Financial Instability, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars Below Trend, Stagnating Real Disposable Income, Financial Repression, World Cyclical Slow Growth and Global Recession Risk: Part II

 

Financial Instability, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars Below Trend, Stagnating Real Disposable Income, Financial Repression, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014

Executive Summary

I Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars Below Trend

IA Mediocre Cyclical United States Economic Growth

IA1 Contracting Real Private Fixed Investment

IA2 Swelling Undistributed Corporate Profits

II Stagnating Real Disposable Income and Consumption Expenditures

IB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Financial Repression

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

IA Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend. The US is experiencing the first expansion from a recession after World War II with stressing socioeconomic conditions:

• Mediocre economic growth below potential and long-term trend, resulting in idle productive resources with GDP two trillion dollars below trend (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). US GDP grew at the average rate of 3.3 percent per year from 1929 to 2013 with similar performance in whole cycles of contractions and expansions but only at 1.0 percent per year on average from 2007 to 2013
• Private fixed investment declining 3.5 percent in the entire cycle from IVQ2007 to IQ2014 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html)Twenty seven million or 16.8 percent of the effective labor force unemployed or underemployed in involuntary part-time jobs with stagnating or declining real wages (http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html)
• Stagnating real disposable income per person or income per person after inflation and taxes (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html)
• Depressed hiring that does not afford an opportunity for reducing unemployment/underemployment and moving to better-paid jobs (http://cmpassocregulationblog.blogspot.com/2014/05/rules-discretionary-authorities-and.html)
• Unsustainable government deficit/debt and balance of payments deficit (http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html)
• Worldwide waves of inflation (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/imf-view-world-inflation-waves-squeeze.html)
• Deteriorating terms of trade and net revenue margins of production across countries in squeeze of economic activity by carry trades induced by zero interest rates (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/imf-view-world-inflation-waves-squeeze.html)
• Financial repression of interest rates and credit affecting the most people without means and access to sophisticated financial investments with likely adverse effects on income distribution and wealth disparity (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html)
• 47 million in poverty and 48 million without health insurance with family income adjusted for inflation regressing to 1995 levels (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html
• Net worth of households and nonprofits organizations increasing by 7.3 percent after adjusting for inflation in the entire cycle from IVQ2007 to IVQ2013 when it would have been over 20.3 percent at trend of 3.1 percent per year in real terms from 1945 to 2013 (http://cmpassocregulationblog.blogspot.com/2014/03/global-financial-risks-recovery-without.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/collapse-of-united-states-dynamism-of.html). Financial assets increased $13.0 trillion while nonfinancial assets fell $729.2 billion with likely concentration of wealth in those with access to sophisticated financial investments.

Valuations of risk financial assets approach historical highs. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 19 quarters from IIIQ2009 to IQ2014. 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) and the first estimate of GDP for IQ2014 (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_2nd.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/2014/05/financial-volatility-mediocre-cyclical.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2014 would have accumulated to 21.2 percent. GDP in IQ2014 would be $18,172.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,269.8 billion than actual $15,902.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 27.4 million unemployed or underemployed equivalent to actual unemployment of 16.8 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html). US GDP in IQ2014 is 12.5 percent below than at trend. US GDP grew from $14,996.1 billion in IVQ2007 in constant dollars to $15,902.9 billion in IQ2014 or 6.0 percent at the average annual equivalent rate of 0.9 percent. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.8 percent in 2011, 2.8 percent in 2012 and 1.9 percent in 2013. The following calculations show that actual growth is around 1.9 to 2.2 percent per year. The rate of growth of 1.0 percent in the entire cycle from 2007 to 2013 is well below 3 percent per year in trend from 1870 to 2010, which the economy of the US always attained for entire cycles in expansions after events such as wars and recessions (Lucas 2011May). Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.

1. Long-term. US GDP grew at the average yearly rate of 3.3 percent from 1929 to 2013 and at 3.2 percent from 1947 to 2013. There were periodic contractions or recessions in this period but the economy grew at faster rates in the subsequent expansions, maintaining long-term economic growth at trend.
2. Whole Cycles. Long-term growth was around 3.0 percent per year during entire cycles including contractions and expansions. The average growth rate of GDP was 3.5 percent per year in the entire cycle from 1980 to 1989 but only 1.0 percent in the entire cycle from 2007 to 2013.
3. Cycles. The combined contraction of GDP in the two almost consecutive recessions in the early 1980s is 4.7 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 IVQ1985 was 5.9 percent and 4.9 percent from IQ1983 to IIIQ1987. In contrast, average annual equivalent growth in the expansion from IIIQ2009 to IQ2014 was only 2.2 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
1929-2013	3.3
1947-2013	3.2
Whole Cycles
1980-1989	3.5
2006-2013	1.1
2007-2013	1.0
Cyclical Contractions ∆%
IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982	-4.7
IVQ2007 to IIQ2009	-4.3
Cyclical Expansions Average Annual Equivalent ∆%
IQ1983 to IVQ1985 IQ1983-IQ1986 IQ1983-IIIQ1986 IQ1983-IVQ1986 IQ1983-IQ1987 IQ1983-IIQ1987 IQ1983-IIIQ1987	5.9 5.7 5.4 5.2 5.0 5.0 4.9
First Four Quarters IQ1983 to IVQ1983	7.8
IIIQ2009 to IQ2014	2.2
First Four Quarters IIIQ2009 to IIQ2010	2.7
	Real Disposable Income	Real Disposable Income per Capita
Long-Term
1929-2013	3.2	2.0
1947-1999	3.7	2.3
Whole Cycles
1980-1989	3.5	2.6
2006-2013	1.3	0.5

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

The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace from 1.9 to 2.2 percent per year. Table Summary GDP provides the data.

1. Average Annual Growth in the Past Eight Quarters. GDP growth in the four quarters of 2012, the four quarters of 2013 and the first quarter of 2014 accumulated to 4.3 percent. This growth is equivalent to 1.9 percent per year, obtained by dividing GDP in IQ2014 of $15,902.9 billion by GDP in IVQ2011 of $15,242.1 billion and compounding by 4/9: {[($15,902.9/$15,242.1)^4/9 -1]100 = 1.9 percent.

2. Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters of IQ2013 to IQ2014 accumulated to 2.3 percent that is equivalent to 2.3 percent in a year. This is obtained by dividing GDP in IQ2014 of $15,902.9 billion by GDP in IQQ2013 of $15,583.9 billion and compounding by 4/4: {[($15,902.9/$15,583.9)^4/4 -1]100 = 2.0%}. The US economy grew 2.0 percent in IQQ2014 relative to the same quarter a year earlier in IQ2013. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012 and in IQ2014, which is just at the borderline of contraction. US GDP fell 0.2 percent in IQ2014. The rate of growth of GDP in the third estimate of IIIQ2013 is 4.1 percent in seasonally adjusted annual rate (SAAR). Inventory accumulation contributed 1.67 percentage points to this rate of growth. The actual rate without this impulse of unsold inventories would have been 2.43 percent, or 0.6 percent in IIIQ2013, such that annual equivalent growth in 2013 is closer to 2.2 percent {[(1.003)(1.006)(1.006)(1.007)^4/4-1]100 = 2.2%}, compounding the quarterly rates and converting into annual equivalent. Inventory divestment deducted 1.62 percentage points from GDP growth in IQ2014. Without this deduction of inventory divestment, GDP growth would have been 0.64 percent in IQ2014, such that the actual growth rates in the four quarters ending in IQ2014 is closer to 3.0 percent {[(1.006)(1.01)(1.007)(1.0064)]^4/4 -1]100 = 3.0%}.

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

	Real GDP, Billions Chained 2009 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	15,679.7	4.6	0.6	1.6
IIIQ2013	15,839.3	5.6	1.0	2.0
IVQ2013	15,942.3	6.3	0.7	2.6
IQ2014	15,902.9	6.0	-0.2	2.0
Cumulative ∆% IQ2012 to IQ2014	4.3		4.4
Annual Equivalent ∆%	1.9		1.9

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

Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table I-1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.0, 11.9 and 6.7. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.6, 9.7, 7.7 and 10.1. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IQ1976: 3.1, 6.8, 5.5 and 9.3. The disaster of the Great Inflation and Unemployment of the 1970s, which made stagflation notorious, is even better in growth rates during the expansion phase in comparison with the current slow-growth recession.

Table I-1, US, Seasonally Adjusted Quarterly Percentage Growth Rates in Annual Equivalent of GDP in Cyclical Recessions and Following Four Quarter Expansions ∆%

	IQ	IIQ	IIIQ	IV
R IIQ1953-IIQ1954
1953			-2.2	-5.9
1954	-1.9
E IIIQ1954-IIQ1955
1954			4.6	8.0
1955	11.9	6.7
R IIIQ1957-IIQ1958
1957				-4.1
1958	-10.0
E IIIQ1958-IIQ1959
1958			9.6	9.7
1959	7.7	10.1
R IVQ1969-IV1970
1969				-1.7
1970	-0.7
E IIQ1970-IQ1971
1970		0.7	3.6	-4.1
1971	11.2
R IVQ1973-IQ1975
1973				3.8
1974	-3.3	1.0	-3.8	-1.6
1975	-4.7
E IIQ1975-IQ1976
1975		3.1	6.8	5.5
1976	9.3
R IQ1980-IIIQ1980
1980	1.3	-7.9	-0.6
R IQ1981-IVQ1982
1981	8.5	-2.9	4.7	-4.6
1982	-6.5	2.2	-1.4	0.4
E IQ1983-IVQ1983
1983	5.3	9.4	8.1	8.5
R IVQ2007-IIQ2009
2008	-2.7	2.0	-2.0	-8.3
2009	-5.4	-0.4
E IIIQ2009-IIQ2010
2009			1.3	3.9
2010	1.6	3.9

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

The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.7 percent is more comparable to the latest revised 4.3 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). Table I-2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981 to 1982 and 2007 to 2009, using the latest major revision published on July 31, 2013 and the second estimate for IQ2014 (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_2nd.pdf), which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There were four quarters of contraction in 1981-1982 ranging in rate from -1.4 percent to -6.5 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.4 percent to -8.3 percent. The striking difference is that in the first nineteen quarters of expansion from IQ1983 to IIIQ1987, shown in Table I-2 in relief, GDP grew at the high quarterly percentage growth rates of 5.3, 9.4, 8.1, 8.5, 8.2, 7.2, 4.0, 3.2, 4.0, 3.7, 6.4, 3.0, 3.8, 1.9, 4.1, 2.1, 2.8, 4.6 and 3.7. In contrast, the percentage growth rates in the first nineteen quarters of expansion from IIIQ2009 to IQ2014 shown in relief in Table I-2 were mediocre: 1.3, 3.9, 1.6, 3.9, 2.8, 2.8, -1.3, 3.2, 1.4, 4.9, 3.7, 1.2, 2.8, 0.1, 1.1, 2.5, 4.1, 2.6 and minus 1.0. Inventory accumulation contributed 2.73 percentage points to the rate of growth of 4.9 percent in IVQ2011, which is the only relatively high rate from IQ2011 to IIIQ2012, 0.60 percentage points to the rate of 2.8 percent in IIIQ2012 and 1.67 percentage points to the rate of 4.1 percent in IIIQ2013. Inventory divestment deducted 1.64 percentage points from GDP growth in IQ2014. Economic growth and employment creation continued at slow rhythm during 2012 and in 2013 while much stronger growth would be required in movement to full employment. The cycle is now long by historical standards and growth rates are typically weaker in the final periods of cyclical expansions.

Table I-2, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	8.5	-6.5	5.3	8.2	-2.7	-5.4	1.6
II	-2.9	2.2	9.4	7.2	2.0	-0.4	3.9
III	4.7	-1.4	8.1	4.0	-2.0	1.3	2.8
IV	-4.6	0.4	8.5	3.2	-8.3	3.9	2.8
				1985			2011
I				4.0			-1.3
II				3.7			3.2
III				6.4			1.4
IV				3.0			4.9
				1986			2012
I				3.8			3.7
II				1.9			1.2
III				4.1			2.8
IV				2.1			0.1
				1987			2013
I				2.8			1.1
II				4.6			2.5
III				3.7			4.1
IV				6.8			2.6
				1988			2014
I				2.3			-1.0
II				5.4
III				2.3
IV				5.4

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

Chart I-1 of the Bureau of Economic Analysis (BEA) provides strong growth of real GDP in the US between 1929 and 1999 at the yearly average rate of 3.5 percent. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) define labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.

Chart I-1, US, Real GDP 1929-1999

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

Chart I-1A provides real GDP annually from 1929 to 2013. Growth after the global recession from IVQ2007 to IIQ2009 has not been sufficiently high to compensate for the contraction as it had occurred in past economic cycles. GDP is about two trillion lower than trend GDP, explaining 30.3 million unemployed or underemployed. There is dramatic decline of productivity growth in the whole cycle from 2.2 percent per year on average from 1947 to 2013 to 1.6 percent per year on average from 2007 to 2013 (http://cmpassocregulationblog.blogspot.com/2014/05/rules-discretionary-authorities-and.html). There is profound drop in the average rate of output growth from 3.4 percent on average from 1947 to 2013 to 1.0 percent from 2007 to 2013. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2014 would have accumulated to 21.2 percent. GDP in IQ2014 would be $18,172.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,269.8 billion than actual $15,902.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 27.4 million unemployed or underemployed equivalent to actual unemployment of 16.8 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html). US GDP in IQ2014 is 12.5 percent below than at trend. US GDP grew from $14,996.1 billion in IVQ2007 in constant dollars to $15,902.9 billion in IQ2014 or 6.0 percent at the average annual equivalent rate of 0.9 percent. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation.

Chart I-1A, US, Real GDP 1929-2013

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

Chart I-2 provides the growth of real quarterly GDP in the US between 1947 and 2013. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery compared with return to trend at 3.0 percent from 1870 to 2010 after events such as wars and recessions (Lucas 2011May) and a standstill that can lead to growth recession, or low rates of economic growth. The expansion is relatively long compared to earlier expansion and there could be even another contraction or conventional recession in the future. The average rate of growth from 1947 to 2013 is 3.2 percent. The average growth rate from IV2007 to IVQ2013 is only 1.0 percent with 2.8 percent annual equivalent from the end of the recession in IVQ2001 to the end of the expansion in IVQ2007.

Chart I-2, US, Real GDP, Quarterly, 1947-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-3 provides real GDP percentage change on the quarter a year earlier for 1983-1984. The objective is simply to compare expansion in two recoveries from sharp contractions as shown in Table I-2. Growth rates in the early phase of the recovery in 1983 and 1984 were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.

Chart I-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1987

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

In contrast, growth rates in the comparable first nineteen quarters of expansion from 2009 to 2014 in Chart I-4 have been mediocre. As a result, growth has not provided the exit from unemployment and underemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.

Chart I-4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table I-3 provides percentage change of real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). Data are available for the 1930s only on a yearly basis. US GDP fell 4.7 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1981 to IVQ1982 and 4.3 percent cumulatively in the recession from IVQ2007 to IIQ2009. It is instructive to compare the first three years of the expansions in the 1980s and the current expansion. GDP grew at 4.6 percent in 1983, 7.3 percent in 1984, 4.2 percent in 1985 and 3.5 percent in 1986 while GDP grew, 2.5 percent in 2010, 1.8 percent in 2011, 2.8 percent in 2012 and 1.9 percent in 2013. Actual annual equivalent GDP growth in the four quarters of 2012, and five quarters from IQ2013 to IQ2014 is 1.9 percent and 2.0 percent in the four quarters ending in IQ2014 but only 2.2 percent in the four quarters of 2013 by discounting contribution of 1.67 percentage points of inventory accumulation to growth in IIIQ2013. GDP grew at 4.2 percent in 1985 and 3.5 percent in 1986 while the forecasts of the central tendency of participants of the Federal Open Market Committee (FOMC) are in the range of 2.8 to 3.0 percent in 2014 (http://www.federalreserve.gov/newsevents/press/monetary/20140319b.htm) with less reliable forecast of 3.0 to 3.2 percent in 2015 (http://www.federalreserve.gov/newsevents/press/monetary/20140319b.htm). Growth of GDP in the expansion from IIIQ2009 to IQ2014 has been at average 2.2 percent in annual equivalent.

Table I-3, US, Percentage Change of GDP in the 1930s, 1980s and 2000s, ∆%

Year	GDP ∆%	Year	GDP ∆%	Year	GDP ∆%
1930	-8.5	1980	-0.2	2000	4.1
1931	-6.4	1981	2.6	2001	1.0
1932	-12.9	1982	-1.9	2002	1.8
1933	-1.3	1983	4.6	2003	2.8
1934	10.8	1984	7.3	2004	3.8
1935	8.9	1985	4.2	2005	3.4
1936	12.9	1986	3.5	2006	2.7
1937	5.1	1987	3.5	2007	1.8
1938	-3.3	1988	4.2	2008	-0.3
1930	8.0	1989	3.7	2009	-2.8
1940	8.8	1990	1.9	2010	2.5
1941	17.7	1991	-0.1	2011	1.8
1942	18.9	1992	3.6	2012	2.8
1943	17.0	1993	2.7	2013	1.9

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

Chart I-5 provides percentage change of GDP in the US during the 1930s. There is vast literature analyzing the Great Depression (Pelaez and Pelaez, Regulation of Banks and Finance (2009), 198-217). Cole and Ohanian (1999) find that US real per capita output was lower by 11 percent in 1939 than in 1929 while the typical expansion of real per capita output in the US during a decade is 31 percent. Private hours worked in the US were 25 percent lower in 1939 relative to 1929.

Chart I-5, US, Percentage Change of GDP in the 1930s

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

In contrast, Chart I-6 shows rapid recovery from the recessions in the 1980s. High growth rates in the initial quarters of expansion eliminated the unemployment and underemployment created during the contraction. The economy then returned to grow at the trend of expansion, interrupted by another contraction in 1991.

Chart I-6, US, Percentage Change of GDP in the 1980s

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-7 provides the rates of growth during the 2000s. Growth rates in the initial eighteen quarters of expansion have been relatively lower than during recessions after World War II. As a result, unemployment and underemployment continue at the rate of 16.8 percent of the US labor force (http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html) with weak hiring (http://cmpassocregulationblog.blogspot.com/2014/05/rules-discretionary-authorities-and.html).

Chart I-7, US, Percentage Change of GDP in the 2000s

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Characteristics of the four cyclical contractions are provided in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.7 percent, which is almost equal to the decline of 4.3 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Table I-4, US, Number of Quarters, GDP Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions   

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Rate
IIQ1953 to IIQ1954	3	-2.4	-0.8
IIIQ1957 to IIQ1958	3	-3.0	-1.0
IVQ1973 to IQ1975	5	-3.1	-0.6
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.5	-0.64
IVQ2007 to IIQ2009	6	-4.3	-0.72

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

Table I-5 shows the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the nineteen quarters of the current cyclical expansion from IIIQ2009 to IQ2014. In sharp contrast, the average growth rate of GDP was:

• 5.7 percent in the first thirteen quarters of expansion from IQ1983 to IQ1986
• 5.4 percent in the first fifteen quarters of expansion from IQ1983 to IIIQ1986
• 5.2 percent in the first sixteen quarters of expansion from IQ1983 to IVQ1986
• 5.0 percent in the first seventeen quarters of expansion from IQ1983 to IQ1987
• 5.0 percent in the first eighteen quarters of expansion from IQ1983 to IIQ1987
• 4.9 percent in the first nineteen quarters of expansion from IQ1983 to IIIQ1987.

The line “average first four quarters in four expansions” provides the average growth rate of 7.7 percent with 7.8 percent from IIIQ1954 to IIQ1955, 9.2 percent from IIIQ1958 to IIQ1959, 6.1 percent from IIIQ1975 to IIQ1976 and 7.8 percent from IQ1983 to IVQ1983. The United States missed this opportunity of high growth in the initial phase of recovery. BEA data show the US economy in standstill with annual growth of 2.4 percent in 2010 decelerating to 1.8 percent annual growth in 2011, 2.8 percent in 2012 and 1.9 percent in 2013 (http://www.bea.gov/iTable/index_nipa.cfm) The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.2 percent from IQ1983 to IVQ1986, 4.9 percent from IQ1983 to IIIQ1987 and at 7.8 percent from IQ1983 to IVQ1983. GDP growth in the eight quarters of 2012 and 2013 and the first quarter of 2014 accumulated to 4.3 percent that is equivalent to 1.9 percent in a year. This is obtained by dividing GDP in IQ2014 of $15,902.9 billion by GDP in IVQ2011 of $15,242.1 billion and compounding by 4/9: {[($15,902.9/$15,242.1)^4/9 -1]100 = 1.9%}. The US economy grew 2.0 percent in IQ2014 relative to the same quarter a year earlier in IQ2013. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012 and IQ2014, which is just at the borderline of contraction. US GDP fell 0.2 percent in IQ2014. The rate of growth of GDP in the third estimate of IIIQ2013 is 4.1 percent in seasonally adjusted annual rate (SAAR). Inventory accumulation contributed 1.67 percentage points to this rate of growth. The actual rate without this impulse of unsold inventories would have been 2.43 percent, or 0.6 percent in IIIQ2013, such that annual equivalent growth in 2013 is closer to 2.2 percent {[(1.003)(1.006)(1.006)(1.007)^4/4-1]100 = 2.2%}, compounding the quarterly rates and converting into annual equivalent. Inventory divestment deducted 1.62 percentage points from GDP growth in IQ2014. Without this deduction of inventory divestment, GDP growth would have been 0.64 percent in IQ2014, such that the actual growth rates in the four quarters ending in IQ2014 is closer to 3.0 percent {[(1.006)(1.01)(1.007)(1.0064)]^4/4 -1]100 = 3.0%}.

Table I-5, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.8	4.5
First Four Quarters IIIQ1954 to IIQ1955	4	7.8
IIQ1958 to IIQ1959	5	10.0	7.9
First Four Quarters IIIQ1958 to IIQ1959	4	9.2
IIQ1975 to IVQ1976	8	8.3	4.1
First Four Quarters IIIQ1975 to IIQ1976	4	6.1
IQ1983-IQ1986 IQ1983-IIIQ1986 IQ1983-IVQ1986 IQ1983-IQ1987 IQ1983-IIQ1987 IQ1983 to IIIQ1987	13 15 16 17 18 19	19.9 21.6 22.3 23.1 24.5 25.6	5.7 5.4 5.2 5.0 5.0 4.9
First Four Quarters IQ1983 to IVQ1983	4	7.8
Average First Four Quarters in Four Expansions*		7.7
IIIQ2009 to IQ2014	19	10.8	2.2
First Four Quarters IIIQ2009 to IIQ2010		2.7

*First Four Quarters: 7.8% IIIQ1954-IIQ1955; 9.2% IIIQ1958-IIQ1959; 6.1% IIIQ1975-IIQ1976; 7.8% IQ1983-IVQ1983

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

Chart I-8 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

Chart I-8, US, Real GDP, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-9 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2013. The economy has underperformed during the first nineteen quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.

Chart I-9, US, Real GDP, 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

As shown in Tables I-4 and I-5 above the loss of real GDP in the US during the contraction was 4.3 percent but the gain in the cyclical expansion has been only 10.8 percent (first to the last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IVQ2013 with the second estimate and revisions is only higher by 6.0 percent than the level of real GDP in IVQ2007. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2014 would have accumulated to 21.2 percent. GDP in IQ2014 would be $18,172.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,269.8 billion than actual $15,902.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 27.4 million unemployed or underemployed equivalent to actual unemployment of 16.8 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html). US GDP in IQ2014 is 12.5 percent below than at trend. US GDP grew from $14,996.1 billion in IVQ2007 in constant dollars to $15,902.9 billion in IQ2014 or 6.0 percent at the average annual equivalent rate of 0.9 percent. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. The contraction actually concentrated in two quarters: decline of 2.2 percent in IVQ2008 relative to the prior quarter and decline of 1.4 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.6 percent {[(1-0.022) x (1-0.014) -1]100 = -3.6%}, or {[(IQ2009 $14,372.1)/(IIIQ2008 $14,895.1) – 1]100 = -3.5%} except for rounding. Those two quarters coincided with the worst effects of the financial crisis (Cochrane and Zingales 2009). GDP fell 0.1 percent in IIQ2009 but grew 0.3 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in five successive quarters from IVQ2009 to IVQ2010 of growth of 1.0 percent in IVQ2009, 0.4 percent in IQ2010, 0.9 percent in IIQ2010 and equal growth at 0.7 percent in IIIQ2010 and 0.7 percent in IVQ2010 for cumulative growth in those five quarters of 3.8 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.004 x 1.009 x 1.007 x 1.007) – 1]100 = 3.8%} or {[(IVQ2010 $14,942.4)/(IIIQ2009 $14,402.5) – 1]100 = 3.7%} with minor rounding difference. The economy then stalled during the first half of 2011 with decline of 0.3 percent in IQ2011 and growth of 0.8 percent in IIQ2011 for combined annual equivalent rate of 1.0 percent {(0.997 x 1.008)²}. The economy grew 0.3 percent in IIIQ2011 for annual equivalent growth of 1.1 percent in the first three quarters {[(0.997 x 1.008 x 1.003)^4/3 -1]100 = 1.1%}. Growth picked up in IVQ2011 with 1.2 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.7 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 2.0 percent in IQ2011, 1.9 percent in IIQ2011, 1.5 percent in IIIQ2011 and 2.0 percent in IVQ2011. As shown below, growth of 1.2 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.9 percent relative to IVQ2011 and 3.3 percent relative to IQ2011, decelerating to 0.3 percent in IIQ2012 and 2.8 percent relative to IIQ2011 and 0.7 percent in IIIQ2012 and 3.1 percent relative to IIIQ2011 largely because of inventory accumulation and national defense expenditures. Growth was 0.0 percent in IVQ2012 with 2.0 percent relative to a year earlier but mostly because of deduction of 2.00 percentage points of inventory divestment and 1.22 percentage points of reduction of one-time national defense expenditures. Growth was 0.3 percent in IQ2013 and 1.3 percent relative to IQ2012 in large part because of burning savings to consume caused by financial repression of zero interest rates. There is similar growth of 0.6 percent in IIQ2013 and 1.6 percent relative to a year earlier. In IIIQ2013, GDP grew 1.0 percent relative to the prior quarter and 2.0 percent relative to the same quarter a year earlier with inventory accumulation contributing 1.67 percentage points to growth at 4.1 percent SAAR in IIIQ2013. GDP increased 0.7 percent in IVQ2013 and 2.6 percent relative to a year earlier. GDP fell 0.2 percent in IQ2014 and grew 2.0 percent relative to a year earlier. Inventory divestment deducted 1.64 percentage points from GDP growth in IQ2014. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area and growth in China are common sources of doubts on the rate and direction of economic growth in the US. There is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.

Table I-6, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2009 Dollars and ∆%

	Real GDP, Billions Chained 2009 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,996.1	NA	NA	1.9
IQ2008	14,895.4	-0.7	-0.7	1.1
IIQ2008	14,969.2	-0.2	0.5	0.9
IIIQ2008	14,895.1	-0.7	-0.5	-0.3
IVQ2008	14,574.6	-2.8	-2.2	-2.8
IQ2009	14,372.1	-4.2	-1.4	-3.5
IIQ2009	14,356.9	-4.3	-0.1	-4.1
IIIQ2009	14,402.5	-4.0	0.3	-3.3
IV2009	14,540.2	-3.0	1.0	-0.2
IQ2010	14,597.7	-2.7	0.4	1.6
IIQ2010	14,738.0	-1.7	0.9	2.7
IIIQ2010	14,839.3	-1.0	0.7	3.0
IVQ2010	14,942.4	-0.4	0.7	2.8
IQ2011	14,894.0	-0.7	-0.3	2.0
IIQ2011	15,011.3	0.1	0.8	1.9
IIIQ2011	15,062.1	0.4	0.3	1.5
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	15,679.7	4.6	0.6	1.6
IIIQ2013	15,839.3	5.6	1.0	2.0
IVQ2013	15,942.3	6.3	0.7	2.6
IQ2014	15,902.9	6.0	-0.2	2.0

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

Chart I-10 provides the percentage change of real GDP from the same quarter a year earlier from 1980 to 1989. There were two contractions almost in succession in 1980 and from 1981 to 1983. The expansion was marked by initial high rates of growth as in other recession in the postwar US period during which employment lost in the contraction was recovered. Growth rates continued to be high after the initial phase of expansion.

Chart I-10, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The experience of recovery after 2009 is not as complete as during the 1980s. Chart I-11 shows the much lower rates of growth in the early phase of the current expansion and sharp decline from an early peak. The US missed the initial high growth rates in cyclical expansions that eliminate unemployment and underemployment.

Chart I-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-12 provides growth rates from a quarter relative to the prior quarter during the 1980s. There is the same strong initial growth followed by a long period of sustained growth.

Chart I-12, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-13 provides growth rates in a quarter relative to the prior quarter from 2007 to 2013. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.

Chart I-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The revised estimates and earlier estimates from IQ2008 to IQ2012 in seasonally adjusted annual equivalent rates are shown in Table I-7. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent and minus 8.3 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent but then lowered to contraction of 5.3 percent and 5.4 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent and minus 2.0 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent and then increased to 4.0 percent but lowered to 3.9 percent. Growth in IQ2010 is lowered from 3.9 percent to 2.3 percent and 1.6 percent. Growth in IIQ2010 is upwardly revised to 3.8 percent but then lowered to 2.2 percent. The final revision increased growth in IIQ2010 to 3.9 percent. Revisions lowered growth of 1.9 percent in IQ2011 to minus 1.3 percent. The revisions lowered growth of 1.8 percent in IQ2013 to 1.1 percent but increased growth of 2.0 percent in IQ2012 to 3.7 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession with higher risks of contraction and continuing underperformance.

Table I-7, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates

Quarters	Revised Estimate Jul 31, 2013	Revised Estimate Jul 27, 2012	Revised Estimate Jul 29, 2011	Earlier Estimate
2008
I	-2.7		-1.8	-0.7
II	2.0		1.3	0.6
III	-2.0		-3.7	-4.0
IV	-8.3		-8.9	-6.8
2009
I	-5.4	-5.3	-6.7	-4.9
II	-0.4	-0.3	-0.7	-0.7
III	1.3	1.4	1.7	1.6
IV	3.9	4.0	3.8	5.0
2010
I	1.6	2.3	3.9	3.7
II	3.9	2.2	3.8	1.7
III	2.8	2.6	2.5	2.6
IV	2.8	2.4	2.3	3.1
2011
I	-1.3	0.1	0.4	1.9
II	3.2	2.5
III	1.4	1.3
IV	4.9	4.1
2012
I	3.7	2.0
II	1.2	1.3
III	2.8	3.1
IV	0.1	0.4
2013
I	1.1	1.8
II	2.5
III	4.1
IV	2.6

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

Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase from IQ1983 to IQ1987 than from IIIQ2009 to IQ2014, as shown in Table I-8. GDI provided the impulse of growth in 1983 and 1984, which has not been the case from 2009 to 2014. The investment decision in the US economy has been frustrated in the current cyclical expansion. Growth of GDP in IIIQ2013 at seasonally adjusted annual rate of 4.1 percent consisted of positive contribution of 1.36 percentage points of personal consumption expenditures (PCE) plus positive contribution of 2.56 percentage points of gross private domestic investment (GDI) of which 1.67 percentage points of inventory investment (∆PI), contribution of net exports (trade or exports less imports) of 0.14 percentage points and 0.08 percentage points of government consumption expenditures and gross investment (GOV) partly because of one-time reduction of national defense expenditures of 0.02 percentage points. Growth at 2.6 percent in IVQ2013 had strongest contributions of 2.22 percentage points of PCE and 0.99 percentage points of trade. Growth of GDP at 0.1 percent in IQ2014 is mostly contribution of 2.09 percentage points by PCE with deductions of 1.98 percentage points by GDI, inventory divestment of 1.62 percentage points and trade deducting 0.95 percentage points. The economy of the United States has lost the dynamic growth impulse of earlier cyclical expansions with mediocre growth resulting from consumption forced by one-time effects of financial repression, national defense expenditures and inventory accumulation.

Table I-8, US, Contributions to the Rate of Growth of GDP in Percentage Points

	GDP	PCE	GDI	∆ PI	Trade	GOV
2014
I	-1.0	2.09	-1.98	-1.62	-0.95	-0.15
2013
I	1.1	1.54	0.71	0.93	-0.28	-0.82
II	2.5	1.24	1.38	0.41	-0.07	-0.07
III	4.1	1.36	2.56	1.67	0.14	0.08
IV	2.6	2.22	0.41	-0.02	0.99	-0.99
2012
I	3.7	1.98	1.57	0.36	0.44	-0.28
II	1.2	1.28	-0.23	-0.91	0.10	0.05
III	2.8	1.15	0.99	0.60	-0.03	0.67
IV	0.1	1.13	-0.36	-2.00	0.68	-1.31
2011
I	-1.3	1.42	-1.11	-1.06	0.01	-1.61
II	3.2	1.03	1.88	0.72	0.53	-0.25
III	1.4	1.42	0.36	-1.60	0.10	-0.52
IV	4.9	1.65	4.13	2.73	-0.60	-0.31
2010
I	1.6	1.42	1.77	1.66	-0.96	-0.63
II	3.9	2.21	2.86	1.09	-1.77	0.61
III	2.8	1.87	1.86	1.90	-0.88	-0.07
IV	2.8	2.86	-0.51	-1.64	1.32	-0.87
2009
I	-5.4	-0.83	-7.02	-2.26	2.25	0.15
II	-0.4	-1.13	-3.25	-1.12	2.40	1.56
III	1.3	1.73	-0.40	-0.38	-0.53	0.48
IV	3.9	0.05	4.05	4.40	-0.05	-0.17
1982
I	-6.5	1.61	-7.60	-5.34	-0.49	-0.05
II	2.2	0.89	-0.06	2.26	0.81	0.56
III	-1.4	1.88	-0.62	1.11	-3.22	0.53
IV	0.4	4.51	-5.37	-5.33	-0.10	1.35
1983
I	5.3	2.45	2.36	0.92	-0.29	0.82
II	9.4	5.06	5.96	3.43	-2.46	0.89
III	8.1	4.50	4.40	0.57	-2.25	1.42
IV	8.5	4.06	6.94	3.01	-1.13	-1.36
1984
I	8.2	2.26	7.23	4.94	-2.31	1.01
II	7.2	3.64	2.57	-0.29	-0.87	1.87
III	4.0	1.95	1.69	0.21	-0.35	0.70
IV	3.2	3.29	-1.08	-2.44	-0.56	1.58
1985
I	4.0	4.23	-2.14	-2.86	0.94	1.01
II	3.7	2.35	1.34	0.35	-1.90	1.93
III	6.4	4.82	-0.43	-0.15	-0.01	1.98
IV	3.0	0.62	2.80	1.40	-0.66	0.27
1986
I	3.8	2.10	0.04	-0.17	0.92	0.70
II	1.9	2.77	-1.30	-1.30	-1.33	1.70
III	4.1	4.55	-1.97	-1.62	-0.45	1.95
IV	2.1	1.62	0.24	-0.29	0.71	-0.48
1987
I	2.8	0.05	1.98	3.28	0.23	0.57
II	4.6	3.54	0.08	-0.99	0.14	0.81
III	3.7	2.97	0.03	-1.19	0.45	0.23
IV	6.8	0.57	4.94	4.95	0.18	1.08

Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive

GDP: percent change at annual rate; percentage points at annual rates

Source: US Bureau of Economic Analysis

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

The Bureau of Economic Analysis (BEA) (pages 1-2 http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_2nd.pdf) explains growth of GDP in IQ2014 as follows:

“Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 1.0 percent in the first quarter according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.6 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, real GDP was estimated to have increased 0.1 percent. With this second estimate for the first quarter, the decline in private inventory investment was larger than previously estimated (see "Revisions" on page 3).

The decrease in real GDP in the first quarter primarily reflected negative contributions from private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures. Imports, which are a subtraction in the calculation of GDP, increased.

The downturn in the percent change in real GDP primarily reflected a downturn in exports, a larger decrease in private inventory investment, and downturns in nonresidential fixed investment and in state and local government spending that were partly offset by an upturn in federal government spending.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the first quarter, 0.1 percentage point less than in the advance estimate; this index increased 1.5 percent in the fourth quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.3 percent in the first quarter, compared with an increase of 1.8 percent in the fourth.”

There are positive contributions to growth in IQ2014 shown in Table I-9:

• Personal consumption expenditures (PCE) growing at 3.1 percent
• Consumption of durable goods growing at 1.4 percent
• Federal government expenditures (Federal GOV) increasing at 0.7 percent

There were negative contributions in IVQ2013:

• Nonresidential fixed investment (NRFI) contracting at 1.6 percent
• Residential fixed investment (RFI) contracting at 5.0 percent
• Exports contracting at 6.0 percent

• Decrease of national defense expenditures at 2.4 percent that deducted 0.11 percentage points from GDP growth
• State and local government expenditures contracting at 1.8 percent
• Private inventory investment deducting 1.62 percentage points

The BEA explains deceleration in real GDP growth in IQ2014 by:

• Decline in the growth rate of PCE from 3.3 percent in IVQ2013 to 3.1 percent in IQ2014
• Deceleration of inventory investment deducting 1.62 percentage points in IQ2014 that is sharper than 0.02 percentage points deducted in IVQ2013
• Contraction of state and local expenditures at 1.8 percent in IQ2014 compared with growth at 0.0 percent in IVQQ2013
• Contraction of nonresidential fixed investment at 1.6 percent in IQ2014 compared with growth at 5.7 percent in IVQ2013
• Growth of consumption of durable goods at 1.4 percent in IQ2014 compared with 2.8 percent in IVQ2013
• Contraction of exports at 6.0 percent compared with growth at 9.5 percent in IVQ2013

The BEA finds offsetting accelerating factors:

· Decline of growth of imports from 1.5 percent in IVQ2013 to 0.7 percent in IQ2014

· Growth of federal expenditures at 0.7 percent in IQ2014 compared with contraction at 12.8 percent in IVQ2013

· Contraction of national defense expenditures at 2.4 percent in IQ2014, deducting 0.11 percentage points from growth, compared with contraction at 14.4 percent in IVQ2014, deducting 0.70 percentage points

· Contraction of residential fixed investment at 5.0 percent in IQ2014 in contrast with contraction at 7.9 percent in IVQ2013

An important aspect of growth in the US is the decline in growth of real disposable personal income, or what is left after taxes and inflation, which increased at the rate of 2.3 percent in IIIQ2013 compared with a year earlier. Contraction of real disposable income of 0.2 percent in IVQ2013 relative to a year earlier is largely due to comparison with an artificially higher level in anticipations of income in Nov and Dec 2012 to avoid increases in taxes in 2013, an episode known as “fiscal cliff.” Real disposable personal income increased 2.3 percent in IQ2014 relative to a year earlier. The effects of financial repression, or zero interest, are vividly shown in the decline of the savings rate, or personal saving as percent of disposable income from 6.6 percent in IVQ2012 to 4.9 percent in IIIQ2013 and 4.3 percent in IVQ2013. The savings rate fell to 4.0 percent in IQ2014. Anticipation of income in IVQ2012 to avoid higher taxes in 2013 caused increases in income and savings while higher payroll taxes in 2013 restricted income growth and savings in IQ2013. Zero interest rates induce risky investments with high leverage and can contract balance sheets of families, business and financial institutions when interest rates inevitably increase in the future. There is a tradeoff of weaker economy in the future when interest rates increase by meager growth in the present with forced consumption by zero interest rates.

Table I-9, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %

	IQ  2013	IIQ 2013	IIIQ 2012	IVQ     2013	IQ  2014
GDP	1.1	2.5	4.1	2.6	-1.0
PCE	2.3	1.8	2.0	3.3	3.1
Durable Goods	5.8	6.2	7.9	2.8	1.4
NRFI	-4.6	4.7	4.8	5.7	-1.6
RFI	12.5	14.2	10.3	-7.9	-5.0
Exports	-1.3	8.0	3.9	9.5	-6.0
Imports	0.6	6.9	2.4	1.5	0.7
GOV	-4.2	-0.4	0.4	-5.2	-0.8
Federal GOV	-8.4	-1.6	-1.5	-12.8	0.7
National Defense	-11.2	-0.6	-0.5	-14.4	-2.4
Cont to GDP Growth % Points	-0.57	-0.03	-0.02	-0.70	-0.11
State/Local GOV	-1.3	0.4	1.7	0.0	-1.8
∆ PI (PP)	0.93	0.41	1.67	-0.02	-1.62
Final Sales of Domestic Product	0.2	2.1	2.5	2.7	0.6
Gross Domestic Purchases	1.4	2.5	3.9	1.6	0.0
Prices Gross Domestic Purchases	1.2	0.2	1.8	1.5	1.6
Prices of GDP	1.3	0.6	2.0	1.6	1.3
Prices of GDP Excluding Food and Energy	1.6	0.9	1.9	1.9	1.3
Prices of PCE	1.1	-0.1	1.9	1.1	1.4
Prices of PCE Excluding Food and Energy	1.4	0.6	1.4	1.3	1.2
Prices of Market Based PCE	1.3	-0.3	2.0	0.8	1.3
Prices of Market Based PCE Excluding Food and Energy	1.6	0.5	1.4	1.0	1.0
Real Disposable Personal Income*	0.4	0.9	1.8	-0.2	2.3
Personal Saving As % Disposable Income	4.1	4.7	4.9	4.3	4.0

Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in

private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income

*Percent change from quarter one year ago

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

Percentage shares of GDP are shown in Table I-10. PCE (personal consumption expenditures) is equivalent to 69.0 percent of GDP and is under pressure with stagnant real disposable income, high levels of unemployment and underemployment and higher savings rates than before the global recession, temporarily interrupted by financial repression in the form of zero interest rates. Gross private domestic investment is also growing slowly even with about two trillion dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth. Bouts of risk aversion revalue the dollar relative to most currencies in the world as investors increase their holdings of dollar-denominated assets.

Table I-10, US, Percentage Shares of GDP, %

	IQ2014
GDP	100.0
PCE	69.0
Goods	23.0
Durable	7.4
Nondurable	15.6
Services	46.0
Gross Private Domestic Investment	15.8
Fixed Investment	15.4
NRFI	12.2
Structures	2.7
Equipment & Software	5.6
Intellectual Property	3.9
RFI	3.1
Change in Private       Inventories	0.4
Net Exports of Goods and Services	-2.9
Exports	13.5
Goods	9.3
Services	4.2
Imports	16.4
Goods	13.6
Services	2.7
Government	18.2
Federal	7.1
National Defense	4.4
Nondefense	2.8
State and Local	11.1

PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment

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

Table I-11 shows percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009, 2010, 2011, 2012 and 2013. The data incorporate the new revisions released by the BEA on Jul 31, 2013. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 6.9 percent in 1959, 5.4 percent in 1976, and 4.6 percent in 1983 followed by 7.3 percent in 1984 and 4.2 percent in 1985. In contrast, GDP grew 2.5 percent in 2010 after six consecutive quarters of growth, 1.8 percent in 2011 after ten consecutive quarters of expansion, 2.8 percent in 2012 after 14 quarters of expansion and 1.9 percent in 2013 after 18 consecutive quarters of expansion. Annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions than in the expansion after the global recession of 2007. Gross domestic investment was much stronger in the earlier expansions than in 2010, 2011, 2012 and 2013.

Table I-11, US, Percentage Point Contributions to the Annual Growth Rate of GDP

	GDP	PCE	GDI	∆ PI	Trade	GOV
1958	-0.7	0.52	-1.16	-0.17	-0.87	0.77
1959	6.9	3.49	2.82	0.83	0.00	0.59
1975	-0.2	1.36	-2.90	-1.23	0.86	0.49
1976	5.4	3.41	2.91	1.37	-1.05	0.12
1982	-1.9	0.86	-2.55	-1.30	-0.59	0.38
1983	4.6	3.54	1.60	0.28	-1.32	0.81
1984	7.3	3.32	4.73	1.90	-1.54	0.76
1985	4.2	3.25	-0.01	-1.03	-0.39	1.38
1986	3.5	2.63	0.03	-0.31	-0.29	1.14
1987	3.5	2.14	0.53	0.41	0.17	0.63
2009	-2.8	-1.06	-3.52	-0.76	1.14	0.64
2010	2.5	1.34	1.66	1.45	-0.51	0.02
2011	1.8	1.74	0.69	-0.16	0.10	-0.68
2012	2.8	1.52	1.36	0.20	0.10	-0.20
2013	1.9	1.37	0.82	0.16	0.12	-0.43

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

Table I-12 provides more detail of the contributions to growth of GDP from 2009 to 2013 using annual-level data. PCEs contributed 1.34 PPs to GDP growth in 2010 of which 0.77 percentage points (PP) in goods and 0.57 PP in services. Gross private domestic investment (GPDI) deducted 3.52 PPs of GDP growth in 2009 of which -2.77 PPs by fixed investment and -0.76 PPs of inventory change (∆PI) and added 1.66 PPs of GPDI in 2010 of which 0.21 PPs of fixed investment and 1.45 PPs of inventory accumulation (∆PI). Trade, or exports of goods and services net of imports, contributed 1.14 PPs in 2009 of which exports deducted 1.10 PPs and imports added 2.24 PPs. In 2010, trade deducted 0.51 PPs with exports contributing 1.28 PPs and imports deducting 1.79 PPs likely benefitting from dollar revaluation. In 2009, government added 0.64 PP of which 0.44 PPs by the federal government and 0.20 PPs by state and local government; in 2010, government added 0.02 PPs of which 0.37 PPs by the federal government with state and local government deducting 0.35 PPs. Table I-12 provides the estimates for 2011, 2012 and 2013. PCE contributed 1.74 PPs in 2011 after 1.34 PPs in 2010. The contribution of PCE fell to 1.52 points in 2012 and 1.37 PPs in 2013. The breakdown into goods and services is similar but with contributions in 2012 of 0.77 PPs of goods and 0.74 PPs of services. In 2013, goods contributed 0.81 PPs and services 0.55 PPs. Gross private domestic investment contributed 1.66 PPs in 2010 with 1.45 PPs of change of private inventories but the contribution of gross private domestic investment was only 0.69 PPs in 2011. The contribution of GDI in 2012 increased to 1.36 PPs with fixed investment increasing its contribution to 1.17 PPs and residential investment contributing 0.32 PPs for the first time since 2009. GDI contributed 0.84 PPs with 0.67 PPs from fixed investment and 0.17 PPs from inventory change. Net exports of goods and services contributed marginally in 2011 with 0.10 PPs and 0.10 PPs in 2012. Net trade contributed 0.12 PPs in 2013. The contribution of exports fell from 1.28 PPs in 2010 and 0.89 PPs in 2011 to only 0.48 PPs in 2012 and 0.36 PPs in 2013. Government deducted 0.68 PPs in 2011, 0.20 PPs in 2012 and 0.44 PPs in 2013. Demand weakened in 2013 with lower contribution of personal consumption expenditures of 1.37 PPs and of gross domestic investment of 0.82 PPs. Net trade contributed only 0.12 PPs. The expansion since IIIQ2009 has been characterized by weak contributions of aggregate demand, which is the sum of personal consumption expenditures plus gross private domestic investment. The US did not recover strongly from the global recessions as typical in past cyclical expansions. Recoveries tend to be more sluggish as expansions mature. At the margin in IVQ2011, the acceleration of expansion was driven by inventory accumulation instead of aggregate demand of consumption and investment. Growth of PCE was partly the result of burning savings because of financial repression, which may not be sustainable in the future while creating multiple distortions of resource allocation and growth restraint.

Table I-12, US, Contributions to Growth of Gross Domestic Product in Percentage Points

	2009	2010	2011	2012	2013
GDP Growth ∆%	-2.8	2.5	1.8	2.8	1.9
Personal Consumption Expenditures (PCE)	-1.06	1.34	1.74	1.52	1.37
Goods	-0.68	0.77	0.76	0.77	0.81
Durable	-0.41	0.43	0.46	0.56	0.51
Nondurable	-0.27	0.34	0.30	0.22	0.31
Services	-0.38	0.57	0.98	0.74	0.55
Gross Private Domestic Investment (GPDI)	-3.52	1.66	0.69	1.36	0.82
Fixed Investment	-2.77	0.21	0.85	1.17	0.66
Nonresidential	-2.04	0.28	0.84	0.85	0.33
Structures	-0.70	-0.49	0.05	0.31	0.03
Equipment, software	-1.29	0.70	0.62	0.41	0.17
Intellectual Property	-0.05	0.07	0.17	0.13	0.12
Residential	-0.73	-0.07	0.01	0.32	0.33
Change Private Inventories	-0.76	1.45	-0.16	0.20	0.16
Net Exports of Goods and Services	1.14	-0.51	0.10	0.10	0.12
Exports	-1.10	1.28	0.89	0.48	0.36
Goods	-1.02	1.08	0.63	0.36	0.22
Services	-0.08	0.20	0.27	0.12	0.14
Imports	2.24	-1.79	-0.79	-0.38	-0.24
Goods	2.15	-1.72	-0.70	-0.30	-0.17
Services	0.08	-0.07	-0.09	-0.07	-0.07
Government Consumption Expenditures and Gross Investment	0.64	0.02	-0.68	-0.20	-0.43
Federal	0.44	0.37	-0.23	-0.12	-0.41
National Defense	0.27	0.18	-0.13	-0.17	-0.35
Nondefense	0.17	0.19	-0.10	0.05	-0.06
State and Local	0.20	-0.35	-0.46	-0.08	-0.02

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Manufacturing jobs increased 12,000 in Apr 2014 relative to Mar 2014, seasonally adjusted. Manufacturing jobs not seasonally adjusted increased 103,000 from Apr 2013 to
Apr 2014 or at the average monthly rate of 8,583. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. Industrial production decreased 0.6 percent in Apr 2014 after increasing 0.9 percent in Mar 2014 and increasing 1.1 percent in Feb 2014, with all data seasonally adjusted. The Federal Reserve completed its annual revision of industrial production and capacity utilization on Mar 28, 2014 (http://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm). The report of the Board of Governors of the Federal Reserve System states (http://www.federalreserve.gov/releases/g17/Current/default.htm):

“Industrial production decreased 0.6 percent in April 2014 after having risen about 1 percent in both February and March. In April, manufacturing output fell 0.4 percent. The index had increased substantially in February and March following a decrease in January; severe weather had restrained production early in the quarter. The output of utilities dropped 5.3 percent in April, as demand for heating returned toward normal levels. The production at mines increased 1.4 percent following a gain of 2.0 percent in March. At 102.7 percent of its 2007 average, total industrial production in April was 3.5 percent above its level of a year earlier. The capacity utilization rate for total industry decreased 0.7 percentage point in April to 78.6 percent, a rate that is 1.5 percentage points below its long-run (1972–2013) average.”

In the six months ending in Apr 2014, United States national industrial production accumulated increase of 2.0 percent at the annual equivalent rate of 4.1 percent, which is higher than growth of 3.5 percent in the 12 months ending in Apr 2014. Excluding growth of 1.1 percent in Feb 2014 (revised from 1.2 percent in the prior estimate), growth in the remaining five months from Nov to Apr 2014 accumulated to 1.0 percent or 2.2 percent annual equivalent. Industrial production fell in two of the past six months. Business equipment accumulated growth of 2.2 percent in the six months from Nov 2013 to Apr 2014 at the annual equivalent rate of 4.4 percent, which is higher than growth of 4.1 percent in the 12 months ending in Apr 2014. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm): “The capacity utilization rate for total industry decreased 0.7 percentage point in April to 78.6 percent, a rate that is 1.5 percentage points below its long-run (1972–2013) average.” United States industry apparently decelerated to a lower growth rate with possible acceleration in the past few months.

Manufacturing decreased 0.4 percent in Apr 2014 after increasing 0.7 percent in Mar 2014 and increasing 1.5 percent in Feb 2014 seasonally adjusted, increasing 2.5 percent not seasonally adjusted in the 12 months ending in Apr 2014. Manufacturing grew cumulatively 1.4 percent in the six months ending in Apr 2014 or at the annual equivalent rate of 2.8 percent. Excluding the increase of 1.5 percent in Feb 2014 (revised from 1.4 percent in the prior estimate), manufacturing accumulated growth of -0.1 percent from Nov 2013 to Apr 2014 or at the annual equivalent rate of -0.3 percent. Table I-2 provides a longer perspective of manufacturing in the US. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 into more recent months as shown by 12 months rates of growth. Growth rates appeared to be increasing again closer to 5 percent in Apr-Jun 2012 but deteriorated. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.2 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appeared to be returning to the levels at 3 percent or higher in the annual rates before the recession but the pace of manufacturing fell steadily in the past six months with some strength at the margin. The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on Mar 28, 2014 (http://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm):

“The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization. The annual revision for 2014 was more limited than in recent years because the source data required to extend the annual benchmark indexes of production into 2012 were mostly unavailable. Consequently, the IP indexes published with this revision are very little changed from previous estimates. Measured from fourth quarter to fourth quarter, total IP is now reported to have increased about 3 1/3 percent in each year from 2011 to 2013. Relative to the rates of change for total IP published earlier, the new rates are 1/2 percentage point higher in 2012 and little changed in any other year. Total IP still shows a peak-to-trough decline of about 17 percent for the most recent recession, and it still returned to its pre-recession peak in the fourth quarter of 2013.”

Manufacturing output fell 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increased 19.9 percent from the trough in Apr 2009 to Dec 2013. Manufacturing grew 22.3 percent from the trough in Apr 2009 to Apr 2014. Manufacturing output in Apr 2014 is 4.5 percent below the peak in Jun 2007.

Table I-13 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.7 percent in IVQ2013. Most of US national income is in the form of services. In Apr 2014, there were 138.288 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 115.990 million NSA in Apr 2014 accounted for 83.9 percent of total nonfarm jobs of 138.288 million, of which 12.044 million, or 10.4 percent of total private jobs and 8.7 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 97.183 million NSA in Apr 2014, or 70.3 percent of total nonfarm jobs and 83.8 percent of total private-sector jobs. Manufacturing has share of 11.0 percent in US national income in IVQ2013, as shown in Table I-13. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

Table I-13, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IV2013	% Total	SAAR IQ2014	% Total
National Income WCCA	14,811.5	100.0	14,927.6	100.0
Domestic Industries	14,527.6	98.1	14,692.8	98.4
Private Industries	12,844.2	86.7	13,003.8	87.1
Agriculture	206.0	1.4
Mining	258.4	1.7
Utilities	208.8	1.4
Construction	650.1	4.4
Manufacturing	1635.5	11.0
Durable Goods	914.2	6.2
Nondurable Goods	721.3	4.9
Wholesale Trade	885.8	6.0
Retail Trade	1000.5	6.8
Transportation & WH	453.5	3.1
Information	519.1	3.5
Finance, Insurance, RE	2531.8	17.1
Professional & Business Services	2033.6	13.7
Education, Health Care	1451.5	9.8
Arts, Entertainment	591.4	4.0
Other Services	418.1	2.8
Government	1683.4	11.4	1689.1	11.3
Rest of the World	284.0	1.9	234.8	1.6

Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

IA1. Contracting Real Private Fixed Investment. 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. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 19 quarters from IIIQ2009 to IQ2014. 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) and the second estimate of GDP for IQ2014 (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_2nd.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/2014/05/financial-volatility-mediocre-cyclical.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2014 would have accumulated to 21.2 percent. GDP in IQ2014 would be $18,172.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,269.8 billion than actual $15,902.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 27.4 million unemployed or underemployed equivalent to actual unemployment of 16.8 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html). US GDP in IQ2014 is 12.5 percent below than at trend. US GDP grew from $14,996.1 billion in IVQ2007 in constant dollars to $15,902.9 billion in IQ2014 or 6.0 percent at the average annual equivalent rate of 0.9 percent. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation.

Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. Table IA1-1 provides quarterly seasonally adjusted annual rates (SAAR) of growth of private fixed investment for the recessions of the 1980s and the current economic cycle. In the cyclical expansion beginning in IQ1983 (http://www.nber.org/cycles.html), real private fixed investment in the United States grew at the average annual rate of 14.7 percent in the first eight quarters from IQ1983 to IVQ1984. Growth rates fell to an average of 2.2 percent in the following eight quarters from IQ1985 to IVQ1986. There were only two quarters of contraction of private fixed investment from IQ1983 to IVQ1986. There is quite different behavior of private fixed investment in the eighteen quarters of cyclical expansion from IIIQ2009 to IVQ2013. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 3.3 percent, which is significantly lower than 14.7 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only strong growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 10.5 percent. Growth has fallen from the SAAR of 14.8 percent in IIIQ2011 to 2.7 percent in IIIQ2012, recovering to 11.6 percent in IVQ2012 and falling to minus 1.5 percent in IQ2013. The SAAR of fixed investment rose to 6.5 percent in IIQ2013 and fell to 5.9 percent in IIIQ2013. The SAAR of fixed investment fell to 2.8 percent in IVQ2013. Fixed investment fell at the SAAR of 2.3 percent in IVQ2014. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012.

Table IA1-1, US, Quarterly Growth Rates of Real Private Fixed Investment, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	3.8	-12.2	9.4	13.1	-7.1	-27.4	0.8
II	3.2	-12.1	16.0	16.6	-5.5	-14.2	13.6
III	0.1	-9.3	24.4	8.2	-12.1	-0.5	-0.4
IV	-1.5	0.2	24.3	7.3	-23.9	-2.8	8.5
				1985			2011
I				3.7			-0.5
II				5.2			8.6
III				-1.6			14.8
IV				7.8			10.0
				1986			2012
I				1.1			8.6
II				0.1			4.7
III				-1.8			2.7
IV				3.1			11.6
				1987			2013
I				-6.7			-1.5
II				6.3			6.5
III				7.1			5.9
IV				-0.2			2.8
				1988			2014
I				0.2			-2.3
II				8.1
III				1.9
IV				4.8

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

Chart IA1-1 of the US Bureau of Economic Analysis (BEA) provides seasonally adjusted annual rates of growth of real private fixed investment from 1981 to 1987. Growth rates recovered sharply during the first eight quarters, which was essential in returning the economy to trend growth and eliminating unemployment and underemployment accumulated during the contractions.

Chart IA1-1, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 1981-1987

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Weak behavior of real private fixed investment from 2007 to 2014 is shown in Chart IA1-2. Growth rates of real private fixed investment were much lower during the initial phase of expansion in the current economic cycle and have entered sharp trend of decline.

Chart IA1-2, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IA1-2 provides real private fixed investment at seasonally adjusted annual rates from IVQ2007 to IQ2014 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980, gross private domestic investment in the US was $951.6 billion of chained 2009 dollars, growing to $1,174.6 billion in IIIQ1987 or 23.4 percent. Real gross private domestic investment in the US decreased 1.6 percent from $2,605.2 billion of chained 2009 dollars in IVQ2007 to $2,562.4 billion in IQ2014. As shown in Table IAI-2, real private fixed investment fell 3.5 percent from $2,586.3 billion of chained 2009 dollars in IVQ2007 to $2,496.6 billion in IQ2014. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012.

Table IA1-2, US, Real Private Fixed Investment and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions of Chained 2009 Dollars and ∆%

	Real PFI, Billions Chained 2009 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	2586.3	NA	-1.2	-1.4
IQ2008	2539.1	-1.8	-1.8	-3.0
IIQ2008	2503.4	-3.2	-1.4	-4.6
IIIQ2008	2424.1	-6.3	-3.2	-7.1
IV2008	2263.8	-12.5	-6.6	-12.5
IQ2009	2089.3	-19.2	-7.7	-17.7
IIQ2009	2011.0	-22.2	-3.7	-19.7
IIIQ2009	2008.4	-22.3	-0.1	-17.1
IVQ2009	1994.1	-22.9	-0.7	-11.9
IQ2010	1997.9	-22.8	0.2	-4.4
IIQ2010	2062.8	-20.2	3.2	2.6
IIIQ2010	2060.8	-20.3	-0.1	2.6
IVQ2010	2103.1	-18.7	2.1	5.5
IQ2011	2100.7	-18.8	-0.1	5.1
IIQ2011	2144.4	-17.1	2.1	4.0
IIIQ2011	2219.8	-14.2	3.5	7.7
IVQ2011	2273.4	-12.1	2.4	8.1
IQ2012	2320.8	-10.3	2.1	10.5
IIQ2012	2347.9	-9.2	1.2	9.5
IIIQ2012	2363.5	-8.6	0.7	6.5
IVQ2012	2429.1	-6.1	2.8	6.8
IQ2013	2420.0	-6.4	-0.4	4.3
IIQ2013	2458.4	-4.9	1.6	4.7
IIIQ2013	2,494.0	-3.6	1.4	5.5
IVQ2013	2,511.2	-2.9	0.7	3.4
IQ2014	2,496.6	-3.5	-0.6	3.2

PFI: Private Fixed Investment

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

Chart IA1-3 provides real private fixed investment in billions of chained 2009 dollars from IQ2007 to IQ2014. Real private fixed investment has not recovered, stabilizing at a level in IQ2014 that is 3.5 percent below the level in IVQ2007.

Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, IQ2007 to IQ2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-4 provides real gross private domestic investment in chained dollars of 2009 from 1980 to 1987. Real gross private domestic investment climbed 23.4 percent to $1174.6 billion of 2009 dollars in IIIQ1987 above the level of $951.6 billion in IQ1980.

Chart IA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 1980-1987

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-5 provides real gross private domestic investment in the United States in billions of chained dollars of 2009 from 2006 to 2014. Gross private domestic investment reached a level of $2562.4 in IQ2014, which was 1.6 percent lower than the level of $2605.2 billion in IVQ2007 (http://www.bea.gov/iTable/index_nipa.cfm).

Chart IA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 2007-2014

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

Table IA1-3 provides percentage shares in GDP of gross private domestic investment and its components in IQ2014, IQ2006 and IQ2000. The share of gross private domestic investment in GDP has fallen from 19.4 percent in IQ2000 and 19.8 percent in IQ2006 to 15.8 percent in IQ2014. There are declines in percentage shares in GDP of all components with sharp reduction of residential investment from 4.8 percent in IQ2000 and 6.6 percent in IQ2006 to 3.1 percent in IQ2014. The share of fixed investment in GDP fell from 19.2 percent in IQ2000 and 19.2 percent in IQ2006 to 15.4 percent in IQ2014.

Table IA1-3, Percentage Shares of Gross Private Domestic Investment and Components in Gross Domestic Product, % of GDP, IQ2013

	IQ2014	IQ2006	IQ2000
Gross Private Domestic Investment	15.8	19.8	19.4
Fixed Investment	15.4	19.2	19.2
Nonresidential	12.2	12.7	14.4
Structures	2.7	2.8	3.0
Equipment           and Software	5.6	6.2	7.5
Intellectual            Property	3.9	3.6	4.0
Residential	3.1	6.6	4.8
Change in Private Inventories	0.4	0.5	0.2

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

Broader perspective is provided in Chart IA1-6 with the percentage share of gross private domestic investment in GDP in annual data from 1929 to 2013. There was sharp drop during the current economic cycle with almost no recovery in contrast with sharp recovery after the recessions of the 1980s.

Chart IA1-6, US, Percentage Share of Gross Private Domestic Investment in Gross Domestic Product, Annual, 1929-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-7 provides percentage shares of private fixed investment in GDP with annual data from 1929 to 2013. The sharp contraction after the recessions of the 1980s was followed by sustained recovery while the sharp drop in the current economic cycle has not been recovered.

Chart IA1-7, US, Percentage Share of Private Fixed Investment in Gross Domestic Product, Annual, 1929-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-8 provides percentage shares in GDP of nonresidential investment from 1929 to 2013. There is again recovery from sharp contraction in the 1980s but inadequate recovery in the current economic cycle.

Chart IA1-8, US, Percentage Share of Nonresidential Investment in Gross Domestic Product, Annual, 1929-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-9 provides percentage shares of business equipment and software in GDP with annual data from 1929 to 2013. There is again inadequate recovery in the current economic cycle.

Chart IA1-9, US, Percentage Share of Business Equipment and Software in Gross Domestic Product, Annual, 1929-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-10 provides percentage shares of residential investment in GDP with annual data from 1929 to 2013. The salient characteristic of Chart IA1-10 is the vertical increase of the share of residential investment in GDP up to 2006 and subsequent collapse.

Chart IA1-10, US, Percentage Share of Residential Investment in Gross Domestic Product, Annual, 1929-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Finer detail is provided by the quarterly share of residential investment in GDP from 1979 to 2014 in Chart IA1-11. There was protracted growth of that share, accelerating sharply into 2006 followed with nearly vertical drop. The explanation of the sharp contraction of United States housing can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ingersoll 1987, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.

The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.

Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).

Chart IA1-11, US, Percentage Share of Residential Investment in Gross Domestic Product, Quarterly, 1979-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-12 provides the share of intellectual property products investment in GDP with annual data from 1929 to 2013. This is an important addition in the revision and enhancement of GDP provided by the Bureau of Economic Analysis. The share rose sharply over time but stabilized at a lower level in the past decade.

Chart IA1-12, US, Percentage Share of Intellectual Property Products Investment in Gross Domestic Product, Annual, 1929-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-13 provides the percentage share of intellectual property investment in GDP on a quarterly basis from 1979 to 2013. The share stabilized in the 2000s.

Chart IA1-13, US, Percentage Share of Intellectual Property Investment in Gross Domestic Product, Quarterly, 1979-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IA1-4 provides the seasonally adjusted annual rate of real GDP percentage change and contributions in percentage points in annual equivalent rate of gross domestic investment (GDI), real private fixed investment (PFI), nonresidential investment (NRES), business equipment and software (BES), residential investment (RES), intellectual property products (IPP) and change in inventories (∆INV) for the cyclical expansions from IQ1983 to IVQ1985 and from IIIQ2009 to IQ2014. GDI deducted 1.98 percentage points from GDP growth in IQ2014: 0.36 for PFI, 0.20 for NRES, 0.18 for BES and 0.16 for RES. IPP added 0.19 percentage points and inventory change deducted 1.62 percentage points. GDI provided strong percentage points contributions to GDP growth in the critical first year of expansion in 1983 and also in several quarters in 1984 and 1985 while it has been muted in the cyclical expansion since IIIQ2009 with contributions largely only from IQ2010 to IVQ2011. Gross domestic investment added 0.41 percentage points to GDP growth in IVQ2013. Nonresidential investment added 0.68 percentage points while residential investment subtracted 0.26 percentage points. Inventory investment deducted 0.02 percentage points. Gross domestic investment added 2.56 percentage points to GDP growth of 4.1 percent in IIIQ2013 partly because of change of inventories of 1.67 percentage points with PFI adding 0.89 percentage points. Nonresidential investment added 0.58 percentage points and residential investment added 0.31 percentage points to GDP growth of 4.1 percent in IIIQ2013. GDI added 1.38 percentage points to GDP growth of 2.5 percent in IIQ2013 with 0.41 percentage points from inventory change while nonresidential investment added 0.56 percentage points and residential investment 0.40 percentage points. GDI added 0.71 percentage points in IQ2013 mostly because of 0.93 percentage points of inventory investment while private fixed investment deducted 0.23 percentage points. Nonresidential investment deducted 0.57 percentage points. Business equipment and software added 0.09 percentage points and residential investment 0.34 percentage points. Intellectual property products (IPP) added 0.14 percentage points in IQ2013, deducted 0.06 percentage points in IIQ2013 and added 0.22 percentage points in IIIQ2013. Intellectual property products added 0.15 percentage points in IVQ2013 and 0.19 percentage points in IQ2014. Much of the strong performance of GDI in the cyclical expansion after IQ1983 originated in contributions by real private fixed investment (PFI). Nonresidential investment also contributed strongly to growth in the expansion of the 1980s but has been muted in the current expansion. The contribution of business equipment and software collapsed to minus 0.22 percentage points in IIIQ2012 as business scales down investment but rebounded with 0.47 percentage points in IVQ2012, 0.09 percentage points in IQ2013 and 0.18 percentage points in IIQ2013. Business equipment and software contributed 0.02 percentage points in IIIQ2013 and 0.58 percentage points in IVQ2013. Business equipment deducted 0.18 percentage points in IQ2014. Residential investment (RES) was relatively strong in 1983 but was muted in following quarters. Residential investment only contributed significantly to growth of GDP in the four quarters of 2012, IQ2013, IIQ2013 and IIIQ2013. Residential investment deducted 0.26 percentage points in IVQ2013 and 0.16 percentage points in IQ2014, raising concerns on the sustainability of housing recovery.

Table IA1-4, US, Contributions to the Rate of Growth of Real GDP in Percentage Points

	GDP	GDI	PFI	NRES	BES	IPP	RES	∆INV
2014
I	-1.0	-1.98	-0.36	-0.20	-0.18	0.19	-0.16	-1.62
2013
I	1.1	0.71	-0.23	-0.57	0.09	0.14	0.34	0.93
II	2.5	1.38	0.96	0.56	0.18	-0.06	0.40	0.41
III	4.1	2.56	0.89	0.58	0.02	0.22	0.31	1.67
IV	2.6	0.41	0.43	0.68	0.58	0.15	-0.26	-0.02
2012
I	3.7	1.57	1.21	0.68	0.45	0.05	0.53	0.36
II	1.2	-0.23	0.68	0.53	0.29	0.07	0.15	-0.91
III	2.8	0.99	0.39	0.04	-0.22	0.11	0.35	0.60
IV	0.1	-0.36	1.63	1.13	0.47	0.21	0.50	-2.00
2011
I	-1.3	-1.11	-0.05	-0.09	0.59	0.14	0.04	-1.06
II	3.2	1.88	1.16	1.09	0.23	0.18	0.07	0.72
III	1.4	0.36	1.96	1.81	0.99	0.20	0.15	-1.60
IV	4.9	4.13	1.39	1.10	0.54	0.21	0.29	2.73
2010
I	1.6	1.77	0.11	0.46	1.25	-0.07	-0.35	1.66
II	3.9	2.86	1.77	1.21	1.02	-0.08	0.56	1.09
III	2.8	1.86	-0.04	0.90	0.83	0.22	-0.94	1.90
IV	2.8	-0.51	1.13	0.94	0.57	0.19	0.19	-1.64
2009
I	-5.4	-7.02	-4.75	-3.58	-2.25	-0.23	-1.17	-2.26
II	-0.4	-3.25	-2.13	-1.46	-0.60	0.16	-0.66	-1.12
III	1.3	-0.40	-0.02	-0.54	0.25	0.04	0.52	-0.38
IV	3.9	4.05	-0.36	-0.37	0.36	0.25	0.01	4.40
1982
I	-6.5	-7.60	-2.26	-1.45	-0.83	0.14	-0.81	-5.34
II	2.2	-0.06	-2.32	-1.89	-1.20	0.08	-0.44	2.26
III	-1.4	-0.62	-1.73	-1.71	-0.55	0.06	-0.02	1.11
IV	0.4	-5.37	-0.03	-1.05	-0.57	0.00	1.01	-5.33
1983
I	5.3	2.36	1.44	-0.92	-0.27	0.16	2.36	0.92
II	9.4	5.96	2.53	0.67	1.24	0.29	1.86	3.43
III	8.1	4.40	3.82	2.13	1.43	0.31	1.70	0.57
IV	8.5	6.94	3.93	3.14	2.32	0.35	0.79	3.01
1984
I	8.2	7.23	2.29	1.71	0.46	0.30	0.58	4.94
II	7.2	2.57	2.86	2.52	1.36	0.29	0.34	-0.29
III	4.0	1.69	1.48	1.70	0.88	0.25	-0.22	0.21
IV	3.2	-1.08	1.36	1.34	0.86	0.29	0.02	-2.44
1985
I	4.0	-2.14	0.72	0.67	-0.23	0.14	0.05	-2.86
II	3.7	1.34	0.99	0.83	0.64	0.20	0.16	0.35
III	6.4	-0.43	-0.28	-0.62	-0.38	0.13	0.34	-0.15
IV	3.0	2.80	1.40	1.00	0.53	0.26	0.40	1.40
1986
I	3.8	0.04	0.21	-0.55	-0.28	0.17	0.76	-0.17
II	1.9	-1.30	0.00	-1.12	0.34	0.15	1.12	-1.30
III	4.1	-1.97	-0.34	-0.63	-0.17	0.10	0.28	-1.62
IV	2.1	0.24	0.53	0.48	0.30	0.10	0.05	-0.29
1987
I	2.8	1.98	-1.30	-1.26	-0.97	0.07	-0.04	3.28
II	4.6	0.08	1.07	1.00	0.76	0.08	0.07	-0.99
III	3.7	0.03	1.22	1.39	0.70	0.11	-0.17	-1.19
IV	6.8	4.94	-0.01	-0.05	-0.48	0.16	0.04	4.95

GDP: Gross Domestic Product; GDI: Gross Domestic Investment; PFI: Private Fixed Investment; NRES: Nonresidential; BES: Business Equipment and Software; IPP: Intellectual Property Products; RES: Residential; ∆INV: Change in Private Inventories.

GDI = PFI + ∆INV, may not add exactly because of errors of rounding.

GDP: Seasonally adjusted annual equivalent rate of growth in a quarter; components: percentage points at annual rate.

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

IA2 Swelling Undistributed Corporate Profits. Table IA1-5 provides value added of corporate business, dividends and corporate profits in billions of current dollars at seasonally adjusted annual rates (SAAR) in IVQ2007 and IQ2014 together with percentage changes. The last three rows of Table IA1-5 provide gross value added of nonfinancial corporate business, consumption of fixed capital and net value added in billions of chained 2009 dollars at SAARs. Deductions from gross value added of corporate profits down the rows of Table IA1-5 end with undistributed corporate profits. Profits after taxes with inventory valuation adjustment (IVA) and capital consumption adjustment (CCA) increased by 73.8 percent in nominal terms from IVQ2007 to IQ2014 while net dividends decreased 7.2 percent and undistributed corporate profits swelled 328.5 percent from $107.7 billion in IQ2007 to $461.5 billion in IQ2014 and changed signs from minus $55.9 billion in current dollars in IVQ2007. The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Gross value added of nonfinancial corporate business adjusted for inflation increased 5.9 percent from IVQ2007 to IQ2014, which is much lower than nominal increase of 16.6 percent in the same period for gross value added of total corporate business.

Table IA1-5, US, Value Added of Corporate Business, Corporate Profits and Dividends, IVQ2007-IQ2013

	IVQ2007	IQ2014	∆%
Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)
Gross Value Added of Corporate Business	8,165.9	9,525.2	16.6
Consumption of Fixed Capital	1,216.5	1,459.3	20.0
Net Value Added	6,949.4	8,065.9	16.1
Compensation of Employees	4,945.8	5,515.4	11.5
Taxes on Production and Imports Less Subsidies	688.5	777.3	12.9
Net Operating Surplus	1,315.1	1,773.2	34.8
Net Interest and Misc	204.2	122.0	-40.3
Business Current Transfer Payment Net	68.9	93.3	35.4
Corporate Profits with IVA and CCA Adjustments	1,042.0	1,558.0	49.5
Taxes on Corporate Income	408.8	457.3	11.9
Profits after Tax with IVA and CCA Adjustment	633.2	1,100.7	73.8
Net Dividends	689.1	639.2	-7.2
Undistributed Profits with IVA and CCA Adjustment	-55.9	461.5	NA ∆% 328.5 relative to 107.7 in IQ2007
Billions of Chained USD 2009 SAAR
Gross Value Added of Nonfinancial Corporate Business	7,519.3	7,960.4	5.9
Consumption of Fixed Capital	1,066.0	1,191.0	11.7
Net Value Added	6,453.4	6,769.3	4.9

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

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

Table IA1-6 provides comparable United States value added of corporate business, corporate profits and dividends from IQ1980 to IIIQ1987. There is significant difference both in nominal and inflation-adjusted data. Between IQ1980 and IIIQ1987, profits after tax with IVA and CCA increased 100.3 percent with dividends growing 129.3 percent and undistributed profits increasing 80.4 percent. There was much higher inflation in the 1980s than in the current cycle. For example, the consumer price index increased 43.6 from Mar 1980 to Sep 1987 but only 12.5 percent between Dec 2007 and Mar 2014 (http://www.bls.gov/cpi/data.htm). The comparison is still valid in terms of inflation-adjusted data: gross value added of nonfinancial corporate business adjusted for inflation increased 31.8 percent between IQ1980 and IIIQ1987 but only 5.9 percent between IVQ2007 and IQ2014 while net value added adjusted for inflation increased 30.8 percent between IQ1980 and IIIQ1987 but only 4.8 percent between IVQ2007 and IQ2014.

Table IA1-6, US, Value Added of Corporate Business, Corporate Profits and Dividends, IQ1980-IVQ1985

	IQ1980	IIIQ1987	∆%
Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)
Gross Value Added of Corporate Business	1,654.1	2,939.6	77.7
Consumption of Fixed Capital	200.5	374.0	86.5
Net Value Added	1,453.6	2,565.6	76.5
Compensation of Employees	1,072.9	1,860.1	73.4
Taxes on Production and Imports Less Subsidies	121.5	234.8	93.3
Net Operating Surplus	259.2	470.7	81.6
Net Interest and Misc.	50.4	108.0	114.3
Business Current Transfer Payment Net	11.5	24.1	109.6
Corporate Profits with IVA and CCA Adjustments	197.2	338.6	71.7
Taxes on Corporate Income	97.0	137.9	42.2
Profits after Tax with IVA and CCA Adjustment	100.2	200.7	100.3
Net Dividends	40.9	93.8	129.3
Undistributed Profits with IVA and CCA Adjustment	59.3	107.0	80.4
Billions of Chained USD 2009 SAAR
Gross Value Added of Nonfinancial Corporate Business	2,952.3	3,890.6	31.8
Consumption of Fixed Capital	315.6	440.9	39.7
Net Value Added	2,636.7	3,449.7	30.8

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

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

Chart IA1-14 of the US Bureau of Economic Analysis provides quarterly corporate profits after tax and undistributed profits with IVA and CCA from 1979 to 2014. There is tightness between the series of quarterly corporate profits and undistributed profits in the 1980s with significant gap developing from 1988 and to the present with the closest approximation peaking in IVQ2005 and surrounding quarters. These gaps widened during all recessions including in 1991 and 2001 and recovered in expansions with exceptionally weak performance in the current expansion.

Chart IA1-14, US, Corporate Profits after Tax and Undistributed Profits with Inventory Valuation Adjustment and Capital Consumption Adjustment, Quarterly, 1979-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IA1-7 provides price, costs and profit per unit of gross value added of nonfinancial domestic corporate income for IVQ2007 and IQ2014 in the upper block and for IQ1980 and IIIQ1987 in the lower block. Compensation of employees or labor costs per unit of gross value added of nonfinancial domestic corporate income hardly changed from 0.577 in IVQ2007 to 0.608 in IQ2014 in a fractured labor market but increased from 0.340 in IQ1980 to 0.436 in IIIQ1987 in a more vibrant labor market. Unit nonlabor costs increased mildly from 0.270 per unit of gross value added in IVQ2007 to 0.300 in IQ2014 but increased from 0.124 in IQ1980 to 0.181 in IIIQ1987 in an economy closer to full employment of resources. Profits after tax with IVA and CCA per unit of gross value added of nonfinancial domestic corporate income increased from 0.076 in IVQ2007 to 0.109 in IQ2043 and from 0.029 in IQ1980 to 0.045 in IIIQ1987.

Table IA1-7, US, Price, Costs and Profit per Unit of Gross Value Added of Nonfinancial Domestic Corporate Income

	IVQ2007	IQ2014
Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business	0.961	1.054
Compensation of Employees (Unit Labor Cost)	0.577	0.608
Unit Nonlabor Cost	0.270	0.300
Consumption of Fixed Capital	0.140	0.160
Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net)	0.093	0.099
Net Interest and Misc. Payments	0.037	0.041
Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production)	0.114	0.145
Taxes on Corporate Income	0.038	0.036
Profits after Tax with IVA and CCA Adjustment	0.076	0.109
	IQ1980	IIIQ1987
Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business	0.518	0.687
Compensation of Employees (Unit Labor Cost)	0.340	0.436
Unit Nonlabor Cost	0.124	0.181
Consumption of Fixed Capital	0.064	0.087
Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net)	0.042	0.064
Net Interest and Misc. Payments	0.018	0.030
Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production)	0.055	0.071
Taxes on Corporate Income	0.026	0.026
Profits after Tax with IVA and CCA Adjustment	0.029	0.045

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

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

Chart IA1-13 provides quarterly profits after tax with IVA and CCA per unit of gross value added of nonfinancial domestic corporate income from 1980 to 2014. In an environment of idle labor and other productive resources nonfinancial corporate income increased after tax profits with IVA and CCA per unit of gross value added at a faster pace in the weak economy from IVQ2007 to IQ2014 than in the vibrant expansion following the cyclical contractions of the 1980s. Part of the profits was distributed as dividends and significant part was retained as undistributed profits in the current economic cycle with frustrated investment decision.

Chart IA1-15, US, Profits after Tax with Inventory Valuation Adjustment and Capital Consumption Adjustment per Unit of Gross Value Added of Nonfinancial Domestic Corporate Income, 1980-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table IA1-8 provides percentage changes of corporate profits in 2012 and 2013 and seasonally adjusted annual rates of change of corporate profits from IIQ2013 to IQ2014. US corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCA) fell 1.3 percent in IQ2013 and 0.1 percent after taxes. Corporate profits with IVA and CCA rebounded at 3.3 percent in IIQ2013 and at 3.5 percent after taxes. Corporate profits with IVA and CCA increased at 1.9 percent in IIIQ2013 and 2.4 percent after taxes. Corporate profits with IVA and CCA increased at 2.2 percent in IVQ2013 and 2.0 percent after taxes. Corporate profits with IVA and CCA fell at 9.8 percent in IQ2014 and at 13.7 percent after taxes. Net dividends jumped at 16.2 percent in IVQ2012 in generalized anticipation of income because of fear of the so-called “fiscal cliff,” or increases in taxes in 2013, and fell at 12.0 percent in IQ2013 in adjustment to normal levels. Net dividends jumped at 35.8 percent in IIQ2013 and fell at 17.3 percent in IIIQ2013. Net dividends rebounded at 10.5 percent in IVQ2013. Undistributed profits fell 9.7 percent in IVQ2012 in anticipation of tax increases and adjusted by increasing 13.7 percent in IQ2013. Undistributed profits fell at 25.5 percent in IIQ2013 and increased at 34.6 percent in IIIQ2013. Undistributed profits fell at 6.7 percent in IVQ2013 and fell at 19.0 percent in IQ2014.

Table IA1-8, Quarterly Seasonally Adjusted Annual Equivalent Percentage Rates of Change of Corporate Profits, ∆%

	2012	2013	IIQ       2013	IIIQ 2013	IVQ 2013	IQ 2014
Corporate Profits with IVA and CCA	7.0	4.6	3.3	1.9	2.2	-9.8
Corporate Income Taxes	16.2	-3.7	2.4	-0.1	3.2	6.1
After Tax Profits with IVA and CCA	4.7	6.9	3.5	2.4	2.0	-13.7
Net Dividends	9.8	17.1	35.8	-17.3	10.5	-9.4
Und Profits with IVA and CCA	0.3	-2.9	-25.5	34.6	-6.7	-19.0

Source: Bureau of Economic Analysis

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

Table IA1-9 provides change from prior quarter of the level of seasonally adjusted annual rates of US corporate profits. Corporate profits with IVA and CCA fell $26.6 billion in IQ2013 after increasing $34.9 billion in IVQ2012 and $13.9 billion in IIIQ2012. Corporate profits with IVA and CCA rebounded with $66.8 billion in IIQ2013 and $39.2 billion in IIIQ2013. Corporate profits with IVA and CCA increased $47.1 billion in IVQ2013. Corporate profits with IVA and CCA fell $213.4 billion in IQ2014. Profits after tax with IVA and CCA fell $1.7 billion in IQ2013 after increasing $40.8 billion in IVQ2012 and $4.5 billion in IIIQ2012. In IIQ2013, profits after tax with IVA and CCA increased $56.9 billion and $39.5 billion in IIIQ2013. In IVQ2013, profits after tax with IVA and CCA increased $33.8 billion. Profits after tax with IVA and CCA fell at $239.5 billion in IQ2014. Anticipation of higher taxes in the “fiscal cliff” episode caused increase of $120.9 billion in net dividends in IVQ2012 followed with adjustment in the form of decrease of net dividends by $103.8 billion in IQ2013, rebounding with $273.5 billion in IIQ2013. Net dividends fell at $179.0 billion in IIIQ2013 and increased at $90.5 billion in IVQ2013. Net dividends fell at $89 billion in IQ2014. There is similar decrease of $80.1 billion in undistributed profits with IVA and CCA in IVQ2012 followed by increase of $102.1 billion in IQ2013 and decline of $216.6 billion in IIQ2013. Undistributed profits with IVA and CCA rose at $218.6 billion in IIIQ2013 and fell at $56.7 billion in IVQ2013. Undistributed profits with IVA and CCA fell at $150.6 billion in IQ2014. Undistributed profits of US corporations swelled 328.5 percent from $107.7 billion IQ2007 to $461.5 billion in IQ2014 and changed signs from minus $55.9 billion in billion in IVQ2007 (Section IA2). In IQ2013, corporate profits with inventory valuation and capital consumption adjustment fell $26.6 billion relative to IVQ2012, from $2047.2 billion to $2020.6 billion at the quarterly rate of minus 1.3 percent. In IIQ2013, corporate profits with IVA and CCA increased $66.8 billion from $2020.6 billion in IQ2013 to $2087.4 billion at the SAAR of 3.3 percent. Corporate profits with IVA and CCA increased $39.2 billion from $2087.4 billion in IIQ2013 to $2126.6 billion in IIIQ2013 at the SAAR of 1.9 percent. Corporate profits with IVA and CCA increased at $47.1 billion in IVQ2013 from $2126.6 billion in IIIQ2013 to $2173.7 billion in IVQ2013 at the SAAR of 2.2 percent. Corporate profits with IVA and CCA fell at $213.4 billion from $2173.7 billion in IVQ2013 to $1960.3 billion in IQ2014 at the SAAR of minus 9.8 percent (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_2nd.pdf). 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.

Table IA1-9, Change from Prior Quarter of Level of Seasonally Adjusted Annual Equivalent Rates of Corporate Profits, Billions of Dollars

	2012	2013	IIQ       2013	IIIQ 2013	IVQ 2013	IQ 2014
Corporate Profits with IVA and CCA	131.8	92.6	66.8	39.2	47.1	-213.4
Corporate Income Taxes	60.6	-15.9	10.0	-0.4	13.3	26.2
After Tax Profits with IVA and CCA	71.2	108.5	56.9	39.5	33.8	-239.5
Net Dividends	68.7	131.7	273.5	-179.0	90.5	-89.0
Und Profits with IVA and CCA	2.4	-23.1	-216.6	218.6	-56.7	-150.6

Source: Bureau of Economic Analysis

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

II Stagnating Real Disposable Income and Consumption Expenditures. The Bureau of Economic Analysis (BEA) provides important revisions and enhancements of data on personal income and outlays since 1929 (http://www.bea.gov/iTable/index_nipa.cfm). There are waves of changes in personal income and expenditures in Table IB-1 that correspond somewhat to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html) because of the influence through price indexes. Data are distorted in Nov and Dec 2012 by the rush to realize income of all forms in anticipation of tax increases beginning in Jan 2013. There is major distortion in Jan 2013 because of higher contributions in payrolls to government social insurance that caused sharp reduction in personal income and disposable personal income. The Bureau of Economic Analysis (BEA) explains as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January [2013] changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December [2012] in anticipation of changes in individual tax rates.”

In the first wave in Jan-Apr 2011 with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 8.1 percent, nominal disposable personal income (NDPI) at 5.2 percent and nominal personal consumption expenditures (NPCE) at 5.5 percent. Real disposable income (RDPI) increased at the annual equivalent rate of 1.8 percent and real personal consumption expenditures (RPCE) rose at annual equivalent 2.1 percent. In the second wave in May-Aug 2011 under risk aversion, NPI rose at annual equivalent 4.3 percent, NPDI at 4.3 percent and NPCE at 4.0 percent. RDPI increased at 1.8 percent annual equivalent and RPCE at 1.5 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec 2011, NPI rose at 1.5 percent annual equivalent, NDPI at 1.5 percent and NPCE at 3.3 percent. RDPI increased at 0.3 percent annual equivalent and RPCE at 2.1 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased at 8.3 percent annual equivalent and NDPI at 7.0 percent. Real disposable income (RDPI) is more dynamic in the revisions, growing at 3.7 percent annual equivalent and RPCE at 3.7 percent. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 6.6 percent and real consumption (RPCE) at 3.7 percent. In the fifth wave in Apr-Jul 2012, NPI increased at annual equivalent 1.2 percent, NDPI at 1.2 percent and RDPI at 0.6 percent. Financial repression failed to stimulate consumption with NPCE growing at 2.1 percent annual equivalent and RPCE at 2.1 percent. In the sixth wave in Aug-Oct 2012, in another wave of carry trades into commodity futures, NPI increased at 4.5 percent annual equivalent and NDPI increased at 3.7 percent while real disposable income (RDPI) increased at 0.4 percent annual equivalent. Data for Nov-Dec 2012 have illusory increases: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In the seventh wave, anticipations of tax increases in Jan 2013 caused exceptional income gains that increased personal income to annual equivalent 29.0 percent in Nov-Dec 2012, nominal disposable income at 29.0 percent and real disposable personal income at 29.8 percent with likely effects on nominal personal consumption that increased at 1.8 percent and real personal consumption at 2.4 percent with subdued prices. The numbers in parentheses show that without the exceptional effects NDPI (nominal disposable personal income) increased at 5.5 percent and RDPI (real disposable personal income) at 8.7 percent. In the eighth wave, nominal personal income fell 4.4 percent in Jan 2013 or at the annual equivalent rate of decline of 41.7 percent; nominal disposable personal income fell 5.1 percent or at the annual equivalent rate of decline of 46.6 percent; real disposable income fell 5.1 percent or at the annual rate of decline of 46.6 percent; nominal personal consumption expenditures increased 0.2 percent or at the annual equivalent rate of 2.4 percent; and real personal consumption expenditures increased 0.1 percent or at the annual equivalent rate of 1.2 percent. The savings rate fell significantly from 8.7 percent in Dec 2012 to 3.6 percent in Jan 2013. The Bureau of Economic Analysis explains as follows (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 3):

“Contributions for government social insurance -- a subtraction in calculating personal income -- increased $126.7 billion in January, compared with an increase of $6.3 billion in December. The

January estimate reflected increases in both employer and employee contributions for government social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.8 billion to January. As noted above, employer contributions were boosted $5.9 billion in January, so the total contribution of special factors to the January change in contributions for government social insurance was $132.8 billion”

Further explanation is provided by the Bureau of Economic Analysis (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3):

“Contributions for government social insurance -- a subtraction in calculating personal income --increased $6.4 billion in February, compared with an increase of $126.8 billion in January. The

January estimate reflected increases in both employer and employee contributions for government social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.9 billion to January. Employer contributions were boosted $5.9 billion in January, which reflected increases in the social security taxable wage base (from $110,100 to $113,700), in the tax rates paid by employers to state unemployment insurance, and in employer contributions for the federal unemployment tax and for pension guaranty. The total contribution of special factors to the January change in contributions for government social insurance was $132.9 billion. The January change in disposable personal income (DPI) mainly reflected the effect of special factors, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to December in anticipation of changes in individual tax rates. Excluding these special factors and others, which are discussed more fully below, DPI increased $46.8 billion in February, or 0.4 percent, after increasing $15.8 billion, or 0.1 percent, in January.”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf). In the ninth wave in Feb-Mar 2013, nominal personal income increased at 10.0 percent and nominal disposable income at 10.0 percent annual equivalent, while real disposable income increased at 8.1 percent annual equivalent. Nominal personal consumption expenditures grew at 5.5 percent annual equivalent and real personal consumption expenditures at 3.7 percent annual equivalent. The savings rate collapsed from 5.0 percent in Oct 2012, 5.9 percent in Nov 2012 and 8.7 percent in Dec 2012 to 3.6 percent in Jan 2013, 4.2 percent in Feb 2013 and 4.3 percent in Mar 2013. In the tenth wave from Apr to Sep 2013, personal income grew at 3.9 percent annual equivalent, nominal disposable income increased at annual equivalent 4.3 percent and nominal personal consumption expenditures at 2.8 percent. Real disposable income grew at 3.2 percent annual equivalent and real personal consumption expenditures at 1.6 percent. In the eleventh wave, nominal personal income fell at 1.2 percent annual equivalent in Oct 2013, nominal disposable income at 2.4 percent and real disposable income at 2.4 percent. Nominal personal consumption expenditures increased at 2.4 percent annual equivalent and real personal consumption expenditures at 2.4 percent. In the twelfth wave, nominal personal income increased at 3.7 percent annual equivalent in Nov 2013, nominal disposable income at 2.4 percent and nominal personal consumption expenditures at 6.2 percent. Real disposable income increased at annual equivalent 1.2 percent and real personal consumption expenditures at 6.2 percent. In the thirteenth wave, nominal personal income fell at 1.2 percent annual equivalent in Dec 2013 and nominal disposable income fell at 1.2 percent while real disposable income fell at 3.5 percent annual equivalent. Nominal personal consumption expenditures increased at 1.2 percent annual equivalent and minus 1.2 percent for real personal consumption expenditures. In the fourteenth wave, nominal personal income increased at 4.6 percent annual equivalent in Jan-Apr 2014, nominal disposable income at 4.9 percent and nominal consumption expenditures at 5.2 percent. Real disposable personal income increased at 3.4 percent and real personal consumption expenditures at 3.0 percent.

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.

Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 19 quarters from IIIQ2009 to IQ2014. 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) and the second estimate of GDP for IQ2014 (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_2nd.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/2014/05/financial-volatility-mediocre-cyclical.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2014 would have accumulated to 21.2 percent. GDP in IQ2014 would be $18,172.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,269.8 billion than actual $15,902.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 27.4 million unemployed or underemployed equivalent to actual unemployment of 16.8 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/interest-rate-risks-twenty-eight.html). US GDP in IQ2014 is 12.5 percent below than at trend. US GDP grew from $14,996.1 billion in IVQ2007 in constant dollars to $15,902.9 billion in IQ2014 or 6.0 percent at the average annual equivalent rate of 0.9 percent. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation.

RDPI stagnated in Jan-Dec 2011 at 1.2 percent with the latest revised data compared with growth of 2.8 percent in Jan-Dec 2010 but grew at annual equivalent 3.7 percent in Jan-Mar 2012 and 0.6 percent in Apr-Jul 2012. The salient deceleration is the decline of the annual equivalent rate of NPCE (nominal personal consumption expenditures) to 2.1 percent annual equivalent in Apr-Jul 2012 and of RPCE (real personal consumption expenditures) to 2.1 percent. A bump occurred in Aug 2012 with increases of commodity prices by the carry trade from zero interest rates to exposures in commodity futures and other risk financial assets. Real disposable income fell 0.3 percent in Aug 2012 or at annual equivalent minus 3.5 percent. Nominal personal consumption expenditures increased 0.2 percent in Aug 2012 or at annual equivalent 2.4 percent but declined 0.1 percent in real terms. Nominal personal income increased 0.1 percent in Aug 2012 or 1.2 percent annual equivalent while nominal disposable income was flat at 0.0 percent. Real disposable income (RDPI) increased 0.2 percent in Oct 2012 while real personal consumption expenditures (RPCE) decreased 0.1 percent. RDPI increased 1.3 percent in Nov 2012 and 3.1 percent in Dec 2012 because of realization of incomes in anticipation of tax increases in Jan 2013 while RPCE increased 0.3 percent in Nov 2012 and 0.1 percent in Dec 2012. In Jan-Dec 2012, RDPI increased 5.9 percent and RPCE 2.2 percent. NPI contracted 4.4 percent in Jan 2013, NDPI 5.1 percent and RDPI 5.1 percent but NPCE increased 0.2 percent and RPCE 0.1 percent, probably by drawing on savings. There is strong recovery in Feb-Mar 2013 and renewed weakness in Apr 2013. While NPI increased at 3.9 percent and NDPI at 4.3 percent in annual equivalent in Apr-Sep 2013 and RDPI at 3.2 percent, NPCE stagnated in Apr-May 2013 and RPCE increased at 1.6 percent annual equivalent in Apr-Sep 2013. There are similar oscillations in the remainder of 2013 and into 2014.

Table IB-1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
2014
Apr	0.3	0.3	0.2	-0.1	-0.3
Mar	0.5	0.5	0.3	1.0	0.8
Feb	0.4	0.4	0.3	0.6	0.5
Jan	0.3	0.4	0.3	0.2	0.0
AE ∆% Jan-Apr	4.6	4.9	3.4	5.2	3.0
2013
Dec	-0.1	-0.1	-0.3	0.1	-0.1
AE ∆% Dec	-1.2	-1.2	-3.5	1.2	-1.2
Nov	0.3	0.2	0.1	0.6	0.5
AE ∆% Nov	3.7	2.4	1.2	7.4	6.2
Oct	-0.1	-0.2	-0.2	0.3	0.3
AE ∆% Oct	-1.2	-2.4	-2.4	2.4	2.4
Sep	0.4	0.5	0.4	0.3	0.2
Aug	0.5	0.6	0.5	0.3	0.2
Jul	0.1	0.3	0.2	0.2	0.1
Jun	0.4	0.3	-0.1	0.6	0.2
May	0.4	0.4	0.3	0.2	0.1
Apr	0.1	0.0	0.3	-0.2	0.0
AE ∆% Apr-Sep	3.9	4.3	3.2	2.8	1.6
Mar	0.3	0.3	0.4	0.2	0.3
Feb	1.3	1.3	0.9	0.7	0.3
AE ∆% Feb-Mar	10.0	10.0	8.1	5.5	3.7
Jan	-4.4	-5.1 (0.1)a	-5.1	0.2	0.1
AE ∆% Jan	-41.7	-46.6 (3.7)a	-46.6	2.4	1.2
2012
∆% Jan-Dec 2012***	7.9	7.5	5.9	3.8	2.2
Dec	3.1	3.1 (0.3)*	3.1 (0.5)*	0.1	0.1
Nov	1.2	1.2 (0.6)*	1.3 (0.9)*	0.2	0.3
AE ∆% Nov-Dec	29.0	29.0 (5.5)*	29.8 (8.7)*	1.8	2.4
Oct	0.4	0.4	0.2	0.1	-0.1
Sep	0.6	0.5	0.2	0.7	0.4
Aug	0.1	0.0	-0.3	0.2	-0.1
AE ∆% Aug-Oct	4.5	3.7	0.4	4.1	0.8
Jul	-0.1	-0.1	-0.1	0.4	0.4
Jun	0.3	0.3	0.1	0.1	0.0
May	0.0	0.0	0.0	-0.1	0.0
Apr	0.2	0.2	0.2	0.3	0.3
AE ∆% Apr-Jul	1.2	1.2	0.6	2.1	2.1
Mar	0.4	0.3	0.1	0.2	0.0
Feb	0.7	0.6	0.3	0.8	0.5
Jan	0.9	0.8	0.5	0.6	0.4
AE ∆% Jan-Mar	8.3	7.0	3.7	6.6	3.7
2011
∆% Jan-Dec 2011*	4.6	3.6	1.2	4.3	1.8
Dec	0.7	0.6	0.6	0.0	0.0
Nov	-0.1	-0.1	-0.2	0.2	0.0
Oct	0.0	0.1	0.0	0.4	0.4
Sep	-0.1	-0.1	-0.3	0.5	0.3
AE ∆% Sep-Dec	1.5	1.5	0.3	3.3	2.1
Aug	0.1	0.1	-0.1	0.2	0.0
Jul	0.6	0.6	0.4	0.5	0.3
Jun	0.4	0.4	0.3	0.3	0.2
May	0.3	0.3	0.0	0.3	0.0
AE ∆% May-Aug	4.3	4.3	1.8	4.0	1.5
Apr	0.2	0.2	-0.1	0.4	0.0
Mar	0.2	0.2	-0.2	0.7	0.4
Feb	0.6	0.5	0.3	0.4	0.2
Jan	1.6	0.8	0.6	0.3	0.1
AE ∆% Jan-Apr	8.1	5.2	1.8	5.5	2.1
2010
∆% Jan-Dec 2010**	4.8	4.2	2.8	4.4	2.9
Dec	0.9	0.9	0.7	0.3	0.1
Nov	0.5	0.4	0.3	0.6	0.4
Oct	0.5	0.5	0.2	0.8	0.5
IVQ2010∆%	1.9	1.8	1.2	1.7	1.0
IVQ2010 AE ∆%	7.9	7.4	4.9	7.0	4.1

Notes: *Excluding exceptional income gains in Nov and Dec 2012 because of anticipated tax increases in Jan 2013 ((page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). ^a Excluding employee contributions for government social insurance (pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf )Excluding NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent

Percentage change month to month seasonally adjusted

*∆% Dec 2011/Dec 2010 **∆% Dec 2010/Dec 2009 *** ∆% Dec 2012/Dec 2011

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

The rates of growth of real disposable income decline in the final quarter of 2013 because of the increases in the last two months of 2012 in anticipation of the tax increases of the “fiscal cliff” episode. The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

The 12-month rate of increase of real disposable income fell to 1.8 percent in Oct 2013 and 0.6 percent in Nov 2013 partly because of the much higher level in late 2012 in anticipation of incomes to avoid increases in taxes in 2013. Real disposable income fell 2.7 percent in the 12 months ending in Dec 2013 primarily because of the much higher level in late 2012 in anticipation of income to avoid increases in taxes in 2013. Real disposable income increased 2.8 percent in the 12 months ending in Jan 2014, partly because of the low level in Jan 2013 after anticipation of incomes in late 2012 in avoiding the fiscal cliff episode. Real disposable income increased 2.2 percent in the 12 months ending Feb 2014 and 2.1 percent in the 12 months ending in Mar 2014. Real disposable income increased 2.0 percent in the 12 months ending in Apr 2014.

RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.1 percent in Mar 2012, 1.8 percent in Oct 2012, 2.1 percent in Nov 2012, 2.2 percent in Dec 2012 perhaps also with some effects of anticipations of tax increases in Jan 2013, 2.0 percent in Jan 2013 by burning savings, 1.7 percent in Feb 2013 and 2.0 percent in Mar 2013. RPCE increased 1.7 percent in the 12 months ending in Apr 2013, 1.8 percent in the 12 months ending in May 2013 and 2.0 percent in the 12 months ending in Jun 2013. RPCE increased 2.1 percent in the 12 months ending in Aug 2013 and 1.9 percent in the 12 months ending in Sep 2013. RPCE increased 2.3 percent in the 12 months ending in Oct 2013. RPCE increased 2.5 percent in the 12 months ending in Nov 2013 and 2.3 percent in the 12 months ending in Dec 2013 because anticipations of income in late 2012 did not affect consumption sharply. RPCE increased 2.2 percent in the 12 months ending in Jan 2014 and 2.4 percent in the 12 months ending in Feb 2014. RPCE increased 3.0 percent in the 12 months ending in Mar 2014 and 2.7 percent in the 12 months ending in Apr 2014. Subdued growth of RPCE could affect revenues of business. Growth rates of personal consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-month rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). Growth of consumption of goods and, in particular, of consumer durable goods drives the faster expansion of the economy while growth of consumption of services is much more moderate. The 12-month rates of growth of RPCEGD have fallen from around 10 percent and even higher in several months from Sep 2010 to Feb 2011 to the range of 2.5 to 9.1 percent from Jan 2012 to Apr 2014. There is evident downward trend of real personal consumption of durable goods (RPCEGD) since Nov 2013. RPCEG growth rates have fallen from around 5 percent late in 2010 and early Jan-Feb 2011 to the range of 1.8 to 4.2 percent from Jan 2012 to Apr 2014. Growth rates in 12 months of goods and durable goods increased again toward the end of 2012 with strength continuing into 2013. In Apr 2014, RPCEG increased 3.5 percent in 12 months and RPCEGD 6.1 percent while RPCES increased only 2.2 percent. There are limits to sustained growth based on financial repression in an environment of weak labor markets and real labor remuneration.

Table IB-2, Real Disposable Personal Income and Real Personal Consumption Expenditures

Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2014
Apr	2.0	2.7	3.5	6.1	2.2
Mar	2.1	3.0	4.0	7.4	2.5
Feb	2.2	2.4	2.6	3.7	2.4
Jan	2.8	2.2	1.8	2.5	2.4
2013
Dec	-2.8	2.3	3.0	3.2	1.9
Nov	0.6	2.5	3.8	6.5	1.8
Oct	1.8	2.3	3.9	7.3	1.4
Sep	2.2	1.9	3.5	5.9	1.1
Aug	2.0	2.1	3.9	8.9	1.2
Jul	1.2	1.8	3.9	8.0	0.7
Jun	0.9	2.0	4.1	8.3	1.0
May	1.1	1.8	3.6	7.7	0.9
Apr	0.8	1.7	3.0	7.1	1.1
Mar	0.8	2.0	3.1	6.3	1.4
Feb	0.5	1.7	3.2	6.6	0.9
Jan	-0.1	2.0	3.7	7.7	1.1
2012
Dec	5.9	2.2	4.2	9.0	1.2
Nov	3.2	2.1	3.6	8.4	1.4
Oct	1.7	1.8	2.8	6.1	1.3
Sep	1.6	2.3	4.1	8.8	1.4
Aug	1.1	2.1	4.0	9.1	1.2
Jul	1.2	2.2	3.4	7.9	1.6
Jun	1.7	2.2	3.2	8.9	1.7
May	1.9	2.4	3.5	7.7	1.8
Apr	1.8	2.4	3.0	6.7	2.1
Mar	1.5	2.1	2.9	6.5	1.7
Feb	1.2	2.5	3.0	7.5	2.2
Jan	1.1	2.1	2.3	6.4	1.9
Dec 2011	1.2	1.8	1.9	5.8	1.7
Dec 2010	2.8	2.9	4.7	8.4	2.1

Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services

Numbers are percentage changes from the same month a year earlier

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

Chart IB-1 shows US real personal consumption expenditures (RPCE) between 1999 and 2014. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.

Chart IB-1, US, Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1999-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Percent changes from the prior period in seasonally adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart IB-2 from 1995 to 2014. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart IB-2 that the average rate of growth of RPCE was higher before the recession than during the past eighteen quarters of expansion that began in IIIQ2009.

Chart IB-2, Percent Change from Prior Period in Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1995-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Personal income and its disposition are shown in Table IB-3. The latest estimates and revisions have changed movements in five forms. (1) Increase in Apr 2014 of personal income by $43.7 billion or 0.3 percent and increase of disposable income of $44.6 billion or 0.3 percent with increase of wages and salaries of 0.2 percent. (2) Decrease of personal income of $115.0 billion from Dec 2012 to Dec 2013 or by 0.8 percent and decrease of disposable income of $209.0 billion or by 1.6 percent. Wages and salaries increased $34.0 billion from Dec 2012 to Dec 2013 or by 0.5 percent. Large part of these declines occurred because of the comparison of high levels in late 2012 in anticipation of tax increases in 2013. In 2012, personal income increased $1060.8 billion or 7.9 percent while salaries increased 7.6 percent and disposable income 7.5 percent. Significant part of these gains occurred in Dec 2012 in anticipation of incomes because of tax increases beginning in Jan 2013. (3) Increase of $591.6 billion of personal income in 2011 or by 4.6 percent with increase of salaries of 2.8 percent and disposable income of 3.6 percent. (4) Decline of the rate of savings as percent of disposable income from 5.8 percent in Dec 2010 to 5.4 percent in Dec 2011 and 4.1 percent in Dec 2013. (5) Increase of personal income of $498.3 billion or 3.6 percent from Apr 2013 to Apr 2014. Nominal disposable income increased $446.9 billion or 3.6 percent while salaries and wages increased $259.5 billion or 3.7 percent.

Table IB-3, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates USD Billions

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Apr        2014	14,530.2	7,348.1	1,707.6	12,822.6	4.0
Mar      2014	14,486,5	7,329.9	1,708.6	12,778.0	3.6
Change Apr 2014/      Mar 2014	43.7 ∆% 0.3	18.2 ∆% 0.2	-1.0 ∆% -0.1	44.6 ∆% 0.3
Apr 2013	14,031.9	7,088.6	1,656.2	12,375.7	4.6
Change Apr 2014/Apr 2013	498.3 ∆% 3.6	259.5 ∆% 3.7	51.4 ∆% 3.1	446.9 ∆% 3.6
Dec 2013	14,305.5	7,234.8	1,685.3	12,620.2	4.1
Dec 2012	14,420.2	7,200.8	1,591.0	12,829.2	8.7
Change Dec 2013/ Dec 2012	-115.0 ∆% -0.8	34.0 ∆% 0.5	94.3 ∆% 5.9	-209.0 ∆% -1.6
Change Dec 2012/ Dec 2011	1060.8 ∆% 7.9	510.7 ∆% 7.6	163.3 ∆% 11.4	897.6 ∆% 7.5
Dec 2011	13,359.4	6,690.1	1,427.7	11,931.6	5.4
Dec 2010	12,767.8	6,506.0	1,254.2	11,513.7	5.8
Change Dec 2011/ Dec 2010	591.6 ∆% 4.6	184.1   ∆% 2.8	173.5     ∆% 13.8	417.9    ∆% 3.6

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The Bureau of Economic Analysis (BEA) provides a wealth of revisions and enhancements of US personal income and outlays since 1929 (http://www.bea.gov/iTable/index_nipa.cfm). Table IB-4 provides growth rates of real disposable income and real disposable income per capita in the long-term and selected periods. Real disposable income consists of after-tax income adjusted for inflation. Real disposable income per capita is income per person after taxes and inflation. There is remarkable long-term trend of real disposable income of 3.2 percent per year on average from 1929 to 2013 and 2.0 percent in real disposable income per capita. Real disposable income increased at the average yearly rate of 3.7 percent from 1947 to 1999 and real disposable income per capita at 2.3 percent. These rates of increase broadly accompany rates of growth of GDP. Institutional arrangements in the United States provided the environment for growth of output and income after taxes, inflation and population growth. There is significant break of growth by much lower 2.3 percent for real disposable income on average from 1999 to 2013 and 1.4 percent in real disposable per capita income. Real disposable income grew at 3.5 percent from 1980 to 1989 and real disposable per capita income at 2.6 percent. In contrast, real disposable income grew at only 1.3 percent on average from 2006 to 2013 and real disposable income per capita at 0.5 percent. The United States has interrupted its long-term and cyclical dynamism of output, income and employment growth. Recovery of this dynamism could prove to be a major challenge. Cyclical uncommonly slow growth explains weakness in the current whole cycle instead of the allegation of secular stagnation.

Table IB-4, Average Annual Growth Rates of Real Disposable Income (RDPI) and Real Disposable Income per Capita (RDPIPC), Percent per Year 

RDPI Average ∆%
1929-2013	3.2
1947-1999	3.7
1999-2013	2.3
1999-2006	3.2
1980-1989	3.5
2006-2013	1.3
RDPIPC Average ∆%
1929-2013	2.0
1947-1999	2.3
1999-2013	1.4
1999-2006	2.2
1980-1989	2.6
2006-2013	0.5

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

Chart IB-3 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982.

Chart IB-3, US, Personal Income, Billion Dollars, Quarterly Seasonally Adjusted at Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

A different evolution of personal income is shown in Chart IB-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2012, nominal disposable personal income grew at the SAAR of 10.7 percent and real disposable personal income at 9.0 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf) The BEA explains as follows: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

In IQ2013, personal income fell at the SAAR of minus 4.1 percent; real personal income excluding current transfer receipts at minus 7.2 percent; and real disposable personal income at minus 7.9 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

In IIQ2013, personal income grew at 4.7 percent, real personal income excluding current transfer receipts at 5.6 percent and real disposable income at 4.1 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf). In IIIQ2013, personal income grew at 4.0 percent, real personal income excluding current transfers at 1.9 percent and real disposable income at 3.0 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf). In IVQ2013, personal income grew at 2.2 percent and real disposable income at 0.7 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf). In IQ2014, personal income grew at 3.3 percent in nominal terms and 1.1 percent in real terms excluding current transfer receipts while nominal disposable income grew at 3.1 percent and real disposable income at 1.7 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf).

Chart IB-4, US, Personal Income, Current Billions of Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Real or inflation-adjusted disposable personal income is provided in Chart IB-5 from 1980 to 1989. Real disposable income after allowing for taxes and inflation grew steadily at high rates during the entire decade.

Chart IB-5, US, Real Disposable Income, Billions of Chained 2009 Dollars, Quarterly Seasonally Adjusted at Annual Rates 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

In IQ2013, personal income fell at the SAAR of minus 4.1 percent; real personal income excluding current transfer receipts at minus 7.2 percent; and real disposable personal income at minus 7.9 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

This is the explanation for the decline in IQ2013 in Chart IB-6. In IIQ2013, personal income increased at 4.7 percent, real personal income excluding current transfer receipts at 5.6 percent and real disposable income at 4.1 percent. In IIIQ2013, personal income increased at 4.0 percent, real personal income excluding current transfer receipts at 1.9 percent and real disposable income at 3.0 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf). In IVQ2013, personal income increased at 2.2 percent, real personal income excluding current transfers at 1.4 percent and real disposable personal income at 0.7 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0314.pdf). In IQ2014, nominal personal income increased at 3.3 percent, real personal income excluding current transfers at 1.1 percent and real disposable personal income at 1.7 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf).

Chart IB-6, US, Real Disposable Income, Billions of Chained 2009 Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2014

http://www.bea.gov/iTable/index_nipa.cfm

Chart IB-7 provides percentage quarterly changes in real disposable income from the preceding period at seasonally adjusted annual rates from 1980 to 1989. Rates of changes were high during the decade with few negative changes.

Chart IB-7, US, Real Disposable Income Percentage Change from Preceding Period at Quarterly Seasonally-Adjusted Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IB-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally adjusted annual rates from 2007 to 2013. There has been a period of positive rates followed by decline of rates and then negative and low rates in 2011. Recovery in 2012 has not reproduced the dynamism of the brief early phase of expansion. In IVQ2012, nominal disposable personal income grew at the SAAR of 10.7 percent and real disposable personal income at 9.0 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf), which the BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

Personal income fell at 4.1 percent in IQ2013, nominal disposable personal income fell at 7.0 percent while real disposable income fell at 7.9 percent. In IIQ2013, personal income increased at 4.7 percent, real personal income excluding current transfer receipts at 5.6 percent and real disposable income at 4.1 percent. In IIIQ2013, personal income increased at 4.0 percent, real personal income excluding current transfer receipts at 1.9 percent and real disposable income at 3.0 percent. In IVQ2013, nominal personal income increased at 2.2 percent, nominal disposable income at 1.8 percent, real personal income excluding current transfers at 1.4 percent and real disposable income at 0.7 percent. In IVQ2014, nominal personal income grew at 3.3 percent, nominal disposable income at 3.1 percent, real personal income excluding current transfers at 1.1 percent and real disposable personal income at 1.7 percent.

Chart, IB-8, US, Real Disposable Income, Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The Bureau of Economic Analysis (BEA) estimates US personal income in Apr 2014 at the seasonally adjusted annual rate of $14,530.2 billion, as shown in Table IB-3 above (see Table 1 at http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi0414.pdf). The major portion of personal income is compensation of employees of $9,104.1 billion, or 62.7 percent of the total. Wages and salaries are $7,348.1 billion, of which $6,141.1 billion by private industries and supplements to wages and salaries of $1,756.0 billion (employer contributions to pension and insurance funds are $1,210.6 billion and contributions to social insurance are $545.4 billion). In Oct 1987 (at the comparable month after the end of the 19^th quarter of cyclical expansion), US personal income was $4,043.5 billion at SAAR (http://www.bea.gov/iTable/index_nipa.cfm). Compensation of employees was $2,784.3 billion, or 68.9 percent of the total. Wages and salaries were $2,307.7 billion of which $1878.0 billion by private industries. Supplements to wages and salaries were $476.6 billion with employer contributions to pension and insurance funds of $307.6 billion and $169.0 billion to government social insurance. Chart IB-9 provides US wages and salaries by private industries in the 1980s. Growth was robust after the interruption of the recessions.

Chart IB-9, US, Wages and Salaries, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates Billions of Dollars, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IB-10 shows US wages and salaries of private industries from 2007 to 2014. There is a drop during the contraction followed by initial recovery in 2010 and then the current much weaker relative performance in 2011, 2012, 2013 and 2014.

Chart IB-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IB-11 provides finer detail with monthly wages and salaries of private industries from 2007 to 2014. Anticipations of income in late 2012 to avoid tax increases in 2013 cloud comparisons.

Chart IB-11, US, Wages and Salaries, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IB-12 provides monthly real disposable personal income per capita from 1980 to 1989. This is the ultimate measure of wellbeing in receiving income by obtaining the value per inhabitant. The measure cannot adjust for the distribution of income. Real disposable personal income per capita grew rapidly during the expansion after 1983 and continued growing during the rest of the decade.

Chart IB-12, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Chained 2009 Dollars 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IB-13 provides monthly real disposable personal income per capita from 2007 to 2014. There was initial recovery from the drop during the global recession followed by stagnation. Real per capita disposable income increased 1.2 percent from $36,584 in chained dollars of 2009 in Oct 2012 to $37,035 in Nov 2012 and 3.1 percent to $38,175 in Dec 2012 for cumulative increase of 4.3 percent from Oct 2012 to Dec 2012. Real per capita disposable income fell 5.2 percent from $38,175 in Dec 2012 to $36,195 in Jan 2013, increasing marginally 0.9 percent to $36,503 in Feb 2013 for cumulative change of minus 0.2 percent from Oct 2012 (data at http://www.bea.gov/iTable/index_nipa.cfm). This increase is shown in a jump in the final segment in Chart II-13 with Nov-Dec 2012, decline in Jan 2013 and recovery in Feb 2013. Real per capita disposable income increased 0.4 percent from $36,503 in Feb 2013 in chained dollars of 2009 to $36,633 in Mar 2013 for cumulative increase of 0.1 percent relative to Oct 2012. Real per capita disposable income increased to $36,794 in May 2013 for gain of 0.2 percent relative to $36,715 in Apr 2013 and 0.6 percent from Oct 2012. Real disposable per capita income eased to $36,743 in Jun 2013 for decrease of 0.1 percent relative to May 2013 and increase of 0.4 percent relative to Oct 2012. Real disposable income per capita increased 0.2 percent from $36,743 in Jun 2013 to $36,801 in Jul 2013 and 0.6 percent relative to $36,584 in Oct 2013. Real per capita disposable income increased to $36,966 in Aug 2013 or 0.4 percent higher than in Jul 2013 and 1.0 percent above Oct 2012. Real per capita disposable income increased 0.3 percent from $36,966 in Aug 2013 to $37,076 in Sep 2013 and increased 1.3 percent relative to $36,584 in Oct 2012. Real per capita disposable income decreased 0.3 percent from $37,076 in Sep 2013 to $36,972 in Oct 2013 and increased 1.1 percent relative to $36,584 in Oct 2012. Real per capita disposable income increased 0.1 percent from $36,972 in Oct 2013 to $36,991 in Nov 2013 and increased 1.1 percent relative to $36,584 in Oct 2012. Real per capita income fell 0.3 percent in Dec 2013 to $36,865 and increased 0.8 percent from $36,584 in Oct 2012. Real disposable income per capita fell 0.3 percent from $36,991 in Nov 2013 to $36,865 in Dec 2013 and increased 0.8 percent from $36,584 in Oct 2012. Real disposable income fell 3.4 percent from $38,175 in Dec 2012 to $36,865 in Dec 2013, largely because of anticipations of income in late 2012. BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

Real disposable per capita income increased 0.2 from $36,865 in Dec 2013 to $36,942 in Jan 2014 and an additional 0.3 percent to $37,036 in Feb 2014. Real disposable income per capita increased 1.2 percent from $36,584 in Oct 2012 to $37,036 in Feb 2014. Real disposable income per capita increased 0.3 percent from $37,036 in Feb 2014 to $37,174 in Mar 2014 and 1.6 percent relative to $36,584 in Oct 2012. Real per capita disposable income increased 0.1 percent from $37,137 in Mar 2014 to $37,174 in Apr 2014 and 1.6 percent from $36,584 in Oct 2012.

Chart IB-13, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Chained 2009 Dollars 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

IA2 Financial Repression. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6; for historical analysis see Pelaez 1975). Excessive official regulation frustrates financial development required for growth (Haber 2011). Emphasis on disclosure can reduce bank fragility and corruption, empowering investors to enforce sound governance (Barth, Caprio and Levine 2006). Interest rate ceilings on deposits and loans have been commonly used. The Banking Act of 1933 imposed prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.

Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 1.5 percent in the 12 months ending in Mar 2013 (http://www.bls.gov/cpi/) but rising during waves of carry trades from zero interest rates to commodity futures exposures (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:

“Large negotiable CD’s were particularly hard hit by the interest rate ceiling because they are deposits of financially sophisticated individuals and institutions who have many alternatives. As already noted, they declined from a peak of $24 billion in mid-December, 1968, to less than $12 billion in early October, 1969.”

Banks created different liabilities to compensate for the decline in CDs. As Friedman (1970, 25; 1969) explains:

“The most important single replacement was almost surely ‘liabilities of US banks to foreign branches.’ Prevented from paying a market interest rate on liabilities of home offices in the United States (except to foreign official institutions that are exempt from Regulation Q), the major US banks discovered that they could do so by using the Euro-dollar market. Their European branches could accept time deposits, either on book account or as negotiable CD’s at whatever rate was required to attract them and match them on the asset side of their balance sheet with ‘due from head office.’ The head office could substitute the liability ‘due to foreign branches’ for the liability ‘due on CDs.”

Friedman (1970, 26-7) predicted the future:

“The banks have been forced into costly structural readjustments, the European banking system has been given an unnecessary competitive advantage, and London has been artificially strengthened as a financial center at the expense of New York.”

In short, Depression regulation exported the US financial system to London and offshore centers. What is vividly relevant currently from this experience is the argument by Friedman (1970, 27) that the controls affected the most people with lower incomes and wealth who were forced into accepting controlled-rates on their savings that were lower than those that would be obtained under freer markets. As Friedman (1970, 27) argues:

“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.”

Chart IB-14 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2014. There was a long-term downward sloping trend from 12 percent in the early 1980s to 2.0 percent in Jul 2005. The savings rate then rose during the contraction and in the expansion. In 2011 and into 2012 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The savings rate increased in the final segment of Chart IB-14 in 2012 followed by another decline because of the pain of the opportunity cost of zero remuneration for hard-earned savings. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2013 caused the jump of the savings rate to 8.7 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The savings rate then collapsed to 3.6 percent in Jan 2013 in part because of the decline of 5.1 percent in real disposable personal income and to 4.2 percent with increase of real disposable income by 0.9 percent in Feb 2013. The savings rate increased to 4.3 percent in Mar 2013 with increase of real disposable income by 0.4 percent and at 4.6 percent in Apr 2013 with increase of real disposable income by 0.3 percent. The savings rate rose to 4.8 percent in May 2013 with increase of real disposable income by 0.3 percent. The savings rate fell to 4.6 percent in Jun 2013 with decline of real disposable personal income by 0.1 percent. The savings rate increased to 4.7 percent in Jul 2013 with increase of real disposable income by 0.2 percent. In Aug 2013, real disposable income increased 0.5 percent and the savings rate increased to 4.9 percent. In Sep 2013, the savings rate increased to 5.1 percent with increase of real disposable income of 0.4 percent. The savings rate fell to 4.6 percent in Oct 2013 with decrease of real disposable income by 0.2 percent. The savings rate fell to 4.3 percent in Nov 2013 with increase of real disposable income of 0.1 percent. In Dec 2013, the savings rate fell to 4.1 percent with decrease of real disposable income by 0.3 percent. The decline of personal income was caused by increasing contributions to government social insurance (page 1 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf). The savings rate increased at 4.3 percent in Jan 2014 with increase of real disposable income by 0.3 percent. The savings rate decreased to 4.1 percent in Feb 2014 with increase of real disposable income by 0.3 percent. The savings rate fell to 3.6 percent in Mar 2014 with increase of real disposable income of 0.3 percent. The savings rate increased to 4.0 percent in Apr 2014 with increase of real disposable income of 0.2 percent.The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings and misallocating resources away from their best uses. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments (http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html).

Chart IB-14, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IB-14A provides the US personal savings rate, or personal savings as percent of disposable personal income, on an annual basis from 1929 to 2013. The US savings rate shows decline from around 10 percent in the 1960 to less than 5 percent currently.

Chart IB-14A, US, Personal Savings as a Percentage of Disposable Personal Income, Annual, 1929-2013

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IB-15 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Mar 2014. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 8.0 percent in May 2008 (http://www.bea.gov/iTable/index_nipa.cfm). The second peak occurred at 8.1 percent in May 2009. There was another rising trend until 5.9 percent in Jun 2010 and then steady downward trend until 4.8 percent in Nov 2011. This was followed by an upward trend with 5.6 percent in Jun 2012 but decline to 4.9 percent in Aug 2012 followed by jump to 8.7 percent in Dec 2012. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2013 caused the jump of the savings rate to 8.7 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). There was a reverse effect in Jan 2013 with decline of the savings rate to 3.6 percent. Real disposable personal income fell 5.1 percent and real disposable per capita income fell from $38,175 in Dec 2012 to $36,195 in Jan 2013 or by 5.2 percent, which is explained by the Bureau of Economic Analysis as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf):

“Contributions for government social insurance -- a subtraction in calculating personal income --increased $6.4 billion in February, compared with an increase of $126.8 billion in January. The

January estimate reflected increases in both employer and employee contributions for government social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.9 billion to January. Employer contributions were boosted $5.9 billion in January, which reflected increases in the social security taxable wage base (from $110,100 to $113,700), in the tax rates paid by employers to state unemployment insurance, and in employer contributions for the federal unemployment tax and for pension guaranty. The total contribution of special factors to the January change in contributions for government social insurance was $132.9 billion.”

The savings rate then collapsed to 3.6 percent in Jan 2013 in part because of the decline of 5.1 percent in real disposable personal income and to 4.2 percent with increase of real disposable income by 0.9 percent in Feb 2013. The savings rate increased to 4.3 percent in Mar 2013 with increase of real disposable income by 0.4 percent and at 4.6 percent in Apr 2013 with increase of real disposable income by 0.3 percent. The savings rate rose to 4.8 percent in May 2013 with increase of real disposable income by 0.3 percent. The savings rate fell to 4.6 percent in Jun 2013 with decline of real disposable personal income by 0.1 percent. The savings rate increased to 4.7 percent in Jul 2013 with increase of real disposable income by 0.2 percent. In Aug 2013, real disposable income increased 0.5 percent and the savings rate increased to 4.9 percent. In Sep 2013, the savings rate increased to 5.1 percent with increase of real disposable income of 0.4 percent. The savings rate fell to 4.6 percent in Oct 2013 with decrease of real disposable income by 0.2 percent. The savings rate fell to 4.3 percent in Nov 2013 with increase of real disposable income of 0.1 percent. In Dec 2013, the savings rate fell to 4.1 percent with decrease of real disposable income by 0.3 percent. The decline of personal income was caused by increasing contributions to government social insurance (page 1 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf). The savings rate increased at 4.3 percent in Jan 2014 with increase of real disposable income by 0.3 percent. The savings rate decreased to 4.1 percent in Feb 2014 with increase of real disposable income by 0.3 percent. The savings rate fell to 3.6 percent in Mar 2014 with increase of real disposable income of 0.3 percent. The savings rate increased to 4.0 percent in Apr 2014 with increase of real disposable income of 0.2 percent. The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings and misallocating resources away from their best uses. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments (http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html).

Permanent manipulation of the entire spectrum of interest rates with monetary policy measures distorts the compass of resource allocation with inferior outcomes of future growth, employment and prosperity and dubious redistribution of income and wealth worsening the most the personal welfare of people without vast capital and financial relations to manage their savings.

Chart IB-15, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2014

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014.