0.1	1.8
AE ∆% Jul-Sep	4.1
Jun	-0.6	2.2
May	-0.3	3.0
Apr	-0.1	3.4
AE ∆% Apr to Jun	-3.9
Mar	0.2	3.6
Feb	-0.1	3.2
Jan	1.5	4.5
Dec 2011	0.3	4.1
AE ∆% Dec to Mar	5.8
Nov	-0.2	4.2
Oct	0.1	5.5
Sep	0.5	6.1
Aug	0.3	6.2
Jul	0.5	6.5
AE ∆% Jul to Nov	2.9
Jun	0.3	6.4
May	0.1	5.5
Apr	0.1	5.3
AE ∆% Apr to Jun	2.0
Mar	-0.2	5.4
Feb	1.2	4.9
Jan	1.0	4.9
AE ∆% Jan to Mar	8.3
Dec 2010	0.5	4.6

AE: Annual Equivalent

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/

Chart IV-2 of the National Bureau of Statistics of China provides monthly and 12-month rates of consumer price inflation. In contrast with producer prices, consumer prices had not moderated at the monthly marginal rates. Consumer prices fell 0.2 percent in Nov 2011 after increasing only 0.1 percent in Oct but increased 0.3 percent in Dec and a high 1.5 percent in Jan 2012, declining 0.1 percent in Feb, rising 0.2 percent in Mar and declining 0.1 percent in Apr, 0.3 percent in May and 0.6 percent in Jun 2012 but increasing 0.1 percent in Jul, 0.6 percent in Aug 2012 and 0.3 percent in Sep 2012. Consumer prices fell 0.1 percent in Oct 2012. The decline of 0.1 percent in Feb 2012 pulled down the 12-month rate to 3.2 percent, which bounced back to 3.6 percent in Mar with the monthly increase of 0.2 percent and fell to 2.2 percent in Jun with increasing pace of monthly decline from Apr to Jun 2012. Even with increase of 0.1 percent in Jul 2012, consumer price inflation in 12 months fell to 1.8 percent in Jul 2012 but bounced back to 2.0 percent with increase of 0.6 percent in Aug. In Sep, increase of 0.3 percent still maintained 12-month inflation at 1.9 percent. The decline of 0.1 percent in Oct 2012 pulled down the 12-month rate to 1.7 percent, which is the lowest in Chart IV-3. Increase of 0.1 percent in Nov 2012 pulled up the 12-month rate to 2.0 percent. Abnormal increase of 0.8 percent in Dec 2012 because of winter weather pulled up the 12-month rate to 2.5 percent. Even with increase of 1.0 percent in Jan 2013 12-month inflation fell to 2.0 percent. Inflation of 1.1 percent in Feb 2013 pulled the 12-month rate to 3.2 percent. Collapse of food prices with decline of consumer prices by 0.9 percent in Mar 2013 brought down the 12-month rate to 2.1 percent. Renewed inflation of 0.2 percent in Apr 2013 raised the 12-month rate to 2.4 percent. Decline of inflation by 0.6 percent in May reduced 12-month inflation to 2.1 percent. Inflation rose to 2.7 percent in the 12 months ending in Jun 2013 with unchanged monthly inflation. Consumer prices increased 0.1 percent in Jul 2013 and 2.7 percent in 12 months.

Chart IV-2, China, Consumer Prices ∆% Month and 12 Months

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/

The producer price index of the euro zone decreased in three consecutive months, 0.2 percent in Mar, 0.6 percent in Apr and 0.3 percent in May and was unchanged in Jun 2013, as shown in Table IV-9. Energy inflation has oscillated with the shocks of risk aversion that cause unwinding of carry trade positions from zero interest rates to commodity futures. Energy prices fell 0.8 percent in Dec 2012 but increased 0.4 percent in Feb 2013 and 0.9 percent in Jan 2013. Energy prices fell 0.8 percent in Dec 2012, 0.5 percent in Nov 2012 and fell 0.4 percent in Oct 2012 after -0.1 percent in Sep 2012, increased 2.4 percent in Aug, and 1.4 percent in Jul 2012 or at the annual equivalent rate of 16.2 percent in the quarter Jul-Sep 2012 and at 25.3 percent in Jul-Aug 2012. Energy prices increased 5.2 percent cumulatively in Jan-Mar 2012 or at the annual equivalent rate of 22.5 percent. During periods of relaxed risk aversion, carry trades from zero interest rates to commodity exposures drive high inflation waves. Prices of capital goods have barely moved. Prices of durable consumer goods have been subdued in the first six months of 2013. Purchasing managers’ indexes worldwide reflect increasing prices of inputs for business while sales prices are stagnant or declining, squeezing economic activity (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html). Unconventional monetary policy causes uncertainty in business decisions with shocks of declining net revenue margins during worldwide inflation waves (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html).

Table IV-9, Euro Area, Industrial Producer Prices Month ∆%

	Jun 2013	May 2013	Apr 2013	Mar 2013	Feb 2013	Jan 2013
Industry ex Construction	0.0	-0.3	-0.6	-0.2	0.2	0.4
Industry ex Construction & Energy	0.0	-0.1	-0.2	0.0	0.1	0.2
Intermediate Goods	-0.2	-0.2	-0.4	0.0	0.0	0.1
Energy	0.0	-0.8	-1.7	-0.8	0.4	0.9
Capital Goods	0.0	0.0	0.1	0.0	0.2	0.2
Durable Consumer Goods	0.0	0.1	0.0	0.1	0.1	0.2
Nondurable Consumer Goods	0.3	0.1	-0.1	0.1	0.1	0.2

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

Twelve-month percentage changes of industrial prices in the euro zone have moderated significantly, as shown in Table IV-10. The 12-month percentage change of industrial prices excluding construction fell from 4.5 percent in Dec 2011 to minus 0.2 percent in Apr-Mar 2012 and increased 0.3 percent in Jun 2013. Energy prices increased 9.7 percent in Dec 2011 and Jan 2011 but the rate fell to 4.5 percent in the 12 months ending in Jul 2012, increasing to 7.5 percent in Aug 2012 and 6.4 percent in Sep 2012 but falling to 5.2 percent in Oct 2012, 3.9 percent in Nov 2012, 3.6 percent in Dec 2012, 2.2 percent in Jan 2013 and 1.6 percent in Feb 2013. Energy prices fell 0.3 in the 12 months ending in Mar 2013, minus 2.1 percent in Apr 2013, minus 1.9 percent in May 2013 and minus 0.6 percent in Jun 2013. There is major vulnerability in producer price inflation that can return together with long positions in commodity futures with carry trades from zero interest during relaxation of risk aversion. Business net revenue or prices of sold goods less costs of inputs suffers wide oscillation preventing sound calculation of risk/returns and capital budgeting (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html).

Table IV-10 Euro Area, Industrial Producer Prices 12-Month ∆%

	Jun 2013	May 2013	Apr 2013	Mar 2013	Feb 2013	Jan 2013
Industry ex Construction	0.3	-0.2	-0.2	0.6	1.4	1.7
Industry ex Construction & Energy	0.6	0.5	0.6	1.0	1.3	1.5
Intermediate Goods	-0.4	-0.5	-0.3	0.4	0.8	1.3
Energy	-0.6	-1.9	-2.1	-0.3	1.6	2.2
Capital Goods	0.6	0.6	0.6	0.7	0.8	0.8
Durable Consumer Goods	0.7	0.7	0.7	0.6	0.6	0.8
Nondurable Consumer Goods	2.3	2.1	1.9	2.1	2.3	2.5

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

Industrial producer prices in the euro area are following similar inflation waves as in the rest of the world (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html), as shown in Table IV-11. In the first wave in Jan-Apr 2011, annual equivalent producer price inflation was 11.4 percent driven by carry trades from zero interest rates into commodity futures. In the second wave in May-Jun 2011, annual equivalent inflation of producer prices declined at minus 0.6 percent. In the third wave in Jul-Sep 2011, annual equivalent inflation increased at 2.8 percent. In the third wave in Oct-Dec 2011, risk aversion originating in the European sovereign debt crisis interrupted commodity carry trades, resulting in annual equivalent inflation of only 0.4 percent. In the fifth wave in Jan-Mar 2012, annual equivalent inflation jumped to 8.3 percent with a high annual equivalent rate of 9.4 percent in Jan-Feb 2012. In the sixth wave, risk aversion from the European sovereign debt event caused reversal of commodity carry trades with equivalent annual inflation of minus 2.0 percent in Apr-Jun 2012. In the seventh wave, annual equivalent inflation jumped to 7.4 percent in Jul-Aug 2012 while energy prices driven by carry trades increased at the annual equivalent rate of 25.3 percent. In the eighth wave, annual equivalent inflation retreated to 0.6 percent in Sep-Oct 2012. In the ninth wave, annual equivalent inflation was minus 2.4 percent in Nov-Dec 2012. In the tenth wave, annual equivalent inflation was 3.7 percent in Jan-Feb 2013. In the eleventh wave, annual equivalent inflation was minus 3.3 percent in Mar-Jun 2013. The bottom part of Table IV-7 provides 12-month percentage changes from 1999 to 2010. The final row of Table IV-7 provides the average annual rate of producer-price inflation in the euro area at 2.5 percent in Dec from 1999 to 2012.

Table IV-11, Euro Area, Industrial Producer Prices Excluding Construction, Month and 12-Month ∆%

	Month ∆%	12-Month ∆%
Jun 2013	0.0	0.3
May	-0.3	-0.2
Apr	-0.6	-0.2
Mar	-0.2	0.6
AE ∆% Mar-Jun	-3.3
Feb	0.2	1.4
Jan	0.4	1.7
AE ∆% Jan-Feb	3.7
Dec 2012	-0.2	2.3
Nov	-0.2	2.3
AE ∆% Nov-Dec	-2.4
Oct	0.0	2.7
Sep	0.1	2.9
AE ∆% Sep-Oct	0.6
Aug	0.9	3.0
Jul	0.3	2.0
AE ∆% Jul-Aug	7.4
Jun	-0.4	2.3
May	-0.3	2.8
Apr	0.2	3.0
AE ∆% Apr-Jun	-2.0
Mar	0.5	3.9
Feb	0.6	4.1
Jan	0.9	4.2
AE ∆% Jan-Mar	8.3
Dec 2011	-0.2	4.5
Nov	0.2	5.5
Oct	0.1	5.7
AE ∆% Oct-Dec	0.4
Sep	0.2	5.7
Aug	-0.1	5.8
Jul	0.6	6.0
AE ∆% Jul-Sep	2.8
Jun	0.0	5.7
May	-0.1	6.1
AE ∆% May-Jun	-0.6
Apr	1.0	6.5
Mar	0.7	6.4
Feb	0.7	6.2
Jan	1.2	5.6
AE ∆% Jan-Apr	11.4
Dec 2012		2.3
Dec 2011		4.5
Dec 2010		5.1
Dec 2009		-3.0
Dec 2008		1.5
Dec 2007		4.4
Dec 2006		3.8
Dec 2005		4.5
Dec 2004		3.7
Dec 2003		1.0
Dec 2002		1.5
Dec 2001		-0.5
Dec 2000		4.7
Dec 1999		2.6
Average ∆% 1999-2012		2.5

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 first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-12. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May 2011 at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep 2011, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in Oct-Nov 2011 jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was 1.2 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation increased to 3.0 percent in Jul-Aug 2012. In the ninth wave, inflation collapsed to zero in Sep-Oct 2012 and was minus 0.8 percent in annual equivalent in Sep-Nov 2012. In the tenth wave, annual equivalent inflation in Dec 2012 to Jul 2013 was 1.7 percent. There are worldwide shocks to economies by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html).

Table IV-12, Italy, Consumer Price Index

	Month	12 Months
Jul 2013	0.1	1.2
Jun	0.3	1.2
May	0.0	1.1
Apr	0.0	1.1
Mar	0.2	1.6
Feb	0.1	1.9
Jan	0.2	2.2
Dec 2012	0.2	2.3
AE ∆% Dec 2012-Jul 2013	1.7
Nov 2012	-0.2	2.5
Oct	0.0	2.6
Sep	0.0	3.2
AE ∆% Sep-Nov	-0.8
Aug	0.4	3.2
Jul	0.1	3.1
AE ∆% Jul-Aug	3.0
June	0.2	3.3
May	0.0	3.2
AE ∆% May-Jun	1.2
Apr	0.5	3.3
Mar	0.5	3.3
Feb	0.4	3.3
AE ∆% Feb-Apr	5.7
Jan	0.3	3.2
Dec 2011	0.4	3.3
AE ∆% Dec-Jan	4.3
Nov	-0.1	3.3
Oct	0.6	3.4
AE ∆% Oct-Nov	3.0
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Sep	2.4
Jun	0.1	2.7
May	0.1	2.6
AE ∆% May-Jun	1.2
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9
Annual
2012		3.0
2011		2.8
2010		1.5
2009		0.8
2008		3.3
2007		1.8
2006		2.1

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97589

Consumer price inflation in Italy by segments in the estimate by ISTAT for Jul 2013 is provided in Table IV-13. Total consumer price inflation in Jul 2013 was 0.1 percent and 1.2 percent in 12 months. Inflation of goods was minus 0.2 percent in Jul 2013 and 1.1 percent in 12 months. Prices of durable goods changed 0.0 percent in Jul and decreased 0.6 percent in 12 months, as typical in most countries. Prices of energy increased 0.6 percent in Jul and decreased 0.2 percent in 12 months. Food prices decreased 0.8 percent in Jul and increased 3.0 percent in 12 months. Prices of services increased 0.4 percent in Jul and rose 1.3 percent in 12 months. Transport prices, also influenced by commodity prices, increased 1.2 percent in Jul and increased 2.8 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion (http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and.html).

Table IV-13, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%

Jul 2013	Weights	Month ∆%	12-Month ∆%
General Index	1,000,000	0.1	1.2
I Goods	559,402	-0.2	1.1
Food	168,499	-0.8	3.0
Energy	94,758	0.6	0.2
Durable	89,934	0.0	-0.6
Nondurable	71,031	0.1	1.4
II Services	440,598	0.4	1.3
Housing	71,158	0.1	2.0
Communications	20,227	-0.2	-4.1
Transport	81,266	1.2	2.9

Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/97589

Chart IV-21 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy with marginal increase followed by decline to 2.5 percent in Nov 2012, 2.3 percent in Dec 2012, 2.2 percent in Jan 2013, 1.9 percent in Feb 2013 and 1.6 percent in Mar 2013. Consumer prices increased 1.1 percent in the 12 months ending in Apr-May 2013 and 1.2 percent in Jun 2013. In Jul 2013, consumer prices increased 1.2 percent in 12 months.

Chart, IV-3, Italy, Consumer Price Index, 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica

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

V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx) to show GDP in dollars in 2012 and the growth rate of real GDP of the world and selected regional countries from 2013 to 2016. The 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 ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015	Real GDP ∆% 2016
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 V-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 0.9 percent, at SAAR of 3.7 percent and higher by 3.3 percent relative to IQ2011. US GDP increased 0.3 percent in IIQ2012, 1.2 percent at SAAR and 2.8 percent relative to a year earlier. In IIIQ2012, GDP grew 0.7 percent, 2.8 percent at SAAR and 3.1 percent relative to IIIQ2011. In IVQ2012, GDP grew 0.0 percent, 0.1 percent at SAAR and 2.0 percent relative to IVQ2011. In IQ2013, US GDP grew at 1.1 percent SAAR, 0.3 percent relative to the prior quarter and 1.3 percent relative to the same quarter in 2013. In IIQ2013, US GDP grew at 1.7 percent in SAAR, 0.4 percent relative to the prior quarter and 1.4 percent relative to IIQ2012 (http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html

and earlier http://cmpassocregulationblog.blogspot.com/2013/06/tapering-quantitative-easing-policy-and.html) with weak hiring (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/07/recovery-without-hiring-tapering.htm). 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 eight consecutive quarters from IIIQ2011 to IIQ2013. 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 2.4 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. Italy’s GDP fell 0.2 percent in IIQ2013 and 2.0 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: 0.9 SAAR: 3.7	3.3
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: 1.2	2.8
Japan	QOQ: -0.2 SAAR: -0.6	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	-2.4
United Kingdom	-0.5	0.0
	IIIQ2012/ IIQ2012	IIIQ2012/ IIIQ2011
United States	QOQ: 0.7 SAAR: 2.8	3.1
Japan	QOQ: –0.9 SAAR: –3.6	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: 0.0 SAAR: 0.1	2.0
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: 0.3 SAAR: 1.1	1.3
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	-2.3
UK	0.3	0.3
	IIQ2013/IQ2013	IIQ2013/IIQ2012
United States	QOQ: 0.4 SAAR: 1.7	1.4
China	1.7	7.5
Italy	-0.2	-2.0
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 (http://cmpassocregulationblog.blogspot.com/2013/07/duration-dumping-steepening-yield-curve.html 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 Jul 2013, China exports increased 5.1 percent relative to a year earlier and imports increased 10.9 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 increased 0.6 percent in Jun 2013 while imports decreased 2.6 percent and net trade added 0.10 percentage points to GDP growth in IIQ2012, 0.10 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 increased 2.2 percent in Jun 2013 and goods exports increased 0.9 percent in Jan-Jun 2013 relative to a year earlier but net trade deducted 0.03 percentage points to GDP growth in IIIQ2012 and added 0.68 percentage points in IVQ2012. Net trade deducted 0.28 percentage points from US GDP growth in IQ2013 and deducted 0.81 percentage points in IIQ2013. US imports decreased 2.5 percent in Jun 2013 and goods imports decreased 1.7 percent in Jan-Jun 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 M ∆%	Exports 12 M ∆%	Imports M ∆%	Imports 12 M ∆%
USA	2.2 Jun	0.9 Jan-Jun	-2.5 Jun	-1.7 Jan-Jun
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		5.1 Jul -3.1 Jun 1.0 May 14.7 Apr 10.0 Mar 21.8 Feb		10.9 Jul -0.7 Jun -0.3 May 16.8 Apr 14.1 Mar -15.2 Feb
Euro Area	0.6 12-M May	2.5 Jan-May	-0.8 12-M May	-3.9 Jan-May
Germany	-2.4 Jun CSA	-2.1 Jun	1.7 May CSA	-1.2 Jun
France Jun	0.6	-2.7	-2.6	-5.6
Italy Jun	1.2	4.4	1.6	-2.6
UK	3.2 Apr	4.3 Apr-Jun 13 /Apr-Jun 12	0.6 Apr	0.9 Apr-Jun 13/Apr-Jun 12
Net Trade % Points GDP Growth	% Points
USA	IIQ2013 -0.81 IQ2013 -0.28 IVQ2012 +0.68 IIIQ2012 -0.03 IIQ2012 +0.10 IQ2012 +0.44
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 Millions Yen	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 2005=100	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, increased to 54.1 in Jul from 51.2 in Jun, indicating expansion at a higher rate (http://www.markiteconomics.com/Survey/PressRelease.mvc/0e5d5a0562a842dba2c773a70c8be7ba). This index has remained above the contraction territory of 50.0 during 48 consecutive months. The employment index decreased from 51.6 in Jun to 51.0 in Jul with input prices rising at higher rate and new orders and output increasing at higher rates (http://www.markiteconomics.com/Survey/PressRelease.mvc/0e5d5a0562a842dba2c773a70c8be7ba). Joe Lupton, Senior Economist at JP Morgan, finds that output increased to a high of 16 months (http://www.markiteconomics.com/Survey/PressRelease.mvc/0e5d5a0562a842dba2c773a70c8be7ba). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, was marginally higher at 50.8 in Jul from 50.6 in Jun, which is the seventh consecutive reading above 50 (http://www.markiteconomics.com/Survey/PressRelease.mvc/760ccbef0b1742ed8fc69acc37857228). The HSBC Brazil Composite Output Index, compiled by Markit, decreased marginally from 51.1 in Jun to 49.6 in Jul, indicating moderate contraction in private sector activity (http://www.markiteconomics.com/Survey/PressRelease.mvc/f27cd5ad8b6d423291c9afd416d7d72b). The HSBC Brazil Services Business Activity index, compiled by Markit, fell from 51.0 in Jun to 50.3 in Jul (http://www.markiteconomics.com/Survey/PressRelease.mvc/f27cd5ad8b6d423291c9afd416d7d72b). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the survey data suggest weaker services in the beginning of the second semester (http://www.markiteconomics.com/Survey/PressRelease.mvc/f27cd5ad8b6d423291c9afd416d7d72b). The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) fell from 50.4 in Jun to 48.5 in Jul (http://www.markiteconomics.com/Survey/PressRelease.mvc/056864bbd85642759ac5fd903f1dcf4d). Andre Loes, Chief Economist, Brazil at HSBC, finds contraction of manufacturing in the first month since Sep 2012 (http://www.markiteconomics.com/Survey/PressRelease.mvc/056864bbd85642759ac5fd903f1dcf4d).

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^™) increased to 53.7 in Jul from 51.9 in Jun (http://www.markiteconomics.com/Survey/PressRelease.mvc/37ac7bf07d1d423bb8c53ef451373170). The index of new exports orders rose from 46.3 in Jun to 52.5 in Jul while total new orders increased from 53.4 in Jun to 55.5 in Jul. Mark Wingham, Economist at Markit, finds that the index increased in Jul at the highest rate in four months(http://www.markiteconomics.com/Survey/PressRelease.mvc/37ac7bf07d1d423bb8c53ef451373170). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business^® increased 4.5 percentage points from 50.9 in Jun to 55.4 in Jul, which indicates growth at a higher ate (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders increased 6.4 percentage points from 51.9 in Jun to 58.3 in Jul. The index of exports decreased 1.0 percentage point from 54.5 in Jun to 53.5 in Jul, growing at a lower rate. The Non-Manufacturing ISM Report on Business^® PMI increased 3.8 percentage points from 52.2 in Jun to 56.0 in Jul, indicating growth of business activity/production during 48 consecutive months, while the index of new orders increased 6.9 percentage points from 50.8 in Jun to 57.7 in Jul (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 Blog 7/21/13
Producer Price Index	Jun 12-month NSA ∆%: 2.5; ex food and energy ∆% 1.7 Jun month SA ∆% = 0.8; ex food and energy ∆%: 0.2 Blog 7/21/13
PCE Inflation	Jun 12-month NSA ∆%: headline 1.3; ex food and energy ∆% 1.2 Blog 8/4/13
Employment Situation	Household Survey: Jul Unemployment Rate SA 7.4% Blog calculation People in Job Stress Jul: 28.3 million NSA, 17.4% of Labor Force Establishment Survey: Nov Nonfarm Jobs +162,000; Private +202,000 jobs created Jun 12-month Average Hourly Earnings Inflation Adjusted ∆%: 1.1 Blog 8/4/13
Nonfarm Hiring	Nonfarm Hiring fell from 63.8 million in 2006 to 52.0 million in 2012 or by 11.8 million Private-Sector Hiring Jun 2013 4.918 million lower by 1.221 million than 6.139 million in Jun 2006 Blog 8/11/13
GDP Growth	BEA Revised National Income Accounts IQ2012/IQ2011 ∆%: 3.3 IIQ2012/IIQ2011 2.8 IIIQ2012/IIIQ2011 3.1 IVQ2012/IVQ2011 2.0 IQ2013/IQ2012 1.3 IIQ2013/IIQ2012 1.4 IQ2012 SAAR 3.7 IIQ2012 SAAR 1.2 IIIQ2012 SAAR 2.8 IVQ2012 SAAR 0.1 IQ2013 SAAR 1.1 IIQ2013 SAAR 1.7 Blog 8/4/13
Real Private Fixed Investment	SAAR IIQ2013 6.3 ∆% IVQ2007 to IIQ2013: minus 5.0% Blog 8/4/13
Personal Income and Consumption	Jun month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% minus 0.1 Real Personal Consumption Expenditures (RPCE): 0.5 12-month Jun NSA ∆%: RDPI: 0.6; RPCE ∆%: 0.9 Blog 8/4/13
Quarterly Services Report	IQ13/IQ12 SA ∆%: Information 4.3 Financial & Insurance 1.8 Blog 6/9/13
Employment Cost Index	Compensation Private IIQ2013 SA ∆%: 0.5 Jun 13 months ∆%: 1.9 Blog 8/11/13
Industrial Production	Jun month SA ∆%: 0.3 Jun 12 months SA ∆%: 2.0 Manufacturing Jun SA ∆% 0.3 Jun 12 months SA ∆% 1.8, NSA 1.7 Capacity Utilization: 77.6 Blog 7/21/13
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 New Orders: From Jun -6.69 to Jul 3.77 Blog 7/21/13
Philadelphia Fed Business Outlook Index	General Index from Jun 12.5 to Jul 19.8 New Orders from Jun 16.6 to Jul 10.2 Blog 7/21/13
Manufacturing Shipments and Orders	New Orders SA Jun ∆% 1.5 Ex Transport -0.4 Jan-Jun NSA New Orders 1.8 Ex transport 0.8 Blog 8/11/13
Durable Goods	Jun New Orders SA ∆%: 4.2; ex transport ∆%: 0.0 Jan-Jun 13/Jan-Jun 12 New Orders NSA ∆%: 3.7; ex transport ∆% 1.7 Blog 7/28/13
Sales of New Motor Vehicles	Jan-Jul 2013 9,144,335; Jan-Jul 2012 8,425,842. Jul 13 SAAR 15.80 million, Jun 13 SAAR 15.88 million, Jul 2012 SAAR 14.21 million Blog 8/11/13
Sales of Merchant Wholesalers	Jan-May 2013/Jan-May 2012 NSA ∆%: Total 2.4; Durable Goods: 2.6; Nondurable Goods: 2.2 Blog 7/14/13
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	May 13/May 12 NSA ∆%: Sales Total Business 3.3; Manufacturers 1.3 Retailers 5.0; Merchant Wholesalers 4.0 Blog 7/21/13
Sales for Retail and Food Services	Jan-Jun 2013/Jan-Jun 2012 ∆%: Retail and Food Services 3.7; Retail ∆% 3.7 Blog 7/21/13
Value of Construction Put in Place	Jun SAAR month SA ∆%: -0.6 Jun 12-month NSA: 2.6 Jan-Jun 2013 ∆% 5.1 Blog 8/11/13
Case-Shiller Home Prices	May 2013/May 2012 ∆% NSA: 10 Cities 11.8; 20 Cities: 12.2 ∆% May SA: 10 Cities 1.1 ; 20 Cities: 1.0 Blog 8/4/13
FHFA House Price Index Purchases Only	May SA ∆% 0.7; 12 month NSA ∆%: 7.3 Blog 7/28/13
New House Sales	Jun 2013 month SAAR ∆%: 8.3 Jan-Jun 2013/Jan-Jun 2012 NSA ∆%: 28.4 Blog 7/28/13
Housing Starts and Permits	Jun Starts month SA ∆%: minus 9.9 ; Permits ∆%: minus 7.5 Jan-Jun 2013/Jan-Jun 2012 NSA ∆% Starts 24.3; Permits ∆% 23.7 Blog 7/21/13
Trade Balance	Balance Jun SA -$34,224 million versus May -$40,097 million Exports Jun SA ∆%: 2.2 Imports Jun SA ∆%: -2.5 Goods Exports Jan-Jun 2013/2012 NSA ∆%: 1.1 Goods Imports Jan-Jun 2013/2012 NSA ∆%: -2.1 Blog 8/11/13
Export and Import Prices	Jun 12-month NSA ∆%: Imports 0.2; Exports -0.8 Blog 7/14/13
Consumer Credit	Jun ∆% annual rate: 5.9 Blog 8/11/13
Net Foreign Purchases of Long-term Treasury Securities	Apr Net Foreign Purchases of Long-term US Securities: minus $37.3 billion Major Holders of Treasury Securities: China $1265 billion; Japan $1100 billion; Total Foreign US Treasury Holdings Feb $5671 billion Blog 6/16/13
Treasury Budget	Fiscal Year 2013/2012 ∆% Jun: Receipts 14.4; Outlays -4.8; Individual Income Taxes 18.0 Deficit Fiscal Year 2011 $1,296 billion 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:

8/4/13 http://cmpassocregulationblog.blogspot.com/2013/08/risks-of-steepening-yield-curve-and.html

7/28/13 http://cmpassocregulationblog.blogspot.com/2013/07/duration-dumping-steepening-yield-curve.html

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

6/16/13 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

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

The Bureau of Labor Statistics (BLS) of the US Department of Labor provides the quarterly employment cost index (ECI). The ECI is highly useful in several ways including: (1) how costs of employees may affect hiring decisions and thus the overall economy; (2) impact of employment costs on inflation and thus monetary policy; and (3) relation of employee costs to inflation on issues such as welfare of the working population and their ability to consume that could affect economic growth. The BLS estimates total compensation composed of wages and salaries, which are about 70 percent of total compensation, and benefits, accounting for the remaining 30 percent (http://www.bls.gov/news.release/pdf/eci.pdf 1). There is vast theoretical and empirical literature on how benefits interact with wage determination. The ECI is considered initially with current data in Table VA-1 and subsequently with charts of the BLS on evolution over the past decade. The BLS provides data for the entire civilian population, the private sector and state/local government. The data are available quarterly and for the 12 months of the ending month of the quarter. Total compensation 12-month percentage changes have moderated for the entire civilian population, the private sector and state and local government. In the 12 months ending in Jun 2013, total compensation increased 1.9 percent for the private sector, which is marginally higher than inflation of 1.8 percent in the 12 months ending in Jun 2013 (http://www.bls.gov/cpi/data.htm), 1.9 percent for the entire civilian population and 1.8 percent for state and local government. Wages and salaries in the 12 months ending in Jun 2013 increased at relatively subdued rates of 1.9 percent for the private sector, which is slightly above inflation of 1.8 percent in the 12 months ending in Jun 2013 (http://www.bls.gov/cpi/data.htm), 1.7 percent for the entire civilian population and only 1.0 percent for state/local workers. Wages have been losing or gaining slightly relative to headline CPI inflation of 1.8 percent in the 12 months ending in Jun 2013 (http://www.bls.gov/cpi/data.htm). Compensation benefits of the private sector increased at 1.9 percent in the 12 months ending in Jun, which is equal to 1.9 percent for wages and salaries.

Table VA-1, Employment Cost Index Quarterly and 12- Month Changes %

	IQ13 SA	IIQ13 SA	12 M Jun 12 NSA	12 M Sep 12 NSA	12 M Dec 12 NSA	12 M Mar 13 NSA	12 M Jun 13 NSA
Civilian
Comp	0.5	0.5	1.7	1.9	1.9	1.9	1.9
Wages/ Salaries	0.5	0.4	1.7	1.7	1.7	1.6	1.7
Benefits	0.6	0.4	2.1	2.4	2.4	2.4	2.2
Private
Comp	0.4	0.6	1.8	1.9	1.8	1.9	1.9
Wages/ Salaries	0.5	0.6	1.8	1.8	1.7	1.7	1.9
Benefits	0.4	0.4	1.9	2.2	2.2	2.0	1.9
State local Govt
Comp	0.5	0.3	1.6	1.8	1.9	1.9	1.8
Wages/ Salaries	0.2	0.2	1.1	1.1	1.1	1.0	1.0
Benefits	1.1	0.6	2.7	3.2	3.4	3.5	3.3

Notes: Civilian includes private industry plus state and local government; SA: seasonally adjusted; NSA: not seasonally adjusted; Comp: compensation; Govt: government

Source: US Bureau of Labor Statistics http://www.bls.gov/ncs/ect/

A series of charts of the BLS provides evolution of the ECI during the past decade. Percentage changes in 12 months of total civilian compensation in Chart VA-1 were in a range of around 3 to 4 percent before the global recession, declining to less than 2 percent with the contraction and increasing above 2 percent in the expansion. Recently, rates have fallen, stagnated, fell again, recovered and declined.