Financial/Geopolitical Risks, Recovery without Hiring, Ten Million Fewer Full-time Jobs, Theory and Reality of Cyclical Slow Growth Not Secular Stagnation: Youth and Middle-Age Unemployment, United States Services, World Cyclical Slow Growth and Global Recession Risk: Part III

 

Financial/Geopolitical Risks, Recovery without Hiring, Ten Million Fewer Full-time Jobs, Theory and Reality of Cyclical Slow Growth Not Secular Stagnation: Youth and Middle-Age Unemployment, United States Services, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

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

Executive Summary

I Recovery without Hiring

IA1 Hiring Collapse

IA2 Labor Underutilization

ICA3 Ten Million Fewer Full-time Jobs

IA4 Theory and Reality of Cyclical Slow Growth Not Secular Stagnation: Youth and

Middle-Age Unemployment

II United States Services

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

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

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

	GDP	CPI	PPI	UNE
US	2.0	2.0	3.1 FD 2.1	6.3
Japan	3.0	3.4	4.4	3.6
China	7.4	2.5	-1.4
UK	3.1	1.8* CPIH 1.6	0.6 output 1.0** input -5.5	6.6
Euro Zone	0.9	0.7	-1.2	11.7
Germany	2.3	1.1	-0.9	5.2
France	0.8	0.8	-0.9	10.4
Nether-lands	-0.5	0.6	-2.0	7.2
Finland	-0.8	1.3	-1.0	8.5
Belgium	1.2	0.9	-5.1	8.5
Portugal	1.2	-0.1	-0.6	14.6
Ireland	NA	0.4	-0.2	11.9
Italy	-0.5	0.5	-1.8	12.6
Greece	-1.1	-1.6	0.8	26.5
Spain	0.5	0.3	0.1	25.1

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/april-2014/index.html **Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/april-2014/index.html Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/; country statistical sources http://www.census.gov/aboutus/stat_int.html

Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 2.0 percent in IQ2014 relative to IQ2013 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html, Table 8 in http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_2nd.pdf). Japan’s GDP grew 1.6 percent in IQ2014 relative to IVQ2013 and 3.0 percent relative to a year earlier. Japan’s GDP grew at the seasonally adjusted annual rate (SAAR) of 6.7 percent in IQ2014 (Section VB and earlier http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/global-financial-risks-recovery-without.html). The UK grew at 0.8 percent in IQ2014 relative to IVQ2013 and GDP increased 3.1 percent in IQ2014 relative to IQ2013 (http://cmpassocregulationblog.blogspot.com/2014/05/united-states-commercial-banks-assets.html and earlier (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). The Euro Zone grew at 0.2 percent in IQ2014 and 0.9 percent in IQ2014 relative to IQ2013 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html). These are stagnating or “growth recession” rates, which are positive or about nil growth rates with some contractions that are insufficient to recover employment. The rates of unemployment are quite high: 6.3 percent in the US but 16.2 percent for unemployment/underemployment or job stress of 27.6 million (http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html and earlier 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 and earlier http://cmpassocregulationblog.blogspot.com/2014/03/rules-discretionary-authorities-and.html), 3.6 percent for Japan (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html), 6.6 percent for the UK with high rates of unemployment for young people (Section VH and earlier 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). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 2.0 percent in the US, 3.4 percent for Japan, 2.5 percent for China, 0.7 percent for the Euro Zone and 1.8 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. Six key interrelated vulnerabilities in the world economy have been causing global financial turbulence. (1) Sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III and earlier http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html). (2) The tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment, high debt and political developments in a decennial transition. (3) Slow growth by repression of savings with de facto interest rate controls (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html) weak hiring with the loss of 10 million full-time jobs (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/rules-discretionary-authorities-and.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/global-financial-instability-recovery.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html) (4) The timing, dose, impact and instruments of normalizing monetary and fiscal policies (http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies. (5) The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 had repercussions throughout the world economy. Japan has share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.

In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These policies and views are discussed initially followed with appropriate analysis.

Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):

“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.

Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.

The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”

Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:

“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”

The Federal Open Market Committee (FOMC) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

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

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

Jon Hilsenrath, writing on “Fed maps exit from stimulus,” on May 11, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the development of strategy for unwinding quantitative easing and how it can create uncertainty in financial markets. Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.

Unconventional monetary policy will remain in perpetuity, or QE→∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE→∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at around 2.3 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 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 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html 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 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html 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 26.6 million unemployed or underemployed equivalent to actual unemployment of 16.2 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.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.

First, total nonfarm payroll employment seasonally adjusted (SA) increased 217,000 in May 2014 and private payroll employment rose 216,000. The average monthly number of nonfarm jobs created from May 2012 to May 2013 was 185,083 using seasonally adjusted data, while the average number of nonfarm jobs created from May 2013 to May 2014 was 198,250, or increase by 7.1 percent. The average number of private jobs created in the US from May 2012 to May 2013 was 189,917, using seasonally adjusted data, while the average from May 2013 to May 2014 was 196,833, or increase by 3.6 percent. This blog calculates the effective labor force of the US at 162.430 million in May 2013 and 163.926 million in May 2014 (Table I-4), for growth of 1.496 million at average 124,667 per month. The difference between the average increase of 196,833 new private nonfarm jobs per month in the US from May 2013 to May 2014 and the 124,667 average monthly increase in the labor force from May 2013 to May 2014 is 72,166 monthly new jobs net of absorption of new entrants in the labor force. There are 26.618 million in job stress in the US currently. Creation of 72,166 new jobs per month net of absorption of new entrants in the labor force would require 369 months to provide jobs for the unemployed and underemployed (26.618 million divided by 72,166) or 31 years (369 divided by 12). The civilian labor force of the US in May 2014 not seasonally adjusted stood at 155.841 million with 9.443 million unemployed or effectively 17.528 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them for effective labor force of 163.926 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.2 years (1 million divided by product of 72,166 by 12, which is 865,992). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.792 million (0.05 times labor force of 155.841 million) for new net job creation of 1.651 million (9.443] million unemployed minus 7.792 million unemployed at rate of 5 percent) that at the current rate would take 1.9 years (1.651 million divided by 0.865992). Under the calculation in this blog, there are 17.528 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 163.926 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 11.257 million jobs net of labor force growth that at the current rate would take 10.8 years (17.528 million minus 0.05(163.926 million) = 9.332 million divided by 0.865992, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in May 2014 was 146.398 million (NSA) or 0.917 million fewer people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population of ages 16 years and over increased from 231.958 million in Jul 2007 to 247.622 million in May 2014 or by 15.664 million. The number employed fell 0.6 percent from Jul 2007 to May 2014 while the noninstitutional civilian population of ages of 16 years and over, or those available for work, increased 6.8 percent. There is actually not sufficient job creation in merely absorbing new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs.

There is current interest in past theories of “secular stagnation.” Alvin H. Hansen (1939, 4, 7; see Hansen 1938, 1941; for an early critique see Simons 1942) argues:

“Not until the problem of full employment of our productive resources from the long-run, secular standpoint was upon us, were we compelled to give serious consideration to those factors and forces in our economy which tend to make business recoveries weak and anaemic (sic) and which tend to prolong and deepen the course of depressions. This is the essence of secular stagnation-sick recoveries which die in their infancy and depressions which feed on them-selves and leave a hard and seemingly immovable core of unemployment. Now the rate of population growth must necessarily play an important role in determining the character of the output; in other words, the com-position of the flow of final goods. Thus a rapidly growing population will demand a much larger per capita volume of new residential building construction than will a stationary population. A stationary population with its larger proportion of old people may perhaps demand more personal services; and the composition of consumer demand will have an important influence on the quantity of capital required. The demand for housing calls for large capital outlays, while the demand for personal services can be met without making large investment expenditures. It is therefore not unlikely that a shift from a rapidly growing population to a stationary or declining one may so alter the composition of the final flow of consumption goods that the ratio of capital to output as a whole will tend to decline.”

The argument that anemic population growth causes “secular stagnation” in the US (Hansen 1938, 1939, 1941) is as misplaced currently as in the late 1930s (for early dissent see Simons 1942). There is currently population growth in the ages of 16 to 24 years but not enough job creation and discouragement of job searches for all ages (http://cmpassocregulationblog.blogspot.com/2014/05/rules-discretionary-authorities-and.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/global-financial-instability-recovery.html).

Second, 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 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 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html 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 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html 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 26.6 million unemployed or underemployed equivalent to actual unemployment of 16.2 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.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

In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation, QE→∞ cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.

The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm) practically unchanged in the statement at its meeting on Apr 30, 2014 with symbolic reduction of purchases of securities for the Fed’s balance sheet (http://www.federalreserve.gov/newsevents/press/monetary/20140430a.htm):

“Release Date: April 30, 2014

For immediate release

Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.”

There are several important issues in this statement.

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

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

1. Open-ended Quantitative Easing or QE_∞ with Symbolic Tapering. Earlier programs are continued with an additional lower open-ended $45 billion of bond purchases per month, increasing the stock of $4,067,133 million securities held outright and bank reserves deposited at the Fed of $2,658,133 million (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1): “The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
2. New Advance Guidance.” Policy will be accommodative even after the economy recovers satisfactorily: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored” (emphasis added).
3. Policy Commitment with Unemployment Rate. “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Current focus is on tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at 0 to ¼ percent; and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Market are overreacting to the so-called “paring” of outright purchases to $45 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent for which there is no end in sight as evident in the FOMC statement for Apr 30, 2014 (http://www.federalreserve.gov/newsevents/press/monetary/20140430a.htm):

““To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored” (emphasis added).

How long is “considerable time”? At the press conference following the meeting on Mar 19, 2014, Chair Yellen answered a question of Jon Hilsenrath of the Wall Street Journal explaining “In particular, the Committee has endorsed the view that it anticipates that will be a considerable period after the asset purchase program ends before it will be appropriate to begin to raise rates. And of course on our present path, well, that's not utterly preset. We would be looking at next, next fall. So, I think that's important guidance” (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20140319.pdf). Many focused on “next fall,” ignoring that the path of increasing rates is not “utterly preset.”

At a speech on Mar 31, 2014, Chair Yellen analyzed labor market conditions as follows (http://www.federalreserve.gov/newsevents/speech/yellen20140331a.htm):

“And based on the evidence available, it is clear to me that the U.S. economy is still considerably short of the two goals assigned to the Federal Reserve by the Congress. The first of those goals is maximum sustainable employment, the highest level of employment that can be sustained while maintaining a stable inflation rate. Most of my colleagues on the Federal Open Market Committee and I estimate that the unemployment rate consistent with maximum sustainable employment is now between 5.2 percent and 5.6 percent, well below the 6.7 percent rate in February.

Let me explain what I mean by that word "slack" and why it is so important.

Slack means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill. During a period of little or no slack, there still may be vacant jobs and people who want to work, but a large share of those willing to work lack the skills or are otherwise not well suited for the jobs that are available. With 6.7 percent unemployment, it might seem that there must be a lot of slack in the U.S. economy, but there are reasons why that may not be true.”

Chair Yellen analyzes the view of inflation (http://www.federalreserve.gov/newsevents/speech/yellen20140416a.htm):

“Inflation, as measured by the price index for personal consumption expenditures, has slowed from an annual rate of about 2-1/2 percent in early 2012 to less than 1 percent in February of this year. This rate is well below the Committee's 2 percent longer-run objective. Many advanced economies are observing a similar softness in inflation.

To some extent, the low rate of inflation seems due to influences that are likely to be temporary, including a deceleration in consumer energy prices and outright declines in core import prices in recent quarters. Longer-run inflation expectations have remained remarkably steady, however. We anticipate that, as the effects of transitory factors subside and as labor market gains continue, inflation will gradually move back toward 2 percent.”

There is a critical phrase in the statement of Sep 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130918a.htm): “but mortgage rates have risen further.” Did the increase of mortgage rates influence the decision of the FOMC not to taper? Is FOMC “communication” and “guidance” successful? Will the FOMC increase purchases of mortgage-backed securities if mortgage rates increase?

In testimony on the Semiannual Monetary Policy Report to the Congress before the Committee on Financial Services, US House of Representatives, on Feb 11, 2014, Chair Janet Yellen states (http://www.federalreserve.gov/newsevents/testimony/yellen20140211a.htm):

“Turning to monetary policy, let me emphasize that I expect a great deal of continuity in the FOMC's approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability.  If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. That said, purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.  In December of last year and again this January, the Committee said that its current expectation--based on its assessment of a broad range of measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments--is that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal. I am committed to achieving both parts of our dual mandate: helping the economy return to full employment and returning inflation to 2 percent while ensuring that it does not run persistently above or below that level (emphasis added).”

At the confirmation hearing on nomination for Chair of the Board of Governors of the Federal Reserve System, Vice Chair Yellen (2013Nov14 http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm), states needs and intentions of policy:

“We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time.

For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

In testimony before the Committee on the Budget of the US Senate on May 8, 2004, Chair Yellen provides analysis of the current economic situation and outlook (http://www.federalreserve.gov/newsevents/testimony/yellen20140507a.htm):

“The economy has continued to recover from the steep recession of 2008 and 2009. Real gross domestic product (GDP) growth stepped up to an average annual rate of about 3-1/4 percent over the second half of last year, a faster pace than in the first half and during the preceding two years. Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity--a sector that has been recovering since 2011--have remained disappointing so far this year and will bear watching.

Conditions in the labor market have continued to improve. The unemployment rate was 6.3 percent in April, about 1-1/4 percentage points below where it was a year ago. Moreover, gains in payroll employment averaged nearly 200,000 jobs per month over the past year. During the economic recovery so far, payroll employment has increased by about 8-1/2 million jobs since its low point, and the unemployment rate has declined about 3-3/4 percentage points since its peak.

While conditions in the labor market have improved appreciably, they are still far from satisfactory. Even with recent declines in the unemployment rate, it continues to be elevated. Moreover, both the share of the labor force that has been unemployed for more than six months and the number of individuals who work part time but would prefer a full-time job are at historically high levels. In addition, most measures of labor compensation have been rising slowly--another signal that a substantial amount of slack remains in the labor market.

Inflation has been quite low even as the economy has continued to expand. Some of the factors contributing to the softness in inflation over the past year, such as the declines seen in non-oil import prices, will probably be transitory. Importantly, measures of longer-run inflation expectations have remained stable. That said, the Federal Open Market Committee (FOMC) recognizes that inflation persistently below 2 percent--the rate that the Committee judges to be most consistent with its dual mandate--could pose risks to economic performance, and we are monitoring inflation developments closely.

Looking ahead, I expect that economic activity will expand at a somewhat faster pace this year than it did last year, that the unemployment rate will continue to decline gradually, and that inflation will begin to move up toward 2 percent. A faster rate of economic growth this year should be supported by reduced restraint from changes in fiscal policy, gains in household net worth from increases in home prices and equity values, a firming in foreign economic growth, and further improvements in household and business confidence as the economy continues to strengthen. Moreover, U.S. financial conditions remain supportive of growth in economic activity and employment.”

In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and r^e the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+r^e). Thus, g = [(r/r^e) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dr^e>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. 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 statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption 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 (10

Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.

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

“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.

The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”

Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σ_y and prices σ_p. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).

The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. Indefinite financial repression induces carry trades with high leverage, risks and illiquidity.

Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output that is actually a target of growth forecast. The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html; see Shultz et al 2012), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness. Jon Hilsenrath, writing on “New view into Fed’s response to crisis,” on Feb 21, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303775504579396803024281322?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes 1865 pages of transcripts of eight formal and six emergency policy meetings at the Fed in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm). If there were an infallible science of central banking, models and forecasts would provide accurate information to policymakers on the future course of the economy in advance. Such forewarning is essential to central bank science because of the long lag between the actual impulse of monetary policy and the actual full effects on income and prices many months and even years ahead (Romer and Romer 2004, Friedman 1961, 1953, Culbertson 1960, 1961, Batini and Nelson 2002). The transcripts of the Fed meetings in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm) analyzed by Jon Hilsenrath demonstrate that Fed policymakers frequently did not understand the current state of the US economy in 2008 and much less the direction of income and prices. The conclusion of Friedman (1953) is that monetary impulses increase financial and economic instability because of lags in anticipating needs of policy, taking policy decisions and effects of decisions. This is a fortiori true when untested unconventional monetary policy in gargantuan doses shocks the economy and financial markets.

In remarkable anticipation in 2005, Professor Raghuram G. Rajan (2005) warned of low liquidity and high risks of central bank policy rates approaching the zero bound (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 218-9). Professor Rajan excelled in a distinguished career as an academic economist in finance and was chief economist of the International Monetary Fund (IMF). Shefali Anand and Jon Hilsenrath, writing on Oct 13, 2013, on “India’s central banker lobbies Fed,” published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304330904579133530766149484?KEYWORDS=Rajan), interviewed Raghuram G Rajan, who is the current Governor of the Reserve Bank of India, which is India’s central bank (http://www.rbi.org.in/scripts/AboutusDisplay.aspx). In this interview, Rajan argues that central banks should avoid unintended consequences on emerging market economies of inflows and outflows of capital triggered by monetary policy. Portfolio reallocations induced by combination of zero interest rates and risk events stimulate carry trades that generate wide swings in world capital flows. Professor Rajan, in an interview with Kartik Goyal of Bloomberg (http://www.bloomberg.com/news/2014-01-30/rajan-warns-of-global-policy-breakdown-as-emerging-markets-slide.html), warns of breakdown of global policy coordination.

Professor Ronald I. McKinnon (2013Oct27), writing on “Tapering without tears—how to end QE3,” on Oct 27, 2013, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304799404579153693500945608?KEYWORDS=Ronald+I+McKinnon), finds that the major central banks of the world have fallen into a “near-zero-interest-rate trap.” World economic conditions are weak such that exit from the zero interest rate trap could have adverse effects on production, investment and employment. The maintenance of interest rates near zero creates long-term near stagnation. The proposal of Professor McKinnon is credible, coordinated increase of policy interest rates toward 2 percent. Professor John B. Taylor at Stanford University, writing on “Economic failures cause political polarization,” on Oct 28, 2013, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303442004579121010753999086?KEYWORDS=John+B+Taylor), analyzes that excessive risks induced by near zero interest rates in 2003-2004 caused the financial crash. Monetary policy continued in similar paths during and after the global recession with resulting political polarization worldwide.

Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Mar 19, 2014. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20131218.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IQ2014 is analyzed in Section I (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html

and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html) and the PCE inflation data from the report on personal income and outlays in Section IV (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html). The Bureau of Economic Analysis provides the estimate of IQ2014 GDP (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in Section IV (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical.html). The report on “Personal Income and Outlays” was released on May 30, 2014 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog. The report for May 2014 was released on Jun 6, 2014 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). “The longer-run projections are the rates of growth, unemployment, and inflation to which a policymaker expects the economy to converge over time—maybe in five or six years—in the absence of further shocks and under appropriate monetary policy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20131218.pdf).

It is instructive to focus on 2014 and 2015 because 2016 and longer term are too far away, and there is not much information even on what will happen in 2014-2015 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Mar 19, 2014 and the second row “PR” the projection of the Dec 18, 2013 meeting. There are three changes in the view.

1. Growth “∆% GDP.” The FOMC has changed the forecast of GDP growth in 2014. The FOMC decreased GDP growth in 2014 from 2.8 to 3.2 percent at the meeting in Dec 2013 to 2.8 to 3.0 percent at the meeting in Mar 2014.

2. Rate of Unemployment “UNEM%.” The FOMC reduced the forecast of the rate of unemployment for 2014 from 6.3 to 6.6 percent at the meeting on Dec 18, 2013 to 6.1 to 6.3 percent at the meeting on Mar 19, 2014. The projection for 2015 decreased to the range of 5.6 to 5.9 in Mar 2014 from 5.8 to 6.1 in Dec 2013. Projections of the rate of unemployment are moving closer to the desire 6.5 percent or lower with 5.2 to 5.6 percent in 2016 after the meeting on Mar 19, 2013.

3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation for 2014 from 1.4 to 1.6 percent at the meeting on Dec 18, 2013 to 1.5 to 1.6 percent at the meeting on Mar 19, 2014. There are no projections exceeding 2.0 percent in the central tendency but some in the range reach 2.4 percent in 2015. The longer run projection is at 2.0 percent.

4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2014, not changing from 1.3 to 1.8 percent at the meeting on Dec 18, 2013 to 1.3 to 1.8 percent at the meeting Mar 19, 2014. In 2015, there is minor change in the projection from 1.5 to 2.3 percent at the meeting on Dec 18, 2013 to 1.5 to 2.4 percent on Mar 19, 2014. The rate of change of the core PCE is below 2.0 percent in the central tendency with 2.4 percent at the top of the range in 2015.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, Dec 18, 2013 and Mar 19, 2014 

	∆% GDP	UNEM %	∆% PCE Inflation	∆% Core PCE Inflation
Central Tendency
2014  Dec 2013 PR	2.8 to 3.0 2.8 to 3.2	6.1 to 6.3 6.3 to 6.6	1.5 to 1.6 1.4 to 1.6	1.4 to 1.6 1.4 to 1.6
2015 Dec PR	3.0 to 3.2 3.0 to 3.4	5.6 to 5.9 5.8 to 6.1	1.5 to 2.0 1.5 to 2.0	1.7 to 2.0 1.6 to 2.0
2016 Dec PR	2.5 to 3.0 2.5 to 3.2	5.2 to 5.6 5.3 to 5.8	1.7 to 2.0 1.7 to 2.0	1.8 to 2.0 1.8 to 2.0
Longer Run Dec PR	2.2 to 2.3 2.2 to 2.4	5.2 to 5.6 5.2 to 5.8	2.0 2.0
Range
2014 Dec PR	2.1 to 3.0 2.2 to 3.3	6.0 to 6.5 6.2 to 6.7	1.3 to 1.8 1.3 to 1.8	1.3 to 1.8 1.3 to 1.8
2015 Dec PR	2.2 to 3.5 2.2 to 3.6	5.4 to 5.9 5.5 to 6.2	1.5 to 2.4 1.4 to 2.3	1.5 to 2.4 1.5 to 2.3
2016 Dec PR	2.2 to 3.4 2.1 to 3.5	5.1 to 5.8 5.0 to 6.0	1.6 to 2.0 1.6 to 2.2	1.6 to 2.0 1.6 to 2.2
Longer Run Dec PR	1.8 to 2.4 1.8 to 2.5	5.2 to 6.0 5.2 to 6.0	2.0 2.0

Notes: UEM: unemployment; PR: Projection

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/newsevents/press/monetary/20140319b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140319.pdf

Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):

“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary.  However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”

The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html See Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-116). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.

The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2014, 2015, 2016 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.pdf). The rate would still remain at 0 to ¼ percent in 2014 for 15 participants with one expecting the rate to be in the range of 0.5 to 1.0. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels. For 2015, 2 participants expect 0 to 0.25 percent, 4 participants expect the rate to remain between 0.5 and 1.0 percent, 7 to be between 1.0 and 1.5 percent, one between 1 and 2 percent and 3 between 2 and 3 percent. For 2016, one participant expects the rate between 0.5 and 1 percent, 6 between 1 and 2 percent, 9 between 2 and 3 percent and 4 between 3 and 4.5 percent. In the long term, all 16 participants expect the fed funds rate in the range of 3.0 to 4.5 percent.

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

Members and Federal Reserve Bank Presidents Participating in FOMC, Mar 19, 2014

	0 to 0.25	0.5 to 1.0	1.0 to 1.5	1.0 to 2.0	2.0 to 3.0	3.0 to 4.5
2014	15	1
2015	2	4	7	1	3
2016		1		6	9	4
Longer Run						16

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/newsevents/press/monetary/20140319b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140319.pdf

Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2014 to 2016. It is evident from Table IV-4 that the prevailing view of the FOMC is for interest rates to continue at low levels until 2015. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2. The FOMC states that rates will continue to be low even after return of the economy to potential growth.

Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal

Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, Mar 19, 2014

Appropriate Year of Increasing Target Fed Funds Rate	Number of Participants
2014	1
2015	13
2016	2

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/newsevents/press/monetary/20140319b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140319.pdf

Inflation in advanced economies has been fluctuating in waves at the production level with alternating surges and moderation of commodity price shocks. Table IV-5 provides month and 12-month percentage rates of inflation of Japan’s corporate goods price index (CGPI). Inflation measured by the CGPI increased 0.3 percent in May 2014 and increased 4.4 percent in 12 months, partly because of the increase in the tax on value added of consumption in Apr 2014. Measured by 12-month rates, CGPI inflation increased from minus 0.2 percent in Jul 2010 to a high of 2.2 percent in Jul-Aug 2011, 2.3 percent in Aug 2013 and 2.6 percent in Nov 2013. Calendar-year inflation is 1.3 percent for 2013. Calendar-year inflation for 2012 is minus 0.9 percent and 1.5 percent for 2011, which is the highest after declines in 2009 and 2010 but lower than 4.6 percent in the commodity shock driven by zero interest rates during the global recession in 2008. Inflation of the corporate goods prices follows waves similar to those in other indices around the world (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). In the first wave, annual equivalent inflation reached 5.8 percent in Jan-Apr 2011, driven by commodity price shocks of the carry trade from zero interest rates to commodity futures. In the second wave, carry trades were unwound because of risk aversion caused by the European debt crisis, resulting in average annual equivalent inflation of minus 1.2 percent in May-Jun 2011. In the third wave, renewed risk aversion caused annual equivalent decline of the CGPI of minus 2.1 percent in Jul-Nov 2011. In the fourth wave, continuing risk aversion resulted in annual equivalent inflation of minus 0.6 percent in Dec 2011 to Jan 2012. In the fifth wave, renewed risk appetite resulted in annual equivalent inflation of 2.0 percent in Feb-Apr 2012. In the sixth wave, annual equivalent inflation dropped to minus 5.5 percent in May-Jul 2012. In the seventh wave, annual equivalent inflation jumped to 2.4 percent in Aug-Sep 2012. In the eighth wave, annual equivalent inflation was minus 3.0 percent in Oct-Nov 2012 in a new round of risk aversion. In the ninth wave, annual equivalent inflation returned at 3.3 percent in Dec 2012-Sep 2013. In the eleventh wave, annual equivalent inflation was minus 0.6 percent in Oct-Nov 2013. In the twelfth wave, annual equivalent inflation was 2.4 percent from Dec 2013 to Jan 2014. In the thirteenth wave, annual equivalent inflation was minus 0.6 percent in Feb-Mar 2014. In the fourteenth wave, annual equivalent inflation was 20.9 percent in Apr 2014 almost entirely because of the increase in the tax on value added of consumption.

Table IV-5, Japan, Corporate Goods Price Index (CGPI) ∆%

	Month	Year
May 2014	0.3	4.4
Apr	2.9	4.2
AE ∆% Apr-May	20.9
Mar	0.0	1.7
Feb	-0.1	1.8
AE ∆% Feb-Mar	-0.6
Jan	0.1	2.4
Dec 2013	0.3	2.5
AE ∆% Dec-Jan	2.4
Nov	0.0	2.6
Oct	-0.1	2.5
AE ∆% Oct-Nov	-0.6
Sep	0.2	2.2
Aug	0.2	2.3
Jul	0.6	2.2
Jun	0.0	1.2
May	0.1	0.6
Apr	0.4	0.1
Mar	0.1	-0.5
Feb	0.5	-0.1
Jan	0.2	-0.4
Dec 2012	0.4	-0.7
AE ∆% Dec-Sep	3.3
Nov	-0.1	-1.1
Oct	-0.4	-1.1
AE ∆% Oct-Nov	-3.0
Sep	0.3	-1.5
Aug	0.1	-2.0
AE ∆% Aug-Sep	2.4
Jul	-0.4	-2.2
Jun	-0.6	-1.5
May	-0.4	-0.9
AE ∆% May-Jul	-5.5
Apr	-0.2	-0.7
Mar	0.5	0.3
Feb	0.2	0.4
AE ∆% Feb-Apr	2.0
Jan	-0.1	0.3
Dec 2011	0.0	0.8
AE ∆% Dec-Jan	-0.6
Nov	-0.1	1.3
Oct	-0.8	1.3
Sep	-0.2	2.0
Aug	-0.1	2.2
Jul	0.3	2.2
AE ∆% Jul-Nov	-2.1
Jun	0.0	1.9
May	-0.2	1.6
AE ∆% May-Jun	-1.2
Apr	0.8	1.8
Mar	0.6	1.3
Feb	0.1	0.7
Jan	0.4	0.6
AE ∆% Jan-Apr	5.8
Dec 2010	0.5	1.2
Nov	-0.1	0.9
Oct	-0.1	0.9
Sep	0.0	-0.1
Aug	-0.1	0.0
Jul	0.0	-0.2
Calendar Year
2013		1.3
2012		-0.9
2011		1.5
2010		-0.1
2009		-5.3
2008		4.6

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

Chart IV-1 of the Bank of Japan provides year-on-year percentage changes of the domestic and services Corporate Goods Price Index (CGPI) of Japan from 1970 to 2014. Percentage changes of inflation of services are not as sharp as for goods. Japan had the same sharp waves of inflation during the 1970s as in the US (see Chart IV-26 and associated table at http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical_8145.html http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html http://cmpassocregulationblog.blogspot.com/2014/02/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2013/12/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2013/12/exit-risks-of-zero-interest-rates-world_1.html and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or_561.html and at http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk_1.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html).). Behavior of the CGPI of Japan in the 1970s mirrors the Great Inflation episode in the United States with waves of inflation rising to two digits. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). Inflation also collapsed in the beginning of the 1980s because of tight monetary policy in the US with focus on inflation instead of on the gap of actual relative to potential output. The areas in shade correspond to the dates of cyclical recessions. The salient event is the sharp rise of inflation of the domestic goods CGPI in 2008 during the global recession that was mostly the result of carry trades from fed funds rates collapsing to zero to long positions in commodity futures in an environment of relaxed financial risk appetite. The panic of toxic assets in banks to be withdrawn by the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009) drove unusual risk aversion with unwinding of carry trades of exposures in commodities and other risk financial assets. Carry trades returned once TARP was clarified as providing capital to financial institutions and stress tests verified the soundness of US banks. The return of carry trades explains the rise of CGPI inflation after mid-2009. Inflation of the CGPI fluctuated with zero interest rates in alternating episodes of risk aversion and risk appetite.

Chart IV-1, Japan, Domestic Corporate Goods Price and Services Index, Year-on-Year Percentage Change, 1970-2014

Notes: Blue: Domestic Corporate Goods Price Index All Commodities; Red: Corporate Price Services Index

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html#

There is similar behavior of year-on-year percentage changes of the US producer price index from 1970 to 2014 in Chart IV-2 of the US Bureau of Labor Statistics as in Chart IV-1 with the domestic goods CGPI. The behavior of the CGPI of Japan in the 1970s is quite similar to that of the US PPI. The US producer price index increased together with the CGPI driven by the period of one percent fed funds rates from 2003 to 2004 inducing carry trades into commodity futures and other risk financial assets and the slow adjustment in increments of 25 basis points at every FOMC meeting from Jun 2004 to Jun 2006. There is also the same increase in inflation in 2008 during the global recession followed by collapse because of unwinding positions during risk aversion and new rise of inflation during risk appetite.

Chart IV-2, US, Producer Price Index Finished Goods, Year-on-Year Percentage Change, 1970-2014

Source: US Bureau of Labor Statistics

http://www.bls.gov/ppi/

Finer detail is provided by Chart IV-3 of the domestic CGPI from 2008 to 2014. The CGPI rose almost vertically in 2008 as the collapse of fed funds rates toward zero drove exposures in commodities and other risk financial assets because of risk appetite originating in the belief that the financial crisis was restricted to structured financial products and not to contracts negotiated in commodities and other exchanges. The panic with toxic assets in banks to be removed by TARP (Cochrane and Zingales 2009) caused unwinding carry trades in flight to US government obligations that drove down commodity prices and price indexes worldwide. Apparent resolution of the European debt crisis of 2010 drove risk appetite in 2011 with new carry trades from zero fed funds rates into commodity futures and other risk financial assets. Domestic CGPI inflation returned in waves with upward slopes during risk appetite and downward slopes during risk aversion. Yen devaluation promoted by monetary and fiscal policy translates imported inputs in higher domestic prices. The increase in the tax on value added of consumption caused the sharp increase in Apr 2014.

Chart IV-3, Japan, Domestic Corporate Goods Price Index, Monthly, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

There is similar behavior of the US producer price index from 2008 to 2014 in Chart IV-4 as in the domestic CGPI in Chart IV-43. A major difference is the strong long-term trend in the US producer price index with oscillations originating mostly in bouts of risk aversion such as the downward slope in the final segment in Chart IV-4 followed by increasing slope during periods of risk appetite. Carry trades from zero interest rates to commodity futures and other risk financial assets drive the upward trend of the US producer price index while oscillations originate in alternating episodes of risk aversion and risk appetite.

Chart IV-4, US, Producer Price Index Finished Goods, Monthly, 2008-2014

Source: US Bureau of Labor Statistics

http://www.bls.gov/ppi/

There was milder increase in Japan’s export corporate goods price index during the global recession in 2008 but similar sharp decline during the bank balance sheets effect in late 2008, as shown in Chart IV-5 of the Bank of Japan. Japan exports industrial goods whose prices have been less dynamic than those of commodities and raw materials. As a result, the export CGPI on the yen basis in Chart IV-5 trends down with oscillations after a brief rise in the final part of the recession in 2009. The export corporate goods price index on the yen basis fell from 104.9 in Jun 2009 to 94.0 in Jan 2012 or minus 10.4 percent and increased to 108.2 in May 2014 for a gain of 15.1 percent relative to Jan 2012 and 3.1 percent relative to Jun 2009. The choice of Jun 2009 is designed to capture the reversal of risk aversion beginning in Sep 2008 with the announcement of toxic assets in banks that would be withdrawn with the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009). Reversal of risk aversion in the form of flight to the USD and obligations of the US government opened the way to renewed carry trades from zero interest rates to exposures in risk financial assets such as commodities. Japan exports industrial products and imports commodities and raw materials.

Chart IV-5, Japan, Export Corporate Goods Price Index, Monthly, Yen Basis, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Chart IV-5A provides the export corporate goods price index on the basis of the contract currency. The export corporate goods price index on the basis of the contract currency increased from 97.9 in Jun 2009 to 103.1 in Apr 2012 or 5.3 percent but dropped to 98.1 in May 2014 or minus 4.8 percent relative to Apr 2012 and gained 0.2 percent to 98.1 in May 2014 relative to Jun 2009.

Chart IV-5A, Japan, Export Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Japan imports primary commodities and raw materials. As a result, the import corporate goods price index on the yen basis in Chart IV-6 shows an upward trend after declining from the increase during the global recession in 2008 driven by carry trades from fed funds rates. The index increases with carry trades from zero interest rates into commodity futures and declines during risk aversion from late 2008 into beginning of 2008 originating in doubts about soundness of US bank balance sheets. More careful measurement should show that the terms of trade of Japan, export prices relative to import prices, declined during the commodity shocks originating in unconventional monetary policy. The decline of the terms of trade restricted potential growth of income in Japan (for the relation of terms of trade and growth see Pelaez (1979, 1976a)). The import corporate goods price index on the yen basis increased from 93.5 in Jun 2009 to 113.1 in Apr 2012 or 21.0 percent and to 126.2 in May 2014 or gain of 11.6 percent relative to Apr 2012 and 35.0 percent relative to Jun 2009.

Chart IV-6, Japan, Import Corporate Goods Price Index, Monthly, Yen Basis, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Chart IV-6A provides the import corporate goods price index on the contract currency basis. The import corporate goods price index on the basis of the contract currency increased from 86.2 in Jun 2009 to 119.5 in Apr 2012 or 38.6 percent and to 112.7 in May 2014 or minus 5.6 percent relative to Apr 2012 and gain of 30.7 percent relative to Jun 2009. There is evident deterioration of the terms of trade of Japan: the export corporate goods price index on the basis of the contract currency increased 0.2 percent from Jun 2009 to May 2014 while the import corporate goods price index increased 30.7 percent. Prices of Japan’s exports of corporate goods, mostly industrial products, increased only 5.3 percent from Jun 2009 to May 2012, while imports of corporate goods, mostly commodities and raw materials increased 38.6 percent. Unconventional monetary policy induces carry trades from zero interest rates to exposures in commodities that squeeze economic activity of industrial countries by increases in prices of imported commodities and raw materials during periods without risk aversion. Reversals of carry trades during periods of risk aversion decrease prices of exported commodities and raw materials that squeeze economic activity in economies exporting commodities and raw materials. Devaluation of the dollar by unconventional monetary policy could increase US competitiveness in world markets but economic activity is squeezed by increases in prices of imported commodities and raw materials. Unconventional monetary policy causes instability worldwide instead of the mission of central banks of promoting financial and economic stability.

Chart IV-6A, Japan, Import Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Table IV-6 provides the Bank of Japan’s Corporate Goods Price indexes of exports and imports on the yen and contract bases from Jan 2008 to May 2014. There are oscillations of the indexes that are shown vividly in the four charts above. For the entire period from Jan 2008 to May 2014, the export index on the contract currency basis decreased 1.1 percent and decreased 6.3 percent on the yen basis. For the entire period from Jan 2008 to May 2014, the import price index increased 11.9 percent on the contract currency basis and increased 6.1 percent on the yen basis. The charts show sharp deteriorations in relative prices of exports to prices of imports during multiple periods. Price margins of Japan’s producers are subject to periodic squeezes resulting from carry trades from zero interest rates of monetary policy to exposures in commodities.

Table IV-6, Japan, Exports and Imports Corporate Goods Price Index, Contract Currency Basis and Yen Basis

Month	Exports Contract Currency	Exports Yen	Imports Contract Currency	Imports Yen
2008/01	99.2	115.5	100.7	119.0
2008/02	99.8	116.1	102.4	120.6
2008/03	100.5	112.6	104.5	117.4
2008/04	101.6	115.3	110.1	125.2
2008/05	102.4	117.4	113.4	130.4
2008/06	103.5	120.7	119.5	140.3
2008/07	104.7	122.1	122.6	143.9
2008/08	103.7	122.1	123.1	147.0
2008/09	102.7	118.3	117.1	137.1
2008/10	100.2	109.6	109.1	121.5
2008/11	98.6	104.5	97.8	105.8
2008/12	97.9	100.6	89.3	93.0
2009/01	98.0	99.5	85.6	88.4
2009/02	97.5	100.1	85.7	89.7
2009/03	97.3	104.2	85.2	93.0
2009/04	97.6	105.6	84.4	93.0
2009/05	97.5	103.8	84.0	90.8
2009/06	97.9	104.9	86.2	93.5
2009/07	97.5	103.1	89.2	95.0
2009/08	98.3	104.4	89.6	95.8
2009/09	98.3	102.1	91.0	94.7
2009/10	98.0	101.2	91.0	94.0
2009/11	98.4	100.8	92.8	94.8
2009/12	98.3	100.7	95.4	97.5
2010/01	99.4	102.2	97.0	100.0
2010/02	99.7	101.6	97.6	99.8
2010/03	99.7	101.8	97.0	99.2
2010/04	100.5	104.6	99.9	104.6
2010/05	100.7	102.9	101.7	104.9
2010/06	100.1	101.6	100.0	102.3
2010/07	99.4	99.0	99.9	99.8
2010/08	99.1	97.3	99.5	97.5
2010/09	99.4	97.0	100.0	97.2
2010/10	100.1	96.4	100.5	95.8
2010/11	100.7	97.4	102.6	98.2
2010/12	101.2	98.3	104.4	100.6
2011/01	102.1	98.6	107.2	102.6
2011/02	102.9	99.5	109.0	104.3
2011/03	103.5	99.6	111.8	106.3
2011/04	104.1	101.7	115.9	111.9
2011/05	103.9	99.9	118.8	112.4
2011/06	103.8	99.3	117.5	110.5
2011/07	103.6	98.3	118.3	110.2
2011/08	103.6	96.6	118.6	108.1
2011/09	103.7	96.1	117.0	106.2
2011/10	103.0	95.2	116.6	105.6
2011/11	101.9	94.8	115.4	105.4
2011/12	101.5	94.5	116.1	106.2
2012/01	101.8	94.0	115.0	104.2
2012/02	102.4	95.8	115.8	106.4
2012/03	102.9	99.2	118.3	112.9
2012/04	103.1	98.7	119.5	113.1
2012/05	102.3	96.3	118.1	109.8
2012/06	101.4	95.0	115.2	106.7
2012/07	100.6	94.0	112.0	103.5
2012/08	100.9	94.1	112.4	103.6
2012/09	101.0	94.1	114.7	105.2
2012/10	101.1	94.7	113.8	105.2
2012/11	100.9	95.9	113.2	106.5
2012/12	100.7	98.0	113.4	109.5
2013/01	101.0	102.4	113.8	115.4
2013/02	101.5	105.9	114.8	120.2
2013/03	101.3	106.6	115.1	122.0
2013/04	100.2	107.5	114.1	123.8
2013/05	99.6	109.1	112.6	125.3
2013/06	99.2	106.1	112.0	121.2
2013/07	99.1	107.5	111.6	122.8
2013/08	99.0	106.1	111.7	121.2
2013/09	99.0	107.2	112.9	123.9
2013/10	99.2	106.7	113.0	122.8
2013/11	99.1	108.0	113.1	124.9
2013-12	99.1	110.4	113.8	129.0
2014-01	99.2	110.7	114.4	130.1
2014-02	98.9	109.3	113.8	127.7
2014-03	98.6	109.0	113.4	127.4
2014-04	98.4	109.0	112.8	127.0
2014-05	98.1	108.2	112.7	126.2

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

Chart IV-7 provides the monthly corporate goods price index (CGPI) of Japan from 1970 to 2014. Japan also experienced sharp increase in inflation during the 1970s as in the episode of the Great Inflation in the US. Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). A remarkable similarity with US experience is the sharp rise of the CGPI of Japan in 2008 driven by carry trades from policy interest rates rapidly falling to zero to exposures in commodity futures during a global recession. Japan had the same sharp waves of consumer price inflation during the 1970s as in the US (see Chart IV-26 and associated table at http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical_4827.html http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical_8145.html http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html http://cmpassocregulationblog.blogspot.com/2014/02/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2013/12/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2013/12/exit-risks-of-zero-interest-rates-world_1.html and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or_561.html and at http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk_1.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html).

Chart IV-7, Japan, Domestic Corporate Goods Price Index, Monthly, 1970-2014

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

The producer price index of the US from 1970 to 2014 in Chart IV-8 shows various periods of more rapid or less rapid inflation but no bumps. The major event is the decline in 2008 when risk aversion because of the global recession caused the collapse of oil prices from $148/barrel to less than $80/barrel with most other commodity prices also collapsing. The event had nothing in common with explanations of deflation but rather with the concentration of risk exposures in commodities after the decline of stock market indexes. Eventually, there was a flight to government securities because of the fears of insolvency of banks caused by statements supporting proposals for withdrawal of toxic assets from bank balance sheets in the Troubled Asset Relief Program (TARP), as explained by Cochrane and Zingales (2009). The bump in 2008 with decline in 2009 is consistent with the view that zero interest rates with subdued risk aversion induce carry trades into commodity futures.

Chart IV-8, US, Producer Price Index Finished Goods, Monthly, 1970-2014

Source: US Bureau of Labor Statistics

http://www.bls.gov/ppi/

Further insight into inflation of the corporate goods price index (CGPI) of Japan is provided in Table IV-7. The increase in the tax on value added of consumption caused sharp increases in prices across all segments. Petroleum and coal with weight of 6.5 percent increased 0.5 percent in May 2014 and increased 11.7 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, prices of production machinery, with weight of 3.6 percent, increased 0.3 percent in May 2014 and increased 4.2 percent in 12 months. In general, most manufactured products have been experiencing negative or low increases in prices while inflation rates have been high in 12 months for products originating in raw materials and commodities. Ironically, unconventional monetary policy of zero interest rates and quantitative easing that intended to increase aggregate demand and GDP growth deteriorated the terms of trade of advanced economies with adverse effects on real income (for analysis of terms of trade and growth see Pelaez (1979, 1976a). There are now inflation effects of the intentional policy of devaluing the yen.

Table IV-7, Japan, Corporate Goods Prices and Selected Components, % Weights, Month and 12 Months ∆%

May 2014	Weight	Month ∆%	12 Month ∆%
Total	1000.0	0.2	4.2
Food, Beverages, Tobacco, Feedstuffs	135.8	0.1	3.5
Petroleum & Coal	65.4	0.5	11.7
Production Machinery	36.3	0.3	4.2
Electronic Components	30.7	-0.2	-2.0
Electric Power, Gas & Water	54.6	3.8	14.0
Iron & Steel	59.9	-0.1	7.0
Chemicals	93.0	-0.1	1.4
Transport Equipment	128.6	0.0	2.7

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

https://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1405.pdf

Percentage point contributions to change of the corporate goods price index (CGPI) in Mar 2014 are provided in Table IV-8 divided into domestic, export and import segments. The final block provides change in the corporate goods price without the effects of the increase in the tax on value added of consumption. In the domestic CGPI, increasing 0.3 percent in May 2014, the energy shock is evident in the contribution of 0.25 percentage points by electric power, gas and water and 0.04 percentage points in petroleum and coal products in new carry trades of exposures in commodity futures. The exports CGPI decreased 0.3 percent on the basis of the contract currency with deduction of 0.19 percentage points by electric and electronic products. The imports CGPI decreased 0.1 percent on the contract currency basis. Petroleum, coal and natural gas products deducted 0.23 percentage points. Shocks of risk aversion cause unwinding carry trades that result in declining commodity prices with resulting downward pressure on price indexes. The volatility of inflation adversely affects financial and economic decisions worldwide. The final block D shows that the increase in the domestic corporate goods price index without the effects of the consumption tax is 0.2 percent.

Table IV-8, Japan, Percentage Point Contributions to Change of Corporate Goods Price Index

Groups May 2014	Contribution to Change Percentage Points
A. Domestic Corporate Goods Price Index	Monthly Change:  0.3%
Electric Power, Gas & Water	0.25
Petroleum & Coal Products	0.04
Nonferrous Metals	0.02
Agriculture, Forestry & Fishery	-0.03
Information & Communications Equipment	-0.02
B. Export Price Index	Monthly Change:    -0.3% contract currency
Electric & Electronic Products	-0.19
Other Primary Products & Manufactured Goods	-0.03
General Purpose, Production & Business Oriented Machinery	-0.03
Chemicals & Related Products	-0.02
Transportation Equipment	0.04
C. Import Price Index	Monthly Change: -0.1% contract currency basis
Petroleum, Coal & Natural Gas	-0.23
Electric & Electronic Products	-0.02
General Purpose, Production & Business Oriented Machinery	-0.02
Metals & Related Products	0.12
D. Domestic Corporate Goods Price Index Excluding Consumption Tax	Monthly Change: 0.2%
Electric Power, Gas & Water	0.14
Petroleum & Coal Products	0.04
Nonferrous Metals	0.02
Agriculture, Forestry & Fishery Products	-0.03
Information & Communications Equipment	-0.02

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

https://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1405.pdf

China is experiencing similar inflation behavior as the advanced economies in several prior months in the form of declining commodity prices but differs in decreasing inflation of producer prices relative to a year earlier. As shown in Table IV-9, inflation of the price indexes for industry in May 2014 is minus 0.1 percent; 12-month inflation is minus 1.4 percent in May; and cumulative inflation in Jan-May 2014 relative to Jan-May 2013 is minus 1.9 percent. Inflation of segments in May 2013 in China is provided in Table IV-9 in column “Month May 2014 ∆%.” There were decreases of prices of mining & quarrying of 1.0 percent in May and decrease of 4.9 percent in 12 months. Prices of consumer goods changed 0.0 percent in May and decreased 0.2 percent in 12 months. Prices of inputs in the purchaser price index decreased 0.1 percent in May and declined 1.8 percent in 12 months. Fuel and power decreased 0.4 percent in May and declined 2.0 percent in 12 months. An important category of inputs for exports is textile raw materials, decreasing 0.1 percent in May and decreasing 1.0 percent in 12 months.

Table IV-9, China, Price Indexes for Industry ∆%

	Month May 2014 ∆%	12-Month May 2014 ∆%	Jan-May 2014/Jan-May 2013 ∆%
I Producer Price Indexes	-0.1	-1.4	-1.9
Means of Production	-0.1	-1.9	-2.4
Mining & Quarrying	-1.0	-4.9	-5.4
Raw Materials	-0.1	-2.0	-2.9
Processing	0.0	-1.6	-1.9
Consumer Goods	0.0	-0.2	-0.2
Food	0.0	0.4	0.0
Clothing	0.0	0.8	0.8
Daily Use Articles	0.0	0.2	-0.2
Durable Consumer Goods	-0.1	-0.6	-0.9
II Purchaser Price Indexes	-0.1	-1.8	-2.1
Fuel and Power	-0.4	-2.0	-2.4
Ferrous Metals	-0.6	-4.7	-4.4
Nonferrous Metals	0.9	-4.3	-6.1
Chemical Raw Materials	-0.2	-1.8	-2.1
Wood & Pulp	-0.1	-0.7	-0.6
Building Materials	0.1	0.6	0.6
Other Industrial Raw Materials	-0.1	-1.3	-1.2
Agricultural	0.8	0.5	-0.5
Textile Raw Materials	-0.1	-1.0	-0.6

Source: National Bureau of Statistics of China

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

China’s producer price inflation follows waves similar to those around the world but with declining trend since May 2012, as shown in Table IV-10. In the first wave, annual equivalent inflation was 6.4 percent in Jan-Jun 2011, driven by carry trades from zero interest rates to commodity futures. In the second wave, risk aversion unwound carry trades, resulting in annual equivalent inflation of minus 3.1 percent in Jul-Nov 2011. In the third wave, renewed risk aversion resulted in annual equivalent inflation of minus 2.4 percent in Dec 2011-Jan 2012. In the fourth wave, new carry trades resulted in annual equivalent inflation of 2.4 percent in Feb-Apr 2012. In the fifth wave, annual equivalent inflation is minus 5.8 percent in May-Sep 2012. There are declining producer prices in China in Aug-Sep 2012 in contrast with increases worldwide. In a sixth wave, producer prices increased 0.2 percent in Oct 2012, which is equivalent to 2.4 percent in a year. In an eighth wave, annual equivalent inflation was minus 1.2 percent in Nov-Dec 2012. In the ninth wave, annual equivalent inflation in Jan-Feb 2013 is 2.4 percent. In the tenth wave, annual equivalent inflation was minus 4.9 percent in Mar-Jul 2013. In the eleventh wave, annual equivalent inflation was 1.8 percent in Aug-Sep 2013. In the twelfth wave, annual equivalent inflation was minus 1.3 percent in Oct 2013-May 2014.

Table IV-10, China, Month and 12-Month Rate of Change of Producer Price Index, ∆%

	12-Month ∆%	Month ∆%
May 2014	-1.4	-0.1
Apr	-2.0	-0.2
Mar	-2.3	-0.3
Feb	-2.0	-0.2
Jan	-1.6	-0.1
Dec 2013	-1.4	0.0
Nov	-1.4	0.0
Oct	-1.5	0.0
AE ∆% Oct-May		-1.3
Sep	-1.3	0.2
Aug	-1.6	0.1
AE ∆% Aug-Sep		1.8
Jul	-2.3	-0.3
Jun	-2.7	-0.6
May	-2.9	-0.6
Apr	-2.6	-0.6
Mar	-1.9	0.0
AE ∆% Mar-Jul		-4.9
Feb	-1.6	0.2
Jan	-1.6	0.2
AE ∆% Jan-Feb		2.4
Dec 2012	-1.9	-0.1
Nov	-2.2	-0.1
AE ∆% Nov-Dec		-1.2
Oct	-2.8	0.2
AE ∆% Oct		2.4
Sep	-3.6	-0.1
Aug	-3.5	-0.5
Jul	-2.9	-0.8
Jun	-2.1	-0.7
May	-1.4	-0.4
AE ∆% May-Sep		-5.8
Apr	-0.7	0.2
Mar	-0.3	0.3
Feb	0.0	0.1
AE ∆% Feb-Apr		2.4
Jan	0.7	-0.1
Dec 2011	1.7	-0.3
AE ∆% Dec-Jan		-2.4
Nov	2.7	-0.7
Oct	5.0	-0.7
Sep	6.5	0.0
Aug	7.3	0.1
Jul	7.5	0.0
AE ∆% Jul-Nov		-3.1
Jun	7.1	0.0
May	6.8	0.3
Apr	6.8	0.5
Mar	7.3	0.6
Feb	7.2	0.8
Jan	6.6	0.9
AE ∆% Jan-Jun		6.4
Dec 2010	5.9	0.7

AE: Annual Equivalent

Source: National Bureau of Statistics of China

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

Chart IV-9 of the National Bureau of Statistics of China provides monthly and 12-month rates of inflation of the price indexes for the industrial sector. Negative monthly rates in Oct, Nov, Dec 2011, Jan, Mar, Apr, May, Jun, Jul, Aug, Sep, Nov and Dec 2012 pulled down the 12-month rates to 5.0 percent in Oct 2011, 2.7 percent in Nov, 1.7 percent in Dec, 0.7 percent in Jan 2012, 0.0 percent in Feb, minus 0.3 percent in Mar, minus 0.7 percent in Apr, minus 1.4 percent in May, 2.1 in Jun, minus 2.9 percent in Jul, minus 3.5 percent in Aug, minus 3.6 percent in Sep. The increase of 0.2 percent in Oct 2012 pulled up the 12-month rate to minus 2.8 percent and the rate eased to minus 2.2 percent in Nov 2012 and minus 1.9 percent in Dec 2012. Increases of 0.2 percent in Jan and Feb 2013 pulled the 12-month rate to minus 1.6 percent while no change in Mar 2013 brought down the 12-month rate to minus 1.9 percent. Declines of prices of 0.6 percent in Apr, May and Jun 2013 pushed the 12-month rate to minus 2.7 percent. Producer prices fell 2.3 percent in the 12 months ending in Jul 2013 and minus 1.6 percent in Aug 2013 with increase of 0.1 percent in the month of Aug 2013. Producer price inflation was minus 1.3 percent in the 12 months ending in Sep 2013 and minus 1.5 percent in the 12 months ending in Oct 2013. Producer price inflation was minus 1.4 percent in the 12 months ending in Nov 2013 and minus 1.4 percent in the 12 months ending in Dec 2013. Producer price inflation was minus 1.6 percent in the 12 months ending in Jan 2014 and minus 2.0 percent in the 12 months ending in Feb 2014. In Mar 2014, producer price inflation was minus 0.3 percent and minus 2.3 percent in 12 months followed by minus 0.2 percent in Apr 2014 and minus 2.0 percent in 12 months. Producer prices fell 0.1 percent in May 2014 and decreased 1.4 percent in 12 months.

Chart IV-9, China, Producer Prices for the Industrial Sector Month and 12 Months ∆%

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

Chart IV-10 of the National Bureau of Statistics of China provides monthly and 12-month inflation of the purchaser product indices for the industrial sector. Decreasing monthly inflation with four successive contractions from Oct 2011 to Jan 2012 and May-Aug 2012 pulled down the 12-month rate to minus 4.1 percent in Aug and Sep. Consecutive increases of 0.1 percent in Sep and Oct 2012 raised the 12-month rate to minus 3.3 percent in Oct 2012. The rate eased to minus 2.8 in Nov 2012 with decrease of 0.2 percent in Nov 2012 and minus 2.4 percent in Dec 2012 with monthly decrease of 0.1 percent. Increase of 0.3 percent in Jan 2013 and 0.2 in Feb 2013 pulled the 12-month rate to minus 1.9 percent. Decrease of prices of 0.1 percent in Mar 2013 brought down the 12-month rate to minus 2.0 percent. Declining prices of 0.6 percent in Apr and May 2013 and 0.5 percent in Jun 2013 pushed down the 12-month rate to minus 2.6 percent. The index fell 2.2 percent in the 12 months ending in Jul 2013 and 1.6 percent in the 12 months ending in Aug 2013. The index fell 1.6 percent in the 12 months ending in Sep 2013 and 1.6 percent in the 12 months ending in Oct 2013. Purchaser price inflation was minus 1.5 percent in the 12 months ending in Nov 2013 and minus 1.4 percent in the 12 months ending in Dec 2013. Purchaser price inflation was minus 1.7 percent in the 12 months ending in Jan 2014 and minus 2.1 percent in the 12 months ending in Feb 2014. In Mar 2014, inflation of the purchaser price index was minus 0.5 percent and minus 2.5 percent in 12 months followed by minus 0.4 percent in Apr 2014 and minus 2.3 percent in 12 months. The purchaser price index fell 0.1 percent in May 2014 and decreased 1.8 percent in 12 months.

Chart IV-10, China, Purchaser Product Indices for Industrial Sector, Month and 12 Months ∆%

Source: National Bureau of Statistics of China

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

China is highly conscious of food price inflation because of its high weight in the basket of consumption of the population. Consumer price inflation in China in May 2014 was minus 0.1 percent and 2.5 percent in 12 months, as shown in Table IV-11. Food prices increased 0.2 percent in May 2014 and 4.1 percent in 12 months. Food prices decreased 1.3 percent in Apr 2014, increasing 2.3 percent in 12 months ending in Apr 2014 and 3.2 percent in Jan-Apr 2014 relative to a year earlier. Food prices increased 2.4 percent in Jan 2014, 3.7 percent in 12 months and 3.7 percent in the cumulative Jan 2014 relative to a year earlier. Food prices fell 0.2 percent in Nov 2013, increasing 5.9 percent in 12 months and 4.7 percent in the cumulative to Nov 2013 relative to a year earlier. Food prices decreased 0.4 percent in Oct 2013, increasing 6.5 percent in 12 months in adjustment to sharp increase in Sep 2013. Adjustment from the prior shock had occurred in May with decline of food prices by 1.6 percent and increase of 3.8 percent in 12 months and 3.8 percent in Jan-May 2013 relative to a year earlier. Another area of concern is housing inflation, which was 0.2 percent in Jan and increased 2.8 percent in 12 months. House inflation was 0.3 percent in Feb 2014 and 2.8 percent in 12 months. House inflation was 0.2 percent in Mar 2014 and 2.5 percent in 12 months. House inflation was 0.1 percent in Apr 2014 and 2.4 percent in 12 months. House inflation was 0.0 percent in May 2014 and 2.3 percent in 12 months. Prices of services changed 0.0 percent in May and gained 2.7 percent in 12 months.

Table IV-11, China, Consumer Price Index

2014	May 2014 Month   ∆%	May 2014 12-Month  ∆%	Jan-May 2014   ∆%/ Jan-May 2013
Consumer Prices	0.1	2.5	2.3
Urban	0.1	2.5	2.3
Rural	0.2	2.3	2.0
Food	0.2	4.1	3.4
Non-food	0.1	1.7	1.7
Consumer Goods	0.1	2.4	1.9
Services	0.0	2.7	2.9
Excluding Food and Energy	0.1	1.7	1.7
Commodity Categories:
Food	0.2	4.1	3.4
Tobacco, Liquor	-0.1	-0.6	-0.7
Clothing	0.3	2.5	2.3
Household	0.1	1.2	1.3
Healthcare & Personal Articles	0.1	1.2	1.2
Transportation & Communication	0.1	0.6	0.0
Recreation, Education, Culture & Services	-0.1	2.1	2.3
Residence	0.0	2.3	2.6

Source: National Bureau of Statistics of China

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

Month and 12-month rates of change of consumer prices are provided in Table IV-12. There are waves of consumer price inflation in China similar to those around the world (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html). In the first wave, consumer prices increased at the annual equivalent rate of 8.3 percent in Jan-Mar 2011, driven by commodity price increases resulting from unconventional monetary policy of zero interest rates. In the second wave, risk aversion unwound carry trades with annual equivalent inflation falling to the rate of 2.0 percent in Apr-Jun 2011. In the third wave, inflation returned at 2.9 percent with renewed interest in commodity exposures in Jul-Nov 2011. In the fourth wave, inflation returned at a high 5.8 percent annual equivalent in Dec 2011 to Mar 2012. In the fifth wave, annual equivalent inflation was minus 3.9 percent in Apr to Jun 2012. In the sixth wave, annual equivalent inflation rose to 4.1 percent in Jul-Sep 2012. In the seventh wave, inflation was minus 1.2 percent annual equivalent in Oct 2012 and 0.0 percent in Oct-Nov 2012. In the eighth wave, annual equivalent inflation was 12.2 percent in Dec 2012-Feb 2013 primarily because of winter weather that caused increases in food prices. In the ninth wave, collapse of food prices resulted in annual equivalent inflation of minus 10.3 percent in Mar 2013. In the tenth wave, annual equivalent inflation returned at 2.4 percent in Apr 2013. In the eleventh wave, annual equivalent inflation was minus 3.5 percent in May-Jun 2013. In the twelfth wave, inflation rose at annual equivalent 4.6 percent in Jul-Oct 2013 with sharp increase of food prices in Sep 2013. In the thirteenth wave, annual equivalent inflation was minus 1.2 percent in Nov 2013. In the fourteenth wave, annual equivalent inflation was 7.4 percent in Dec 2013-Feb 2014. In the fifteenth wave, annual inflation was minus 4.7 percent in Mar-Apr 2014. In the sixteenth wave, annual equivalent inflation was 1.2 percent in May 2014. Inflation volatility originating in unconventional monetary policy clouds investment and consumption decisions by business and households. There is local problem in China with food prices.

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

	Month ∆%	12-Month ∆%
May 2014	0.1	2.5
AE ∆% May	1.2
Apr	-0.3	1.8
Mar	-0.5	2.4
AE ∆% Mar-Apr	-4.7
Feb	0.5	2.0
Jan	1.0	2.5
Dec 2013	0.3	2.5
AE ∆% Dec-Feb	7.4
Nov	-0.1	3.0
AE ∆% Nov	-1.2
Oct	0.1	3.2
Sep	0.8	3.1
Aug	0.5	2.6
Jul	0.1	2.7
AE ∆% Jul-Oct	4.6
Jun	0.0	2.7
May	-0.6	2.1
AE ∆% May-Jun	-3.5
Apr	0.2	2.4
AE ∆% Apr	2.4
Mar 2013	-0.9	2.1
AE ∆% Mar	-10.3
Feb	1.1	3.2
Jan	1.0	2.0
Dec 2012	0.8	2.5
AE ∆% Dec-Feb	12.2
Nov	0.1	2.0
Oct	-0.1	1.7
AE ∆% Oct-Nov	0.0
Sep	0.3	1.9
Aug	0.6	2.0
Jul	0.1	1.8
AE ∆% Jul-Sep	4.1
Jun	-0.6	2.2
May	-0.3	3.0
Apr	-0.1	3.4
AE ∆% Apr to Jun	-3.9
Mar	0.2	3.6
Feb	-0.1	3.2
Jan	1.5	4.5
Dec 2011	0.3	4.1
AE ∆% Dec to Mar	5.8
Nov	-0.2	4.2
Oct	0.1	5.5
Sep	0.5	6.1
Aug	0.3	6.2
Jul	0.5	6.5
AE ∆% Jul to Nov	2.9
Jun	0.3	6.4
May	0.1	5.5
Apr	0.1	5.3
AE ∆% Apr to Jun	2.0
Mar	-0.2	5.4
Feb	1.2	4.9
Jan	1.0	4.9
AE ∆% Jan to Mar	8.3
Dec 2010	0.5	4.6

AE: Annual Equivalent

Source: National Bureau of Statistics of China

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

Chart IV-13 of the National Bureau of Statistics of China provides monthly and 12-month rates of consumer price inflation. In contrast with producer prices, consumer prices had not moderated at the monthly marginal rates. Consumer prices fell 0.2 percent in Nov 2011 after increasing only 0.1 percent in Oct but increased 0.3 percent in Dec and a high 1.5 percent in Jan 2012, declining 0.1 percent in Feb, rising 0.2 percent in Mar and declining 0.1 percent in Apr, 0.3 percent in May and 0.6 percent in Jun 2012 but increasing 0.1 percent in Jul, 0.6 percent in Aug 2012 and 0.3 percent in Sep 2012. Consumer prices fell 0.1 percent in Oct 2012. The decline of 0.1 percent in Feb 2012 pulled down the 12-month rate to 3.2 percent, which bounced back to 3.6 percent in Mar with the monthly increase of 0.2 percent and fell to 2.2 percent in Jun with increasing pace of monthly decline from Apr to Jun 2012. Even with increase of 0.1 percent in Jul 2012, consumer price inflation in 12 months fell to 1.8 percent in Jul 2012 but bounced back to 2.0 percent with increase of 0.6 percent in Aug. In Sep, increase of 0.3 percent still maintained 12-month inflation at 1.9 percent. The decline of 0.1 percent in Oct 2012 pulled down the 12-month rate to 1.7 percent, which is the lowest in Chart IV-3. Increase of 0.1 percent in Nov 2012 pulled up the 12-month rate to 2.0 percent. Abnormal increase of 0.8 percent in Dec 2012 because of winter weather pulled up the 12-month rate to 2.5 percent. Even with increase of 1.0 percent in Jan 2013 12-month inflation fell to 2.0 percent. Inflation of 1.1 percent in Feb 2013 pulled the 12-month rate to 3.2 percent. Collapse of food prices with decline of consumer prices by 0.9 percent in Mar 2013 brought down the 12-month rate to 2.1 percent. Renewed inflation of 0.2 percent in Apr 2013 raised the 12-month rate to 2.4 percent. Decline of inflation by 0.6 percent in May reduced 12-month inflation to 2.1 percent. Inflation rose to 2.7 percent in the 12 months ending in Jun 2013 with unchanged monthly inflation. Consumer prices increased 0.1 percent in Jul 2013 and 2.7 percent in 12 months. In combination of increases of food prices and other prices, inflation returned with 0.5 percent in Aug 2013 and 2.6 percent in 12 months. Consumer prices increased 0.8 percent in Sept 2013 and 3.1 percent in 12 months with increase in food prices of 1.5 in the month of Sep 2013. Consumer prices increased 0.1 percent in Oct 2013 and 3.2 percent in 12 months. Consumer prices fell 0.1 percent in Nov 2013 and increased 3.0 percent in 12 months. Consumer prices increased 0.3 percent in Dec 2013 and increased 2.5 percent in 12 months. Consumer prices increased 1.0 percent in Jan 2014 and 2.5 percent in 12 months. In Feb 2014, consumer prices increased 0.5 percent and 2.0 percent in 12 months. Consumer prices fell 0.5 percent in Mar 2014 and increased 2.4 percent in 12 months followed by 0.3 percent in Apr 2014 and 1.8 percent in 12 months. Consumer prices increased 0.1 percent in May 2014 and 2.5 percent in 12 months.

Chart IV-11, China, Consumer Prices ∆% Month and 12 Months

Source: National Bureau of Statistics of China

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

The estimate of consumer price inflation in Germany in Table IV-13 is 0.9 percent in 12 months ending in May 2014, minus 0.1 percent NSA (not seasonally adjusted) in May 2014 relative to Apr 2014 and minus 0.1 percent CSA (calendar and seasonally adjusted) in May 2014 relative to Apr 2014. There are waves of consumer price inflation in Germany similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html). In the first wave, annual equivalent inflation was 3.0 percent in Feb-Apr 2011 NSA and 2.4 percent CSA during risk appetite in carry trades from zero interest rates to commodity futures. In the second wave, annual equivalent consumer price inflation collapsed to 0.6 percent NSA and 3.0 percent CSA in May-Jun 2011 because of risk aversion caused by the European sovereign debt event. In the third wave, annual equivalent consumer price inflation was 1.7 percent NSA and 1.9 percent CSA in Jul-Nov 2011 because of relaxed risk aversion. In the fourth wave, annual equivalent inflation was 0.6 percent NSA and 1.8 percent CSA in Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation rose to 4.5 percent NSA and 2.4 percent CSA in Feb-Apr 2012 during another energy-commodity carry trade shock. In the sixth wave, annual equivalent inflation in May-Jun 2012 is minus 1.2 percent NSA and 0.6 percent CSA. In the seventh wave, annual equivalent inflation NSA is 4.9 percent in Jul-Aug 2012 and 3.0 percent CSA. In the eighth wave in Sep-Dec 2012, annual equivalent inflation is 1.5 percent NSA and 1.5 percent CSA. In the ninth wave, annual equivalent inflation fell to minus 5.8 percent NSA in Jan 2013 and 0.0 percent CSA. In the eleventh wave, annual equivalent inflation rose to 6.8 percent NSA in Feb-Mar 2013 and 1.2 percent CSA. In the twelfth wave, annual equivalent inflation in Apr fell to minus 5.8 percent NSA and 0.0 percent CSA in reversal of carry trades into commodity futures. In the thirteenth wave, annual equivalent inflation returned at 4.1 percent in May-Jul 2013 NSA and 2.8 percent CSA. In the fourteenth wave, annual equivalent inflation was nil NSA and 0.6 percent CSA in Aug-Sep 2013. In the fifteenth wave, annual equivalent inflation was minus 2.4 percent NSA in Oct 2013 and 0.0 percent CSA. In the sixteenth wave, annual equivalent inflation was 3.7 percent NSA and 2.4 percent CSA in Nov-Dec 2013. In the seventeenth wave, annual equivalent inflation was minus 7.0 percent NSA in Jan 2014 and 0.0 percent CSA. In the eighteenth wave, annual equivalent inflation returned at 4.9 percent in Feb-Mar 2014 and 0.0 percent CSA. In the nineteenth wave, annual equivalent inflation was minus 1.8 percent NSA and 0.6 CSA in May 2014. Under unconventional monetary policy of zero interest rates and quantitative easing, inflation becomes highly volatile during alternative shocks of risk aversion and risk appetite, preventing sound investment and consumption decisions.

Table IV-13, Germany, Consumer Price Index ∆%

	12-Month ∆%	Month ∆% NSA	Month ∆% CSA
May 2014	0.9	-0.1	-0.1
Apr	1.3	-0.2	0.2
AE ∆% Apr-May		-1.8	0.6
Mar	1.0	0.3	0.0
Feb	1.2	0.5	0.0
AE ∆% Feb-Mar		4.9	0.0
Jan	1.3	-0.6	0.0
AE ∆% Jan		-7.0	0.0
Dec 2013	1.4	0.4	0.2
Nov	1.3	0.2	0.2
AE ∆% Nov-Dec		3.7	2.4
Oct	1.2	-0.2	0.0
AE ∆% Oct		-2.4	0.0
Sep	1.4	0.0	0.1
Aug	1.5	0.0	0.0
AE ∆% Aug-Sep		0.0	0.6
Jul	1.9	0.5	0.2
Jun	1.8	0.1	0.2
May	1.5	0.4	0.3
AE ∆% May-Jul		4.1	2.8
Apr	1.2	-0.5	0.0
AE ∆% Apr		-5.8	0.0
Mar	1.4	0.5	0.1
Feb	1.5	0.6	0.1
AE ∆% Feb-Mar		6.8	1.2
Jan	1.7	-0.5	0.0
AE ∆% Jan		-5.8	0.0
Dec 2012	2.0	0.3	0.1
Nov	1.9	0.1	0.1
Oct	2.0	0.0	0.2
Sep	2.0	0.1	0.1
AE ∆% Sep-Dec		1.5	1.5
Aug	2.2	0.4	0.3
Jul	1.9	0.4	0.2
AE ∆% Jul-Aug		4.9	3.0
Jun	1.7	-0.2	0.0
May	2.0	0.0	0.1
AE ∆% May-Jun		-1.2	0.6
Apr	2.0	-0.2	0.2
Mar	2.2	0.6	0.2
Feb	2.2	0.7	0.2
AE ∆% Feb-Apr		4.5	2.4
Jan	2.1	-0.1	0.3
Dec 2011	2.0	0.2	0.0
AE ∆% Dec-Jan		0.6	1.8
Nov	2.4	0.2	0.2
Oct	2.3	0.0	0.1
Sep	2.4	0.2	0.3
Aug	2.1	0.1	0.1
Jul	2.1	0.2	0.1
AE ∆% Jul-Nov		1.7	1.9
Jun	2.1	0.1	0.3
May	2.0	0.0	0.2
AE ∆% May-Jun		0.6	3.0
Apr	1.9	0.0	0.2
Mar	2.0	0.6	0.2
Feb	1.9	0.6	0.2
Jan	1.7	-0.2	0.2
AE ∆% Feb-Apr		3.0	2.4
Dec 2010	1.3	0.6	0.2
Nov	1.5	0.1	0.2
Oct	1.3	0.1	0.2
Sep	1.2	-0.1	0.1
Aug	1.0	0.1	0.1
Annual Average ∆%
2013	1.5
2012	2.0
2011	2.1
2010	1.1
2009	0.4
2008	2.6
Dec 2009	0.8
Dec 2008	1.1
Dec 2007	3.2
Dec 2006	1.4
Dec 2005	1.4
Dec 2004	2.2
Dec 2003	1.1
Dec 2002	1.1
Dec 2001	1.6

AE: Annual Equivalent

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Chart IV-12 of the Statistisches Bundesamt Deutschland, or federal statistical office of Germany, provides the unadjusted consumer price index of Germany from 2006 to 2014. There is evident acceleration in the form of sharper slope in the first months of 2011 and then a flattening in subsequent months with renewed strength in Dec 2011, decline in Jan 2012 and another upward spike from Feb to Apr 2012, new drop in May-Jun 2012 and increases in Jul and Aug 2012 relaxed in Sep-Nov 2012. Inflation returned in Dec 2012 and fell in Jan 2013, rebounding in Feb-Mar 2013. Inflation fell in Apr 2013 and rebounded in May 2013. Reversals of commodity exposures caused the decline in Apr 2013 followed by increases in May-Jul 2013. Inflation stabilized in Aug-Sep 2013 and fell in Oct 2013. Inflation increased in Nov-Dec 2013 and fell in Jan 2014. Consumer prices increased again in Feb-Mar 2014 and fell in Apr-May 2014. If risk aversion declines, new carry trades from zero interest rates to commodity futures could again result in higher inflation.

Chart IV-12, Germany, Consumer Price Index, Unadjusted, 2010=100

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Chart IV-12A provides the consumer price index NSA of the US from 2006 to 2014. The salient similarity is the hump in 2008 caused by commodity carry trades driven by the movement to zero interest rates. Inflation communicated worldwide through carry trade from zero interest rates to exposures in commodity futures, creating instability in financial and economic decisions.

Chart IV-12A, US, Consumer Price Index, All Items, NSA, 2006-2014

Source: Bureau of Labor Statistics http://www.bls.gov/cpi/data.htm4

Chart IV-13, of the Statistisches Bundesamt Deutschland, or Federal Statistical Agency of Germany, provides the unadjusted consumer price index and trend of Germany from 2010 to 2014. Chart IV-13 captures inflation waves with alternation of periods of positive and negative slopes resulting from zero interest rates with shocks of risk appetite and risk aversion. For example, the negative slope of decline of inflation by 0.2 percent in Jun 2012 and 0.0 percent in May 2012 follows an upward slope of price increases in Feb-Apr 2012 after decline of inflation by 0.1 percent in Jan 2012. The is another positive slope caused by inflation of 0.4 percent in Jul 2012, which is followed by 0.4 percent in Aug 2012 and flattening segment, as inflation remains almost unchanged with 0.1 percent in Sep and 0.0 percent in Oct 2012, increasing 0.1 percent in Nov 2012 and increasing 0.3 percent in Dec 2012. Inflation fell 0.5 percent in Jan 2013 and jumped 0.6 percent in Feb 2013 and 0.5 percent in Mar 2013. Another declining segment indicates the decline of 0.5 percent in Apr 2013 followed by the increases in May-Jul 2013. Inflation was nil in Aug-Sep 2013 and fell in Oct 2013. Inflation increased in Nov-Dec 2013 and fell in Jan 2014. Inflation returned in Feb-Mar 2014 and fell in Apr-May 2014. The waves occur around an upward trend of prices, disproving the proposition of fear of deflation.

Chart IV-13, Germany, Consumer Price Index, Unadjusted and Trend, 2010=100

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Table IV-14 provides the monthly and 12-month rate of inflation for segments of the consumer price index of Germany in May 2014. Inflation excluding energy decreased 0.1 percent in May 2014 and increased 1.1 percent in 12 months. Excluding household energy inflation decreased 0.1 percent in May 2014 and rose 1.0 percent in 12 months. Food prices decreased 0.4 percent in May 2014 and increased 0.5 percent in 12 months. There were differences in inflation of energy-related prices. Heating oil decreased 3.1 percent in 12 months and decreased 0.5 percent in May 2014. Motor fuels increased 0.3 percent in May and decreased 2.3 percent in 12 months.

Table IV-14, Germany, Consumer Price Index ∆%

May 2014	Weight	12- Month ∆%	Month   ∆%
Total	1,000.00	0.9	-0.1
Excluding heating oil and motor fuels	950.52	1.0	-0.2
Excluding household energy	931.81	1.0	-0.1
Excluding Energy	893.44	1.1	-0.1
Total Goods	479.77	0.3	-0.2
Nondurable Consumer Goods	307.89	0.5	-0.1
Energy	106.56	-0.8	0.0
Services	520.23	1.4	-0.2
Energy Components
Motor Fuels	38.37	-2.3	0.3
Household Energy	68.19	-0.1	-0.1
Heating Oil	11.11	-3.1	-0.5
Food	90.52	0.5	-0.4

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2014/06/PE14_213_611.html

Table IV-15 provides monthly and 12 months consumer price inflation in France. There are the same waves as in inflation worldwide (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html). In the first wave, annual equivalent inflation in Jan-Apr 2011 was 4.3 percent driven by the carry trade from zero interest rates to commodity futures positions in an environment of risk appetite. In the second wave, risk aversion caused the reversal of carry trades into commodity futures, resulting in the fall of the annual equivalent inflation rate to minus 1.2 percent in May-Jul 2011. In the third wave, annual equivalent inflation rose to 3.0 percent in Aug-Nov 2011 with alternations of risk aversion and risk appetite. In the fourth wave, risk aversion originating in the European debt crisis caused annual equivalent inflation of 0.0 percent from Dec 2011 to Jan 2012. In the fifth wave, annual equivalent inflation increased to 5.3 percent in Feb-Apr 2012. In the sixth wave, annual equivalent inflation was minus 2.4 percent in May-Jul 2012 during another bout of risk aversion causing reversal of carry trades from zero interest rates to commodity price futures exposures. In the seventh wave, annual equivalent inflation jumped to 8.7 percent in Aug 2012, 3.0 percent in Aug-Sep 2012 and 2.8 percent in Aug-Oct 2012. In the eighth wave, annual equivalent inflation was minus 2.4 percent in Nov 2012 and minus 1.6 percent in Nov 2012 to Jan 2013. In the ninth wave, annual equivalent inflation was 6.8 percent in Feb-Mar 2013. In the tenth wave, annual equivalent inflation was minus 1.2 percent in Apr because of reversal of commodity carry trades. In the eleventh wave, annual equivalent inflation was 1.8 percent in May-Jun 2013. In the twelfth wave, annual equivalent inflation was minus 3.5 percent in Jul 2013. In the thirteenth wave, annual equivalent inflation returned at 6.2 percent in Aug 2013. In the fourteenth wave, annual equivalent inflation was minus 1.6 percent in Sep-Nov 2013. In the fifteenth wave, annual equivalent inflation was 3.7 percent in Dec 2013. In the sixteenth wave, annual equivalent inflation was minus 7.0 percent in Jan 2014. In the sixteenth wave, annual equivalent inflation was 6.8 percent in Feb-Apr 2014. In the seventeenth wave, annual equivalent inflation was 0.0 percent in Apr-May 2014.

Table IV-15, France, Consumer Price Index, Month and 12-Month ∆%

	Month ∆%	12-Month ∆%
May 2014	0.0	0.7
Apr	0.0	0.7
AE ∆% Apr-May	0.0
Mar	0.5	0.6
Feb	0.6	0.9
AE ∆% Feb-Mar	6.8
Jan	-0.6	0.7
AE ∆% Jan	-7.0
Dec 2013	0.3	0.7
AE ∆% Dec	3.7
Nov	-0.1	0.7
Oct	-0.1	0.6
Sep	-0.2	0.9
AE ∆% Sep-Nov	-1.6
Aug	0.5	0.9
AE ∆% Aug	6.2
Jul	-0.3	1.1
AE ∆% Jul	-3.5
Jun	0.2	0.9
May	0.1	0.8
AE ∆% May-Jun	1.8
Apr	-0.1	0.7
AE ∆% Apr	-1.2
Mar	0.8	1.0
Feb	0.3	1.0
AE ∆% Feb-Mar	6.8
Jan	-0.5	1.2
Dec 2012	0.3	1.3
Nov	-0.2	1.4
AE ∆% Nov-Jan	-1.6
Oct	0.2	1.9
Sep	-0.2	1.9
Aug	0.7	2.1
AE ∆% Aug-Oct	2.8
Jul	-0.5	1.9
Jun	0.0	1.9
May	-0.1	2.0
AE ∆% May-Jul	-2.4
Apr	0.1	2.1
Mar	0.8	2.3
Feb	0.4	2.3
AE ∆% Feb-Apr	5.3
Jan	-0.4	2.4
Dec 2011	0.4	2.5
AE ∆% Dec-Jan	0.0
Nov	0.3	2.5
Oct	0.3	2.4
Sep	-0.1	2.2
Aug	0.5	2.2
AE ∆% Aug-Nov	3.0
Jul	-0.5	1.9
Jun	0.1	2.1
May	0.1	2.0
AE ∆% May-Jul	-1.2
Apr	0.3	2.1
Mar	0.8	2.0
Feb	0.5	1.6
Jan	-0.2	1.8
AE ∆% Jan-Apr	4.3
Dec 2010	0.4	1.8
Annual
2013		0.9
2012		2.0
2011		2.1
2010		1.5
2009		0.1
2008		2.8
2007		1.5
2006		1.6
2005		1.8
2004		2.1
2003		2.1
2002		1.9
2001		1.7
2000		1.7
1999		0.5
1998		0.7
1997		1.2
1996		2.0
1995		1.8
1994		1.6
1993		2.1
1992		2.4
1991		3.2

AE: Annual Equivalent Metropolitan France

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20140612

Chart IV-14 of Institut National de la Statistique et des Études Économiques provides the consumer price index in France since Jan 1998. There is the same jump and decline of inflation during the global recession from 2008 to 2009 caused by carry trades from zero interest rates into commodity exposures. The index also captures the waves of inflation around an upward trend.

Chart IV-14, France, Consumer Price Index, Jan 1998-May 2014, 1998=100

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20140612

Table IV-16 provides consumer price inflation in France and of various items in May 2014 and in the 12 months ending in May 2014. Inflation of all items was 0.0 percent in May 2014 and 0.7 percent in 12 months. Energy prices decreased 0.1 percent in May 2014 and increased 1.1 percent in 12 months. Transport and communications decreased 1.0 percent in May 2014 and rose 1.3 percent in 12 months. Rentals and dwellings show higher 12-month increase of 1.5 percent. Services changed 0.0 percent in Apr 2014 and increased 1.8 percent in 12 months.

Table IV-16, France, Consumer Price Index, Month and 12-Month Percentage Changes of Index and Components, ∆%

May 2014	Weights	Month ∆%	12-Month ∆%
All Items	10000	0.0	0.7
Food	1653	0.3	-0.9
Manufactured Products	2653	-0.1	-0.8
Energy	850	-0.1	1.1
Petroleum Products	475	0.1	-1.5
Services	4640	0.0	1.8
Rentals, Dwellings	748	-0.6	1.5
Transport and Communications	503	-1.0	1.3

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20140612

Chart IV-15 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows headline and core consumer price inflation of France. Inflation rose during the commodity price shock of unconventional monetary policy. Risk aversion in late 2008 and beginning of 2009 caused collapse of valuation of commodity futures with resulting decline in inflation. The current downward trend of inflation originates in concentration of carry trades in equities and high-yield bonds with reversal of exposures in commodities.

Chart IV-15, France, Consumer Price Index (IPC) and Core Consumer Price Index (ISJ) 12 Months Rates of Change

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20140612

The first wave of commodity price increases in the first four months of Jan-Apr 2011 also influenced the surge of consumer price inflation in Italy shown in Table IV-17. Annual equivalent inflation in the first four months of 2011 from Jan to Apr was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in the second wave in Jun and May 2011 at 0.1 percent for annual equivalent 1.2 percent. In the third wave in Jul-Sep 2011, annual equivalent inflation increased to 2.4 percent. In the fourth wave, annual equivalent inflation in Oct-Nov 2011 jumped again at 3.0 percent. Inflation returned in the fifth wave from Dec 2011 to Jan 2012 at annual equivalent 4.3 percent. In the sixth wave, annual equivalent inflation rose to 5.7 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was 1.2 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation increased to 3.0 percent in Jul-Aug 2012. In the ninth wave, inflation collapsed to zero in Sep-Oct 2012 and was minus 0.8 percent in annual equivalent in Sep-Nov 2012. In the tenth wave, annual equivalent inflation in Dec 2012 to Aug 2013 was 2.0 percent. In the twelfth wave, annual equivalent inflation was minus 3.2 percent in Sep-Nov 2013 during reallocations of investment portfolios away from commodity futures. In the thirteenth wave, inflation returned in annual equivalent 2.4 percent in Dec 2013-Jan 2014. In the fourteenth wave, annual equivalent inflation fell at 1.2 percent in Feb 2014. In the fifteenth wave, annual equivalent inflation was 1.8 percent in Mar-Apr 2014. In the sixteen wave, annual inflation was minus 1.2 percent in May 2014. There are worldwide shocks to economies by intermittent waves of inflation originating in combination of zero interest rates and quantitative easing with alternation of risk appetite and risk aversion (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html).

Table IV-17, Italy, Consumer Price Index

	Month	12 Months
May 2014	-0.1	0.5
AE ∆% May	-1.2
Apr	0.2	0.6
Mar	0.1	0.4
AE ∆% Mar-Apr	1.8
Feb	-0.1	0.5
AE ∆% Feb	-1.2
Jan	0.2	0.7
Dec 2013	0.2	0.7
AE ∆% Dec 2013-Jan 2014	2.4
Nov	-0.3	0.7
Oct	-0.2	0.8
Sep	-0.3	0.9
AE ∆% Sep-Nov	-3.2
Aug	0.4	1.2
Jul	0.1	1.2
Jun	0.3	1.2
May	0.0	1.1
Apr	0.0	1.1
Mar	0.2	1.6
Feb	0.1	1.9
Jan	0.2	2.2
Dec 2012	0.2	2.3
AE ∆% Dec 2012-Aug 2013	2.0
Nov	-0.2	2.5
Oct	0.0	2.6
Sep	0.0	3.2
AE ∆% Sep-Nov	-0.8
Aug	0.4	3.2
Jul	0.1	3.1
AE ∆% Jul-Aug	3.0
June	0.2	3.3
May	0.0	3.2
AE ∆% May-Jun	1.2
Apr	0.5	3.3
Mar	0.5	3.3
Feb	0.4	3.3
AE ∆% Feb-Apr	5.7
Jan	0.3	3.2
Dec 2011	0.4	3.3
AE ∆% Dec-Jan	4.3
Nov	-0.1	3.3
Oct	0.6	3.4
AE ∆% Oct-Nov	3.0
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Sep	2.4
Jun	0.1	2.7
May	0.1	2.6
AE ∆% May-Jun	1.2
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9
Annual
2013		1.2
2012		3.0
2011		2.8
2010		1.5
2009		0.8
2008		3.3
2007		1.8
2006		2.1

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/125449

Consumer price inflation in Italy by segments in the estimate by ISTAT for May 2014 is provided in Table IV-18. Total consumer price inflation in May 2014 was -0.1 percent and 0.5 percent in 12 months. Inflation of goods was 0.0 percent in May 2014 and minus 0.1 percent in 12 months. Prices of durable goods increased 0.1 percent in May and decreased 0.5 percent in 12 months, as typical in most countries. Prices of energy increased 0.1 percent in May and decreased 1.0 percent in 12 months. Food prices increased 0.1 percent in May and changed 0.0 percent in 12 months. Prices of services decreased 0.3 percent in May and rose 0.9 percent in 12 months. Transport prices, also influenced by commodity prices, decreased 1.7 percent in May and increased 0.5 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion and portfolio reallocations (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html).

Table IV-18, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%

May 2014	Weights	Month ∆%	12-Month ∆%
General Index All Items	1,000,000	-0.1	0.5
I Goods	546,724	0.0	-0.1
Food	173,611	0.1	0.0
Energy	85,796	0.1	-1.0
Durable	80,901	0.1	-0.5
Nondurable	74,391	-0.2	0.7
II Services	453,276	-0.3	0.9
Housing	77,009	-0.1	3.1
Communications	18,206	-1.1	-7.3
Transport	81,924	-1.7	0.5

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/125449

Chart IV-16 of the Istituto Nazionale di Statistica shows moderation in 12-month percentage changes of the consumer price index of Italy with marginal increase followed by decline to 2.5 percent in Nov 2012, 2.3 percent in Dec 2012, 2.2 percent in Jan 2013, 1.9 percent in Feb 2013 and 1.6 percent in Mar 2013. Consumer prices increased 1.1 percent in the 12 months ending in Apr-May 2013 and 1.2 percent in Jun-Jul 2013. In Aug 2013, consumer prices increased 1.2 percent in 12 months. Consumer prices increased 0.9 percent in the 12 months ending in Sep 2013 and 0.8 percent in the 12 months ending in Oct 2013. Consumer price inflation increased 0.7 percent in the 12 months ending in Nov 2013 and 0.7 percent in the 12 months ending in Dec 2013. Consumer prices increased 0.7 percent in the 12 months ending in Jan 2014 and 0.5 percent in the 12 months ending in Feb 2014. Consumer prices increased 0.4 percent in the 12 months ending in Mar 2014 and 0.6 percent in the 12 months ending in Apr 2014. Consumer prices increased 0.5 percent in the 12 months ending in May 2014.

Chart, IV-16, Italy, Consumer Price Index, 12-Month Percentage Changes

Source: Istituto Nazionale di Statistica 

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

V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/ns/cs.aspx?id=28) to show GDP in dollars in 2012 and the growth rate of real GDP of the world and selected regional countries from 2013 to 2016. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has changed its forecast of the world economy to 3.0 percent in 2013 but accelerating to 3.6 percent in 2014, 3.9 percent in 2015 and 3.9 percent in 2016. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $34,543 billion of world output of $72,106 billion, or 47.9 percent, but are projected to grow at much lower rates than world output, 2.0 percent on average from 2013 to 2016 in contrast with 3.6 percent for the world as a whole. While the world would grow 15.2 percent in the four years from 2013 to 2016, the G7 as a whole would grow 8.5 percent. The difference in dollars of 2012 is rather high: growing by 15.2 percent would add around $11.0 trillion of output to the world economy, or roughly, two times the output of the economy of Japan of $5,938 billion but growing by 8.5 percent would add $6.1 trillion of output to the world, or about the output of Japan in 2012. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2012 of $27,080 billion, or 37.6 percent of world output. The EMDEs would grow cumulatively 21.9 percent or at the average yearly rate of 5.1 percent, contributing $5.9 trillion from 2013 to 2016 or the equivalent of somewhat less than the GDP of $8,229 billion of China in 2012. The final four countries in Table V-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output in 2012 adds to $14,340 billion, or 19.9 percent of world output, which is equivalent to 41.5 percent of the combined output of the major advanced economies of the G7.

Table V-1, IMF World Economic Outlook Database Projections of Real GDP Growth

	GDP USD 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015	Real GDP ∆% 2016
World	72,106	3.0	3.6	3.9	3.9
G7	34,543	1.4	2.2	2.3	2.3
Canada	1,821	2.0	2.3	2.4	2.4
France	2,613	0.3	1.0	1.5	1.7
DE	3,428	0.5	1.7	1.6	1.4
Italy	2,014	-1.8	0.6	1.1	1.3
Japan	5,938	1.5	1.4	1.0	0.7
UK	2,484	1.8	2.9	2.5	2.4
US	16,245	1.9	2.8	3.0	3.0
Euro Area	12,192	-0.5	1.2	1.5	1.5
DE	3,428	0.5	1.7	1.6	1.4
France	2,613	0.3	1.0	1.5	1.7
Italy	2,014	-1.8	0.6	1.1	1.3
POT	212	-1.4	1.2	1.5	1.7
Ireland	211	-0.3	1.7	2.5	2.5
Greece	249	-3.9	0.6	2.9	3.7
Spain	1,323	-1.2	0.9	1.0	1.1
EMDE	27,080	4.7	4.9	5.3	5.4
Brazil	2,248	2.3	1.8	2.7	3.0
Russia	2,004	1.3	1.3	2.3	2.5
India	1,859	4.4	5.4	6.4	6.5
China	8,229	7.7	7.5	7.3	7.0

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal

Source: IMF World Economic Outlook databank http://www.imf.org/external/ns/cs.aspx?id=28

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/ns/cs.aspx?id=28). Table V-2 is constructed with the WEO database to provide rates of unemployment from 2012 to 2016 for major countries and regions. In fact, unemployment rates for 2013 in Table V-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high in 2013 for the countries with sovereign debt difficulties in Europe: 16.3 percent for Portugal (POT), 13.1 percent for Ireland, 27.3 percent for Greece, 26.4 percent for Spain and 12.2 percent for Italy, which is lower but still high. The G7 rate of unemployment is 7.1 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.

Table V-2, IMF World Economic Outlook Database Projections of Unemployment Rate as Percent of Labor Force

	% Labor Force 2012	% Labor Force 2013	% Labor Force 2014	% Labor Force 2015	% Labor Force 2016
World	NA	NA	NA	NA	NA
G7	7.4	7.1	6.7	6.5	6.3
Canada	7.3	7.0	7.0	6.9	6.8
France	10.2	10.8	11.0	10.7	10.3
DE	5.5	5.3	5.2	5.2	5.2
Italy	10.7	12.2	12.4	11.9	11.1
Japan	4.3	4.0	3.9	3.9	3.9
UK	8.0	7.6	6.9	6.6	6.3
US	8.1	7.4	6.4	6.2	6.1
Euro Area	11.4	12.1	11.9	11.6	11.1
DE	5.5	5.3	5.2	5.2	5.2
France	10.2	10.8	11.0	10.7	10.3
Italy	10.7	12.2	12.4	11.9	11.1
POT	15.7	16.3	15.7	15.1	14.5
Ireland	14.7	13.1	11.2	10.5	10.1
Greece	24.2	27.3	26.3	24.4	21.4
Spain	25.0	26.4	25.5	24.9	24.2
EMDE	NA	NA	NA	NA	NA
Brazil	5.5	5.4	5.6	5.8	6.0
Russia	5.5	5.5	6.2	6.2	6.0
India	NA	NA	NA	NA	NA
China	4.1	4.1	4.1	4.1	4.1

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries)

Source: IMF World Economic Outlook databank http://www.imf.org/external/ns/cs.aspx?id=28

Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog from IQ2012 to IVQ2013 available now for all countries. There are preliminary estimates for all countries for IQ2014. Growth is weak throughout most of the world.

• Japan. The GDP of Japan increased 1.0 percent in IQ2012, 4.1 percent at SAAR (seasonally adjusted annual rate) and 3.2 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. Japan’s GDP fell 0.6 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of minus 2.5 percent, which is much lower than 4.1 percent in IQ2012. Growth of 3.2 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan’s GDP contracted 0.8 percent in IIIQ2012 at the SAAR of minus 3.0 percent and decreased 0.2 percent relative to a year earlier. Japan’s GDP increased 0.1 percent in IVQ2012 at the SAAR of 0.2 percent and decreased 0.3 percent relative to a year earlier. Japan grew 1.3 percent in IQ2013 at the SAAR of 5.3 percent and increased 0.1 percent relative to a year earlier. Japan’s GDP increased 0.7 percent in IIQ2013 at the SAAR of 2.9 percent and increased 1.2 percent relative to a year earlier. Japan’s GDP grew 0.3 percent in IIIQ2013 at the SAAR of 1.3 percent and increased 2.3 percent relative to a year earlier. In IVQ2013, Japan’s GDP increased 0.1 percent at the SAAR of 0.3 percent, increasing 2.5 percent relative to a year earlier. Japan’s GDP increased 1.6 percent in IQ2014 at the SAAR of 6.7 percent and increased 3.0 percent relative to a year earlier.
• China. China’s GDP grew 1.4 percent in IQ2012, annualizing to 5.7 percent, and 8.1 percent relative to a year earlier. The GDP of China grew at 2.1 percent in IIQ2012, which annualizes to 8.7 percent and 7.6 percent relative to a year earlier. China grew at 2.0 percent in IIIQ2012, which annualizes at 8.2 percent and 7.4 percent relative to a year earlier. In IVQ2012, China grew at 1.9 percent, which annualizes at 7.8 percent, and 7.9 percent in IVQ2012 relative to IVQ2011. In IQ2013, China grew at 1.5 percent, which annualizes at 6.1 percent and 7.7 percent relative to a year earlier. In IIQ2013, China grew at 1.8 percent, which annualizes at 7.4 percent and 7.5 percent relative to a year earlier. China grew at 2.3 percent in IIIQ2013, which annualizes at 9.5 percent and 7.8 percent relative to a year earlier. China grew at 1.7 percent in IVQ2013, which annualized to 7.0 percent and 7.7 percent relative to a year earlier. China’s GDP grew 1.4 percent in IQ2014, which annualizes to 5.7 percent, and 7.4 percent relative to a year earlier. There is decennial change in leadership in China (http://www.xinhuanet.com/english/special/18cpcnc/index.htm). Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2014.
• Euro Area. GDP fell 0.1 percent in the euro area in IQ2012 and decreased 0.2 in IQ2012 relative to a year earlier. Euro area GDP contracted 0.3 percent IIQ2012 and fell 0.5 percent relative to a year earlier. In IIIQ2012, euro area GDP fell 0.2 percent and declined 0.7 percent relative to a year earlier. In IVQ2012, euro area GDP fell 0.5 percent relative to the prior quarter and fell 1.0 percent relative to a year earlier. In IQ2013, the GDP of the euro area fell 0.2 percent and decreased 1.1 percent relative to a year earlier. The GDP of the euro area increased 0.3 percent in IIQ2013 and fell 0.6 percent relative to a year earlier. In IIIQ2013, euro area GDP increased 0.1 percent and fell 0.3 percent relative to a year earlier. The GDP of the euro area increased 0.3 percent in IVQ2013 and increased 0.5 percent relative to a year earlier. In IQ2014, the GDP of the euro area increased 0.2 percent and 0.9 percent relative to a year earlier.
• Germany. The GDP of Germany increased 0.7 percent in IQ2012 and 1.8 percent relative to a year earlier. In IIQ2012, Germany’s GDP decreased 0.1 percent and increased 0.6 percent relative to a year earlier but 1.1 percent relative to a year earlier when adjusted for calendar (CA) effects. In IIIQ2012, Germany’s GDP increased 0.2 percent and 0.4 percent relative to a year earlier. Germany’s GDP contracted 0.5 percent in IVQ2012 and changed 0.0 percent relative to a year earlier. In IQ2013, Germany’s GDP changed 0.0 percent and fell 1.6 percent relative to a year earlier. In IIQ2013, Germany’s GDP increased 0.7 percent and 0.9 percent relative to a year earlier. The GDP of Germany increased 0.3 percent in IIIQ2013 and 1.1 percent relative to a year earlier. In IVQ2013, Germany’s GDP increased 0.4 percent and 1.3 percent relative to a year earlier. The GDP of Germany increased 0.8 percent in IQ2014 and 2.5 percent relative to a year earlier.
• United States. Growth of US GDP in IQ2012 was 0.9 percent, at SAAR of 3.7 percent and higher by 3.3 percent relative to IQ2011. US GDP increased 0.3 percent in IIQ2012, 1.2 percent at SAAR and 2.8 percent relative to a year earlier. In IIIQ2012, US GDP grew 0.7 percent, 2.8 percent at SAAR and 3.1 percent relative to IIIQ2011. In IVQ2012, US GDP grew 0.0 percent, 0.1 percent at SAAR and 2.0 percent relative to IVQ2011. In IQ2013, US GDP grew at 1.1 percent SAAR, 0.3 percent relative to the prior quarter and 1.3 percent relative to the same quarter in 2013. In IIQ2013, US GDP grew at 2.5 percent in SAAR, 0.6 percent relative to the prior quarter and 1.6 percent relative to IIQ2012. US GDP grew at 4.1 percent in SAAR in IIIQ2013, 1.0 percent relative to the prior quarter and 2.0 percent relative to the same quarter a year earlier (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html) with weak hiring (http://cmpassocregulationblog.blogspot.com/2014/05/rules-discretionary-authorities-and.html). In IVQ2013, US GDP grew 0.7 percent at 2.6 percent SAAR and 2.6 percent relative to a year earlier. In IQ2014, US GDP decreased 0.2 percent, 2.0 percent relative to a year earlier and -1.0 percent at SAAR.
• United Kingdom. In IQ2012, UK GDP changed 0.0 percent, increasing 0.6 percent relative to a year earlier. UK GDP fell 0.4 percent in IIQ2012 and increased 0.1 percent relative to a year earlier. UK GDP increased 0.8 percent in IIIQ2012 and increased 0.3 percent relative to a year earlier. UK GDP fell 0.2 percent in IVQ2012 relative to IIIQ2012 and increased 0.2 percent relative to a year earlier. UK GDP increased 0.4 percent in IQ2013 and 0.5 percent relative to a year earlier. UK GDP increased 0.8 percent in IIQ2013 and 1.7 percent relative to a year earlier. In IIIQ2013, UK GDP increased 0.8 percent and 1.8 percent relative to a year earlier. UK GDP increased 0.7 percent in IVQ2013 and 2.7 percent relative to a year earlier. In IQ2014, UK GDP increased 0.8 percent and 3.1 percent relative to a year earlier.
• Italy. Italy has experienced decline of GDP in nine consecutive quarters from IIIQ2011 to IIIQ2013. Italy’s GDP fell 1.1 percent in IQ2012 and declined 1.7 percent relative to IQ2011. Italy’s GDP fell 0.5 percent in IIQ2012 and declined 2.4 percent relative to a year earlier. In IIIQ2012, Italy’s GDP fell 0.4 percent and declined 2.6 percent relative to a year earlier. The GDP of Italy contracted 0.9 percent in IVQ2012 and fell 2.8 percent relative to a year earlier. In IQ2013, Italy’s GDP contracted 0.6 percent and fell 2.4 percent relative to a year earlier. Italy’s GDP fell 0.3 percent in IIQ2013 and 2.2 percent relative to a year earlier. The GDP of Italy decreased 0.1 percent in IIIQ2013 and declined 1.9 percent relative to a year earlier. Italy’s GDP increased 0.1 percent in IVQ2013 and decreased 0.9 percent relative to a year earlier. In IQ2014, Italy’s GDP decreased 0.1 percent and fell 0.5 percent relative to a year earlier.
• France. France’s GDP increased 0.2 percent in IQ2012 and increased 0.6 percent relative to a year earlier. France’s GDP decreased 0.3 percent in IIQ2012 and increased 0.4 percent relative to a year earlier. In IIIQ2012, France’s GDP increased 0.3 percent and increased 0.5 percent relative to a year earlier. France’s GDP fell 0.3 percent in IVQ2012 and changed 0.0 percent relative to a year earlier. In IQ2013, France GDP changed 0.0 percent and declined 0.2 percent relative to a year earlier. The GDP of France increased 0.6 percent in IIQ2013 and 0.7 percent relative to a year earlier. France’s GDP decreased 0.1 percent in IIIQ2013 and increased 0.3 percent relative to a year earlier. The GDP of France increased 0.2 percent in IVQ2013 and 0.8 percent relative to a year earlier. In IVQ2014, France’s GDP changed 0.0 percent and increased 0.8 percent relative to a year earlier.

Table V-3, Percentage Changes of GDP Quarter on Prior Quarter and on Same Quarter Year Earlier, ∆%

	IQ2012/IVQ2011	IQ2012/IQ2011
United States	QOQ: 0.9        SAAR: 3.7	3.3
Japan	QOQ: 1.0 SAAR: 4.1	3.2
China	1.4	8.1
Euro Area	-0.1	-0.2
Germany	0.7	1.8
France	0.2	0.6
Italy	-1.1	-1.7
United Kingdom	0.0	0.6
	IIQ2012/IQ2012	IIQ2012/IIQ2011
United States	QOQ: 0.3         SAAR: 1.2	2.8
Japan	QOQ: -0.6 SAAR: -2.5	3.2
China	2.1	7.6
Euro Area	-0.3	-0.5
Germany	-0.1	0.6 1.1 CA
France	-0.3	0.4
Italy	-0.5	-2.4
United Kingdom	-0.4	0.1
	IIIQ2012/ IIQ2012	IIIQ2012/ IIIQ2011
United States	QOQ: 0.7  SAAR: 2.8	3.1
Japan	QOQ: –0.8 SAAR: –3.0	-0.2
China	2.0	7.4
Euro Area	-0.2	-0.7
Germany	0.2	0.4
France	0.3	0.5
Italy	-0.4	-2.6
United Kingdom	0.8	0.3
	IVQ2012/IIIQ2012	IVQ2012/IVQ2011
United States	QOQ: 0.0 SAAR: 0.1	2.0
Japan	QOQ: 0.1 SAAR: 0.2	-0.3
China	1.9	7.9
Euro Area	-0.5	-1.0
Germany	-0.5	0.0
France	-0.3	0.0
Italy	-0.9	-2.8
United Kingdom	-0.2	0.2
	IQ2013/IVQ2012	IQ2013/IQ2012
United States	QOQ: 0.3 SAAR: 1.1	1.3
Japan	QOQ: 1.3 SAAR: 5.3	0.1
China	1.5	7.7
Euro Area	-0.2	-1.1
Germany	0.0	-1.6
France	0.0	-0.2
Italy	-0.6	-2.4
UK	0.4	0.5
	IIQ2013/IQ2013	IIQ2013/IIQ2012
United States	QOQ: 0.6 SAAR: 2.5	1.6
Japan	QOQ: 0.7 SAAR: 2.9	1.2
China	1.8	7.5
Euro Area	0.3	-0.6
Germany	0.7	0.9
France	0.6	0.7
Italy	-0.3	-2.2
UK	0.8	1.7
	IIIQ2013/IIQ2013	III/Q2013/  IIIQ2012
USA	QOQ: 1.0 SAAR: 4.1	2.0
Japan	QOQ: 0.3 SAAR: 1.3	2.3
China	2.3	7.8
Euro Area	0.1	-0.3
Germany	0.3	1.1
France	-0.1	0.3
Italy	-0.1	-1.9
UK	0.8	1.8
	IVQ2013/IIIQ2013	IVQ2013/IVQ2012
USA	QOQ: 0.7 SAAR: 2.6	2.6
Japan	QOQ: 0.1 SAAR: 0.3	2.5
China	1.7	7.7
Euro Area	0.3	0.5
Germany	0.4	1.3
France	0.2	0.8
Italy	0.1	-0.9
UK	0.7	2.7
	IQ2014/IVQ2013	IQ2014/IQ2013
USA	QOQ -0.2 SAAR -1.0	2.0
Japan	QOQ: 1.6 SAAR: 6.7	3.0
China	1.4	7.4
Euro Area	0.2	0.9
Germany	0.8	2.5
France	0.0	0.8
Italy	-0.1	-0.5
UK	0.8	3.1

QOQ: Quarter relative to prior quarter; SAAR: seasonally adjusted annual rate

Source: Country Statistical Agencies http://www.census.gov/aboutus/stat_int.html

Table V-4 provides two types of data: growth of exports and imports in the latest available months and in the past 12 months; and contributions of net trade (exports less imports) to growth of real GDP.

• Japan. Japan provides the most worrisome data (http://cmpassocregulationblog.blogspot.com/2014/05/united-states-commercial-banks-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html and earlier http://cmpassocregulationblog.blogspot.com/2014/02/mediocre-cyclical-united-states.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/11/risks-of-zero-interest-rates-world.html http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-world-inflation.html http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations_8763.html http://cmpass ocregulationblog.blogspot.com/2013/08/interest-rate-risks-duration-dumping.html and earlier http://cmpassocregulationblog.blogspot.com/2013/07/duration-dumping-steepening-yield-curve.html and earlier http://cmpassocregulationblog.blogspot.com/2013/06/paring-quantitative-easing-policy-and_4699.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/05/united-states-commercial-banks-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2013/04/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2013/03/united-states-commercial-banks-assets.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real_25.html and for GDP http://cmpassocregulationblog.blogspot.com/2013/09/recovery-without-hiring-ten-million.html and earlier http://cmpassocregulationblog.blogspot.com/2013/08/duration-dumping-and-peaking-valuations.html and earlier http://cmpassocreulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html). In Apr 2014, Japan’s exports grew 5.1 percent in 12 months while imports increased 3.4 percent. The second part of Table V-4 shows that net trade deducted 1.3 percentage points from Japan’s growth of GDP in IIQ2012, deducted 2.2 percentage points from GDP growth in IIIQ2012 and deducted 0.5 percentage points from GDP growth in IVQ2012. Net trade added 0.4 percentage points to GDP growth in IQ2012, 1.7 percentage points in IQ2013 and 0.5 percentage points in IIQ2013. In IIIQ2013, net trade deducted 2.0 percentage points from GDP growth in Japan. Net trade ducted 2.2 percentage points from GDP growth in Japan in IVQ2013. Net trade deducted 1.1 percentage point from GDP growth of Japan in IQ2014.
• China. In May 2014, China exports increased 7.0 percent relative to a year earlier and imports decreased 1.6 percent.
• Germany. Germany’s exports increased 3.0 percent in the month of Apr 2014 and decreased 0.2 percent in the 12 months ending in Apr 2014. Germany’s imports decreased 0.2 percent in the month of Apr and increased 0.6 percent in the 12 months ending in Apr. Net trade contributed 0.8 percentage points to growth of GDP in IQ2012, contributed 0.3 percentage points in IIQ2012, contributed 0.3 percentage points in IIIQ2012, deducted 0.5 percentage points in IVQ2012, deducted 0.3 percentage points in IQ2013 and added 0.1 percentage points in IIQ2013. Net traded deducted 0.5 percentage points from Germany’s GDP growth in IIIQ2013 and added 0.4 percentage points to GDP growth in IVQ2013. Net trade added 0.1 percentage points to GDP growth in IQ2014.
• United Kingdom. Net trade deducted 0.7 percentage points from UK value added in IQ2012, deducted 0.8 percentage points in IIQ2012, added 0.9 percentage points in IIIQ2012 and subtracted 0.4 percentage points in IVQ2012. In IQ2013, net trade added 0.5 percentage points to UK’s growth of value added and contributed 0.0 percentage points in IIQ2013. In IIIQ2013, net trade deducted 1.1 percentage points from UK growth. Net trade contributed 1.0 percentage points to UK value added in IVQ2013. Net trade contributed 0.0 percentage points to UK value added in IQ2014.
• France. France’s exports decreased 0.7 percent in Apr 2014 while imports decreased 2.9 percent. Net traded added 0.1 percentage points to France’s GDP in IIIQ2012 and 0.1 percentage points in IVQ2012. Net trade deducted 0.1 percentage points from France’s GDP growth in IQ2013 and added 0.2 percentage points in IIQ2013, deducting 0.5 percentage points in IIIQ2013. Net trade added 0.3 percentage points to France’s GDP in IVQ2013 and deducted 0.2 percentage points in IQ2014.
• United States. US exports decreased 0.2 percent in Apr 2014 and goods exports increased 2.8 percent in Jan-Apr 2014 relative to a year earlier. Net trade deducted 0.03 percentage points from GDP growth in IIIQ2012 and added 0.68 percentage points in IVQ2012. Net trade deducted 0.28 percentage points from US GDP growth in IQ2013 and deducted 0.07 percentage points in IIQ2013. Net traded added 0.14 percentage points to US GDP growth in IIIQ2013. Net trade added 0.99 percentage points to US GDP growth in IVQ2013. Net trade deducted 0.95 percentage points from US GDP growth in IQ2014. 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 V-4, Growth of Trade and Contributions of Net Trade to GDP Growth, ∆% and % Points

	Exports M ∆%	Exports 12 M ∆%	Imports M ∆%	Imports 12 M ∆%
USA	-0.2 Apr	2.8 Jan-Apr	1.2 Apr	2.8 Jan-Apr
Japan		Apr 2014 5.1 Mar 2014 1.8 Feb 2014 9.5 Jan 2014 9.5 Dec 2013 15.3 Nov 2013 18.4 Oct 2013 18.6 Sep 2013 11.5 Aug 2013 14.7 Jul 2013 12.2 Jun 2013 7.4 May 2013 10.1 Apr 2013 3.8 Mar 2013 1.1 Feb 2013 -2.9 Jan 2013 6.4 Dec -5.8 Nov -4.1 Oct -6.5 Sep -10.3 Aug -5.8 Jul -8.1		Apr 2013 3.4 Mar 2014 18.1 Feb 2014 9.0 Jan 2014 25.0 Dec 2013 24.7 Nov 2013 21.1 Oct 2013 26.1 Sep 2013 16.5 Aug 2013 16.0 Jul 2013 19.6 Jun 2013 11.8 May 2013 10.0 Apr 2013 9.4 Mar 2013 5.5 Feb 2013 7.3 Jan 2013 7.3 Dec 1.9 Nov 0.8 Oct -1.6 Sep 4.1 Aug -5.4 Jul 2.1
China		2014 7.0 May 0.9 Apr -6.6 Mar -18.1 Feb 10.6 Jan 2013 4.3 Dec 12.7 Nov 5.6 Oct -0.3 Sep 7.2 Aug 5.1 Jul -3.1 Jun 1.0 May 14.7 Apr 10.0 Mar 21.8 Feb 25.0 Jan		2014 -1.6 May -0.8 Apr -11.3 Mar 10.1 Feb 10.0 Jan 2013 8.3 Dec 5.3 Nov 7.6 Oct 7.4 Sep 7.0 Aug 10.9 Jul -0.7 Jun -0.3 May 16.8 Apr 14.1 Mar -15.2 Feb 28.8 Jan
Euro Area	-1.5 12-M Apr	0.5 Jan-Apr	-2.8 12-M Apr	-0.6 Jan-Apr
Germany	3.0 Apr CSA	-0.2 Apr	0.1 Apr CSA	0.6 Apr
France Mar	-0.7	-6.4	-2.9	-5.5
Italy Mar	-0.8	1.2	-1.0	-1.3
UK	-2.9 Apr	-2.9 Feb-Apr 14 /Feb-Apr 13	0.6 Apr	-3.7 Feb-Apr 14 13/Feb-Apr 13
Net Trade % Points GDP Growth	% Points
USA	IQ2014 -0.95 IVQ2013 0.99 IIIQ2013 0.14 IIQ2013 -0.07 IQ2013 -0.28 IVQ2012 +0.68 IIIQ2012 -0.03 IIQ2012 +0.10 IQ2012 +0.44
Japan	0.4 IQ2012 -1.3 IIQ2012 -2.2 IIIQ2012 -0.5 IVQ2012 1.7 IQ2013 0.5 IIQ2013 -2.0 IIIQ2013 -2.2 IVQ2013 -1.1 IQ2014
Germany	IQ2012 0.8 IIQ2012 0.4 IIIQ2012 0.3 IVQ2012 -0.5 IQ2013 -0.3 IIQ2013 0.1 IIIQ2013 -0.5 IVQ2013 0.4 IQ2014 0.1
France	0.1 IIIQ2012 0.1 IVQ2012 -0.1 IQ2013 0.2 IIQ2013 -0.5 IIIQ2013 0.3 IVQ2013 -0.2 IQ2014
UK	-0.7 IQ2012 -0.8 IIQ2012 +0.9 IIIQ2012 -0.4 IVQ2012 0.5 IQ2013 0.0 IIQ2013 -1.1 IIIQ2013 1.0 IVQ2013 0.0 IQ2014

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

The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table V-5 for Apr 2014. The share of Asia in Japan’s trade is more than one-half for 53.8 percent of exports and 45.2 percent of imports. Within Asia, exports to China are 18.0 percent of total exports and imports from China 22.6 percent of total imports. While exports to China increased 9.8 percent in the 12 months ending in Apr 2014, imports from China increased 7.8 percent. The largest export market for Japan in Apr 2014 is the US with share of 18.5 percent of total exports, which is close to that of China, and share of imports from the US of 8.4 percent in total imports. Japan’s exports to the US grew 1.9 percent in the 12 months ending in Apr 2014 and imports from the US grew 6.9 percent. Western Europe has share of 10.7 percent in Japan’s exports and of 10.3 percent in imports. Rates of growth of exports of Japan in Apr 2014 are 1.9 percent for exports to the US, minus 5.9 percent for exports to Brazil and 17.6 percent for exports to Germany. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity. Growth rates of imports in the 12 months ending in Apr 2014 are positive for all trading partners except for declines from Canada and the Middle East. Imports from Asia increased 7.6 percent in the 12 months ending in Apr 2014 while imports from China increased 7.8 percent. Data are in millions of yen, which may have effects of recent depreciation of the yen relative to the United States dollar (USD).

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

Apr 2014	Exports Millions Yen	12 months ∆%	Imports Millions Yen	12 months ∆%
Total	6,069,221	5.1	6,878,077	3.4
Asia	3,263,128	3.6	3,109,642	7.6
China	1,095,389	9.8	1,556,390	7.8
USA	1,122,903	1.9	575,427	6.9
Canada	76,087	12.0	92,453	-18.4
Brazil	44,568	-5.9	73,187	5.0
Mexico	98,272	19.7	37,125	9.5
Western Europe	649,304	14.4	710,007	10.1
Germany	169,365	17.6	189,736	7.8
France	54,689	-7.3	96,321	1.0
UK	91,072	10.2	66,436	30.4
Middle East	246,455	25.6	1,249,425	-6.9
Australia	132,306	-10.0	426,071	7.4

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

World trade projections of the IMF are in Table V-6. There is increasing growth of the volume of world trade of goods and services from 3.0 percent in 2013 to 5.3 percent in 2015 and 5.7 percent on average from 2016 to 2019. World trade would be slower for advanced economies while emerging and developing economies (EMDE) experience faster growth. World economic slowdown would be more challenging with lower growth of world trade.

Table V-6, IMF, Projections of World Trade, USD Billions, USD/Barrel and Annual ∆%

	2013	2014	2015	Average ∆% 2016-2019
World Trade Volume (Goods and Services)	3.0	4.3	5.3	5.7
Exports Goods & Services	3.1	4.5	5.3	5.7
Imports Goods & Services	2.9	4.2	5.2	5.7
World Trade Value of Exports Goods & Services USD Billion	23,083	23,990	25,123	Average ∆% 2006-2015 20,390
Value of Exports of Goods USD Billion	18,591	19,281	20,132	Average ∆% 2006-2015 16,396
Average Oil Price USD/Barrel	104.07	104.17	97.92	Average ∆% 2006-2015 88.84
Average Annual ∆% Export Unit Value of Manufactures	-1.1	-0.3	-0.4	Average ∆% 2006-2015 1.4
Exports of Goods & Services	2013	2014	2015	Average ∆% 2016-2019
Euro Area	1.4	3.4	4.2	4.7
EMDE	4.4	5.0	6.2	6.2
G7	1.4	3.9	4.5	4.9
Imports Goods & Services
Euro Area	0.3	2.8	3.5	4.7
EMDE	5.6	5.2	6.3	6.4
G7	1.1	3.2	4.2	4.9
Terms of Trade of Goods & Services
Euro Area	-0.3	-0.2	-0.7	-0.1
EMDE	0.7	-0.4	-0.6	-0.4
G7	0.7	-0.044	0.3	0.0
Terms of Trade of Goods
Euro Area	0.8	-0.044	0.1	-0.2
EMDE	-0.6	-0.9	-0.9	-0.8
G7	-0.1	-0.3	-0.9	-0.7

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

Source: International Monetary Fund World Economic Outlook databank

http://www.imf.org/external/ns/cs.aspx?id=28

The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, increased to 54.3 in May from 52.8 in Apr, indicating expansion at faster rate (http://www.markiteconomics.com/Survey/PressRelease.mvc/e4a3e6a323e44c3f9d5a30c1d2c99a59). This index has remained above the contraction territory of 50.0 during 58 consecutive months. The employment index increased from 51.2 in Apr to 51.7 in May with input prices rising at faster rate, new orders increasing at faster rate and output increasing at faster rate (http://www.markiteconomics.com/Survey/PressRelease.mvc/e4a3e6a323e44c3f9d5a30c1d2c99a59). David Hensley, Director of Global Economics Coordination at JP Morgan finds possible higher growth in the second half of the year (http://www.markiteconomics.com/Survey/PressRelease.mvc/e4a3e6a323e44c3f9d5a30c1d2c99a59). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, increased at 52.2 in May from 51.9 in Apr (http://www.markiteconomics.com/Survey/PressRelease.mvc/fe712f3189ef4f73910514ced33c78d1). New export orders expanded for the eleventh consecutive month (http://www.markiteconomics.com/Survey/PressRelease.mvc/fe712f3189ef4f73910514ced33c78d1). David Hensley, Director of Global Economic Coordination at JP Morgan finds improvement of the index with possibly higher growth in the second half of 2014 (http://www.markiteconomics.com/Survey/PressRelease.mvc/fe712f3189ef4f73910514ced33c78d1). The HSBC Brazil Composite Output Index, compiled by Markit, decreased from 49.9 in Apr to 49.8 in May, indicating unchanged activity of Brazil’s private sector (http://www.markiteconomics.com/Survey/PressRelease.mvc/1b1eac66368b4c93b0488de12835096a). The HSBC Brazil Services Business Activity index, compiled by Markit, increased from 50.4 in Apr to 50.6 in May, indicating expanding services activity (http://www.markiteconomics.com/Survey/PressRelease.mvc/1b1eac66368b4c93b0488de12835096a). André Loes, Chief Economist, Brazil, at HSBC, finds risks of slowing economic activity (http://www.markiteconomics.com/Survey/PressRelease.mvc/1b1eac66368b4c93b0488de12835096a). The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) decreased marginally from 49.3 in Apr to 48.8 in May, indicating moderate deterioration in manufacturing (http://www.markiteconomics.com/Survey/PressRelease.mvc/3b3a43fb381f4a8bb8f3f6b86953a877). André Loes, Chief Economist, Brazil at HSBC, finds weakening industrial activity in Brazil (http://www.markiteconomics.com/Survey/PressRelease.mvc/3b3a43fb381f4a8bb8f3f6b86953a877).

VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted increased to 56.2 in May from 55.4 in Apr (http://www.markiteconomics.com/Survey/PressRelease.mvc/1132ab4261d34b5a9194a1c5aed2ddad). New export orders registered 51.5 in May, decreasing from 51.7 in Apr, indicating expansion at a slower rate. Chris Williamson, Chief Economist at Markit, finds that manufacturing hiring is growing with creation of about 15,000 to 20,000 jobs per month and output increasing at the fastest pace in more than three years (http://www.markiteconomics.com/Survey/PressRelease.mvc/1132ab4261d34b5a9194a1c5aed2ddad). The Markit Flash US Services PMI™ Business Activity Index increased from 55.0 in Apr to 58.4 in May (http://www.markiteconomics.com/Survey/PressRelease.mvc/772f9f410a674dc28ef47cfce6cc9ab1). Tim Moore, Senior Economist at Markit, finds that the surveys are consistent with stronger growth in IIQ2014 (http://www.markiteconomics.com/Survey/PressRelease.mvc/772f9f410a674dc28ef47cfce6cc9ab1). The Markit US Composite PMI™ Output Index of Manufacturing and Services increased to 58.4 in May from 55.6 in Apr (http://www.markiteconomics.com/Survey/PressRelease.mvc/79ce2aae785c47a4b99b1233d757b169). The Markit US Services PMI™ Business Activity Index increased from 55.0 in Apr to 58.1 in May (http://www.markiteconomics.com/Survey/PressRelease.mvc/79ce2aae785c47a4b99b1233d757b169). Chris Williamson, Chief Economist at Markit, finds the indexes consistent with US growth at annual rate of 3.0 percent in IIQ2014 (http://www.markiteconomics.com/Survey/PressRelease.mvc/79ce2aae785c47a4b99b1233d757b169). The Markit US Manufacturing Purchasing Managers’ Index^™ (PMI^™) increased to 56.4 in May from 55.4 in Apr, which indicates expansion at faster rate (http://www.markiteconomics.com/Survey/PressRelease.mvc/4de925caab7141c9ab46942a017cba27). The index of new exports orders increased from 51.7 in Apr to 52.2 in May while total new orders decreased from 58.9 in Apr to 58.8 in May. Chris Williamson, Chief Economist at Markit, finds that the index suggests output growth at the fastest pace since the Global Recession (http://www.markiteconomics.com/Survey/PressRelease.mvc/4de925caab7141c9ab46942a017cba27). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business^® increased 0.5 percentage points from 54.9 in Apr to 55.4 in May, which indicates growth at a faster rate (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders increased 1.8 percentage points from 55.1 in Apr to 56.9 in May. The index of exports decreased 0.5 percentage point from 57.0 in Apr to 56.5 in May, growing at a slower rate. The Non-Manufacturing ISM Report on Business^® PMI increased 1.1 percentage points from 55.2 in Apr to 56.3 in May, indicating growth of business activity/production during 58 consecutive months, while the index of new orders increased 2.3 percentage points from 58.2 in Apr to 60.5 in May (http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943). Table USA provides the country economic indicators for the US.

Table USA, US Economic Indicators

Consumer Price Index	Apr 12 months NSA ∆%: 2.0; ex food and energy ∆%: 1.8 Apr month SA ∆%: 0.3; ex food and energy ∆%: 0.2 Blog 5/18/14
Producer Price Index	Finished Goods Apr 12-month NSA ∆%: 3.1; ex food and energy ∆% 1.7 Apr month SA ∆% = 0.7; ex food and energy ∆%: 0.3 Final Demand Apr 12-month NSA ∆%: 2.1; ex food and energy ∆% 1.9 Apr month SA ∆% = 0.6; ex food and energy ∆%: 0.5 Blog 5/18/14
PCE Inflation	Apr 12-month NSA ∆%: headline 1.6; ex food and energy ∆% 1.4 Blog 6/1/14
Employment Situation	Household Survey: May Unemployment Rate SA 6.3% Blog calculation People in Job Stress May: 26.6 million NSA, 16.2% of Labor Force Establishment Survey: May Nonfarm Jobs +217,000; Private +216,000 jobs created  May 12-month Average Hourly Earnings Inflation Adjusted ∆%: -0.1 Blog 6/8/14
Nonfarm Hiring	Nonfarm Hiring fell from 63.3 million in 2006 to 54.2 million in 2013 or by 9.1 million Private-Sector Hiring Apr 2014 5.197 million lower by 0.649 million than 5.846 million in Apr 2005 Blog 6/15/14
GDP Growth	BEA Revised National Income Accounts IQ2012/IQ2011 ∆%: 3.3 IIQ2012/IIQ2011 2.8 IIIQ2012/IIIQ2011 3.1 IVQ2012/IVQ2011 2.0 IQ2013/IQ2012 1.3 IIQ2013/IIQ2012 1.6 IIIQ2013/IIIQ2012 2.0 IVQ2013/IVQ2012 2.6 IQ2014/IQ2013 2.0 IQ2012 SAAR 3.7 IIQ2012 SAAR 1.2 IIIQ2012 SAAR 2.8 IVQ2012 SAAR 0.1 IQ2013 SAAR 1.1 IIQ2013 SAAR 2.5 IIIQ2013 SAAR 4.1 IVQ2013 SAAR 2.6 IQ2014 SAAR -1.0 Blog 6/1/14
Real Private Fixed Investment	SAAR IQ2014 minus 2.3 ∆% IVQ2007 to IQ2014: minus 3.5% Blog 6/1/14
Corporate Profits	IQ2014 SAAR: Corporate Profits -9.8; Undistributed Profits -19.0 Blog 6/1/14
Personal Income and Consumption	Apr month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.2 Real Personal Consumption Expenditures (RPCE): minus 0.3 12-month Apr NSA ∆%: RDPI: 2.0; RPCE ∆%: 2.7 Blog 6/1/14
Quarterly Services Report	IQ14/IQ13 NSA ∆%: Information 5.8 Financial & Insurance 5.3 Blog 6/15/14
Employment Cost Index	Compensation Private IQ2014 SA ∆%: 0.3 Mar 12 months ∆%: 1.7 Blog 5/4/14
Industrial Production	Apr month SA ∆%: -0.6 Apr 12 months SA ∆%: 3.5 Manufacturing Apr SA ∆% minus 0.4 Apr 12 months SA ∆% 2.9, NSA 2.5 Capacity Utilization: 78.6 Blog 5/18/14
Productivity and Costs	Nonfarm Business Productivity IQ2014∆% SAAE -3.2; IQ2014/IQ2013 ∆% 1.0; Unit Labor Costs SAAE IQ2014 ∆% 5.7; IQ2014/IQ2013 ∆%: 1.2 Blog 6/8/2014
New York Fed Manufacturing Index	General Business Conditions From Apr 1.29 to May 19.01 New Orders: From Apr minus 2.77 to May 10.44 Blog 5/18/14
Philadelphia Fed Business Outlook Index	General Index from Apr 16.6 to May 15.4 New Orders from Apr 14.8 to May 10.5 Blog 5/18/14
Manufacturing Shipments and Orders	New Orders SA Apr ∆% 0.7 Ex Transport 0.5 Jan-Apr NSA New Orders ∆% 2.8 Ex transport 1.9 Blog 6/8/14
Durable Goods	Apr New Orders SA ∆%: 0.8; ex transport ∆%: 0.1 Jan-Apr 14/Jan-Apr 13 New Orders NSA ∆%: 4.9; ex transport ∆% 3.3 Blog 6/1/14
Sales of New Motor Vehicles	Jan-May 2014 6,742,948; Jan-May 2013 6,424,707. May 14 SAAR 16.77 million, Apr 14 SAAR 16.04 million, May 2013 SAAR 15.48 million Blog 6/8/14
Sales of Merchant Wholesalers	Jan-Apr 2014/Jan-Apr 2013 NSA ∆%: Total 5.2; Durable Goods: 4.0; Nondurable Goods: 6.2 Blog 6/15/14
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Apr 14 12-M NSA ∆%: Sales Total Business 5.6; Manufacturers 3.8 Retailers 5.7; Merchant Wholesalers 7.6 Blog 6/15/14
Sales for Retail and Food Services	Jan-May 2014/Jan-May 2013 ∆%: Retail and Food Services 3.4; Retail ∆% 3.3 Blog 6/15/14
Value of Construction Put in Place	Apr SAAR month SA ∆%: 0.2 Apr 12-month NSA: 8.1 Blog 6/8/14
Case-Shiller Home Prices	Mar 2014/Mar 2013 ∆% NSA: 10 Cities 12.6; 20 Cities: 12.4 ∆% Mar SA: 10 Cities 1.1 ; 20 Cities: 1.2 Blog 6/1/14
FHFA House Price Index Purchases Only	Mar SA ∆% 0.7; 12 month NSA ∆%: 6.5 Blog 6/1/14
New House Sales	Apr 2014 month SAAR ∆%: 6.4 Jan-Apr 2014/Jan-Apr 2013 NSA ∆%: -2.6 Blog 5/25/14
Housing Starts and Permits	Apr Starts month SA ∆% 13.2; Permits ∆%: 8.0 Jan-Apr 2014/Jan-Apr 2013 NSA ∆% Starts 5.7; Permits  ∆% 7.0 Blog 5/25/14
Trade Balance	Balance Apr SA -$47,236 million versus Mar -$44,176 million Exports Apr SA ∆%: -0.2 Imports Apr SA ∆%: 1.2 Goods Exports Jan-Apr 2014/Jan-Apr 2013 NSA ∆%: 2.8 Goods Imports Jan-Apr 2014/Jan-Apr 2012 NSA ∆%: 2.8 Blog 6/8/14
Export and Import Prices	May 12-month NSA ∆%: Imports 0.4; Exports 0.5 Blog 6/15/14
Consumer Credit	Apr ∆% annual rate: Total 10.2; Revolving 12.3; Nonrevolving 9.5 Blog 6/15/14
Net Foreign Purchases of Long-term Treasury Securities	Mar Net Foreign Purchases of Long-term US Securities: $4.0 billion Major Holders of Treasury Securities: China $1272 billion; Japan $1200 billion; Total Foreign US Treasury Holdings Mar $5949 billion Blog 5/18/14
Treasury Budget	Fiscal Year 2014/2013 ∆% May: Receipts 7.5; Outlays minus 2.3; Individual Income Taxes 3.3 Deficit Fiscal Year 2011 $1,300 billion Deficit Fiscal Year 2012 $1,087 billion Deficit Fiscal Year 2013 $680 billion Blog 6/15/2014
CBO Budget and Economic Outlook	2012 Deficit $1087 B 6.8% GDP Debt 11,281 B 70.1% GDP 2013 Deficit $680 B, 4.1% GDP Debt 11,982 B 72.1% GDP Blog 8/26/12 11/18/12 2/10/13 9/22/13 2/16/14
Commercial Banks Assets and Liabilities	Apr 2014 SAAR ∆%: Securities 3.7 Loans 8.3 Cash Assets 2.2 Deposits 9.3 Blog 5/25/14
Flow of Funds	IVQ2013 ∆ since 2007 Assets +$12,272.6 BN Nonfinancial -$729.2 BN Real estate -$1380.6 BN Financial +13,001.7 BN Net Worth +$12,910.9 BN Blog 3/16/14
Current Account Balance of Payments	IVQ2013 -83,739 MM %GDP 2.2 Blog 3/23/14

Links to blog comments in Table USA:

6/8/14 http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html

6/1/14 http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html

5/25/14 http://cmpassocregulationblog.blogspot.com/2014/05/united-states-commercial-banks-assets.html

5/18/14 http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html

5/11/14 5/4/2014 http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html

3/23/14 http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html

3/16/2014 http://cmpassocregulationblog.blogspot.com/2014/03/global-financial-risks-recovery-without.html

2/16/14 http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html

9/22/13 http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html

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

Sales of manufacturers increased 0.3 percent in Apr 2014 after increasing 0.4 percent in Mar and increased 3.8 percent in the 12 months ending in Apr, as shown in Table VA-1. Retailers’ sales increased 0.6 percent in Apr 2014 after increasing 1.5 percent in Mar and increased 5.7 percent in 12 months ending in Apr 2014. Sales of merchant wholesalers increased 1.3 percent in Apr, increased 1.6 percent in Mar and increased 7.6 percent in 12 months ending in Apr. Sales of total business increased 0.7 percent in Apr after decreasing 1.1 percent in Mar and increased 5.6 percent in 12 months.

Table VA-1, US, Percentage Changes for Sales of Manufacturers, Retailers and Merchant Wholesalers

	Apr 14/ Mar 14 ∆% SA	Apr 2014 Millions of Dollars NSA	Mar 14/ Feb 14  ∆% SA	Apr 14/ Apr 13 ∆% NSA
Total Business	0.7	1,355,529	1.1	5.6
.Manufacturers	0.3	501,651	0.4	3.8
Retailers	0.6	389,786	1.5	5.7
Merchant Wholesalers	1.3	464,092	1.6	7.6

Source: US Census Bureau http://www.census.gov/mtis/

Chart VA-1 of the US Census Bureau provides total US sales of manufacturing, retailers and wholesalers seasonally adjusted (SA) in millions of dollars. Seasonal adjustment softens adjacent changes for purposes of comparing short-term variations free of seasonal factors. There was sharp drop in the global recession followed by sharp recovery with decline and recovery in the final segment above the peak before the global recession. Data are not adjusted for price changes.

Chart VA-1, US, Total Business Sales of Manufacturers, Retailers and Merchant Wholesalers, SA, Millions of Dollars, Jan 1992-Apr 2014

US Census Bureau

http://www.census.gov/mtis/

Chart VA-2 of the US Census Bureau provides total US sales of manufacturing, retailers and wholesalers not seasonally adjusted (NSA) in millions of dollars. The series without adjustment shows sharp jagged behavior because of monthly fluctuations following seasonal patterns. There is sharp recovery from the global recession in a robust trend, which is mixture of price and quantity effects because data are not adjusted for price changes. There is stability in the final segment with monthly marginal strength.

Chart VA-2, US, Total Business Sales of Manufacturers, Retailers and Merchant Wholesalers, NSA, Millions of Dollars, Jan 1992-Apr 2014

US Census Bureau

http://www.census.gov/mtis/

Businesses added cautiously to inventories to replenish stocks. Retailers’ inventories added 0.5 percent in Apr 2014 and 0.1 percent in Mar with growth of 6.1 percent in 12 months, as shown in Table VA-2. Total business increased inventories by 0.6 percent in Apr, 0.4 percent in Mar and 5.1 percent in 12 months. Inventories sales/ratios of total business continued at a level close to 1.30 under careful management to avoid costs and risks. Inventory/sales ratios of manufacturers and retailers are higher than for merchant wholesalers. There is stability in inventory/sales ratios in individual months and relative to a year earlier.

Table VA-2, US, Percentage Changes for Inventories of Manufacturers, Retailers and Merchant Wholesalers and Inventory/Sales Ratios

Inventory Change	Apr 14 Millions of Dollars NSA	Apr 14/ Mar 14 ∆% SA	Mar 14/  Feb 14 ∆% SA	Apr 14/ Apr 13 ∆% NSA
Total Business	1,736,546	0.6	0.4	5.1
Manufacturers	650,783	0.4	0.2	2.9
Retailers	552,223	0.5	0.1	6.1
Merchant Wholesalers	533,540	1.1	1.1	6.8
Inventory/ Sales Ratio NSA	Apr 14 Millions of Dollars NSA	Apr 2014 SA	Mar 2014 SA	Apr 2013 SA
Total Business	1,736,546	1.29	1.29	1.30
Manufacturers	650,783	1.30	1.30	1.31
Retailers	552,223	1.42	1.42	1.40
Merchant Wholesalers	533,540	1.18	1.18	1.19

Source: US Census Bureau http://www.census.gov/mtis/

Chart VA-3 of the US Census Bureau provides total business inventories of manufacturers, retailers and merchant wholesalers seasonally adjusted (SA) in millions of dollars from Jan 1992 to Apr 2014. The impact of the two recessions of 2001 and IVQ2007 to IIQ2009 is evident in the form of sharp reductions in inventories. Inventories have surpassed the peak before the global recession. Data are not adjusted for price changes.

Chart VA-3, US, Total Business Inventories of Manufacturers, Retailers and Merchant Wholesalers, SA, Millions of Dollars, Jan 1992-Apr 2014

US Census Bureau

http://www.census.gov/mtis/

Chart VA-4 provides total business inventories of manufacturers, retailers and merchant wholesalers not seasonally adjusted (NSA) from Jan 1992 to Apr 2014 in millions of dollars. The recessions of 2001 and IVQ2007 to IIQ2009 are evident in the form of sharp reductions of inventories. There is sharp upward trend of inventory accumulation after both recessions. Total business inventories are higher than in the peak before the global recession.

Chart VA-4, US, Total Business Inventories of Manufacturers, Retailers and Merchant Wholesalers, NSA, Millions of Dollars, Jan 1992-Apr 2014

US Census Bureau

http://www.census.gov/mtis/

Inventories follow business cycles. When recession hits sales inventories pile up, declining with expansion of the economy. In a fascinating classic opus, Lloyd Meltzer (1941, 129) concludes:

“The dynamic sequences (i) through (6) were intended to show what types of behavior are possible for a system containing a sales output lag. The following conclusions seem to be the most important:

(i) An economy in which business men attempt to recoup inventory losses will always undergo cyclical fluctuations when equilibrium is disturbed, provided the economy is stable.

This is the pure inventory cycle.

(2) The assumption of stability imposes severe limitations upon the possible size of the marginal propensity to consume, particularly if the coefficient of expectation is positive.

(3) The inventory accelerator is a more powerful de-stabilizer than the ordinary acceleration principle. The difference in stability conditions is due to the fact that the former allows for replacement demand whereas the usual analytical formulation of the latter does not. Thus, for inventories, replacement demand acts as a de-stabilizer. Whether it does so for all types of capital goods is a moot question, but I believe cases may occur in which it does not.

(4) Investment for inventory purposes cannot alter the equilibrium of income, which depends only upon the propensity to consume and the amount of non-induced investment.

(5) The apparent instability of a system containing both an accelerator and a coefficient of expectation makes further investigation of possible stabilizers highly desirable.”

Chart VA-5 shows the increase in the inventory/sales ratios during the recession of 2007-2009. The inventory/sales ratio fell during the expansions. The inventory/sales ratio declined to a trough in 2011, climbed and then stabilized at current levels in 2012, 2013 and 2014.

Chart VA-5, Total Business Inventories/Sales Ratios 2005 to 2015

Source: US Census Bureau

http://www2.census.gov/retail/releases/historical/mtis/img/mtisbrf.gif

Sales and inventories of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-3 for Jan-Apr 2014 NSA and percentage changes from the prior month SA and for Jan-Apr 2014 relative to Jan-Apr 2013. These data are volatile, aggregating diverse categories of durable and nondurable goods without adjustment for price changes. Total sales for the US rose 5.2 percent in Jan-Apr 2014 relative to Jan-Apr 2013 and increased 1.3 percent in Apr 2014 relative to Mar 2014. The value of total sales is quite high at $1728.0 billion, approaching five trillion dollars in a year. Value in the breakdown is useful in identifying relative importance of individual categories. Sales of durable goods in Jan-Apr 2014 reached $782.5 billion, over two trillion dollars for a year, increasing 1.7 percent in Apr 2014 relative to Mar 2014 and increasing 4.0 percent in Jan-Apr 2014 relative to Jan-Apr 2013. Sales of automotive products reached $130.7 billion in Jan-Apr 2014, increasing 2.9 percent in the month and also increasing 2.9 percent relative to a year earlier. There is strong performance of 11.1 percent in machinery but lower of 4.3 percent in electrical products. Sales of nondurable goods rose 6.2 percent over a year earlier. The influence of commodity prices returned as suggested by increase of 0.1 percent in Apr 2014 and decrease of 2.0 percent in Jan-Apr 2014 relative to a year earlier in farm products with decrease of 0.1 percent in petroleum products in Apr 2014 and increase of 11.3 percent relative to a year earlier. The final three columns in Table VA-3 provide the value of inventories and percentage changes from the prior month and relative to the same month a year earlier. US total inventories of wholesalers increased 1.1 percent in Apr 2014 and increased 6.8 percent relative to a year earlier. Inventories of durable goods of $325.7 billion are 61.0 percent of total inventories of $533.5 billion and rose 6.7 percent relative to a year earlier. Automotive inventories increased 7.7 percent relative to a year earlier. Machinery inventories of $95.8 billion rose 11.8 percent relative to a year earlier. Inventories of nondurable goods of $207.8 billion are 39.0 percent of the total and increased 6.8 percent relative to a year earlier. Inventories of farm products increased 1.4 percent in Apr relative to Mar and increased 4.8 percent relative to a year earlier. Inventories of petroleum products increased 0.4 percent in Apr and decreased 3.8 percent relative to a year earlier.

Table VA-3, US, Sales and Inventories of Merchant Wholesalers except Manufacturers’ Sales Branches and Offices, Month ∆%

2014	Sales $ Billions Jan-Apr 2014 NSA	Sales Apr ∆% SA	Sales∆% Jan-Apr 2014 from Jan-Apr 2013  NSA	INV $ Billions Apr 2014 NSA	INV Apr ∆% SA	INV  ∆% Apr 2014 from Apr 2013 NSA
US Total	1728.0	1.3	5.2	533.5	1.1	6.8
Durable	782.5	1.7	4.0	325.7	0.9	6.7
Automotive	130.7	2.9	2.9	53.9	0.3	7.7
Prof. Equip.	146.2	2.4	2.9	40.9	0.4	5.1
Computer Equipment	82.1	3.4	3.7	18.5	3.0	4.0
Electrical	135.6	2.3	4.3	36.1	2.8	4.3
Machinery	149.6	1.7	11.1	95.8	0.4	11.8
Not Durable	945.5	1.0	6.2	207.8	1.4	6.8
Drugs	154.4	3.0	9.7	42.0	2.6	22.6
Apparel	47.2	-1.6	5.9	23.6	1.0	7.5
Groceries	201.0	1.2	7.1	33.3	1.5	4.0
Farm Products	84.1	0.1	-2.0	24.1	1.4	4.8
Petroleum	264.7	-0.1	11.3	21.1	0.4	-3.8

Note: INV: inventories

Source: US Census Bureau

http://www.census.gov/wholesale/index.html

Chart VA-6 of the US Census Bureau provides sales of wholesale trade NSA from Jan 1992 to Apr 2014. The jagged curve of wholesale trade sales without adjustment shows strong seasonal variations. There is a strong long-term trend interrupted by sharp drop during the global recession. Growth resumed along a stronger upward trend and the level surpasses the peak before the global recession with stability in the final segment.

Chart VA-6, US, Wholesale Trade Sales, Monthly, NSA, Jan 1992- Apr 2014, Millions of Dollars

Source: US Census Bureau

http://www.census.gov/wholesale/index.html

Chart VA-7 of the US Census Bureau provides US wholesale trade sales with seasonal adjustment from Jan 1992 to Apr 2014. The elimination of seasonality permits enhanced comparison of adjacent sales. The final segment identifies another drop followed by increase to a higher level with stability.

Chart VA-7, US, Wholesale Trade Sales, Monthly, SA, Jan 1992-Apr 2014, Millions of Dollars

Source: US Census Bureau

http://www.census.gov/wholesale/index.html

Inventory/sales ratios of merchant wholesalers except manufacturers’ sales branches and offices are shown in Table VA-4. The total for the US has remained almost without change at 1.18 in Apr 2014, 1.18 in Mar 2014 and 1.19 in Apr 2013. Inventory/sales ratios are higher in durable goods industries but remain relatively stable with 1.57 in Apr 2014, 1.59 in Mar 2014 and 1.56 in Apr 2013. Computer equipment operates with low inventory/sales ratios of 0.81 in Apr 2014, 0.81 in Mar 2014 and 0.86 in Apr 2013 because of the capacity to fill orders on demand. As expected because of perishable nature, nondurable inventory/sales ratios are quite low with 0.85 in Apr 2014 and 0.84 in Mar 2014, which are close to 0.87 in Apr 2013. There are exceptions such as 2.00 in Apr 2014 in apparel that is close to 1.95 in Mar 2014 and close to 2.11 in Apr 2013.

Table VA-4, Inventory/Sales Ratios of Merchant Wholesalers except Manufacturers’ Sales Branches and Offices, % SA

	Apr 2014	Mar 2014	Apr 2013
US Total	1.18	1.18	1.19
Durable	1.57	1.59	1.56
Automotive	1.58	1.62	1.54
Prof. Equip.	1.04	1.06	1.06
Comp. Equip.	0.81	0.81	0.86
Electrical	0.99	0.99	1.03
Machinery	2.45	2.48	2.43
Not Durable	0.85	0.84	0.87
Drugs	1.06	1.06	0.98
Apparel	2.00	1.95	2.11
Groceries	0.64	0.64	0.68
Farm Products	1.11	1.09	1.08
Petroleum	0.31	0.31	0.37

Source: US Census Bureau

http://www.census.gov/wholesale/index.html

Inventories of merchant wholesalers except manufacturers’ sales branches in millions of dollars SA are provided in Chart VA-8 of the US Census Bureau. There is evident acceleration in inventory building in the final segment at a sharper slope than before the global recession with recent downward turn followed by increase.

Chart VA-8, US, Inventories of Merchant Wholesalers, Millions of Dollars, NSA, Jan 1992-Apr 2014

Source: US Census Bureau

http://www.census.gov/wholesale/index.html

Inventories of merchant wholesalers except manufacturers’ sales branches in millions of dollars SA are provided in Chart VA-9 of the US Census Bureau. There is evident acceleration in inventory building in the final segment at a sharper slope than before the global recession with recent downward turn followed by increase.

Chart VA-9, US, Inventories of Merchant Wholesalers, Millions of Dollars, SA, Jan 1992-Apr 2014

Source: US Census Bureau

http://www.census.gov/wholesale/index.html

Chart VA-10 provides the chart of the US Census Bureau with inventories/sales ratios of merchant wholesalers from 2004 to 2014 seasonally adjusted. Inventory/sales ratios rise during contractions as merchants are caught with increasing inventories because of weak sales and fall during expansions as merchants attempt to fill sales with existing stocks. There is an increase in the inventory/sales ratio in 2012 but not yet significantly higher with declining trend in the final segment followed by an increase and new decline/stability.

Chart VA-10, US, Monthly Inventories/Sales Ratios of Merchant Wholesalers, SA, 2005-2014

Source: US Census Bureau

http://www2.census.gov/wholesale/img/mwtsbrf.jpg

Sales of retail and food services increased 0.3 percent in May 2014 after increasing -.5 percent in Apr 2014 seasonally adjusted (SA), growing 3.4 percent in Jan-May 2014 relative to Jan-May 2013 not seasonally adjusted (NSA), as shown in Table VA-5. Excluding motor vehicles and parts, retail sales increased 0.1 percent in May 2014, increasing 0.4 percent in Apr 2014 SA and increasing 2.2 percent NSA in Jan-May 2014 relative to a year earlier. Sales of motor vehicles and parts increased 1.4 percent in May 2014 after increasing 0.9 percent in Apr 2014 SA and increasing 8.2 percent NSA in Jan-May 2014 relative to a year earlier. Gasoline station sales increased 0.4 percent SA in May 2014 after increasing 0.9 percent in Apr 2014 in oscillating prices of gasoline that are moderating, decreasing 1.7 percent in Jan-May 2014 relative to a year earlier.

Table VA-5, US, Percentage Change in Monthly Sales for Retail and Food Services, ∆%

	May/Apr ∆% SA	Apr/Mar ∆% SA	Jan-May 2014 Million Dollars NSA	Jan-May 2014 from Jan-May 2013 ∆% NSA
Retail and Food Services	0.3	0.5	2,112,023	3.4
Excluding Motor Vehicles and Parts	0.1	0.4	1,679,105	2.2
Motor Vehicles & Parts Dealers	1.4	0.9	432,918	8.2
Retail	0.4	0.6	1,880,852	3.3
Building Materials	1.1	1.9	132,453	3.6
Food and Beverage	-0.1	0.1	270,349	2.6
Grocery	-0.2	0.1	242,190	2.2
Health & Personal Care Stores	-0.1	0.7	120,754	4.5
Clothing & Clothing Accessories Stores	-0.6	1.2	95,690	1.3
Gasoline Stations	0.4	0.9	222,822	-1.7
General Merchandise Stores	-0.6	0.9	257,707	0.9
Food Services & Drinking Places	-0.2	-0.3	231,171	3.7

Source: US Census Bureau http://www.census.gov/retail/

Chart VA-11 provides monthly percentage changes of sales of retail and food services. There is significant volatility that prevents identification of clear trends.

Chart VA-11, US, Monthly Percentage Change of Retail and Food Services Sales, Jan 1992-May 2014

Source: US Census Bureau

http://www.census.gov/retail/

Chart VA-12 of the US Census Bureau provides total sales of retail trade and food services seasonally adjusted (SA) from Jan 1992 to May 2014 in millions of dollars. The impact on sales of the shallow recession of 2001 was much milder than the sharp contraction in the global recession from IVQ2007 to IIQ2009. There is flattening in the final segment of the series followed by another increase. Data are not adjusted for price changes.

Chart VA-12, US, Total Sales of Retail Trade and Food Services, SA, Jan 1992-May 2014, Millions of Dollars

Source: US Census Bureau

http://www.census.gov/retail/

Chart VA-13 of the US Census Bureau provides total sales of retail trade and food services not seasonally adjusted (NSA) in millions of dollars from Jan 1992 to May 2014. Data are not adjusted for seasonality, which explains sharp jagged behavior, or price changes. There was contraction during the global recession from IVQ2007 to IIQ2009 with strong rebound to a higher level and stability followed by strong increase in the final segment.

Chart VA-13, US, Total Sales of Retail Trade and Food Services, NSA, Jan 1992-May 2014, Millions of Dollars

Source: US Census Bureau

http://www.census.gov/retail/

Chart IIA2-1 provides prices of total US imports 2001-2014. Prices fell during the contraction of 2001. Import price inflation accelerated after unconventional monetary policy of near zero interest rates in 2003-2004 and quantitative easing by withdrawing supply with the suspension of 30-year Treasury bond auctions. Slow pace of adjusting fed funds rates from 1 percent by increments of 25 basis points in 17 consecutive meetings of the Federal Open Market Committee (FOMC) between Jun 2004 and Jun 2006 continued to give impetus to carry trades. The reduction of fed funds rates toward zero in 2008 fueled a spectacular global hunt for yields that caused commodity price inflation in the middle of a global recession. After risk aversion in 2009 because of the announcement of TARP (Troubled Asset Relief Program) creating anxiety on “toxic assets” in bank balance sheets (see Cochrane and Zingales 2009), prices collapsed because of unwinding carry trades. Renewed price increases returned with zero interest rates and quantitative easing. Monetary policy impulses in massive doses have driven inflation and valuation of risk financial assets in wide fluctuations over a decade.

Chart IIA2-1, US, Prices of Total US Imports 2001=100, 2001-2014

Source: Bureau of Labor Statistics

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

Chart IIA2-2 provides 12-month percentage changes of prices of total US imports from 2001 to 2014. The only plausible explanation for the wide oscillations is by the carry trade originating in unconventional monetary policy. Import prices jumped in 2008 during deep and protracted global recession driven by carry trades from zero interest rates to long, leveraged positions in commodity futures. Carry trades were unwound during the financial panic in the final quarter of 2008 that resulted in flight to government obligations. Import prices jumped again in 2009 with subdued risk aversion because US banks did not have unsustainable toxic assets. Import prices then fluctuated as carry trades were resumed during periods of risk appetite and unwound during risk aversion resulting from the European debt crisis.

Chart IIA2-2, US, Prices of Total US Imports, 12-Month Percentage Changes, 2001-2014

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

Chart IIA2-3 provides prices of US imports from 1982 to 2014. There is no similar episode to that of the increase of commodity prices in 2008 during a protracted and deep global recession with subsequent collapse during a flight into government obligations. Trade prices have been driven by carry trades created by unconventional monetary policy in the past decade.

Chart IIA2-3, US, Prices of Total US Imports, 2001=100, 1982-2014

Source: Bureau of Labor Statistics

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

Chart IIA2-4 provides 12-month percentage changes of US total imports from 1982 to 2014. There have not been wide consecutive oscillations as the ones during the global recession of IVQ2007 to IIQ2009.

Chart IIA2-4, US, Prices of Total US Imports, 12-Month Percentage Changes, 1982-2014

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

Chart IIA2-5 provides the index of US export prices from 2001 to 2014. Import and export prices have been driven by impulses of unconventional monetary policy in massive doses. The most recent segment in Chart IIA2-5 shows declining trend resulting from a combination of the world economic slowdown and the decline of commodity prices as carry trade exposures are unwound because of risk aversion to the sovereign debt crisis in Europe and slowdown in the world economy.

Chart IIA2-5, US, Prices of Total US Exports, 2001=100, 2001-2014

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

Chart IIA2-6 provides prices of US total exports from 1982 to 2014. The rise before the global recession from 2003 to 2008, driven by carry trades, is also unique in the series and is followed by another steep increase after risk aversion moderated in IQ2009.

Chart IIA2-6, US, Prices of Total US Exports, 2001=100, 1982-2014

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

Chart IIA2-7 provides 12-month percentage changes of total US exports from 1982 to 2014. The uniqueness of the oscillations around the global recession of IVQ2007 to IIQ2009 is clearly revealed.

Chart IIA2-7, US, Prices of Total US Exports, 12-Month Percentage Changes, 1982-2014

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

Twelve-month percentage changes of US prices of exports and imports are provided in Table IIA2-1. Import prices have been driven since 2003 by unconventional monetary policy of near zero interest rates influencing commodity prices according to moods of risk aversion and portfolio reallocations. In a global recession without risk aversion until the panic of Sep 2008 with flight to government obligations, import prices increased 21.4 percent in the 12 months ending in Jul 2008, 18.1 percent in the 12 months ending in Aug 2008, 13.1 percent in the 12 months ending in Sep 2008, 4.9 percent in the twelve months ending in Oct 2008. Import prices fell 10.1 percent in the 12 months ending in Dec 2008 when risk aversion developed in 2008 until mid 2009 (http://www.bls.gov/mxp/data.htm). Import prices rose again sharply in Dec 2009 by 8.6 percent and in Dec 2010 by 5.3 percent in the presence of zero interest rates with relaxed mood of risk aversion. Carry trades were unwound in May 2011 and following months as shown by decrease of import prices by 2.0 percent in the 12 months ending in Dec 2012 and 1.3 percent in Dec 2013. Import prices increased 16.9 percent in the 12 months ending in Apr 2008, fell 16.4 percent in the 12 months ending in Apr 2009 and increased 11.2 percent in the 12 months ending in Apr 2010. Fluctuations are much sharper in imports because of the high content of oil that as all commodities futures contracts increases sharply with zero interest rates and risk appetite, contracting under risk aversion. There is similar behavior of prices of imports ex fuels, exports and exports ex agricultural goods but less pronounced than for commodity-rich prices dominated by carry trades from zero interest rates. A critical event resulting from unconventional monetary policy driving higher commodity prices by carry trades is the deterioration of the terms of trade, or export prices relative to import prices, that has adversely affected US real income growth relative to what it would have been in the absence of unconventional monetary policy. Europe, Japan and other advanced economies have experienced similar deterioration of their terms of trade. Because of unwinding carry trades of commodity futures because of risk aversion and portfolio reallocations, import prices increased 0.4 percent in the 12 months ending in May 2014, export prices increased 0.5 percent and prices of nonagricultural exports increased 0.5 percent. Imports excluding fuel fell 0.2 percent in the 12 months ending in May 2014. At the margin, price changes over the year in world exports and imports are decreasing or increasing moderately because of unwinding carry trades in a temporary mood of risk aversion and relative allocation of asset classes toward equities that reverses exposures in commodity futures.

Table IIA2-1, US, Twelve-Month Percentage Rates of Change of Prices of Exports and Imports

	Imports	Imports Ex Fuels	Exports	Exports Non-Ag
May 2014	0.4	-0.2	0.5	0.5
May 2013	-1.8	-1.1	-0.8	-1.6
May 2012	-0.8	0.9	-0.2	0.0
May 2011	12.9	4.5	9.1	7.0
May 2010	8.5	3.5	5.6	5.8
May 2009	-17.3	-4.1	-6.6	-5.6
May 2008	19.1	6.0	8.1	5.7
May 2007	1.2	2.4	4.6	3.6
May 2006	8.6	1.5	3.5	3.9
May 2005	5.9	2.0	2.5	3.7
May 2004	6.9	2.8	4.4	2.9
May 2003	1.0	0.2	1.7	1.0
May 2002	-3.7	NA	-1.6	-1.7
May 2001	-0.8	NA	-0.6	-0.6

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

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

Table IIA2-2 provides 12-month percentage changes of the import price index all commodities from 2001 to 2014. Interest rates moving toward zero during unconventional monetary policy in 2008 induced carry trades into highly leveraged commodity derivatives positions that caused increases in 12-month percentage changes of import prices of around 20 percent. The flight into dollars and Treasury securities by fears of toxic assets in banks in the proposal of TARP (Cochrane and Zingales 2009) caused reversion of carry trades and collapse of commodity futures explaining sharp declines in trade prices in 2009. Twelve-month percentage changes of import prices at the end of 2012 and into 2013 occurred during another bout of risk aversion and portfolio reallocation. There is a new shock of risk aversion in late 2013 with marginally increasing exposures in commodities followed by reversals of exposures into 2014.

Table IIA2-2, US, Twelve-Month Percentage Changes of Import Price Index All Commodities, 2001-2014

Year	Jan	Feb	Mar	Apr	May	Sep	Oct	Nov	Dec
2001	2.8	0.2	-1.6	-0.7	-0.8	-5.6	-7.4	-8.8	-9.1
2002	-8.9	-8.3	-5.6	-3.6	-3.7	-0.4	1.9	2.5	4.2
2003	5.8	7.5	6.8	1.8	1.0	0.7	0.8	2.3	2.4
2004	2.2	0.9	1.1	4.6	6.9	8.2	9.9	9.0	6.7
2005	5.7	6.1	7.6	8.4	5.9	9.9	8.2	6.4	8.0
2006	8.7	6.9	4.5	5.8	8.6	1.6	-1.0	1.3	2.5
2007	0.0	1.2	2.8	2.1	1.2	4.8	9.1	12.0	10.6
2008	13.6	13.5	15.2	16.9	19.1	13.1	4.9	-5.9	-10.1
2009	-12.5	-12.7	-14.9	-16.4	-17.3	-12.0	-5.6	3.4	8.6
2010	11.4	11.3	11.2	11.2	8.5	3.6	3.9	4.1	5.3
2011	5.6	7.6	10.3	11.9	12.9	12.7	11.1	10.1	8.5
2012	6.9	5.1	3.5	0.8	-0.8	-0.6	0.0	-1.4	-2.0
2013	-1.5	-0.6	-2.1	-2.7	-1.8	-0.7	-1.6	-1.8	-1.1
2014	-1.3	-1.1	-0.6	-0.4	0.4

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

There is finer detail in one-month percentage changes of imports of the US in Table IIA2-3. Carry trades into commodity futures induced by interest rates moving to zero in unconventional monetary policy caused sharp monthly increases in import prices for cumulative increase of 13.8 percent from Mar to Jul 2008 at average rate of 2.6 percent per month or annual equivalent in five months of 36.4 percent (3.1 percent in Mar 2008, 2.8 percent in Apr 2008, 2.8 percent in May 2008, 3.0 percent in Jun 2008 and 1.4 percent in Jul 2008, data from http://www.bls.gov/mxp/data.htm). There is no other explanation for increases in import prices during sharp global recession and contracting world trade. Import prices then fell 23.4 percent from Aug 2008 to Jan 2009 or at the annual equivalent rate of minus 41.4 percent in the flight to US government securities in fear of the need to buy toxic assets from banks in the TARP program (Cochrane and Zingales 2009). Risk aversion during the first sovereign debt crisis of the euro area in May-Jun 2010 caused decline of US import prices at the annual equivalent rate of 11.4 percent. US import prices have been driven by combinations of carry trades induced by unconventional monetary policy and bouts of risk aversion and portfolio reallocation (http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html). US import prices increased 0.5 percent in Jan 2013 and 0.9 percent in Feb 2013 for annual equivalent rate of 8.7 percent, similar to those in national price indexes worldwide, originating in carry trades from zero interest rates to commodity futures. Import prices fell 0.1 percent in Mar 2013, 0.7 percent in Apr 2013, 0.6 percent in May 2013 and 0.4 percent in Jun 2013. Import prices changed 0.1 percent in Jul 2013, increased 0.4 percent in Aug 2013 and increased 0.3 percent in Sep 2013. Portfolio reallocations into asset classes other than commodities explains declines of import prices by 0.6 percent in Oct 2013 and 0.9 percent in Nov 2013. Import prices increased 0.1 percent in Dec 2013, 0.4 percent in Jan 2014, 1.1 percent in Feb 2014 and 0.4 percent in Mar 2014. Import prices fell 0.5 percent in Apr 2014 and increased 0.1 percent in May 2014.

Table IIA2-3, US, One-Month Percentage Changes of Import Price Index All Commodities, 2001-2014

Year	Jan	Feb	Mar	Apr	May	Jul	Aug	Sep	Oct	Nov	Dec
2001	0.0	-0.6	-1.6	-0.5	0.2	-1.5	-0.1	-0.1	-2.3	-1.5	-1.0
2002	0.2	0.0	1.3	1.6	0.1	0.4	0.3	0.7	0.0	-0.9	0.6
2003	1.8	1.7	0.6	-3.1	-0.7	0.5	0.0	-0.5	0.1	0.5	0.7
2004	1.5	0.4	0.8	0.2	1.5	0.4	1.5	0.5	1.6	-0.3	-1.4
2005	0.6	0.9	2.2	0.9	-0.8	1.2	1.4	2.1	0.1	-1.9	0.0
2006	1.2	-0.8	-0.1	2.1	1.8	0.8	0.5	-2.2	-2.5	0.4	1.1
2007	-1.2	0.4	1.6	1.4	0.9	1.3	-0.3	0.6	1.5	3.2	-0.2
2008	1.5	0.2	3.1	2.8	2.8	1.4	-3.1	-3.6	-6.0	-7.4	-4.6
2009	-1.3	0.0	0.5	1.1	1.7	-0.6	1.5	0.2	0.8	1.5	0.2
2010	1.2	-0.1	0.4	1.1	-0.8	0.0	0.4	0.0	1.1	1.7	1.4
2011	1.5	1.7	3.0	2.6	0.1	0.1	-0.4	-0.1	-0.4	0.7	0.0
2012	0.0	0.0	1.4	-0.1	-1.5	-0.7	1.2	1.0	0.3	-0.7	-0.6
2013	0.5	0.9	-0.1	-0.7	-0.6	0.1	0.4	0.3	-0.6	-0.9	0.1
2014	0.4	1.1	0.4	-0.5	0.1

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

Chart IIA2-8 shows the US monthly import price index of all commodities excluding fuels from 2001 to 2014. All curves of nominal values follow the same behavior under the influence of unconventional monetary policy. Zero interest rates without risk aversion result in jumps of nominal values while under strong risk aversion even with zero interest rates there are declines of nominal values.

Chart IIA2-8, US, Import Price Index All Commodities Excluding Fuels, 2001=100, 2001-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-9 provides 12-month percentage changes of the US import price index excluding fuels between 2001 and 2014. There is the same behavior of carry trades driving up without risk aversion and down with risk aversion prices of raw materials, commodities and food in international trade during the global recession of IVQ2007 to IIQ2009 and in previous and subsequent periods.

Chart IIA2-9, US, Import Price Index All Commodities Excluding Fuels, 12-Month Percentage Changes, 2002-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-10 provides the monthly US import price index ex petroleum from 2001 to 2014. Prices including or excluding commodities follow the same fluctuations and trends originating in impulses of unconventional monetary policy of zero interest rates.

Chart IIA2-10, US, Import Price Index ex Petroleum, 2001=100, 2000-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-11 provides the US import price index ex petroleum from 1985 to 2014. There is the same unique hump in 2008 caused by carry trades from zero interest rates to prices of commodities and raw materials.

Chart IIA2-11, US, Import Price Index ex Petroleum, 2001=100, 1985-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-12 provides 12-month percentage changes of the import price index ex petroleum from 1986 to 2014. The oscillations caused by the carry trade in increasing prices of commodities and raw materials without risk aversion and subsequently decreasing them during risk aversion are unique.

Chart IIA2-12, US, Import Price Index ex Petroleum, 12-Month Percentage Changes, 1986-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-13 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart IA2-13 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 at $145.29/barrel on Jul 3, 2008, can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices. Risk aversion resulted in another drop in recent weeks followed by some recovery and renewed deterioration/increase.

Chart IIA2-13, US, Crude Oil Futures Contract

Source: US Energy Information Administration

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

The price index of US imports of petroleum and petroleum products in shown in Chart IIA2-14. There is similar behavior of the curves all driven by the same impulses of monetary policy.

Chart IIA2-14, US, Import Price Index of Petroleum and Petroleum Products, 2001=100, 2001-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-15 provides the price index of petroleum and petroleum products from 1982 to 2014. The rise in prices during the global recession in 2008 and the decline after the flight to government obligations is unique in the history of the series. Increases in prices of trade in petroleum and petroleum products were induced by carry trades and declines by unwinding carry trades in flight to government obligations.

Chart IIA2-15, US, Import Price Index of Petroleum and Petroleum Products, 2001=100, 1982-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-16 provides 12-month percentage changes of the price index of US imports of petroleum and petroleum products from 1982 to 2014. There were wider oscillations in this index from 1999 to 2001 (see Barsky and Killian 2004 for an explanation).

Chart IIA2-16, US, Import Price Index of Petroleum and Petroleum Products, 12-Month Percentage Changes, 1982-2014

Source: US Bureau of Labor Statistics

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

The price index of US exports of agricultural commodities is in Chart IIA2-17 from 2001 to 2014. There are similar fluctuations and trends as in all other price index originating in unconventional monetary policy repeated over a decade. The most recent segment in 2011 has declining trend in a new flight from risk resulting from the sovereign debt crisis in Europe followed by declines in Jun 2012 and Nov 2012 with stability/decline in Dec 2012 into 2013. Prices rebounded into 2014.

Chart IIA2-17, US, Exports Price Index of Agricultural Commodities, 2001=100, 2001-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-18 provides the price index of US exports of agricultural commodities from 1982 to 2014. The increase in 2008 in the middle of deep, protracted contraction was induced by unconventional monetary policy. The decline from 2008 into 2009 was caused by unwinding carry trades in a flight to government obligations. The increase into 2011 and current pause with marginal rebound were also induced by unconventional monetary policy in waves of increases during relaxed risk aversion and declines during unwinding of positions because of aversion to financial risk.

Chart IIA2-18, US, Exports Price Index of Agricultural Commodities, 2001=100, 1982-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-19 provides 12-month percentage changes of the index of US exports of agricultural commodities from 1986 to 2014. The wide swings in 2008, 2009 and 2011 are only explained by unconventional monetary policy inducing carry trades from zero interest rates to commodity futures and reversals during risk aversion.

Chart IIA2-19, US, Exports Price Index of Agricultural Commodities, 12-Month Percentage Changes, 1986-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-20 shows the export price index of nonagricultural commodities from 2001 to 2014. Unconventional monetary policy of zero interest rates drove price behavior during the past decade. Policy has been based on the myth of stimulating the economy by climbing the negative slope of an imaginary short-term Phillips curve.

Chart IIA2-20, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 2001-2014

Source: US Bureau of Labor Statistics

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

Chart IIA2-21 provides a longer perspective of the price index of US nonagricultural commodities from 1982 to 2014. Increases and decreases around the global contraction after 2007 were caused by carry trade induced by unconventional monetary policy.

Chart IIA2-21, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 1982-2014

Source: US Bureau of Labor Statistics

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

Finally, Chart IIA2-22 provides 12-month percentage changes of the price index of US exports of nonagricultural commodities from 1986 to 2014. The wide swings before, during and after the global recession beginning in 2007 were caused by carry trades induced by unconventional monetary policy.

Chart IIA2-22, US, Exports Price Index of Nonagricultural Commodities, 12-Month Percentage Changes, 1986-2014

Source: US Bureau of Labor Statistics

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

The report of consumer credit outstanding of the Board of Governors of the Federal Reserve System is provided in Table VA-6. The data are in seasonally adjusted annual rates both percentage changes and billions of dollars. The estimate of consumer credit “covers most short- and intermediate-term credit extended to individuals, excluding loans secured by real estate (http://www.federalreserve.gov/releases/g19/current/default.htm). Consumer credit is divided into two categories. (1) Revolving consumer credit (REV in Table VA-6) consists mainly of unsecured credit cards. (2) Non-revolving consumer credit (NREV in Table VA-6) “includes automobile loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers or vacations” (http://www.federalreserve.gov/releases/g19/current/default.htm). In Apr 2014, revolving credit was $870 billion, or 27.4 percent of total consumer credit of $3175 billion, and non-revolving credit was $2305 billion, or 72.6 percent of total consumer credit outstanding. Consumer credit grew at relatively high rates before the recession beginning in IVQ2007 (Dec) and extending to IIQ2009 (Jun) as dated by the National Bureau of Economic Research or NBER (http://www.nber.org/cycles/cyclesmain.html). Percentage changes of consumer credit outstanding fell already in 2009. Rates were still negative in 2010 with decline of 1.0 percent in annual data and sharp decline of 7.6 percent in revolving credit. In IVQ 2013, total consumer credit grew at 5.3 percent with increase of revolving credit at 2.0 percent and increase of non-revolving credit at 6.6 percent. Growth continued in Mar 2014 with total credit at 7.5 percent, revolving at 3.1 percent and non-revolving at 9.1 percent.

Table VA-6, US, Consumer Credit Outstanding, SA, Annual Rate and Billions of Dollars

	Total ∆%	REV ∆%	NRV ∆%	Total $B	REV $B	NREV $B
2014
Apr	10.2	12.3	9.5	3175	870	2305
Mar	7.5	3.1	9.1	3148	862	2286
Feb	5.9	-1.3	8.7	3128	859	2269
IQ	6.6	1.9	8.4	3148	862	2286
2013
IVQ	5.3	2.0	6.6	3097	857	2240
IIIQ	6.3	0.9	8.5	3056	853	2203
IIQ	5.5	1.0	7.3	3009	851	2158
IQ	6.1	1.3	8.1	2968	849	2119
2013	5.9	1.3	7.8	3097	857	2240
2012	6.2	0.6	8.6	2924	847	2077
2011	4.1	0.2	5.9	2756	842	1914
2010	-1.0	-7.6	2.7	2647	840	1807
2009	-3.9	-8.8	-1.0	2553	917	1636
2008	1.3	0.2	2.0	2651	1005	1646
2007	5.9	8.5	4.3	2529	1008	1521

Note: REV: Revolving; NREV: Non-revolving; ∆%: simple annual rate from unrounded data; Total may not add exactly because of rounding

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g19/current/default.htm

Chart VA-14 of the Board of Governors of the Federal Reserve System total consumer credit outstanding in millions of dollars measured in the right axis and the finance rate on 24-month personal loans at commercial banks, not seasonally adjusted, measured on the left axis. There was sharp decline of total consumer loans outstanding during the global recession followed by strong recovery. There is long-term decline of the financing rate.

Chart VA-14, US, Total Consumer Credit Owned and Securitized NSA and Financing Rate on 24-month Personal Loans at Commercial Banks NSA, Millions of Dollars and Percent, Feb 1972-Apr 2014

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g19/current/default.htm

Chart VA-15 of the Board of Governors of the Federal Reserve System provides percentage changes of total consumer credit outstanding in the US and the financing rate on 24-month personal consumer loans at commercial banks, since 1972. The shaded bars are the cyclical contraction dates of the National Bureau of Economic Research (http://www.nber.org/cycles/cyclesmain.html). Consumer credit is cyclical, declining during contractions as shown by negative percentage changes during economic contractions. There is clear upward trend in 2012-2013 but with significant fluctuations and vacillation in the final segment.

Chart VA-15, US, Percent Change of Total Consumer Credit, Seasonally Adjusted at an Annual Rate and Finance Rate on 24-month Personal Loans at Commercial Banks NSA, Feb 1972-Apr 2014

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g19/current/default.htm

Table VA-7 provides additional information required for understanding the deficit/debt situation of the United States. The table is divided into four parts: Treasury budget in the 2014 fiscal year beginning on Oct 1, 2013 and ending on Sep 30, 2014; federal fiscal data for the years from 2009 to 2013; federal fiscal data for the years from 2005 to 2008; and Treasury debt held by the public from 2005 to 2013. Receipts increased 7.5 percent in the cumulative fiscal year 2014 ending in May 2014 relative to the cumulative in fiscal year 2013. Individual income taxes increased 3.3 percent relative to the same fiscal period a year earlier. Outlays decreased 2.3 percent relative to a year earlier. There are also receipts, outlays, deficit and debt for fiscal year 2013. Total revenues of the US from 2009 to 2012 accumulate to $9021 billion, or $9.0 trillion, while expenditures or outlays accumulate to $14,109 billion, or $14.1 trillion, with the deficit accumulating to $5090 billion, or $5.1 trillion. Revenues decreased 6.5 percent from $9653 billion in the four years from 2005 to 2008 to $9021 billion in the years from 2009 to 2012. Decreasing revenues were caused by the global recession from IVQ2007 (Dec) to IIQ2009 (Jun) and also by growth of only 2.2 percent on average in the cyclical expansion from IIIQ2009 to IQ2014. In contrast, the expansion from IQ1983 to IIIQ1987 was at the average annual growth rate of 4.9 percent and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html). Because of mediocre GDP growth, there are 26.6 million unemployed or underemployed in the United States for an effective unemployment rate of 16.2 percent (http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html). Weakness of growth and employment creation is analyzed in II Collapse of United States Dynamism of Income Growth and Employment Creation (http://cmpassocregulationblog.blogspot.com/2014/05/united-states-commercial-banks-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2014/04/financial-fluctuations-united-states.html). In contrast with the decline of revenue, outlays or expenditures increased 30.2 percent from $10,839 billion, or $10.8 trillion, in the four years from 2005 to 2008, to $14,109 billion, or $14.1 trillion, in the four years from 2009 to 2012. Increase in expenditures by 30.2 percent while revenue declined by 6.5 percent caused the increase in the federal deficit from $1186 billion in 2005-2008 to $5090 billion in 2009-2012. Federal revenue was 14.9 percent of GDP on average in the years from 2009 to 2012, which is well below 17.4 percent of GDP on average from 1973 to 2012. Federal outlays were 23.3 percent of GDP on average from 2009 to 2012, which is well above 20.4 percent of GDP on average from 1973 to 2012. The lower part of Table I-2 shows that debt held by the public swelled from $5803 billion in 2008 to $11,982 billion in 2013, by $5478 billion or 106.5 percent. Debt held by the public as percent of GDP or economic activity jumped from 39.3 percent in 2008 to 72.1 percent in 2013, which is well above the average of 38.0 percent from 1973 to 2012. The United States faces tough adjustment because growth is unlikely to recover, creating limits on what can be obtained by increasing revenues, while continuing stress of social programs restricts what can be obtained by reducing expenditures.

Table VA-7, US, Treasury Budget in Fiscal Year to Date Million Dollars

May 2014	Fiscal Year 2014	Fiscal Year 2013	∆%
Receipts	1,934,919	1,800,515	7.5
Outlays	2,371,301	2,426,840	-2.3
Deficit	-436,382	-626,325
Individual Income Tax	903,024	873,862	3.3
Corporation Income Tax	164,840	142,632	15.6
Social Insurance	493,716	439,239	12.4
	Receipts	Outlays	Deficit (-), Surplus (+)
$ Billions
Fiscal Year 2013	2,775	3,455	-680
% GDP	16.7	20.8	-4.1
Fiscal Year 2012	2,450	3,537	-1,087
% GDP	15.2	22.0	-6.8
Fiscal Year 2011	2,304	3,603	-1,300
% GDP	15.0	23.4	-8.4
Fiscal Year 2010	2,163	3,457	-1,294
% GDP	14.6	23.4	-8.8
Fiscal Year 2009	2,105	3,518	-1,413
% GDP	14.6	24.4	-9.8
Total 2009-2012	9,021	14,109	-5,090
Average % GDP 2009-2012	14.9	23.3	-8.4
Fiscal Year 2008	2,524	2,983	-459
% GDP	17.1	20.2	-3.1
Fiscal Year 2007	2,568	2,729	-161
% GDP	17.9	19.0	-1.1
Fiscal Year 2006	2,407	2,655	-248
% GDP	17.6	19.4	-1.8
Fiscal Year 2005	2,154	2,472	-318
% GDP	16.7	19.2	-2.5
Total 2005-2008	9,653	10,839	-1,186
Average % GDP 2005-2008	17.3	19.5	-2.1
Debt Held by the Public	Billions of Dollars	Percent of GDP
2005	4,592	35.6
2006	4,829	35.3
2007	5,035	35.1
2008	5,803	39.3
2009	7,545	52.3
2010	9,019	61.0
2011	10,128	65.8
2012	11,281	70.1
2013	11,982	72.1

Source: http://www.fms.treas.gov/mts/index.html CBO (2012NovMBR). CBO (2011AugBEO); Office of Management and Budget 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan. CBO. 2012AugBEO. Budget and Economic Outlook. Washington, DC, Aug 22. CBO. 2012Jan31. Historical budget data. Washington, DC, Jan 31. CBO. 2012NovCDR. Choices for deficit reduction. Washington, DC. Nov. CBO. 2013HBDFeb5. Historical budget data—February 2013 baseline projections. Washington, DC, Congressional Budget Office, Feb 5. CBO. 2013HBDFeb5. Historical budget data—February 2013 baseline projections. Washington, DC, Congressional Budget Office, Feb 5. CBO (2013Aug12). 2013AugHBD. Historical budget data—August 2013. Washington, DC, Congressional Budget Office, Aug. CBO, Historical Budget Data—February 2014, Washington, DC, Congressional Budget Office, Feb. CBO, Historical budget data—April 2014 release. Washington, DC, Congressional Budget Office, Apr.

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