Monday, March 23, 2015

“Impatience” with Monetary Policy of Exchange Rates and Valuations of Financial Assets, United States Industrial Production, Unresolved US Balance of Payments Deficits and Fiscal Imbalance, United States Services, United States Producer Prices, World Cyclical Slow Growth and Global Recession Risk: Part II

 

“Impatience” with Monetary Policy of Exchange Rates and Valuations of Financial Assets, United States Industrial Production, Unresolved US Balance of Payments Deficits and Fiscal Imbalance, United States Services, United States Producer Prices, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015

I United States Industrial Production

IIA Unresolved US Balance of Payments Deficits and Fiscal Imbalance Threatening Risk Premium on Treasury Securities

IIB United States Services

IIC United States Producer Prices

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

I United States Industrial Production. There is socio-economic stress in the combination of adverse events and cyclical performance: 

Industrial production increased 0.1 percent in Feb 2015 and decreased 0.3 percent in Jan 2015 after decreasing 0.2 percent in Dec 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 increased 0.1 percent in February after decreasing 0.3 percent in January. In February, manufacturing output moved down 0.2 percent, its third consecutive monthly decline. The rates of change for the total index in January and for manufacturing in both December and January are lower than previously reported. The index for mining fell 2.5 percent in February; drops in the indexes for coal mining and for oil and gas well drilling and servicing primarily accounted for the decrease. The output of utilities jumped 7.3 percent, as especially cold temperatures drove up demand for heating. At 105.8 percent of its 2007 average, total industrial production in February was 3.5 percent above its level of a year earlier. Capacity utilization for the industrial sector decreased to 78.9 percent in February, a rate that is 1.2 percentage points below its long-run (1972–2014) average.“ In the six months ending in Feb 2015, United States national industrial production accumulated increase of 1.4 percent at the annual equivalent rate of 2.8 percent, which is lower than growth of 3.5 percent in the 12 months ending in Feb 2015. Excluding growth of 1.2 percent in Nov 2014, growth in the remaining five months from Sep 2014 to Feb 2015 accumulated to 0.2 percent or 0.5 percent annual equivalent. Industrial production declined in three of the past six months. Industrial production contracted at annual equivalent 1.6 percent in the most recent quarter from Dec 2014 to Feb 2015 and expanded at 7.4 percent in the prior quarter Sep to Nov 2014. Business equipment accumulated growth of 0.9 percent in the six months from Sep 2014 to Feb 2015 at the annual equivalent rate of 1.8 percent, which is lower than growth of 4.0 percent in the 12 months ending in Feb 2015. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm): “Capacity utilization for the industrial sector decreased to 78.9 percent in February, a rate that is 1.2 percentage points below its long-run (1972–2014) average.” United States industry apparently decelerated to a lower growth rate followed by possible acceleration and oscillating growth in past months.

Table I-1, US, Industrial Production and Capacity Utilization, SA, ∆% 

2014

Feb 

15

Jan 

15

Dec 

14

Nov 

14

Oct 

14

Sep 

14

Feb 

15/

Feb     14 

Total

0.1

-0.3

-0.2

1.2

-0.1

0.7

3.5

Market
Groups

              

Final Products

-0.4

-0.2

-0.8

1.8

0.0

0.6

2.2

Consumer Goods

1.0

-0.1

-0.7

2.2

-0.3

1.0

2.2

Business Equipment

-0.3

0.3

-1.3

1.5

1.1

-0.4

4.0

Non
Industrial Supplies

0.3

-0.2

-0.3

0.8

0.2

0.8

2.8

Construction

-0.4

-1.0

1.0

0.1

0.7

0.3

4.1

Materials

-0.2

-0.4

0.2

0.8

-0.3

0.8

4.7

Industry Groups

              

Manufacturing

-0.2

-0.3

-0.1

1.2

0.1

0.2

3.4

Mining

-2.5

-1.3

2.0

-0.3

-1.1

0.9

5.3

Utilities

7.3

1.0

-5.0

3.6

0.4

4.2

1.3

Capacity

78.9

79.1

79.4

79.8

79.1

79.4

3.1

Sources: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/default.htm

Manufacturing decreased 0.2 percent in Feb 2015 after decreasing 0.3 percent in Jan 2015 and decreasing 0.1 percent in Dec 2014 seasonally adjusted, increasing 3.3 percent not seasonally adjusted in the 12 months ending in Feb 2015, as shown in Table I-2. Manufacturing grew cumulatively 0.9 percent in the six months ending in Feb 2015 or at the annual equivalent rate of 1.8 percent. Excluding the increase of 1.2 percent in Nov 2014, manufacturing contracted 0.3 percent from Sep 2014 to Feb 2015 or at the annual equivalent rate of minus 0.7 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 with recovery in 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 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.”

The bottom part of Table I-2 shows decline of manufacturing by 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increase by 25.0 percent from the trough in Apr 2009 to Dec 2014. Manufacturing grew 24.3 percent from the trough in Apr 2009 to Feb 2015. Manufacturing output in Feb 2015 is 2.9 percent below the peak in Jun 2007. 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 IVQ2014 would have accumulated to 23.0 percent. GDP in IVQ2014 would be $18,438.0 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,144.3 billion than actual $16,293.7 billion. There are about two trillion dollars of GDP less than at trend, explaining the 27.2 million unemployed or underemployed equivalent to actual unemployment/underemployment of 16.5 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/03/global-competitive-devaluation-rules.html and earlier http://cmpassocregulationblog.blogspot.com/2015/02/job-creation-and-monetary-policy-twenty.html and earlier http://cmpassocregulationblog.blogspot.com/2015/01/fluctuating-valuations-of-risk.html). US GDP in IVQ2014 is 11.6 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,293.7 billion in IVQ2014 or 8.7 percent at the average annual equivalent rate of 1.2 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. 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. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth at average 3.3 percent per year from Feb 1919 to Feb 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.2379 in Feb 2015. The actual index NSA in Feb 2015 is 100.0312, which is 20.1 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014, raising the index at trend to 117.6250 in Feb 2015. The output of manufacturing at 100.0312 in Feb 2015 is 15.0 percent below trend under this alternative calculation.

Table I-2, US, Monthly and 12-Month Rates of Growth of Manufacturing ∆%

 

Month SA ∆%

12-Month NSA ∆%

Feb 2015

-0.2

3.3

Jan

-0.3

4.8

Dec 2014

-0.1

4.2

Nov

1.2

4.4

Oct

0.1

3.3

Sep

0.2

3.6

Aug

-0.3

3.9

Jul

0.8

4.3

Jun

0.4

3.6

May

0.4

3.6

Apr

0.3

3.0

Mar

0.8

3.4

Feb

1.3

2.4

Jan

-1.0

1.4

Dec 2013

0.2

2.2

Nov

0.3

2.8

Oct

0.4

3.7

Sep

0.3

2.8

Aug

0.7

2.9

Jul

-0.4

1.7

Jun

0.3

2.3

May

0.3

2.4

Apr

-0.2

2.7

Mar

0.1

2.6

Feb

0.6

2.5

Jan

-0.2

2.9

Dec 2012

0.7

3.8

Nov

1.3

3.8

Oct

-0.4

2.6

Sep

0.2

3.5

Aug

-0.5

3.8

Jul

0.4

4.3

Jun

0.4

5.0

May

-0.2

4.9

Apr

0.8

5.1

Mar

-0.3

3.8

Feb

0.6

5.1

Jan

1.0

4.0

Dec 2011

0.7

3.5

Nov

-0.1

2.9

Oct

0.5

3.0

Sep

0.4

2.9

Aug

0.3

2.3

Jul

0.8

2.6

Jun

0.1

2.1

May

0.2

1.9

Apr

-0.6

3.2

Mar

0.7

4.9

Feb

0.0

5.4

Jan

0.2

5.7

Dec 2010

0.4

6.3

Nov

0.2

5.4

Oct

0.1

6.6

Sep

0.1

6.9

Aug

0.1

7.4

Jul

0.8

7.8

Jun

0.0

9.3

May

1.5

8.8

Apr

0.9

7.0

Mar

1.3

4.8

Feb

-0.1

1.3

Jan

1.1

1.2

Dec 2009

-0.1

-3.1

Nov

1.0

-6.0

Oct

0.2

-9.1

Sep

0.8

-10.6

Aug

1.0

-13.6

Jul

1.4

-15.2

Jun

-0.3

-17.7

May

-1.1

-17.6

Apr

-0.7

-18.2

Mar

-1.8

-17.3

Feb

-0.3

-16.1

Jan

-2.9

-16.4

Dec 2008

-3.4

-13.9

Nov

-2.4

-11.3

Oct

-0.6

-8.9

Sep

-3.4

-8.5

Aug

-1.2

-5.0

Jul

-1.1

-3.5

Jun

-0.6

-3.1

May

-0.5

-2.4

Apr

-1.1

-1.1

Mar

-0.3

-0.6

Feb

-0.6

0.9

Jan

-0.4

2.2

Dec 2007

0.1

1.9

Nov

0.5

3.3

Oct

-0.4

2.8

Sep

0.5

2.9

Aug

-0.4

2.6

Jul

0.2

3.5

Jun

0.3

3.0

May

-0.1

3.1

Apr

0.7

3.6

Mar

0.8

2.5

Feb

0.4

1.6

Jan

-0.5

1.3

Dec 2006

  

2.7

Dec 2005

  

3.5

Dec 2004

  

3.8

Dec 2003

  

2.0

Dec 2002

  

2.4

Dec 2001

  

-5.7

Dec 2000

  

0.7

Dec 1999

  

5.3

Average ∆% Dec 1986-Dec 2014

  

2.4

Average ∆% Dec 1986-Dec 2013

  

2.3

Average ∆% Dec 1986-Dec 1999

  

4.2

Average ∆% Dec 1999-Dec 2006

  

1.3

Average ∆% Dec 1999-Dec 2014

  

0.8

∆% Peak 103.0351 in 06/2007 to 100.5493 in 12/2014

  

-2.4

∆% Peak 103.0351 in 06/2007 to Trough 80.4551 in 4/2009

  

-21.9

∆% Trough  80.4551 in 04/2009 to 100.5493 in 12/2014

  

25.0

∆% Trough  80.4551 in 04/2009 to 100.0312 in 2/2015

  

24.3

∆% Peak 103.0351 on 06/2007 to 100.0312 in 2/2015

  

-2.9

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/default.htm

Chart I-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (Cobet and Wilson (2002); see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered sufficiently above levels before the global recession, remaining like GDP below historical trend. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977).

clip_image002

Chart I-1, US, Industrial Production, Capacity and Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/ipg1.gif

The modern industrial revolution of Jensen (1993) is captured in Chart I-2 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart II-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression (http://cmpassocregulationblog.blogspot.com/2014/12/valuations-of-risk-financial-assets.html). The bottom left-hand part of Chart II-2 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of semiconductors has already surpassed the level before the global recession.

clip_image004

Chart I-2, US, Industrial Production, Capacity and Utilization of High Technology Industries

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/ipg3.gif

Additional detail on industrial production and capacity utilization is provided in Chart I-3 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is oscillating above the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.

clip_image006

Chart I-3, US, Industrial Production and Capacity Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/ipg2.gif

United States manufacturing output from 1919 to 2015 on a monthly basis is in Chart I-4 of the Board of Governors of the Federal Reserve System. The second industrial revolution of Jensen (1993) is quite evident in the acceleration of the rate of growth of output given by the sharper slope in the 1980s and 1990s. Growth was robust after the shallow recession of 2001 but dropped sharply during the global recession after IVQ2007. Manufacturing output recovered sharply but has not reached earlier levels and is losing momentum at the margin. Current output is well below the extrapolation of a long-term trend. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth at average 3.3 percent per year from Feb 1919 to Feb 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.2379 in Feb 2015. The actual index NSA in Feb 2015 is 100.0312, which is 20.1 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014, raising the index at trend to 117.6250 in Feb 2015. The output of manufacturing at 100.0312 in Feb 2015 is 15.0 percent below trend under this alternative calculation.

clip_image007

Chart I-4, US, Manufacturing Output, 1919-2015

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/default.htm

Manufacturing jobs not seasonally adjusted increased 216,000 from Feb 2014 to
Feb 2015 or at the average monthly rate of 18,000. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. Industrial production increased 0.1 percent in Feb 2015 and decreased 0.3 percent in Jan 2015 after decreasing 0.2 percent in Dec 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 increased 0.1 percent in February after decreasing 0.3 percent in January. In February, manufacturing output moved down 0.2 percent, its third consecutive monthly decline. The rates of change for the total index in January and for manufacturing in both December and January are lower than previously reported. The index for mining fell 2.5 percent in February; drops in the indexes for coal mining and for oil and gas well drilling and servicing primarily accounted for the decrease. The output of utilities jumped 7.3 percent, as especially cold temperatures drove up demand for heating. At 105.8 percent of its 2007 average, total industrial production in February was 3.5 percent above its level of a year earlier. Capacity utilization for the industrial sector decreased to 78.9 percent in February, a rate that is 1.2 percentage points below its long-run (1972–2014) average.“ In the six months ending in Feb 2015, United States national industrial production accumulated increase of 1.4 percent at the annual equivalent rate of 2.8 percent, which is lower than growth of 3.5 percent in the 12 months ending in Feb 2015. Excluding growth of 1.2 percent in Nov 2014, growth in the remaining five months from Sep 2014 to Feb 2015 accumulated to 0.2 percent or 0.5 percent annual equivalent. Industrial production declined in three of the past six months. Industrial production contracted at annual equivalent 1.6 percent in the most recent quarter from Dec 2014 to Feb 2015 and expanded at 7.4 percent in the prior quarter Sep to Nov 2014. Business equipment accumulated growth of 0.9 percent in the six months from Sep 2014 to Feb 2015 at the annual equivalent rate of 1.8 percent, which is lower than growth of 4.0 percent in the 12 months ending in Feb 2015. The Fed analyzes capacity utilization of total industry in its report (http://www.federalreserve.gov/releases/g17/Current/default.htm): “Capacity utilization for the industrial sector decreased to 78.9 percent in February, a rate that is 1.2 percentage points below its long-run (1972–2014) average.” United States industry apparently decelerated to a lower growth rate followed by possible acceleration and oscillating growth in past months.

Manufacturing fell 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increased by 25.0 percent from the trough in Apr 2009 to Dec 2014. Manufacturing grew 24.3 percent from the trough in Apr 2009 to Feb 2015. Manufacturing output in Feb 2015 is 2.9 percent below the peak in Jun 2007. 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 IVQ2014 would have accumulated to 23.0 percent. GDP in IVQ2014 would be $18,438.0 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,144.3 billion than actual $16,293.7 billion. There are about two trillion dollars of GDP less than at trend, explaining the 27.2 million unemployed or underemployed equivalent to actual unemployment/underemployment of 16.5 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/03/global-competitive-devaluation-rules.html and earlier http://cmpassocregulationblog.blogspot.com/2015/02/job-creation-and-monetary-policy-twenty.html and earlier http://cmpassocregulationblog.blogspot.com/2015/01/fluctuating-valuations-of-risk.html). US GDP in IVQ2014 is 11.6 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,293.7 billion in IVQ2014 or 8.7 percent at the average annual equivalent rate of 1.2 percent. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. 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. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth at average 3.3 percent per year from Feb 1919 to Feb 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.2379 in Feb 2015. The actual index NSA in Feb 2015 is 100.0312, which is 20.1 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014, raising the index at trend to 117.6250 in Feb 2015. The output of manufacturing at 100.0312 in Feb 2015 is 15.0 percent below trend under this alternative calculation.

Table I-3 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 87.4 percent in IIIQ2014. Most of US national income is in the form of services. In Feb 2015, there were 139.566 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 117.365 million NSA in Feb 2015 accounted for 84.1 percent of total nonfarm jobs of 139.566 million, of which 12.235 million, or 10.4 percent of total private jobs and 8.8 percent of total nonfarm jobs, were in manufacturing. Private service-providing jobs were 98.315 million NSA in Feb 2015, or 70.4 percent of total nonfarm jobs and 83.8 percent of total private-sector jobs. Manufacturing has share of 11.2 percent in US national income in IIIQ2014 and durable goods 6.5 percent, as shown in Table I-3. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

Table I-3, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

 

SAAR
IIQ2014

% Total

SAAR IIIQ2014

% Total

National Income WCCA

15,222.0

100.0

15,494.0

100.0

Domestic Industries

15,008.6

98.6

15,264.1

98.5

Private Industries

13,287.8

87.3

13,538.5

87.4

    Agriculture

179.0

1.2

167.6

1.1

    Mining

261.4

1.7

273.9

1.8

    Utilities

215.6

1.4

221.8

1.4

    Construction

670.3

4.4

681.7

4.4

    Manufacturing

1712.8

11.3

1743.0

11.2

       Durable Goods

975.4

6.4

1,002.2

6.5

       Nondurable Goods

737.4

4.8

740.8

4.8

    Wholesale Trade

917.7

6.0

944.4

6.1

     Retail Trade

1048.0

6.9

1055.1

6.8

     Transportation & WH

478.1

3.1

479.8

3.1

     Information

580.3

3.8

574.9

3.7

     Finance, Insurance, RE

2642.8

17.4

2794.1

18.0

     Professional & Business Services

2064.5

13.6

2066.4

13.3

     Education, Health Care

1484.3

9.8

1494.6

9.6

     Arts, Entertainment

605.0

4.0

609.4

3.9

     Other Services

428.0

2.8

431.9

2.8

Government

1720.8

11.3

1725.6

11.1

Rest of the World

213.5

1.4

229.9

1.5

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

Source: US Bureau of Economic Analysis

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

Motor vehicle sales and production in the US have been in long-term structural change. Table I-4 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. In Feb 2015, light vehicle sales accumulated to 2,408,742 which is higher by 9.2 percent relative to 2,206,454 a year earlier (http://motorintelligence.com/m_frameset.html). The seasonally adjusted annual rate of light vehicle sales in the US reached 16.23 million in Feb 2015, lower than 16.66 million in Jan 2015 and higher than 15.41 million in Feb 2014 (http://motorintelligence.com/m_frameset.html).

Table I-4, US, New Motor Vehicle Sales and Car Production, Thousand Units

 

New Motor Vehicle Sales

New Car Sales and Leases

New Truck Sales and Leases

Domestic Car Production

1990

14,137

9,300

4,837

6,231

1991

12,725

8,589

4,136

5,454

1992

13,093

8,215

4,878

5,979

1993

14,172

8,518

5,654

5,979

1994

15,397

8,990

6,407

6,614

1995

15,106

8,536

6,470

6,340

1996

15,449

8,527

6,922

6,081

1997

15,490

8,273

7,218

5,934

1998

15,958

8,142

7,816

5,554

1999

17,401

8,697

8,704

5,638

2000

17,806

8,852

8,954

5,542

2001

17,468

8,422

9,046

4,878

2002

17,144

8,109

9,036

5,019

2003

16,968

7,611

9,357

4,510

2004

17,298

7,545

9,753

4,230

2005

17,445

7,720

9,725

4,321

2006

17,049

7,821

9,228

4,367

2007

16,460

7,618

8,683

3,924

2008

13,494

6,814

6.680

3,777

2009

10,601

5,456

5,154

2,247

2010

11,772

5,729

6,044

2,840

Source: US Census Bureau

http://www.census.gov/compendia/statab/cats/wholesale_retail_trade/motor_vehicle_sales.html

Chart I-5 of the Board of Governors of the Federal Reserve provides output of motor vehicles and parts in the United States from 1972 to 2015. Output virtually stagnated since the late 1990s.

clip_image008

Chart 1-5, US, Motor Vehicles and Parts Output, 1972-2015

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/default.htm

Chart I-6 of the Board of Governors of the Federal Reserve System provides output of computers and electronic products in the United States from 1972 to 2015. Output accelerated sharply in the 1990s and 2000s and has surpassed the level before the global recession beginning in IVQ2007.

clip_image009

Chart I-6, US, Output of Computers and Electronic Products, 1972-2015

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/default.htm

Chart I-7 of the Board of Governors of the Federal Reserve System shows that output of durable manufacturing accelerated in the 1980s and 1990s with slower growth in the 2000s perhaps because processes matured. Growth was robust after the major drop during the global recession but appears to vacillate in the final segment.

clip_image010

Chart I-7, US, Output of Durable Manufacturing, 1972-2015

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/default.htm

Chart I-8 of the Board of Governors of the Federal Reserve System provides output of aerospace and miscellaneous transportation equipment from 1972 to 2015. There is long-term upward trend with oscillations around the trend and cycles of large amplitude.

clip_image011

Chart I-8, US, Output of Aerospace and Miscellaneous Transportation Equipment, 1972-2015

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/Current/default.htm

The Empire State Manufacturing Survey Index in Table VA-1 provides continuing deterioration that started in Jun 2012 well before Hurricane Sandy in Oct 2012. The current general index has been in negative contraction territory from minus 3.84 in Aug 2012 to minus 9.56 in Jan 2013 and minus 1.72 in May 2013. The current general index changed to 6.90 in Mar 2015. The index of current orders has also been in negative contraction territory from minus 3.51 in Aug 2012 to minus 10.59 in Jan 2013 and minus 5.39 in Jun 2013. The index of current new orders changed to minus 2.39 in Mar 2015. Number of workers and hours worked have registered negative or declining readings since Sep 2012 with improvement to 18.56 for number of workers in Mar 2015 and weakness of 5.15 for average workweek. There is improvement in the general index for the next six months at 30.72 in Mar 2015 and new orders at 26.31.

Table VA-1, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index SA

Current

General Index

New Orders

Shipments

Number of Workers

Average Workweek

Sep-11

-4.87

-4.51

-7.19

-5.43

-2.17

Oct-11

-4.97

1.2

1.96

3.37

-4.49

Nov-11

4.11

0.62

12.66

-3.66

2.44

Dec-11

12.74

9.64

22.81

2.33

-2.33

Jan-12

10.2

8.82

18.4

12.09

6.59

Feb-12

16.5

5.94

17.74

11.76

7.06

Mar-12

16.35

4.79

15.02

13.58

18.52

Apr-12

7.43

5.69

6.7

19.28

6.02

May-12

14.05

9.04

22.5

20.48

12.05

Jun-12

2.82

3.57

12.34

12.37

3.09

Jul-12

4.48

-3.04

9.5

18.52

0

Aug-12

-3.84

-3.51

7.08

16.47

3.53

Sep-12

-7.69

-10.68

4.21

4.26

-1.06

Oct-12

-3.31

-7.63

-6.55

-1.08

-4.3

Nov-12

-1.65

4.94

16.2

-14.61

-7.87

Dec-12

-4.71

-0.38

11.22

-9.68

-10.75

Jan-13

-9.56

-10.59

-4.09

-4.3

-5.38

Feb-13

7.47

10.8

10.55

8.08

-4.04

Mar-13

6.94

5.89

7

3.23

0

Apr-13

4.1

3.05

3.94

6.82

5.68

May-13

-1.72

-0.98

-1.16

5.68

-1.14

Jun-13

6.25

-5.39

-5.14

0

-11.29

Jul-13

6.63

3.09

6.26

3.26

-7.61

Aug-13

8.58

1.76

2.16

10.84

4.82

Sep-13

6.47

2.1

12.64

7.53

1.08

Oct-13

5.36

7.3

14.26

3.61

3.61

Nov-13

1.08

-3.42

0.75

0

-5.26

Dec-13

4.79

0.35

7.05

0

-10.84

Jan-14

10.35

8.33

13.9

12.2

1.22

Feb-14

4.34

0.37

2.74

11.25

3.75

Mar-14

5.92

3.38

6.1

5.88

4.71

Apr-14

3.49

-0.94

7.72

8.16

2.04

May-14

16.95

10.03

16.99

20.88

2.2

Jun-14

18.16

16.63

15.57

10.75

9.68

Jul-14

22.6

17.79

21.01

17.05

2.27

Aug-14

15.1

14.24

21.93

13.64

7.95

Sep-14

27.41

16.35

23.24

3.26

3.26

Oct-14

8.55

-1.01

2.67

10.23

-1.14

Nov-14

10.33

9.12

10.61

8.51

-7.45

Dec-14

-1.23

0.39

2.55

8.33

-11.46

Jan-15

9.95

6.09

9.59

13.68

-8.42

Feb-15

7.78

1.22

14.12

10.11

-1.12

Mar-15

6.90

-2.39

7.93

18.56

5.15
 

General Index

New Orders

Shipments

Number of Workers

Average Workweek

Sep-11

22.52

23.48

22.26

0.00

-6.52

Oct-11

14.63

19.77

23.69

6.74

-2.25

Nov-11

34.92

30.37

32.68

14.63

8.54

Dec-11

47.29

45.32

41.27

24.42

22.09

Jan-12

51.87

44.86

44.7

28.57

17.58

Feb-12

45.13

36.76

40.64

29.41

18.82

Mar-12

43.69

37.41

40.12

32.1

20.99

Apr-12

40.45

38.12

38.18

27.71

10.84

May-12

32.16

31.96

26.64

12.05

8.43

Jun-12

27.38

27.87

22.38

16.49

2.06

Jul-12

23.72

21.6

22.55

6.17

-4.94

Aug-12

19.26

13.72

22.16

3.53

-8.24

Sep-12

26.79

27.84

22.63

8.51

2.13

Oct-12

20.45

22.91

18.62

0

-11.83

Nov-12

16.88

15.44

25.48

-1.12

0

Dec-12

21.88

21.56

23.6

10.75

5.38

Jan-13

22.71

23.85

24.95

7.53

3.23

Feb-13

30.18

25.88

26.77

15.15

11.11

Mar-13

34.81

32.92

39.94

19.35

2.15

Apr-13

30.41

35.35

36.47

25

7.95

May-13

25.85

29.83

26.15

11.36

1.14

Jun-13

27.55

21.89

20.71

1.61

-9.68

Jul-13

33.4

32.86

35.14

1.09

-1.09

Aug-13

36.26

29.58

31.54

8.43

-6.02

Sep-13

39.9

37.87

37.13

4.3

-2.15

Oct-13

41.54

37.86

34.08

7.23

2.41

Nov-13

36.96

39.6

37.16

22.37

-3.95

Dec-13

39.77

30.57

33.15

9.64

1.2

Jan-14

37.32

37.85

31.07

20.73

9.76

Feb-14

38.17

43.16

42.43

25

7.5

Mar-14

34.84

36.29

35.24

17.65

9.41

Apr-14

38.43

34.08

38.3

22.45

1.02

May-14

42.49

37.99

35.63

17.58

-3.3

Jun-14

41.06

43.81

44.05

20.43

0

Jul-14

29.53

26.85

25.61

17.05

-4.55

Aug-14

46.1

48.9

54.67

22.73

0

Sep-14

46.08

45.35

46.64

14.13

5.43

Oct-14

42.39

43.24

43.07

12.5

-2.27

Nov-14

46.84

47.69

44.78

24.47

8.51

Dec-14

39.31

38.85

37.75

20.83

12.5

Jan-15

48.35

41.44

40.57

31.58

11.58

Feb-15

25.58

28.61

30.34

24.72

1.12

Mar-15

30.72

26.31

28.71

28.87

3.09

Source: Federal Reserve Bank of New York

http://www.ny.frb.org/survey/empire/empiresurvey_overview.html

Chart VA-1 of the Federal Reserve Bank of New York provides indexes of current and expected economic activity. There were multiple contractions in current activity after the global recession shown in shade. Current activity is weakening relative to strong recovery in the initial expansion in 2010 and 2011.

clip_image012

Chart VA-1, US, US, Federal Reserve Bank of New York, Diffusion Index of Current and Expected Activity, Seasonally Adjusted

Source: Federal Reserve Bank of New York

http://www.ny.frb.org/survey/empire/empiresurvey_overview.html

The Business Outlook Survey Diffusion Index of the Federal Reserve Bank of Philadelphia in Table VA-2 also shows improvement after prior deterioration followed by current soft improvement. The general index moved out of contraction at 7.9 in Feb 2013 to 5.0 in Feb 2015 together with 3.9 for new orders. Expectations for the next six months are brighter with the general index at 32.0 in Mar 2015 and the index of new orders at 34.3.

Table VA-2, FRB of Philadelphia Business Outlook Survey Diffusion Index

 

Current General Index

Current New Orders

Current Shipments

Future General Index

Future New Orders

Future Shipments

Jan-11

15.8

20.0

10.8

43.6

36.5

37.6

Feb-11

28.7

19.2

24.1

41.4

38.4

43.4

Mar-11

35.4

33.4

28.1

55.8

54.6

53.5

Apr-11

13.2

13.5

20.8

34.6

30.1

35.9

May-11

6.4

8.6

8.6

25.6

25

28.3

Jun-11

0.4

-3.9

7.6

7.5

8.2

9.3

Jul-11

7.7

4.2

8

28.4

32.7

28

Aug-11

-18.9

-16.7

-1.7

13.1

27.3

24.4

Sep-11

-13.4

-5.7

-8.9

22.4

20.6

23.2

Oct-11

7.0

5.6

9.2

26.6

29.2

29.9

Nov-11

6.0

1.7

6.8

37.2

36.5

34.1

Dec-11

3.3

4.3

5.8

34.1

38.4

32

Jan-12

5.6

10.2

3.7

43.6

44.1

42.9

Feb-12

9.1

10.6

8.5

28.8

31.6

27.2

Mar-12

7.3

-0.6

-0.1

28.3

35.6

28.9

Apr-12

5.8

-0.1

-3.9

38

40.7

33.6

May-12

-0.6

2.4

7.6

23.6

34.5

29.8

Jun-12

-10.9

-15.8

-10.5

24.4

33.6

37.7

Jul-12

-11.7

-3.1

-9.8

21.6

26.9

20.4

Aug-12

-1.1

2.4

-0.7

21.8

27.2

19.8

Sep-12

-3.1

0.7

-12.1

36.6

44.6

36.9

Oct-12

0

-5.7

-6.4

18.2

21.8

21.3

Nov-12

-7.9

-6.7

-6.4

18.5

23.6

25.2

Dec-12

4

2.3

13.6

23.4

28.8

28.4

Jan-13

-4.9

-2.7

-0.7

27.9

31.9

35

Feb-13

-7.9

-1.1

2.2

29.2

37.6

31.5

Mar-13

0.3

0.4

3.2

32.1

35.8

31.1

Apr-13

0.4

-0.7

2.9

28.2

32.2

31.8

May-13

0.2

-4.1

-2.5

37.6

40.5

37.4

Jun-13

15.9

14.6

9.3

35.8

39.1

40

Jul-13

16.9

8.8

10.6

42

54.1

46.1

Aug-13

10.5

9.8

5.9

42.2

41.9

43.5

Sep-13

16.8

19

20.4

54.4

54

50.5

Oct-13

14.7

21.1

16.9

56.8

62.5

52.6

Nov-13

8.1

10.5

5.3

45.2

47.9

43

Dec-13

6.2

11.3

11.5

43.1

44.7

41.7

Jan-14

10

6.7

11.1

36

39.7

34.4

Feb-14

-2

2.5

-6

39.8

37.5

38.7

Mar-14

10.7

8.2

7.6

37.7

35.7

42.4

Apr-14

16

15

21

36

35.9

37.2

May-14

18.3

13.6

16.4

40.8

39.8

41.7

Jun-14

19.6

14.4

17.5

51

53.5

47.7

Jul-14

22.8

31.4

29.9

54.6

50.8

54.3

Aug-14

25.5

15.8

18.9

66

56.2

65.2

Sep-14

18.6

13.1

20.0

52.4

47.6

53.4

Oct-14

19

13.8

15.9

52.7

51.0

51.8

Nov-14

40.2

32.4

29.6

55.0

47.6

50.5

Dec-14

24.3

13.6

15.1

50.4

44.8

47.5

Jan-15

6.3

8.5

-6.9

50.9

44.8

40.8

Feb-15

5.2

5.4

8.1

29.7

42.8

38.2

Mar-15

5.0

3.9

-7.8

32.0

34.3

32.3

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Chart VA-2 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Jan 2015. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now by what hopefully appeared as renewed strength from late 2011 into Jan 2012. There is decline to negative territory of the current activity index in Nov 2012 and return to positive territory in Dec 2012 with decline of current conditions into contraction in Jan-Feb 2013 and rebound to mild expansion in Mar-Apr 2013. The index of current activity moved into expansion in Jun-Oct 2013 with weakness in Nov-Dec 2013, improving in Jan 2014. There is renewed deterioration in Feb 2014 with rebound in Apr-Sep 2014 and mild deterioration in Oct 2014 followed by improvement in Nov 2014. The index deteriorated in Jan-Feb 2015, stabilizing in Mar 2015.

clip_image014

Chart VA-2, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

The index of current new orders of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia in Chart VA-2 illustrates the weakness of the cyclical expansion. The index weakened in 2006 and 2007 and then fell sharply into contraction during the global recession. There have been twelve readings into contraction from Jan 2012 to May 2013 and generally weak readings with some exceptions. The index of new orders moved into expansion in Jun-Oct 2013 with moderation in Nov-Dec 2013 and into Jan 2014. The index fell into contraction in Feb 2014, recovering in Mar-Apr 2014 but weaker reading in May 2014. There is marked improvement in Jun-Jul 2014 with slowing in Aug-Oct 2014 followed by acceleration in Nov 2014. New orders deteriorated in Jan-Mar 2015.

clip_image016

Chart VA-3, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current New Orders Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

IIA Unresolved US Balance of Payments Deficits and Fiscal Imbalance Threatening Risk Premium on Treasury Securities. Table IIA1-1 of the CBO (2012NovMBR, 2013BEOFeb5, 2013HBDFFeb5, 2013MEFFeb5, 2013Aug12, CBO, Feb 2014, CBO, Apr 2014, CBO, Jan 2015) shows the significant worsening of United States fiscal affairs from 2007-2008 to 2009-2012 with marginal improvement in 2013-2014 but with much higher debt relative to GDP. The deficit of $1.1 trillion in fiscal year 2012 was the fourth consecutive federal deficit exceeding one trillion dollars. All four deficits are the highest in share of GDP since 1946 (CBO 2012MBR, 2013HBDFeb5, 2013Aug12, 2013AugHBD, CBO, Jan 2015).

Table IAI-1, US, Budget Fiscal Year Totals, Billions of Dollars and % GDP

 

2007

2008

2009

2010

2011

2012

2013

2014

Receipts

2568

2524

2105

2163

2304

2450

2775

3021

Outlays

2729

2983

3518

3457

3603

3537

3455

3504

Deficit

-161

-459

1413

1294

1300

1087

680

-483

% GDP

-1.1

-3.1

-9.8

-8.7

-8.5

-6.8

-4.1

-2.8

Source: CBO (2012NovMBR), CBO (2013BEOFeb5), CBO (2013HBDFeb5), CBO (2013Aug12). CBO, Historical Budget Data—February 2014, Washington, DC, Congressional Budget Office, Feb. CBO, Historical Budget Data—April 2014, Washington DC, Congressional Budget Office, Apr 14. CBO, Historical budget data—August 2014 release. Washington, DC, Congressional Budget Office, Aug 27. CBO, Monthly budget review: summary of fiscal year 2014. Washington, DC, Congressional Budget Office, Nov 10, 2014. CBO, Historical Budget Data, January 2015 Baseline from Budget and economic outlook: 2015 to 2025. Washington, DC, CBO, Jan 26.

Table IIAI-2 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 2015 fiscal year beginning on Oct 1, 2014 and ending on Sep 30, 2015; federal fiscal data for the years from 2009 to 2014; federal fiscal data for the years from 2005 to 2008; and Treasury debt held by the public from 2005 to 2014. Receipts increased 7.1 percent in the cumulative fiscal year 2015 ending in Feb 2015 relative to the cumulative in fiscal year 2014. Individual income taxes increased 8.1 percent relative to the same fiscal period a year earlier. Outlays increased 6.0 percent relative to a year earlier. There are also receipts, outlays, deficit and debt for fiscal years 2013 and 2014. 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 2.3 percent on average in the cyclical expansion from IIIQ2009 to IVQ2014. In contrast, the expansion from IQ1983 to IIQ1988 was at the average annual growth rate of 4.9 percent and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html). Because of mediocre GDP growth, there are 25.9 million unemployed or underemployed in the United States for an effective unemployment/underemployment rate of 16.5 percent (http://cmpassocregulationblog.blogspot.com/2015/03/global-competitive-devaluation-rules.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/2015/01/peaking-valuations-of-risk-financial.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 1965 to 2014. Federal outlays were 23.3 percent of GDP on average from 2009 to 2012, which is well above 20.1 percent of GDP on average from 1965 to 2014. The lower part of Table IIA1-2 shows that debt held by the public swelled from $5803 billion in 2008 to $12,779 billion in 2014, by $6976 billion or 120.2 percent. Debt held by the public as percent of GDP or economic activity jumped from 39.3 percent in 2008 to 74.1 percent in 2014, which is well above the average of 38.2 percent from 1965 to 2014. 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 IIA1-2, US, Treasury Budget in Fiscal Year to Date Million Dollars

Feb 2014

Fiscal Year 2015

Fiscal Year 2014

∆%

Receipts

1,185,613

1,106,767

7.1

Outlays

1,572,149

1,483,138

6.0

Deficit

-386,537

-376,371

  

Individual Income Tax

555,461

513,769

8.1

Corporation Income Tax

101,634

85,422

19.0

Social Insurance

296,475

285,986

3.7
 

Receipts

Outlays

Deficit (-), Surplus (+)

$ Billions

      

Fiscal Year 2014

3,021

3,504

-483

% GDP

17.5

20.3

2.8

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

72.0

  

2014

12,779

74.1

  

Source: http://www.fiscal.treasury.gov/fsreports/rpt/mthTreasStmt/mthTreasStmt_home.htm 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. Congressional Budget Office, August 2014 baseline: an update to the budget and economic outlook: 2014 to 2024. Washington, DC, CBO, Aug 27, 2014. CBO, Monthly budget review: summary of fiscal year 2014. Washington, DC, Congressional Budget Office, Nov 10, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

Table IIAI-3 provides total United States federal receipts from 2010 to 2014. Individual income taxes of $1132 billion, or $1.1 trillion, increased 25.9 percent from 2010 to 2012 and account for 46.2 percent of US total receipts in 2012. Individual income taxes increased 23.2 percent from $1132 billion in 2012 to $1395 billion in 2014, contributing 46.2 percent of total receipts. Total receipts stood at 15.3 percent of GDP in 2012, which is lower than average 17.4 percent from 1965 to 2014 (CBO 2013Aug12Av, CBO, Jan 2015). Total receipts increased to 16.7 percent of GDP in 2013. Total receipts increased to 17.5 percent of GDP in 2014.

Table IIA1-3, United States, Total Receipts, Billions of Dollars and ∆%

Major Source

2010

2011

2012

2013

2014

∆% 2013-2014

Individual Income Taxes

899

1092

1132

1316

1395

16.3

Corporate Income Taxes

191

181

242

274

321

13.2

Social Insurance

865

819

845

948

1024

12.2

Other

208

212

231

237

281

10.0

Total

2163

2304

2450

2775

3021

13.3

% of GDP

14.6

15.0

15.3

16.7

17.5

NA

Source: CBO (2012NovMBR), CBO (2013BEOFeb5), CBO 2013HBDFeb5), CBO (2013Aug12). 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. CBO, Historical budget data—August 2014 release. Washington, DC, Congressional Budget Office, Aug 27. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

Total outlays of the federal government of the United States have grown to extremely high levels. Table IIA1-4 of the CBO (2014Feb, Apr 2014, CBO, Jan 2015) provides total outlays in 2006 and 2014. Total outlays of $3504.2 billion in 2014, or $3.5 trillion, are higher by $849.1 billion, or $0.8 trillion, relative to $2655.1 billion in 2006, or $2.7 trillion. Outlays have grown from 19.4 percent of GDP in 2006 to 20.3 percent of GDP in 2013. Outlays as percent of GDP were on average 20.1 percent from 1965 to 2014 and receipts as percent of GDP were on average 17.4 percent of GDP. It has proved extremely difficult to increase receipts above 19 percent of GDP. Mandatory outlays increased from $1411.8 billion in 2006 to $2031.8 billion in 2014, by $620 billion. The first to the final row shows that the total of social security, Medicare, Medicaid, Income Security, net interest and defense absorbs 82.3 percent of US total outlays, which is equal to 16.7 percent of GDP. There has been no meaningful constraint of spending, which is quite difficult because of the rigid structure of social programs.

Table IIA1-4, US, Central Government Total Revenue and Outlays, Billions of Dollars and Percent

 

2006

% Total

2014

% Total

I TOTAL REVENUE $B

2406.9

100.0

3020.8

100.0

% GDP

17.6

  

17.5

  

Individual Income Taxes $B

1043.9

  

1394.6

  

% GDP

7.6

  

8.1

  

Corporate Income Taxes $B

353.9

  

320.7

  

% GDP

2.6

  

1.9

  

Social Insurance Taxes

837.8

  

1023.9

  

% GDP

6.1

  

5.9

  

II TOTAL OUTLAYS

2655.1

  

3504.2

  

% GDP

19.4

  

20.3

  

Discretionary

1016.6

  

1178.7

  

% GDP

7.4

  

6.8

  

Defense

520.0

  

595.8

  

% GDP

3.8

  

3.5

  

Nondefense

496.7

  

582.9

  

% GDP

3.6

  

3.4

  

Mandatory

1411.8

  

2031.8

  

% GDP

10.3

  

12.2

  

Social Security

543.9

  

844.9

  

% GDP

4.0

  

4.9

  

Medicare

376.8

  

599.9

  

% GDP

2.8

  

3.5

  

Medicaid

180.6

  

301.5

  

% GDP

1.3

  

1.7

  

Income Security

200.0

  

311.1

  

% GDP

1.5

  

1.8

  

Offsetting Receipts

-144.3

  

-276.3

  

% GDP

-1.1

  

-1.6

  

Net Interest

226.6

  

229.2

  

% GDP

1.7

  

1.3

  

Defense
+Social Security         

+Medicare
+Medicaid
+Income Security
+Net interest

2047.9

77.1*

2882.4

82.3*

% GDP

15.1

  

16.7

  

*Percent of Total Outlays

Source: 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. CBO, Historical budget data—August 2014 release. Washington, DC, Congressional Budget Office, Aug 27. CBO, Historical budget data—August 2014 release. Washington, DC, Congressional Budget Office, Aug 27. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

The US is facing a major fiscal challenge. Table IIA1-5 provides federal revenues, expenditures, deficit and debt as percent of GDP and the yearly change in GDP in the more than eight decades from 1930 to 2014. The most recent period of debt exceeding 90 percent of GDP based on yearly observations in Table IIA1-5 is between 1944 and 1948. The data in Table IIA-15 use the earlier GDP estimates of the Bureau of Economic Analysis (BEA) until 1972 for the ratios to GDP of revenue, expenditures, deficit and debt and the revised CBO (2013Aug12) after 1973 that incorporate the new BEA GDP estimates (http://www.bea.gov/iTable/index_nipa.cfm). The percentage change of GDP is based on the new BEA estimates for all years. The debt/GDP ratio actually rose to 106.2 percent of GDP in 1945 and to 108.7 percent of GDP in 1946. GDP fell revised 11.6 percent in 1946, which is only matched in Table I-5 by the decline of revised 12.9 percent in 1932. Part of the decline is explained by the bloated US economy during World War II, growing at revised 17.7 percent in 1941, 18.9 percent in 1942 and 17.0 percent in 1943. Expenditures as a share of GDP rose to their highest in the series: 43.6 percent in 1943, 43.6 percent in 1944 and 41.9 percent in 1945. The repetition of 43.6 percent in 1943 and 1944 is in the original source of Table IIA1-5. During the Truman administration from Apr 1945 to Jan 1953, the federal debt held by the public fell systematically from the peak of 108.7 percent of GDP in 1946 to 61.6 percent of GDP in 1952. During the Eisenhower administration from Jan 1953 to Jan 1961, the federal debt held by the public fell from 58.6 percent of GDP in 1953 to 45.6 percent of GDP in 1960. The Truman and Eisenhower debt reductions were facilitated by diverse factors such as low interest rates, lower expenditure/GDP ratios that could be attained again after lowering war outlays and less rigid structure of mandatory expenditures than currently. There is no subsequent jump of debt as the one from revised 39.3 percent of GDP in 2008 to 65.9 percent of GDP in 2011, 70.4 percent in 2012, 72.3 percent in 2013 and 74.1 percent in 2014.

Table IIA1-5, United States Central Government Revenue, Expenditure, Deficit, Debt and GDP Growth 1930-2011

 

Rev
% GDP

Exp
% GDP

Deficit
% GDP

Debt
% GDP

GDP
∆%

1930

4.2

3.4

0.8

  

-8.5

1931

3.7

4.3

-0.6

  

-6.4

1932

2.8

6.9

-4.0

  

-12.9

1933

3.5

8.0

-4.5

  

-1.3

1934

4.8

10.7

-5.9

  

10.8

1935

5.2

9.2

-4.0

  

8.9

1936

5.0

10.5

-5.5

  

12.9

1937

6.1

8.6

-2.5

  

5.1

1938

7.6

7.7

-0.1

  

-3.3

1939

7.1

10.3

-3.2

  

8.0

1940s

          

1940

6.8

9.8

-3.0

44.2

8.8

1941

7.6

12.0

-4.3

42.3

17.7

1942

10.1

24.3

-14.2

47.0

18.9

1943

13.3

43.6

-30.3

70.9

17.0

1944

20.9

43.6

-22.7

88.3

8.0

1945

20.4

41.9

-21.5

106.2

-1.0

1946

17.7

24.8

-7.2

108.7

-11.6

1947

16.5

14.8

1.7

96.2

-1.1

1948

16.2

11.6

4.6

84.3

4.1

1949

14.5

14.3

0.2

79.0

-0.5

1950s

          

1950

14.4

15.6

-1.1

80.2

8.7

1951

16.1

14.2

1.9

66.9

8.1

1952

19.0

19.4

-0.4

61.6

4.1

1953

18.7

20.4

-1.7

58.6

4.7

1954

18.5

18.8

-0.3

59.5

-0.6

1955

16.5

17.3

-0.8

57.2

7.1

1956

17.5

16.5

0.9

52.0

2.1

1957

17.7

17.0

0.8

48.6

2.1

1958

17.3

17.9

-0.6

49.2

-0.7

1959

16.2

18.8

-2.6

47.9

6.9

1960s

          

1960

17.8

17.8

0.1

45.6

2.6

1961

17.8

18.4

-0.6

45.0

2.6

1962

17.6

18.8

-1.3

43.7

6.1

1963

17.8

18.6

-0.8

42.4

4.4

1964

17.6

18.5

-0.9

40.0

5.8

1965

16.4

16.6

-0.2

36.7

6.5

1966

16.7

17.2

-0.5

33.7

6.6

1967

17.8

18.8

-1.0

31.8

2.7

1968

17.0

19.8

-2.8

32.2

4.9

1969

19.0

18.7

0.3

28.3

3.1

1970s

          

1970

18.4

18.7

-0.3

27.0

0.2

1971

16.7

18.8

-2.1

27.1

3.3

1972

17.0

18.9

-1.9

26.4

5.2

1973

17.0

18.1

-1.1

25.1

5.6

1974

17.7

18.1

-0.4

23.1

-0.5

1975

17.3

20.6

-3.3

24.5

-0.2

1976

16.6

20.8

-4.1

26.7

5.4

1977

17.5

20.2

-2.6

27.1

4.6

1978

17.5

20.1

-2.6

26.6

5.6

1979

18.0

19.6

-1.6

24.9

3.2

1980s

          

1980

18.5

21.1

-2.6

25.5

-0.2

1981

19.1

21.6

-2.5

25.2

2.6

1982

18.6

22.5

-3.9

27.9

-1.9

1983

17.0

22.8

-5.9

32.1

4.6

1984

16.9

21.5

-4.7

33.1

7.3

1985

17.2

22.2

-5.0

35.3

4.2

1986

17.0

21.8

-4.9

38.4

3.5

1987

17.9

21.0

-3.1

39.5

3.5

1988

17.6

20.6

-3.0

39.8

4.2

1989

17.8

20.5

-2.7

39.3

3.7

1990s

          

1990

17.4

21.2

-3.7

40.8

1.9

1991

17.3

21.7

-4.4

44.0

-0.1

1992

17.0

21.5

-4.5

46.6

3.6

1993

17.0

20.7

-3.8

47.8

2.7

1994

17.5

20.3

-2.8

47.7

4.0

1995

17.8

20.0

-2.2

47.5

2.7

1996

18.2

19.6

-1.3

46.8

3.8

1997

18.6

18.9

-0.3

44.5

4.5

1998

19.2

18.5

0.8

41.6

4.5

1999

19.2

17.9

1.3

38.2

4.7

2000s

          

2000

20.0

17.6

2.3

33.6

4.1

2001

18.8

17.6

1.2

31.4

1.0

2002

17.0

18.5

-1.5

32.6

1.8

2003

15.7

19.1

-3.3

34.5

2.8

2004

15.6

19.0

-3.4

35.5

3.8

2005

16.7

19.2

-2.5

35.6

3.3

2006

17.6

19.4

-1.8

35.3

2.7

2007

17.9

19.1

-1.1

35.2

1.8

2008

17.1

20.2

-3.1

39.3

-0.3

2009

14.6

24.4

-9.8

52.3

-2.8

2010s

          

2010

14.6

23.4

-8.7

60.9

2.5

2011

15.0

23.4

-8.5

65.9

1.6

2012

15.3

22.1

-6.8

70.4

2.3

2013

16.7

20.8

-4.1

72.3

2.2

2014

17.5

20.3

-2.8

74.1

2.4

Sources:

Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB. CBO (2012JanBEO). CBO (2012Jan31). CBO (2012AugBEO). CBO (2013BEOFeb5). CBO2013HBDFeb5), CBO (2013Aug12). 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 14, 2014. Congressional Budget Office, August 2014 baseline: an update to the budget and economic outlook: 2014 to 2024. Washington, DC, CBO, Aug 27, 2014. CBO, Historical Budget Data, January 2015 Baseline from Budget and economic outlook: 2015 to 2025. Washington, DC, CBO, Jan 26.

Table IIA1-6 of the US, Congressional Budget Office, provides 40-Year averages of revenues and outlays before and after revision of the US National Income Accounts by the Bureau of Economic Analysis.

Table IIA1-6, US, Congressional Budget Office, 40-Year Averages of Revenues and Outlays Before and After Update of the US National Income Accounts by the Bureau of Economic Analysis, % of GDP 

 

Before Update

After Update

Revenues

    

Individual Income Taxes

8.2

7.9

Social Insurance Taxes

6.2

6.0

Corporate Income Taxes

1.9

1.9

Other

1.6

1.6

Total Revenues

17.9

17.4

Outlays

    

Mandatory

10.2

9.9

Discretionary

8.6

8.4

Net Interest

2.2

2.2

Total Outlays

21.0

20.4

Deficit

-3.1

-3.0

Debt Held by the Public

39.2

38.0

Source: CBO (2013Aug12Av). Kim Kowaleski and Amber Marcellino.

Table IIA1-7 provides the latest exercise by the CBO (2013BEOFeb5, 2012AugBEO, CBO2012NovCDR, 2013Sep11, CBO Feb2014, CBO Apr2014, CBOAug2014, CBO Jan 26, 2015) of projecting the fiscal accounts of the US. Table IIA1-7 extends data back to 1995 with the projections of the CBO from 2015 to 2025, using the new estimates of the Bureau of Economic Analysis of US GDP (http://www.bea.gov/iTable/index_nipa.cfm). Budget analysis in the US uses a ten-year horizon. The significant event in the data before 2011 is the budget surpluses from 1998 to 2001, from 0.8 percent of GDP in 1998 to 2.3 percent of GDP in 2000 and 1.2 percent of GDP in 2001. Debt held by the public fell from 47.5 percent of GDP in 1995 to 31.4 percent of GDP in 2001.

Table IIA1-7, US, CBO Baseline Budget Outlook 2015-2025

 

Out
$B

Out
% GDP

Deficit
$B

Deficit
% GDP

Debt

Debt
% GDP

1995

1,516

20.0

-164

-2.2

3,604

47.5

1996

1,560

19.6

-107

-1.3

3,734

46.8

1997

1,601

18.9

-22

-0.3

3,772

44.5

1998

1,652

18.5

+69

+0.8

3,721

41.6

1999

1,702

17.9

+126

+1.3

3,632

38.2

2000

1,789

17.6

+236

+2.3

3,410

33.6

2001

1,863

17.6

+128

+1.2

3,320

31.4

2002

2,011

18.5

-158

-1.5

3,540

32.6

2003

2,159

19.1

-378

-3.3

3,913

34.5

2004

2,293

19.0

-413

-3.4

4,295

35.5

2005

2,472

19.2

-318

-2.5

4,592

35.6

2006

2,655

19.4

-248

-1.8

4,829

35.3

2007

2,729

19.1

-161

-1.1

5,035

35.2

2008

2,983

20.2

-459

-3.1

5,803

39.3

2009

3,518

24.4

-1,413

-9.8

7,545

52.3

2010

3,457

23.4

-1,294

-8.7

9,019

60.9

2011

3,603

23.4

-1,300

-8.5

10,128

65.9

2012

3,537

22.1

-1,087

-6.8

11,281

70.4

2013

3,455

20.8

-680

-4.1

11,983

72.3

2014

3,504

20.3

-483

-2.8

12,779

74.1

2015

3,656

20.3

-468

-2.6

13,359

74.2

2016

3,926

20.8

-467

-2.5

13,905

73.8

2017

4,076

20.7

-489

-2.5

14,466

73.4

2018

4,255

20.7

-540

-2.6

15,068

73.3

2019

4,517

21.1

-652

-3.0

15,782

73.7

2020

4,765

21.4

-739

-3.3

16,580

74.3

2021

5,018

21.6

-814

-3.5

17,451

75.0

2022

5,337

22.0

-948

-3.9

18,453

76.1

2023

5,544

21.9

-953

-3.8

19,458

76.9

2024

5,754

21.8

-951

-3.6

20,463

77.7

2025

6,117

22.3

-1,088

-4.0

21,605

78.7

2016 to 2020

21,540

21.0

-2,887

-2.8

NA

NA

2016
to
2025

49,310

21.5

-7,641

-3.3

NA

NA

Note: Out = outlays

Sources: 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 (2013Sep11). CBO, Historical Budget Data—February 2014, Washington, DC, Congressional Budget Office, Feb. CBO, The Budget and Economic Outlook 2014 to 2024. Washington, DC, Congressional Budget Office, Feb 2014. CBO, Historical budget data—April 2014 release. Washington, DC, Congressional Budget Office, Apr 14, 2014. CBO, Updated Budget Projections: 2014 to 2024. Washington, DC, Congressional Budget Office, Apr 14, 2014.

Congressional Budget Office, August 2014 baseline: an update to the budget and economic outlook: 2014 to 2024. Washington, DC, CBO, Aug 27, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

Chart IIA1-1 of the Congressional Budget Office (CBO) provides the deficits of the US as percent of GDP from 1965 to 2014 followed on the right with the projections of the CBO in Jan 2015. Large deficits from 2009 to 2013, all above the average from 1965 to 2014, doubled the debt held by the public. Fiscal adjustment is now more challenging with rigidities in revenues and expenditures. The projections of the CBO in Jan 2015 for the years from 2015 to 2025 show lower deficits in proportion of GDP in the initial years that eventually become larger than the average in the second half of the ten-year window.

clip_image018

Chart IIA1-1, US, Actual, Average and Projected Revenues and Outlays

Source: Congressional Budget Office

The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

http://www.cbo.gov/publication/49892

Table IIA1-8 provides baseline CBO projections of federal revenues, outlays, deficit and debt as percent of GDP. The adjustment depends on increasing revenues from 15.0 percent of GDP in 2011 and 17.5 percent in 2015 to 18.3 percent of GDP in 2025, which is above the average of 17.4 percent of GDP from 1965 to 2014. Outlays fall from 23.4 percent of GDP in 2011 and 20.3 percent of GDP in 2014 to 22.3 percent of GDP in 2025, which is much higher than 20.1 percent on average from 1965 to 2014. The last row of Table IIA1-8 provides the CBO estimates of averages for 1965 to 2014 of 17.4 percent for revenues/GDP, 20.4 percent for outlays/GDP and 38.0 percent for debt/GDP. The debt/GDP ratio increases to 78.7 percent of GDP in 2025. The United States faces tough adjustment of its fiscal accounts. There is an additional source of pressure on financing the current account deficit of the balance of payments.

Table IIA1-8, US, Baseline CBO Projections of Federal Government Revenues, Outlays, Deficit and Debt as Percent of GDP

 

Revenues
% GDP

Outlays
% GDP

Deficit
% GDP

Debt
GDP

2011

15.0

23.4

-8.5

65.9

2012

15.3

22.1

-6.8

70.4

2013

16.7

20.8

-4.1

72.3

2014

17.5

20.3

-2.8

74.1

2015

17.7

20.3

-2.6

74.2

2016

18.4

20.8

-2.5

73.8

2017

18.2

20.7

-2.5

73.4

2018

18.1

20.7

-2.6

73.3

2019

18.1

21.1

-3.0

73.7

2020

18.0

21.4

-3.3

74.3

2021

18.1

21.6

-3.5

75.0

2022

18.1

22.0

-3.9

76.1

2023

18.2

21.9

-3.8

76.9

2024

18.2

21.8

-3.6

77.7

2025

18.3

22.3

-4.0

78.7

Total 2016-2020

18.1

21.0

-2.8

NA

Total 2016-2025

18.2

21.5

-3.3

NA

Average
1965-2014

17.4

20.1

-2.7

38.2

Source: CBO (2012AugBEO). CBO (2012NovCDR). CBO (2013BEOFeb5). CBO 2013HBDFeb5), CBO (2013Sep11), CBO (2013Aug12Av). Kim Kowaleski and Amber Marcellino. CBO, Historical Budget Data—February 2014, Washington, DC, Congressional Budget Office, Feb. CBO, The Budget and Economic Outlook 2014 to 2024. Washington, DC, Congressional Budget Office, Feb 2014. CBO, Historical budget data—April 2014 release. Washington, DC, Congressional Budget Office, Apr 14, 2014. CBO, Updated Budget Projections: 2014 to 2024. Washington, DC, Congressional Budget Office, Apr 14, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

Chart IIA1-2 of the Congressional Budget Office (CBO) provides the actual federal debt as percent of GDP from 1940 to 2014 and the projected path by the CBO from 2015 to 2025. The federal debt exceeded 100 percent of GDP because of the war effort during World War II. Adjustment was swift and continuous during rapid economic growth in large part because of less rigid structures of expenditures and revenues. The jump of the federal debt from 35.1 percent of GDP in 2007 to 74.1 percent of GDP in 2014 with CBO projection of 78.7 percent of GDP in 2025 poses a major challenge of fiscal adjustment.

clip_image020

Chart IIA1-2, US, Federal Debt Held by the Public

Source: Congressional Budget Office

CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

http://www.cbo.gov/publication/49892

Table IIA1-9 provides the long-term budget outlook of the CBO for 2014, 2024 and 2039. Revenues increase from 17.6 percent of GDP in 2014 to 19.4 percent in 2038. The growing stock of debt raises net interest spending from 1.3 percent of GDP in 2014 to 3.3 percent in 2024 and 4.7 percent 2039. Total spending increases from 20.4 percent of GDP in 2014 to 25.9 percent in 2039. Federal debt held by the public rises to 106.0 percent of GDP in 2039. US fiscal affairs are in an unsustainable path with tough rigidities in spending and revenues.

Table IIA1-9, Congressional Budget Office, Long-term Budget Outlook, % of GDP

 

2014

2024

2039

Revenues

17.6

18.3

19.4

Total Noninterest Spending

19.1

18.8

21.2

Social Security

4.9

5.6

6.3

Medicare

3.0

3.2

4.6

Medicaid, CHIP and Exchange Subsidies

1.9

2.7

3.4

Other

9.3

7.3

6.8

Net Interest

1.3

3.3

4.7

Total Spending

20.4

22.1

25.9

Revenues Minus Total Noninterest Spending

-1.5

-0.5

-1.7

Revenues Minus Total Spending

-2.8

-3.7

-6.4

Federal Debt Held by the Public

74.0

78.0

106.0

Source: CBO (2014Jul25). The 2014 long-term budget outlook. Washington, DC, Congressional Budget Office, Jul 25.

Chart IIA1-3 provides actual federal debt held by the public as percent of GDP from 1790 to 2012 and projected by the CBO (2013Sep17) from 2013 to 2038. The ratio of debt to GDP climbed from 42.3 percent in 1941 to a peak of 108.7 percent in 1946 because of the Second World War. The ratio of debt to GDP declined to 80.2 percent in 1950 and 66.9 percent in 1951 because of unwinding war effort, economy growing to capacity and less rigid mandatory expenditures. The ratio of debt to GDP of 70.1 percent in 2012 is the highest in the United States since 1950. The CBO (2013BEOJul25) projects the ratio of debt of GDP of the United States to reach 106.0 percent in 2039, which will be more than double the average ratio of 38.0 percent in 1973-2012. The misleading debate on the so-called “fiscal cliff” has disguised the unsustainable path of United States fiscal affairs.

clip_image021

Chart IIA1-3, Congressional Budget Office, Federal Debt Held by the Public, Extended Baseline Projection, % of GDP

Source: CBO. 2013Sep17. The 2013 long-term budget outlook. Washington, DC, Congressional Budget Office, Sep 17.

Chart IIIA1-4 of the Congressional Budget Office provides actual and extended baseline projections of federal debt held by the public, spending and revenues. The excess of spending over revenues increases from 2.8 percent in 2014 to 3.7 percent in 2024 and 6.4 percent in 2039. Federal debt held by the public rises from 74.0 percent of GDP in 2014 to 78.0 percent of GDP in 2024 and 106 percent of GDP in 2039.

clip_image023

Chart IIA1-4, Congressional Budget Office, Federal Debt Held by the Public, % of GDP

Source: CBO (2014Jul25). The 2014 long-term budget outlook. Washington, DC, Congressional Budget Office, Jul 25.

Chart IIA1-5 of the Congressional Budget Office provides actual and baseline projections of components of federal spending, illustrating the rigidity of US federal government spending. The combined spending in social security, Medicare and Medicaid increases from 9.8 percent of GDP in 2014 to 14.3 percent of GDP in 2039. Interest spending on a rising federal debt increases from 1.3 percent of GDP in 2014 to 4.7 percent of GDP in 2039.

clip_image025

Chart IIA1-5, Congressional Budget Office, Actual and Extended Baseline Projections of Components of Total Spending, % of GDP

Source: CBO (2014Jul25). The 2014 long-term budget outlook. Washington, DC, Congressional Budget Office, Jul 25.

Chart IIA1-6 of the Congressional Budget Office provides similar rigidity in the components of federal revenues. Individual income taxes increase from 8.0 percent of GDP in 2014 to 10.5 percent of GDP in 2039. Corporate income taxes decrease from 2.0 percent of GDP in 2014 to 1.8 percent of GDP in 2039. Payroll (social insurance) taxes decrease from 6.0 percent of GDP in 2014 to 5.7 percent of GDP in 2039. Other revenue sources decrease from 1.5 percent of GDP in 2014 to 1.4 percent of GDP in 2039. There is limited space for reduction of expenditures and increases of revenue.

clip_image027

Chart IIA1-6, Congressional Budget Office, Actual and Extended Baseline Projections of Components of Total Revenue, % of GDP

Source: CBO (2014Jul25). The 2014 long-term budget outlook. Washington, DC, Congressional Budget Office, Jul 25.

IIA2 Unresolved US Balance of Payments Deficits. The current account of the US balance of payments is provided in Table IIA2-1 for IVQ2013 and IVQ2014. The Bureau of Economic Analysis analyzes as follows (http://www.bea.gov/newsreleases/international/transactions/2015/pdf/trans414.pdf):

“The U.S. current-account deficit—a net measure of transactions between the United States and the rest of the world in goods, services, primary income (investment income and compensation), and secondary income (current transfers)— increased to $113.5 billion (preliminary) in the fourth quarter of 2014 from $98.9 billion (revised) in the third quarter. The deficit increased to 2.6 percent of current dollar gross domestic product (GDP) from 2.2 percent in the third quarter. The increase in the current-account deficit was primarily accounted for by a decrease in the surplus on primary income. In addition, the deficits on goods and secondary income increased. These changes were partly offset by an increase in the surplus on services.”

The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US not seasonally adjusted increased from $87.4 billion in IVQ2013 to $111.2 billion in IVQ2014. The current account deficit seasonally adjusted at annual rate increased from 2.0 percent of GDP in IVQ2013 to 2.2 percent of GDP in IIIQ2014, increasing to 2.6 percent of GDP in IIVQ2014. The ratio of the current account deficit to GDP has stabilized below 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71).

Table IIA2-1, US, Balance of Payments, Millions of Dollars NSA

 

IVQ2013

IVQ2014

Difference

Goods Balance

-169,368

-184,334

14,966

X Goods

413,725

417,333

0.9 ∆%

M Goods

-583,093

-601,667

3.2 ∆%

Services Balance

58,094

59,689

1,595

X Services

173,845

179,821

3.4 ∆%

M Services

-115,751

-120,133

3.8 ∆%

Balance Goods and Services

-111,273

-124,645

13,372

Exports of Goods and Services and Income Receipts

819,495

828,144

  

Imports of Goods and Services and Income Payments

-906,930

-939,366

  

Current Account Balance

-87,434

-111,222

23,788

% GDP

IVQ2013

IVQ2014

IIIQ2014
 

2.0

2.6

2.2

X: exports; M: imports

Balance on Current Account = Exports of Goods and Services – Imports of Goods and Services and Income Payments

Source: Bureau of Economic Analysis

http://www.bea.gov/international/index.htm#bop

In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”

The alternative fiscal scenario of the CBO (2012NovCDR, 2013Sep17) resembles an economic world in which eventually the placement of debt reaches a limit of what is proportionately desired of US debt in investment portfolios. This unpleasant environment is occurring in various European countries.

The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.

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

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

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

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

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

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

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

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

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

(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)

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

MtV(it, ·) = PtYt (5)

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

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

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

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

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

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

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

This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.

The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net relative to financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):

“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”

The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below trend. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. In the release of Jun 14, 2013, the Bureau of Economic Analysis (http://www.bea.gov/newsreleases/international/transactions/2013/pdf/trans113.pdf) informs of revisions of US data on US international transactions since 1999:

“The statistics of the U.S. international transactions accounts released today have been revised for the first quarter of 1999 to the fourth quarter of 2012 to incorporate newly available and revised source data, updated seasonal adjustments, changes in definitions and classifications, and improved estimating methodologies.”

The BEA introduced new concepts and methods (http://www.bea.gov/international/concepts_methods.htm) in comprehensive restructuring on Jun 18, 2014 (http://www.bea.gov/international/modern.htm):

“BEA introduced a new presentation of the International Transactions Accounts on June 18, 2014 and will introduce a new presentation of the International Investment Position on June 30, 2014. These new presentations reflect a comprehensive restructuring of the international accounts that enhances the quality and usefulness of the accounts for customers and bring the accounts into closer alignment with international guidelines.”

Table IIA2-3 provides data on the US fiscal and balance of payments imbalances incorporating all revisions and methods. In 2007, the federal deficit of the US was $161 billion corresponding to 1.1 percent of GDP while the Congressional Budget Office estimates the federal deficit in 2012 at $1087 billion or 6.8 percent of GDP. The estimate of the deficit for 2013 is $680 billion or 4.1 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5090 billion or 31.6 percent of the estimate of GDP for fiscal year 2012 implicit in the CBO (CBO 2013Sep11) estimate of debt/GDP. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.094 trillion in four years, using the fiscal year deficit of $1087 billion for fiscal year 2012, which is the worst fiscal performance since World War II. Federal debt in 2007 was $5035 billion, slightly less than the combined deficits from 2009 to 2012 of $5094 billion. Federal debt in 2012 was 70.4 percent of GDP (CBO 2015Jan26) and 72.3 percent of GDP in 2013 (http://www.cbo.gov/). This situation may worsen in the future (CBO 2013Sep17):

“Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, CBO projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now, even without accounting for the harmful effects that growing debt would have on the economy. Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely.

The gap between federal spending and revenues would widen steadily after 2015 under the assumptions of the extended baseline, CBO projects. By 2038, the deficit would be 6½ percent of GDP, larger than in any year between 1947 and 2008, and federal debt held by the public would reach 100 percent of GDP, more than in any year except 1945 and 1946. With such large deficits, federal debt would be growing faster than GDP, a path that would ultimately be unsustainable.

Incorporating the economic effects of the federal policies that underlie the extended baseline worsens the long-term budget outlook. The increase in debt relative to the size of the economy, combined with an increase in marginal tax rates (the rates that would apply to an additional dollar of income), would reduce output and raise interest rates relative to the benchmark economic projections that CBO used in producing the extended baseline. Those economic differences would lead to lower federal revenues and higher interest payments. With those effects included, debt under the extended baseline would rise to 108 percent of GDP in 2038.”

Table IIA2-2, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %

 

2007

2008

2009

2010

2011

2012

2013

Goods &
Services

-705

-709

-384

-495

-549

-538

-476

Primary Income

101

146

124

178

221

203

200

Secondary Income

-114

-124

-121

-127

-132

-126

-124

Current Account

-719

-687

-381

-444

-459

-461

-400

NGDP

14478

14719

14419

14964

15518

16163

16768

Current Account % GDP

-5.0

-4.7

-2.6

-3.0

-3.0

-2.9

-2.4

NIIP

-1279

-3995

-2628

-2512

-4455

-4578

-5383

US Owned Assets Abroad

20705

19423

19426

21768

22209

22520

23710

Foreign Owned Assets in US

21984

23418

22054

24280

26664

27098

29093

NIIP % GDP

-8.8

-27.1

-18.2

-16.8

-28.7

-28.3

-32.1

Exports
Goods,
Services and
Income

2569

2751

2286

2631

2988

3085

3179

NIIP %
Exports
Goods,
Services and
Income

-50

-145

-115

-95

-149

-148

-169

DIA MV

5858

3707

4945

5486

5215

5938

7080

DIUS MV

4134

3091

3619

4099

4199

4671

5791

Fiscal Balance

-161

-459

-1413

-1294

-1300

-1087

-680

Fiscal Balance % GDP

-1.1

-3.1

-9.8

-8.7

-8.5

-6.8

-4.1

Federal   Debt

5035

5803

7545

9019

10128

11281

11983

Federal Debt % GDP

35.2

39.3

52.3

60.9

65.9

70.4

72.3

Federal Outlays

2729

2983

3518

3457

3603

3537

3455

∆%

2.8

9.3

17.9

-1.7

4.2

-1.8

-2.3

% GDP

19.1

20.2

24.4

23.4

23.4

22.1

20.8

Federal Revenue

2568

2524

2105

2163

2304

2450

2775

∆%

6.7

-1.7

-16.6

2.7

6.5

6.3

13.3

% GDP

17.9

17.1

14.6

14.6

15.0

15.3

16.7

Sources: 

Notes: NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which the original number of the CBO source is maintained. See Bureau of Economic Analysis, US International Economic Accounts: Concepts and Methods. 2014. Washington, DC: BEA, Department of Commerce, Jun 2014 http://www.bea.gov/international/concepts_methods.htm These discrepancies do not alter conclusions. Budget http://www.cbo.gov/ Balance of Payments and NIIP http://www.bea.gov/international/index.htm#bop Gross Domestic Product, Bureau of Economic Analysis (BEA) http://www.bea.gov/iTable/index_nipa.cfm

Table IIA2-3 provides quarterly estimates NSA of the external imbalance of the United States. The current account deficit seasonally adjusted falls from 2.4 percent of GDP in IIIQ2013 to 2.0 percent in IVQ2013. The current account deficit increases to 2.4 percent of GDP in IQ2014 and decreases to 2.3 percent of GDP in IIQ2014. The deficit stabilizes at 2.2 percent of GDP in IIIQ2014. The net international investment position increases from $5.0 trillion in IIIQ2013 to $5.4 trillion in IVQ2013, increasing to $5.5 trillion in IQ2014. The net international investment position eases to $5.5 trillion in IIQ2014 and increases to $6.2 trillion in IIIQ2014.

Table IIA2-3, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and % NSA

 

IIIQ2013

IVQ2013

IQ2014

IIQ2014

IIIQ2014

Goods &
Services

-137

-111

-100

-139

-142

Primary

Income

51

53

52

56

59

Secondary Income

-33

-29

-31

-21

-36

Current Account

-119

-87

-77

-103

-119

Current Account % GDP

-2.4

-2.0

-2.4

-2.3

-2.2

NIIP

-4995

-5383

-5512

-5475

-6158

US Owned Assets Abroad

22954

23710

24020

24977

24615

Foreign Owned Assets in US

-27949

-29093

-29532

-30452

-30772

DIA MV

6690

7080

7117

7489

7235

DIA MV Equity

5699

6070

6135

6429

6170

DIUS MV

5342

5791

5689

5999

6044

DIUS MV Equity

4041

4462

4387

4624

4669

Notes: NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. See Bureau of Economic Analysis, US International Economic Accounts: Concepts and Methods. 2014. Washington, DC: BEA, Department of Commerce, Jun 2014 http://www.bea.gov/international/concepts_methods.htm

Chart VI-10 of the Board of Governors of the Federal Reserve System provides the overnight Fed funds rate on business days from Jul 1, 1954 at 1.13 percent through Jan 10, 1979, at 9.91 percent per year, to Mar 19, 2015, at 0.12 percent per year. US recessions are in shaded areas according to the reference dates of the NBER (http://www.nber.org/cycles.html). In the Fed effort to control the “Great Inflation” of the 1930s (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), the fed funds rate increased from 8.34 percent on Jan 3, 1979 to a high in Chart VI-10 of 22.36 percent per year on Jul 22, 1981 with collateral adverse effects in the form of impaired savings and loans associations in the United States, emerging market debt and money-center banks (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 72-7; Pelaez 1986, 1987). Another episode in Chart VI-10 is the increase in the fed funds rate from 3.15 percent on Jan 3, 1994, to 6.56 percent on Dec 21, 1994, which also had collateral effects in impairing emerging market debt in Mexico and Argentina and bank balance sheets in a world bust of fixed income markets during pursuit by central banks of non-existing inflation (Pelaez and Pelaez, International Financial Architecture (2005), 113-5). Another interesting policy impulse is the reduction of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of equally non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85), followed by increments of 25 basis points from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006 in Chart VI-10. Central bank commitment to maintain the fed funds rate at 1.00 percent induced adjustable-rate mortgages (ARMS) linked to the fed funds rate. Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at interest rates close to zero, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper with the objective of purchasing default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever-increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4). A final episode in Chart VI-10 is the reduction of the fed funds rate from 5.41 percent on Aug 9, 2007, to 2.97 percent on October 7, 2008, to 0.12 percent on Dec 5, 2008 and close to zero throughout a long period with the final point at 0.12 percent on Mar 19, 2015. Evidently, this behavior of policy would not have occurred had there been theory, measurements and forecasts to avoid these violent oscillations that are clearly detrimental to economic growth and prosperity without inflation. Current policy consists of forecast mandate of maintaining policy accommodation until the forecast of the rate of unemployment reaches 6.5 percent and the rate of personal consumption expenditures excluding food and energy reaches 2.5 percent (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm). The FOMC dropped the numbers but affirmed guidance (http://www.federalreserve.gov/newsevents/press/monetary/20140319a.htm): “With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements.” It is a forecast mandate because of the lags in effect of monetary policy impulses on income and prices (Romer and Romer 2004). The intention is to reduce unemployment close to the “natural rate” (Friedman 1968, Phelps 1968) of around 5 percent and inflation at or below 2.0 percent. If forecasts were reasonably accurate, there would not be policy errors. A commonly analyzed risk of zero interest rates is the occurrence of unintended inflation that could precipitate an increase in interest rates similar to the Himalayan rise of the fed funds rate from 9.91 percent on Jan 10, 1979, at the beginning in Chart VI-10, to 22.36 percent on Jul 22, 1981. There is a less commonly analyzed risk of the development of a risk premium on Treasury securities because of the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html

and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html and earlier (http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html and earlier (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). There is not a fiscal cliff or debt limit issue ahead but rather free fall into a fiscal abyss. The combination of the fiscal abyss with zero interest rates could trigger the risk premium on Treasury debt or Himalayan hike in interest rates.

clip_image028

Chart VI-10, US, Fed Funds Rate, Business Days, Jul 1, 1954 to Mar 19, 2015, Percent per Year

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/update/

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table VI-7G when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table VI-7G shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table VI-7G, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

1994

FF

30Y

30P

10Y

10P

MOR

CPI

Jan

3.00

6.29

100

5.75

100

7.06

2.52

Feb

3.25

6.49

97.37

5.97

98.36

7.15

2.51

Mar

3.50

6.91

92.19

6.48

94.69

7.68

2.51

Apr

3.75

7.27

88.10

6.97

91.32

8.32

2.36

May

4.25

7.41

86.59

7.18

88.93

8.60

2.29

Jun

4.25

7.40

86.69

7.10

90.45

8.40

2.49

Jul

4.25

7.58

84.81

7.30

89.14

8.61

2.77

Aug

4.75

7.49

85.74

7.24

89.53

8.51

2.69

Sep

4.75

7.71

83.49

7.46

88.10

8.64

2.96

Oct

4.75

7.94

81.23

7.74

86.33

8.93

2.61

Nov

5.50

8.08

79.90

7.96

84.96

9.17

2.67

Dec

6.00

7.87

81.91

7.81

85.89

9.20

2.67

Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months

Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t

Chart VI-14 provides the overnight fed funds rate, the yield of the 10-year Treasury constant maturity bond, the yield of the 30-year constant maturity bond and the conventional mortgage rate from Jan 1991 to Dec 1996. In Jan 1991, the fed funds rate was 6.91 percent, the 10-year Treasury yield 8.09 percent, the 30-year Treasury yield 8.27 percent and the conventional mortgage rate 9.64 percent. Before monetary policy tightening in Oct 1993, the rates and yields were 2.99 percent for the fed funds, 5.33 percent for the 10-year Treasury, 5.94 for the 30-year Treasury and 6.83 percent for the conventional mortgage rate. After tightening in Nov 1994, the rates and yields were 5.29 percent for the fed funds rate, 7.96 percent for the 10-year Treasury, 8.08 percent for the 30-year Treasury and 9.17 percent for the conventional mortgage rate.

ChVI-14DDPChart

Chart VI-14, US, Overnight Fed Funds Rate, 10-Year Treasury Constant Maturity, 30-Year Treasury Constant Maturity and Conventional Mortgage Rate, Monthly, Jan 1991 to Dec 1996

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/update/

Chart VI-15 of the Bureau of Labor Statistics provides the all items consumer price index from Jan 1991 to Dec 1996. There does not appear acceleration of consumer prices requiring aggressive tightening.

clip_image030

Chart VI-15, US, Consumer Price Index All Items, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

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

Chart IV-16 of the Bureau of Labor Statistics provides 12-month percentage changes of the all items consumer price index from Jan 1991 to Dec 1996. Inflation collapsed during the recession from Jul 1990 (III) and Mar 1991 (I) and the end of the Kuwait War on Feb 25, 1991 that stabilized world oil markets. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). Policy tightening had adverse collateral effects in the form of emerging market crises in Mexico and Argentina and fixed income markets worldwide.

clip_image031

Chart VI-16, US, Consumer Price Index All Items, Twelve-Month Percentage Change, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

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

The Congressional Budget Office (CBO 2014BEOFeb4) estimates potential GDP, potential labor force and potential labor productivity provided in Table IB-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2014 at 3.3 percent per year. The projected path is significantly lower at 2.1 percent per year from 2015 to 2025. The legacy of the economic cycle expansion from IIIQ2009 to IVQ2014 at 2.3 percent on average is in contrast with 4.9 percent on average in the expansion from IQ1983 to IIQ1988 (http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/02/financial-and-international.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 27.2 million or 16.5 percent of the effective labor force in Feb 2015 (http://cmpassocregulationblog.blogspot.com/2015/03/global-competitive-devaluation-rules.html and earlier http://cmpassocregulationblog.blogspot.com/2015/02/job-creation-and-monetary-policy-twenty.html) with much lower hiring than in the period before the current cycle (http://cmpassocregulationblog.blogspot.com/2015/03/global-exchange-rate-struggle-recovery.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/02/g20-monetary-policy-recovery-without.html).

Table IB-3, US, Congressional Budget Office History and Projections of Potential GDP of US Overall Economy, ∆%

 

Potential GDP

Potential Labor Force

Potential Labor Productivity*

Average Annual ∆%

      

1950-1973

4.0

1.6

2.4

1974-1981

3.3

2.5

0.8

1982-1990

3.2

1.6

1.6

1991-2001

3.2

1.3

1.9

2002-2007

2.8

0.9

1.9

2008-2014

1.4

0.5

0.9

Total 1950-2014

3.3

1.5

1.8

Projected Average Annual ∆%

      

2015-2019

2.1

0.5

1.6

2019-2025

2.2

0.6

1.6

2015-2025

2.1

0.5

1.6

*Ratio of potential GDP to potential labor force

Source: CBO (2014BEOFeb4), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015.

Chart IB-1A of the Congressional Budget Office provides historical and projected potential and actual US GDP. The gap between actual and potential output closes by 2017. Potential output expands at a lower rate than historically. Growth is even weaker relative to trend.

clip_image032

Chart IB-1A, Congressional Budget Office, Estimate of Potential GDP and Gap

Source: Congressional Budget Office

https://www.cbo.gov/publication/49890

Chart IB-1 of the Congressional Budget Office (CBO 2013BEOFeb5) provides actual and potential GDP of the United States from 2000 to 2011 and projected to 2024. Lucas (2011May) estimates trend of United States real GDP of 3.0 percent from 1870 to 2010 and 2.2 percent for per capita GDP. The United States successfully returned to trend growth of GDP by higher rates of growth during cyclical expansion as analyzed by Bordo (2012Sep27, 2012Oct21) and Bordo and Haubrich (2012DR). Growth in expansions following deeper contractions and financial crises was much higher in agreement with the plucking model of Friedman (1964, 1988). The unusual weakness of growth at 2.3 percent on average from IIIQ2009 to IVQ2014 during the current economic expansion in contrast with 4.9 percent on average in the cyclical expansion from IQ1983 to IIQ1988 (http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/02/financial-and-international.html) cannot be explained by the contraction of 4.2 percent of GDP from IVQ2007 to IIQ2009 and the financial crisis. Weakness of growth in the expansion is perpetuating unemployment and underemployment of 27.2 million or 16.5 percent of the labor force as estimated for Feb 2015 (http://cmpassocregulationblog.blogspot.com/2015/03/global-competitive-devaluation-rules.html and earlier http://cmpassocregulationblog.blogspot.com/2015/02/job-creation-and-monetary-policy-twenty.html). There is no exit from unemployment/underemployment and stagnating real wages because of the collapse of hiring (http://cmpassocregulationblog.blogspot.com/2015/03/global-exchange-rate-struggle-recovery.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/02/g20-monetary-policy-recovery-without.html). The US economy and labor markets collapsed without recovery. Abrupt collapse of economic conditions can be explained only with cyclic factors (Lazear and Spletzer 2012Jul22) and not by secular stagnation (Hansen 1938, 1939, 1941 with early dissent by Simons 1942).

clip_image034

Chart IB-1, US, Congressional Budget Office, Actual and Projections of Potential GDP, 2000-2024, Trillions of Dollars

Source: Congressional Budget Office, CBO (2013BEOFeb5). The last year in common in both projections is 2017. The revision lowers potential output in 2017 by 7.3 percent relative to the projection in 2007.

Chart IB-2 provides differences in the projections of potential output by the CBO in 2007 and more recently on Feb 4, 2014, which the CBO explains in CBO (2014Feb28).

clip_image036

Chart IB-2, Congressional Budget Office, Revisions of Potential GDP

Source: Congressional Budget Office, 2014Feb 28. Revisions to CBO’s Projection of Potential Output since 2007. Washington, DC, CBO, Feb 28, 2014.

Chart IB-3 provides actual and projected potential GDP from 2000 to 2024. The gap between actual and potential GDP disappears at the end of 2017 (CBO2014Feb4). GDP increases in the projection at 2.5 percent per year.

clip_image038

Chart IB-3, Congressional Budget Office, GDP and Potential GDP

Source: CBO (2013BEOFeb5), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014.

Chart IIA2-3 of the Bureau of Economic Analysis of the Department of Commerce shows on the lower negative panel the sharp increase in the deficit in goods and the deficits in goods and services from 1960 to 2012. The upper panel shows the increase in the surplus in services that was insufficient to contain the increase of the deficit in goods and services. The adjustment during the global recession has been in the form of contraction of economic activity that reduced demand for goods.

clip_image039

Chart IIA2-3, US, Balance of Goods, Balance on Services and Balance on Goods and Services, 1960-2013, Millions of Dollars

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

Chart IIA2-4 of the Bureau of Economic Analysis shows exports and imports of goods and services from 1960 to 2012. Exports of goods and services in the upper positive panel have been quite dynamic but have not compensated for the sharp increase in imports of goods. The US economy apparently has become less competitive in goods than in services.

clip_image040

Chart IIA2-4, US, Exports and Imports of Goods and Services, 1960-2013, Millions of Dollars

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

Chart IIA2-5 of the Bureau of Economic Analysis shows the US balance on current account from 1960 to 2012. The sharp devaluation of the dollar resulting from unconventional monetary policy of zero interest rates and elimination of auctions of 30-year Treasury bonds did not adjust the US balance of payments. Adjustment only occurred after the contraction of economic activity during the global recession.

clip_image041

Chart IIA2-5, US, Balance on Current Account, 1960-2013, Millions of Dollars

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

Chart IIA2-6 of the Bureau of Economic Analysis provides real GDP in the US from 1960 to 2014. The contraction of economic activity during the global recession was a major factor in the reduction of the current account deficit as percent of GDP.

clip_image042

Chart IIA2-6, US, Real GDP, 1960-2014, Billions of Chained 2009 Dollars

Source: Bureau of Economic Analysis

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

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

Chart IIA-7 provides the US current account deficit on a quarterly basis from 1980 to IQ1983. The deficit is at a lower level because of growth below potential not only in the US but worldwide. The combination of high government debt and deficit with external imbalance restricts potential prosperity in the US.

clip_image043

Chart IIA-7, US, Balance on Current Account, Quarterly, 1980-2013

Source: Bureau of Economic Analysis

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

Risk aversion channels funds toward US long-term and short-term securities that finance the US balance of payments and fiscal deficits benefitting from risk flight to US dollar denominated assets. There are now temporary interruptions because of fear of rising interest rates that erode prices of US government securities because of mixed signals on monetary policy and exit from the Fed balance sheet of four trillion dollars of securities held outright. Net foreign purchases of US long-term securities (row C in Table VA-6) decreased from $49.7 billion in Dec 2014 to minus $39.3 billion in Jan 2015. Foreign (residents) purchases minus sales of US long-term securities (row A in Table VA-6) in Dec 2014 of minus $3.0 billion decreased to minus $39.8 billion in Jan 2015. Net US (residents) purchases of long-term foreign securities (row B in Table VA-6) decreased from $42.2 billion in Dec 2014 to $12.6 billion in Jan 2015. Other transactions (row C2 in Table VA-6) fell from $10.5 billion in Dec 2014 to minus $12.1 billion in Jan 2015. In Jan 2015,

C = A + B + C2 = -$39.8 billion +$12.6 billion -$12.1 = -$39.3 billion

There are minor rounding errors. There is weakening demand in Table VA-6 in Dec in A1 private purchases by residents overseas of US long-term securities of minus $27.8 billion of which deterioration in A11 Treasury securities of minus $42.7 billion, improvement in A12 of $6.2 billion in agency securities, improvement of $7.1 billion of corporate bonds and deterioration of $1.6 billion in equities. Worldwide risk aversion causes flight into US Treasury obligations with significant oscillations. Official purchases of securities in row A2 decreased $12.0 billion with decrease of Treasury securities of $12.4 billion in Jan 2015. Official purchases of agency securities increased $2.9 billion in Jan 2015. Row D shows decrease in Jan 2015 of $8.1 billion in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills decreased $15.6 billion (row D11) with foreign official holdings increasing $4.8 billion while the category “other” increased $2.7 billion. Foreign private holdings of US Treasury bills decreased $15.6 billion in what could be arbitrage of duration exposures. Risk aversion of default losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses with significant oscillations in risk perceptions.

Table VA-6, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

 

Jan 2014 12 Months

Jan 2015 12 Months

Dec 2014

Jan 2015

A Foreign Purchases less Sales of
US LT Securities

10.9

227.9

-3.0

-39.8

A1 Private

11.3

145.1

17.0

-27.8

A11 Treasury

82.7

65.8

1.4

-42.7

A12 Agency

-6.5

53.2

5.3

6.2

A13 Corporate Bonds

-15.6

30.4

5.6

7.1

A14 Equities

-49.2

-4.3

4.6

1.6

A2 Official

-0.4

82.8

-19.9

-12.0

A21 Treasury

-78.2

49.2

-17.0

-12.4

A22 Agency

70.3

33.8

-4.0

2.9

A23 Corporate Bonds

13.2

6.0

0.9

-0.9

A24 Equities

-5.8

-6.2

0.3

-1.7

B Net US Purchases of LT Foreign Securities

-176.1

20.0

42.2

12.6

B1 Foreign Bonds

-10.4

127.8

37.9

26.1

B2 Foreign Equities

-165.7

-107.8

4.3

-13.4

C1 Net Transactions

-165.2

247.9

39.2

-27.2

C2 Other

-219.3

-72.7

10.5

-12.1

C Net Foreign Purchases of US LT Securities

-384.5

175.2

49.7

-39.3

D Increase in Foreign Holdings of Dollar Denominated Short-term 

-36.6

7.4

10.1

-8.1

D1 US Treasury Bills

2.1

-15.9

24.8

-10.8

D11 Private

-14.8

38.0

31.5

-15.6

D12 Official

16.9

-53.9

-6.7

4.8

D2 Other

-38.7

23.3

-14.7

2.7

C1 = A + B; C = C1+C2

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

Sources: United States Treasury

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

http://www.treasury.gov/press-center/press-releases/Pages/jl2609.aspx

Table VA-7 provides major foreign holders of US Treasury securities. China is the largest holder with $1239.1 billion in Jan 2015, decreasing 2.9 percent from $1275.6 billion in Jan 2015 while decreasing $5.2 billion from Dec 2014 or 0.4 percent. The United States Treasury estimates US government debt held by private investors at $9829 billion in Sep 2014. China’s holding of US Treasury securities represent 12.6 percent of US government marketable interest-bearing debt held by private investors (http://www.fms.treas.gov/bulletin/index.html). Min Zeng, writing on “China plays a big role as US Treasury yields fall,” on Jul 16, 2004, published in the Wall Street Journal (http://online.wsj.com/articles/china-plays-a-big-role-as-u-s-treasury-yields-fall-1405545034?tesla=y&mg=reno64-wsj), finds that acceleration in purchases of US Treasury securities by China has been an important factor in the decline of Treasury yields in 2014. Japan increased its holdings from $1201.4 billion in Jan 2014 to $1238.6 billion in Jan 2015 or 3.1 percent. The combined holdings of China and Japan in Jan 2015 add to $2477.7 billion, which is equivalent to 25.2 percent of US government marketable interest-bearing securities held by investors of $9829 billion in Sep 2014 (http://www.fms.treas.gov/bulletin/index.html). Total foreign holdings of Treasury securities rose from $5841.3 billion in Jan 2014 to $6217.9 billion in Jan 2015, or 6.4 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings (see Pelaez and Pelaez, The Global Recession Risk (2007)). A point of saturation of holdings of US Treasury debt may be reached as foreign holders evaluate the threat of reduction of principal by dollar devaluation and reduction of prices by increases in yield, including possibly risk premium. Shultz et al (2012) find that the Fed financed three-quarters of the US deficit in fiscal year 2011, with foreign governments financing significant part of the remainder of the US deficit while the Fed owns one in six dollars of US national debt. Concentrations of debt in few holders are perilous because of sudden exodus in fear of devaluation and yield increases and the limit of refinancing old debt and placing new debt. In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”

Table VA-7, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

 

Jan 2015

Dec 2014

Jan 2014

Total

6217.9

6156.0

5841.3

China

1239.1

1244.3

1275.6

Japan

1238.6

1230.9

1201.4

Belgium

354.6

335.4

310.3

Caribbean Banking Centers

338.5

335.9

297.8

Oil Exporters

290.8

285.9

246.5

Brazil

256.5

255.8

246.0

United Kingdom

207.4

188.9

163.2

Switzerland

205.5

190.1

173.8

Luxembourg

176.0

171.8

135.5

Hong Kong

172.0

172.6

160.3

Taiwan

170.6

174.4

179.1

Ireland

137.1

138.6

109.9

Singapore

109.7

110.0

85.9

Foreign Official Holdings

4124.3

4113.1

4068.0

A. Treasury Bills

340.1

335.3

394.0

B. Treasury Bonds and Notes

3784.3

3777.8

3674.0

Source: United States Treasury

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx

IIB United States Services. Chart II-1 of the US Census Bureau of the Department of Commerce provides the quarterly service report SA from IIIQ2003 to IIQ2014. Services revenue contracted during the recession from IVQ2007 (December) to IIQ2009 (June) (http://wwwdev.nber.org/cycles/cyclesmain.html) but there appears to be continuing growth especially for professional, scientific and technical services with steeper slope from IVQ2010 through IVQ2014.

clip_image045

Note: _____ Information Seasonally Adjusted (SA)

_____ Professional, Scientific and Technical Services (SA)

_____ Administrative and Support and Waste Management (SA)

Chart II-4, Total Quarterly Revenue for Financial Services and Insurance Not Seasonally Adjusted, Millions of Dollars 2003-2014

Source: US Census Bureau

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

Total revenues of information services not seasonally adjusted in millions of current dollars are shown in Table II-1 from IVQ2003, when they become available, to IVQ2014. The row below current values provides percentage change in the quarter from the quarter a year earlier. Growth rates were robust before the global recession in the range from 3.7 percent in IVQ2004 to 5.5 percent in IQ2005. Percentage changes were negative in all quarters in 2009 with the deepest declines in the first three quarters. Growth was milder in the expansion phase than before the global recession. As with most indicators of the US, growth was robust in the final three quarters of 2010 and initial quarters of 2011. Growth rates recovered to 5.1 percent in IVQ2012, 3.2 percent in IQ2013 and 2.7 percent in IIQ2013. Growth continued with 4.0 percent in IIIQ2013 relative to a year earlier and 3.8 percent in IVQ2013. Growth strengthened with 5.8 percent in IQ2014 relative to a year earlier and 5.8 percent in IIQ2014 relative to a year earlier. Growth softened to 4.7 percent in IIIQ2014 relative to a year earlier and 4.6 percent in IVQ2014 relative to a year earlier.

Table II-1, US, Information Services Revenue Not Seasonally Adjusted, Millions of Dollars, 2003-2014

Year

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

2003

NA

NA

NA

237,399

2004

223,675

233,241

232,983

246,201

∆%

NA

NA

NA

3.7

2005

236,033

244,136

244,711

255,856

∆%

5.5

4.7

5.0

3.9

2006

245,182

254,735

255,745

271,401

∆%

3.9

4.3

4.5

6.1

2007

257,973

265,739

267,325

281,304

∆%

5.2

4.3

4.5

3.6

2008

270,163

277,629

277,631

282,926

∆%

4.7

4.5

3.9

0.6

2009

261,949

266,869

265,502

280,639

∆%

-3.0

-3.9

-4.4

-0.8

2010

267,560

274,769

276,061

291,835

∆%

2.1

3.0

4.0

4.0

2011

277,489

289,159

288,766

305,132

∆%

3.7

5.2

4.6

4.6

2012

291,696

299,467

297,326

320,717

∆%

5.1

3.6

3.0

5.1

2013

301,018

307,540

309,127

332,841

∆%

3.2

2.7

4.0

3.8

2014

318,419

325,235

323,540

348,059

∆%

5.8

5.8

4.7

4.6

Source: US Census Bureau

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

Chart II-2 provides total revenue of information services not seasonally adjusted from IVQ2013 to IVQ2014 in current millions of dollars not seasonally adjusted. Oscillating growth was strong before the drop of the global recession. Growth recovered in recent quarters relative to the same quarter a year earlier with strong increase in IVQ2012 followed by increases in all quarters in 2013. Growth continued in upward trend IQ2014, IIQ2014, IIIQ2014 and IVQ2014.

clip_image046

Chart II-2, Quarterly Revenue for Information Services Not Seasonally Adjusted, Millions of Dollars 2003-2014

Source: US Census Bureau

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

There is similar pattern in Chart II-3 with quarterly total revenue of information services in current millions of dollars adjusted for seasonality. There is the same hump of the global recession followed by resumption of growth.

clip_image047

Chart II-3, Quarterly Revenue for Information Services Seasonally Adjusted, Millions of Dollars 2003-2014

Source: US Census Bureau

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

Table II-2 provides total revenue of financial services and insurance in current million dollars not seasonally adjusted from IIIQ2009, when data first become available, to IVQ2014. The row below values provides percentage changes in a quarter relative to the same quarter a year earlier. Percentage changes were soft until 2012 with 4.3 percent in IQ2012, 1.8 percent in IIQ2012, 5.3 percent in IIIQ2012 and 4.0 percent in IVQ2012. Revenue increased 1.3 percent in IQ2013 relative to a year earlier and increased 3.5 percent in IIQ2013. Revenue growth moderated to 0.1 percent in IIIQ2013 and recovered to 4.1 percent in IVQ2013. Growth strengthened with 3.8 percent in IQ2014 relative to a year earlier and 4.4 percent in IIQ2014 relative to a year earlier. Growth increased to 8.2 percent in IIIQ2014 relative to a year earlier and 5.2 percent in IVQ2014 relative to a year earlier.

Table II-2, US, Financial Services and Insurance Total Revenue Not Seasonally Adjusted, Millions of Dollars, 2003-2013

2009

NA

NA

838,726

837,522

2010

825,800

828,556

832,017

838,817

∆%

NA

NA

-0.8

0.2

2011

844,830

848,993

837,923

845,580

∆%

2.3

2.5

0.7

0.8

2012

880,774

864,002

882,372

879,732

∆%

4.3

1.8

5.3

4.0

2013

892,612

894,583

883,116

915,747

∆%

1.3

3.5

0.1

4.1

2014

926,172

934,003

955,487

963,394

∆%

3.8

4.4

8.2

5.2

Source: US Census Bureau

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

Chart II-4 provides total quarterly revenue of financial services and insurance from IIIQ2009, when data first become available, to IVQ2014. Total revenue of financial services and insurance contracted 0.8 percent between IIIQ2009 and IIIQ2011 and grew 4.0 percent between IVQ2011 and IVQ2012. Revenue increased 1.3 percent in IQ2013 relative to a year earlier and 3.5 percent in IIQ2013. Revenue growth slowed to 0.1 percent in IIIQ2013 and jumped to 4.1 percent in IVQ2013. Growth continued with 3.8 percent in IQ2014 relative to a year earlier and 4.4 percent in IIQ2014 relative to a year earlier, strengthening to 8.2 percent in IIIQ2014 relative to a year earlier. Growth continued at 5.2 percent in IVQ2014 relative to a year earlier.

clip_image048

Chart II-4, Total Quarterly Revenue for Financial Services and Insurance Not Seasonally Adjusted, Millions of Dollars 2003-2014

Source: US Census Bureau

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

IIC United States Producer Prices. The history of producer price inflation in the past five decades does not provide evidence of deflation. The finished core PPI does not register even one single year of decline, as shown in Table PPIEX.

Table PPIEX, Annual Percentage Changes of the PPI Finished Goods Excluding Food and Energy

Year

Annual ∆%

1974

11.4

1975

11.4

1976

5.7

1977

6.0

1978

7.5

1979

8.9

1980

11.2

1981

8.6

1982

5.7

1983

3.0

1984

2.4

1985

2.5

1986

2.3

1987

2.4

1988

3.3

1989

4.4

1990

3.7

1991

3.6

1992

2.4

1993

1.2

1994

1.0

1995

2.1

1996

1.4

1997

0.3

1998

0.9

1999

1.7

2000

1.3

2001

1.4

2002

0.1

2003

0.2

2004

1.5

2005

2.4

2006

1.5

2007

1.9

2008

3.4

2009

2.6

2010

1.2

2011

2.4

2012

2.6

2013

1.5

2014

1.9

Source: Bureau of Labor Statistics

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

The producer price index of the US from 1947 to 2015 in Chart I-6 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.

clip_image049

Chart I-6, US, Producer Price Index, Finished Goods, NSA, 1947-2015

Source: US Bureau of Labor Statistics

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

Chart I-7 provides 12-month percentage changes of the producer price index from 1948 to 2015. The distinguishing event in Chart I-7 is the Great Inflation of the 1970s. The shape of the two-hump Bactrian camel of the 1970s resembles the double hump from 2007 to 2015.

clip_image050

Chart I-7, US, Producer Price Index, Finished Goods, 12-Month Percentage Change, NSA, 1948-2015

Source: US Bureau of Labor Statistics

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

Annual percentage changes of the producer price index from 1948 to 2014 are shown in Table I-1A. The producer price index fell 2.8 percent in 1949 following the adjustment to World War II and fell 0.6 percent in 1952 and 1.0 percent in 1953 around the Korean War. There are two other mild decline of 0.3 percent in 1959 and 0.3 percent in 1963. There are only few subsequent and isolated declines of the producer price index of 1.4 percent in 1986, 0.8 percent in 1998, 1.3 percent in 2002 and 2.6 percent in 2009. The decline of 2009 was caused by unwinding of carry trades in 2008 that had lifted oil prices to $140/barrel during deep global recession because of the panic of probable toxic assets in banks that would be removed with the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009). There is no evidence in this history of 65 years of the US producer price index suggesting that there is frequent and persistent deflation shock requiring aggressive unconventional monetary policy. The design of such anti-deflation policy could provoke price and financial instability because of lags in effect of monetary policy, model errors, inaccurate forecasts and misleading analysis of current economic conditions.

Table I-1A, US, Annual PPI Inflation ∆% 1948-2014

Year

Annual ∆%

1948

8.0

1949

-2.8

1950

1.8

1951

9.2

1952

-0.6

1953

-1.0

1954

0.3

1955

0.3

1956

2.6

1957

3.8

1958

2.2

1959

-0.3

1960

0.9

1961

0.0

1962

0.3

1963

-0.3

1964

0.3

1965

1.8

1966

3.2

1967

1.1

1968

2.8

1969

3.8

1970

3.4

1971

3.1

1972

3.2

1973

9.1

1974

15.4

1975

10.6

1976

4.5

1977

6.4

1978

7.9

1979

11.2

1980

13.4

1981

9.2

1982

4.1

1983

1.6

1984

2.1

1985

1.0

1986

-1.4

1987

2.1

1988

2.5

1989

5.2

1990

4.9

1991

2.1

1992

1.2

1993

1.2

1994

0.6

1995

1.9

1996

2.7

1997

0.4

1998

-0.8

1999

1.8

2000

3.8

2001

2.0

2002

-1.3

2003

3.2

2004

3.6

2005

4.8

2006

3.0

2007

3.9

2008

6.3

2009

-2.6

2010

4.2

2011

6.0

2012

1.9

2013

1.2

2014

1.9

Source: US Bureau of Labor Statistics

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

The producer price index excluding food and energy from 1973 to 2015, the first historical date of availability in the dataset of the Bureau of Labor Statistics (BLS), shows similarly dynamic behavior as the overall index, as shown in Chart I-8. There is no evidence of persistent deflation in the US PPI.

clip_image051

Chart I-8, US Producer Price Index, Finished Goods Excluding Food and Energy, NSA, 1973-2015

Source: US Bureau of Labor Statistics

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

Chart I-9 provides 12-month percentage rates of change of the finished goods index excluding food and energy. The dominating characteristic is the Great Inflation of the 1970s. The double hump illustrates how inflation may appear to be subdued and then returns with strength.

clip_image052

Chart I-9, US Producer Price Index, Finished Goods Excluding Food and Energy, 12-Month Percentage Change, NSA, 1974-2015

Source: US Bureau of Labor Statistics

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

The producer price index of energy goods from 1974 to 2015 is provided in Chart I-10. The first jump occurred during the Great Inflation of the 1970s analyzed in various comments of this blog (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html) and in Appendix I. There is relative stability of producer prices after 1986 with another jump and decline in the late 1990s into the early 2000s. The episode of commodity price increases during a global recession in 2008 could only have occurred with interest rates dropping toward zero, which stimulated the carry trade from zero interest rates to leveraged positions in commodity futures. Commodity futures exposures were dropped in the flight to government securities after Sep 2008. Commodity future exposures were created again when risk aversion diminished around Mar 2010 after the finding that US bank balance sheets did not have the toxic assets that were mentioned in proposing TARP in Congress (see Cochrane and Zingales 2009). Fluctuations in commodity prices and other risk financial assets originate in carry trade when risk aversion ameliorates. There are also fluctuations originating in shifts in preference for asset classes such as between commodities and equities.

clip_image053

Chart I-10, US, Producer Price Index, Finished Energy Goods, NSA, 1974-2015

Source: US Bureau of Labor Statistics

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

Chart I-11 shows 12-month percentage changes of the producer price index of finished energy goods from 1975 to 2015. This index is only available after 1974 and captures only one of the humps of energy prices during the Great Inflation. Fluctuations in energy prices have occurred throughout history in the US but without provoking deflation. Two cases are the decline of oil prices in 2001 to 2002 that has been analyzed by Barsky and Kilian (2004) and the collapse of oil prices from over $140/barrel with shock of risk aversion to the carry trade in Sep 2008.

clip_image054

Chart I-11, US, Producer Price Index, Finished Energy Goods, 12-Month Percentage Change, NSA, 1974-2015

Source: US Bureau of Labor Statistics

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

Headline and core producer price indexes are in Table I-6. The headline PPI SA decreased 0.1 percent in Feb 2015 and decreased 3.4 percent NSA in the 12 months ending in Feb 2015. The core PPI SA increased 0.1 percent in Feb 2015 and rose 1.5 percent in 12 months. Analysis of annual equivalent rates of change shows inflation waves similar to those worldwide. In the first wave, the absence of risk aversion from the sovereign risk crisis in Europe motivated the carry trade from zero interest rates into commodity futures that caused the annual equivalent rate of 10.4 percent in the headline PPI in Jan-Apr 2011 and 3.7 percent in the core PPI. In the second wave, commodity futures prices collapsed in Jun 2011 with the return of risk aversion originating in the sovereign risk crisis of Europe. The annual equivalent rate of headline PPI inflation collapsed to 1.2 percent in May-Jun 2011 but the core annual equivalent inflation rate was higher at 2.4 percent. In the third wave, headline PPI inflation resuscitated with annual equivalent at 4.5 percent in Jul-Sep 2011 and core PPI inflation at 3.7 percent. Core PPI inflation was persistent throughout 2011, jumping from annual equivalent at 2.0 percent in the first three months of 2010 to 3.0 percent in 12 months ending in Dec 2011. Unconventional monetary policy is based on the proposition that core rates reflect more fundamental inflation and are thus better predictors of the future. In practice, the relation of core and headline inflation is as difficult to predict as future inflation (see IIID Supply Shocks in http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html). In the fourth wave, risk aversion originating in the lack of resolution of the European debt crisis caused unwinding of carry trades with annual equivalent headline PPI inflation of minus 0.4 percent in Oct-Dec 2011 and 2.0 percent in the core annual equivalent. In the fifth wave from Jan to Mar 2012, annual equivalent inflation was 2.8 percent for the headline index but 3.2 percent for the core index excluding food and energy. In the sixth wave, annual equivalent inflation in Apr-May 2012 during renewed risk aversion was minus 3.5 percent for the headline PPI and 1.8 percent for the core. In the seventh wave, continuing risk aversion caused reversal of carry trades into commodity exposures with annual equivalent headline inflation of 0.6 percent in Jun-Jul 2012 while core PPI inflation was at annual equivalent 3.7 percent. In the eighth wave, relaxed risk aversion because of the announcement of the impaired bond buying program or Outright Monetary Transactions (OMT) of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html) induced carry trades that drove annual equivalent inflation of producer prices of the United States at 14.0 percent in Aug-Sep 2012 and 0.6 percent in the core index. In the ninth wave, renewed risk aversion caused annual equivalent inflation of minus 2.4 percent in Oct 2011-Dec 2012 in the headline index and 1.2 percent in the core index. In the tenth wave, annual equivalent inflation was 6.2 percent in the headline index in Jan-Feb 2013 and 2.4 percent in the core index. In the eleventh wave, annual equivalent inflation was minus 7.0 percent in Mar-Apr 2012 and 1.8 percent for the core index. In the twelfth wave, annual equivalent inflation returned at 3.7 percent in May-Aug 2013 and 1.2 percent in the core index. In the thirteenth wave, portfolio reallocations away from commodities and into equities reversed commodity carry trade with annual equivalent inflation of 0.0 percent in Sep-Nov 2013 in the headline PPI and 0.8 percent in the core. In the fourteenth wave, annual equivalent inflation returned at 5.3 percent annual equivalent for the headline index in Dec 2013-Feb 2014 and 4.1 percent for the core index. In the fifteenth wave, annual equivalent inflation was 3.7 percent for the general PPI index in Mar 2014 and 0.0 percent for the core PPI index. In the sixteenth wave, annual equivalent headline PPI inflation increased at 2.7 percent in Apr-Jul 2014 and 1.8 percent for the core PPI. In the seventeenth wave, annual equivalent inflation in Aug-Nov 2014 was minus 3.5 percent and 1.2 percent for the core index. In the eighteenth wave, annual equivalent inflation fell at 17.6 percent for the general index in Dec 2014 to Jan 2015 and increased at 3.0 percent in the core index. In the nineteenth wave, annual equivalent inflation fell at 1.2 percent in Feb 2015 and increased at 1.2 percent for the core index. It is almost impossible to forecast PPI inflation and its relation to CPI inflation. “Inflation surprise” by monetary policy could be proposed to climb along a downward sloping Phillips curve, resulting in higher inflation but lower unemployment (see Kydland and Prescott 1977, Barro and Gordon 1983 and past comments of this blog 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 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). The architects of monetary policy would require superior inflation forecasting ability compared to forecasting naivety by everybody else. In practice, we are all naïve in forecasting inflation and other economic variables and events.

Table I-6, US, Headline and Core PPI Inflation Monthly SA and 12-Month NSA ∆%

 

Finished
Goods SA
Month

Finished
Goods NSA 12 months

Finished Core SA
Month

Finished Core NSA
12 months

Feb 2015

-0.1

-3.4

0.1

1.5

AE ∆% Feb

-1.2

  

1.2

  

Jan

-2.1

-3.1

0.2

1.5

Dec 2014

-1.1

-0.5

0.3

1.8

AE ∆% Dec-Jan

-17.6

  

3.0

  

Nov

-0.8

1.1

0.0

2.0

Oct

-0.2

1.7

0.1

2.2

Sep

-0.1

2.2

0.2

2.1

Aug

-0.1

2.3

0.1

1.9

AE ∆% Aug-Nov

-3.5

  

1.2

  

July

0.0

2.9

0.1

1.9

Jun

0.4

2.8

0.2

1.9

May

0.1

2.5

0.2

1.8

Apr

0.4

3.1

0.1

1.7

AE ∆% Apr-Jul

2.7

  

1.8

  

Mar

0.3

1.9

0.0

1.7

AE ∆% Mar

3.7

  

0.0

  

Feb

0.1

1.3

0.1

1.9

Jan

0.6

1.6

0.5

2.0

Dec 2013

0.6

1.4

0.4

1.6

AE ∆% Dec-Feb

5.3

  

4.1

  

Nov

-0.2

0.8

0.2

1.3

Oct

0.2

0.3

0.0

1.2

Sep

0.0

0.3

0.0

1.2

AE ∆% Sep-Nov

0.0

  

0.8

  

Aug

0.3

1.3

0.1

1.2

Jul

0.0

2.1

0.1

1.3

Jun

0.2

2.3

0.1

1.6

May

0.7

1.6

0.1

1.7

AE ∆%  May-Aug

3.7

  

1.2

  

Apr

-0.7

0.5

0.1

1.7

Mar

-0.5

1.1

0.2

1.7

AE ∆%  Mar-Apr

-7.0

  

1.8

  

Feb

0.6

1.8

0.2

1.8

Jan

0.4

1.5

0.2

1.8

AE ∆%  Jan-Feb

6.2

  

2.4

  

Dec 2012

-0.1

1.4

0.1

2.1

Nov

-0.7

1.5

0.2

2.2

Oct

0.2

2.3

0.0

2.2

AE ∆%  Oct-Dec

-2.4

  

1.2

  

Sep

1.0

2.1

0.0

2.4

Aug

1.2

1.9

0.1

2.6

AE ∆% Aug-Sep

14.0

  

0.6

  

Jul

0.2

0.5

0.4

2.6

Jun

-0.3

0.7

0.2

2.6

AE ∆% Jun-Jul

-0.6

  

3.7

  

May

-0.4

0.6

0.1

2.7

Apr

-0.2

1.8

0.2

2.7

AE ∆% Apr-May

-3.5

  

1.8

  

Mar

0.1

2.8

0.2

2.9

Feb

0.3

3.4

0.2

3.1

Jan

0.3

4.1

0.4

3.1

AE ∆% Jan-Mar

2.8

  

3.2

  

Dec 2011

-0.1

4.7

0.2

3.0

Nov

0.2

5.6

0.1

3.0

Oct

-0.2

5.8

0.2

2.9

AE ∆% Oct-Dec

-0.4

  

2.0

  

Sep

0.8

7.0

0.3

2.8

Aug

-0.1

6.6

0.1

2.7

Jul

0.4

7.1

0.5

2.7

AE ∆% Jul-Sep

4.5

  

3.7

  

Jun

-0.3

6.9

0.2

2.3

May

0.5

7.1

0.2

2.1

AE ∆%  May-Jun

1.2

  

2.4

  

Apr

0.8

6.6

0.3

2.3

Mar

0.7

5.6

0.3

2.0

Feb

1.0

5.4

0.2

1.8

Jan

0.8

3.6

0.4

1.6

AE ∆%  Jan-Apr

10.4

  

3.7

  

Dec 2010

0.8

3.8

0.2

1.4

Nov

0.4

3.4

0.0

1.2

Oct

0.8

4.3

0.0

1.6

Sep

0.4

3.9

0.2

1.6

Aug

0.5

3.3

0.1

1.3

Jul

0.1

4.1

0.1

1.5

Jun

-0.3

2.7

0.1

1.1

May

0.0

5.1

0.3

1.3

Apr

0.0

5.4

0.0

0.9

Mar

0.7

5.9

0.2

0.9

Feb

-0.7

4.2

0.1

1.0

Jan

1.0

4.5

0.2

1.0

Note: Core: excluding food and energy; AE: annual equivalent

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

The US producer price index NSA from 2000 to 2015 is shown in Chart I-24. There are two episodes of decline of the PPI during recessions in 2001 and in 2008. Barsky and Kilian (2004) consider the 2001 episode as one in which real oil prices were declining when recession began. Recession and the fall of commodity prices instead of generalized deflation explain the behavior of US inflation in 2008. There is similar collapse of producer prices into 2015 as in 2009 caused by the drop of commodity prices.

clip_image055

Chart I-24, US, Producer Price Index, NSA, 2000-2015

Source: US Bureau of Labor Statistics

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

Twelve-month percentage changes of the PPI NSA from 2000 to 2015 are shown in Chart I-25. It may be possible to forecast trends a few months in the future under adaptive expectations but turning points are almost impossible to anticipate especially when related to fluctuations of commodity prices in response to risk aversion. In a sense, monetary policy has been tied to behavior of the PPI in the negative 12-month rates in 2001 to 2003 and then again in 2009 to 2010. There is similar sharp decline of inflation into 2015 caused by the drop of commodities. Monetary policy following deflation fears caused by commodity price fluctuations would introduce significant volatility and risks in financial markets and eventually in consumption and investment.

clip_image056

Chart I-25, US, Producer Price Index, 12-Month Percentage Change NSA, 2000-2015

Source: US Bureau of Labor Statistics

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

The US PPI excluding food and energy from 2000 to 2015 is in Chart I-26. There is here again a smooth trend of inflation instead of prolonged deflation as in Japan.

clip_image057

Chart I-26, US, Producer Price Index Excluding Food and Energy, NSA, 2000-2015

Source: US Bureau of Labor Statistics

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

Twelve-month percentage changes of the producer price index excluding food and energy are in Chart I-27. Fluctuations replicate those in the headline PPI. There is an evident trend of increase of 12 months rates of core PPI inflation in 2011 but lower rates in 2012-2014. Prices rose less rapidly into 2015 as during earlier fluctuations.

clip_image058

Chart I-27, US, Producer Price Index Excluding Food and Energy, NSA, 12-Month Percentage Changes, 2000-2015

Source: US Bureau of Labor Statistics

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

The US producer price index of energy goods from 2000 to 2014 is in Chart I-28. There is a clear upward trend with fluctuations, which would not occur under persistent deflation.

clip_image059

Chart I-28, US, Producer Price Index Finished Energy Goods, NSA, 2000-2015

Source: US Bureau of Labor Statistics

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

Chart I-29 provides 12-month percentage changes of the producer price index of energy goods from 2000 to 2015. Barsky and Killian (2004) relate the episode of declining prices of energy goods in 2001 to 2002 to the analysis of decline of real oil prices. Interest rates dropping to zero during the global recession in 2008 induced carry trades that explain the rise of the PPI of energy goods toward 30 percent. Bouts of risk aversion with policy interest rates held close to zero explain the fluctuations in the 12-month rates of the PPI of energy goods in the expansion phase of the economy. Symmetric inflation targets induce significant instability in inflation and interest rates with adverse effects on financial markets and the overall economy.

clip_image060

Chart I-29, US, Producer Price Index Energy Goods, 12-Month Percentage Change, NSA, 2000-2015

Source: US Bureau of Labor Statistics

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

The Bureau of Labor Statistics (BLS) is enhancing the producer price index of the US with the final demand producer price index (FD PPI) beginning in Jan 2014 (http://www.bls.gov/ppi/fdidtransition.htm):

“Effective with the January 2014 Producer Price Index (PPI) data release in February 2014, BLS transitioned from the Stage of Processing (SOP) to the Final Demand-Intermediate Demand (FD-ID) aggregation system. This shift resulted in significant changes to the PPI news release, as well as other documents available from PPI. The transition to the FD-ID system was the culmination of a long-standing PPI objective to improve the current SOP aggregation system by incorporating PPIs for services, construction, government purchases, and exports. In comparison to the SOP system, the FD-ID system more than doubled PPI coverage of the United States economy to over 75 percent of in-scope domestic production. The FD-ID system was first introduced as a set of experimental indexes in January 2011. Nearly all new FD-ID goods, services, and construction indexes provide historical data back to either November 2009 or April 2010, while the indexes for goods that correspond with the historical SOP indexes go back to the 1970s or earlier.”

Headline and core final demand producer price indexes are in Table I-6A. The headline FD PPI SA decreased 0.5 percent in Feb 2015 and decreased 0.6 percent NSA in the 12 months ending in Feb 2015. The core FD PPI SA decreased 0.5 percent in Feb 2015 and rose 1.0 percent in 12 months. Analysis of annual equivalent rates of change shows inflation waves similar to those worldwide. In the first wave, the absence of risk aversion from the sovereign risk crisis in Europe motivated the carry trade from zero interest rates into commodity futures that caused the average equivalent rate of 7.4 percent in the headline FD PPI in Jan-Apr 2011 and 4.9 percent in the core FD PPI. In the second wave, commodity futures prices collapsed in Jun 2011 with the return of risk aversion originating in the sovereign risk crisis of Europe. The annual equivalent rate of headline FD PPI inflation collapsed to 2.4 percent in May-Jun 2011 but the core annual equivalent inflation rate was lower at 1.8 percent. In the third wave, headline FD PPI inflation resuscitated with annual equivalent at 3.2 percent in Jul-Sep 2011 and core PPI inflation at 3.2 percent. Core FD PPI inflation was persistent throughout 2011, from annual equivalent at 4.9 percent in the first four months of 2011 to 2.6 percent in 12 months ending in Dec 2011. Unconventional monetary policy is based on the proposition that core rates reflect more fundamental inflation and are thus better predictors of the future. In practice, the relation of core and headline inflation is as difficult to predict as future inflation (see IIID Supply Shocks in http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html). In the fourth wave, risk aversion originating in the lack of resolution of the European debt crisis caused unwinding of carry trades with annual equivalent headline FD PPI inflation of minus 0.8 percent in Oct-Dec 2011 and minus 0.4 percent in the core annual equivalent. In the fifth wave from Jan to Mar 2012, annual equivalent inflation was 3.7 percent for the headline index and 3.7 percent for the core index excluding food and energy. In the sixth wave, annual equivalent inflation in Apr-May 2012 during renewed risk aversion was 0.6 percent for the headline FD PPI and 3.0 percent for the core. In the seventh wave, continuing risk aversion caused reversal of carry trades into commodity exposures with annual equivalent headline inflation of minus 1.2 percent in Jun-Jul 2012 while core FD PPI inflation was at annual equivalent minus 1.2 percent. In the eighth wave, relaxed risk aversion because of the announcement of the impaired bond buying program or Outright Monetary Transactions (OMT) of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html) induced carry trades that drove annual equivalent inflation of final demand producer prices of the United States at 5.5 percent in Aug-Sep 2012 and 1.2 percent in the core index. In the ninth wave, renewed risk aversion caused annual equivalent inflation of 1.2 percent in Oct 2011-Dec 2012 in the headline index and 2.8 percent in the core index. In the tenth wave, annual equivalent inflation was 2.4 percent in the headline index in Jan-Feb 2013 and 0.6 percent in the core index. In the eleventh wave, annual equivalent was minus 1.8 percent in Mar-Apr 2012 and 2.4 percent for the core index. In the twelfth wave, annual equivalent inflation returned at 2.1 percent in May-Aug 2013 and 1.2 percent in the core index. In the thirteenth wave, portfolio reallocations away from commodities and into equities reversed commodity carry trade with annual equivalent inflation of 1.6 percent in Sep-Nov 2013 in the headline FD PPI and 2.0 percent in the core. In the fourteenth wave, annual equivalent inflation was 2.4 percent annual equivalent for the headline index in Dec 2013-Feb 2014 and 1.6 percent for the core index. In the fifteenth wave, annual equivalent inflation increased to 2.7 percent in the headline FD PPI and 2.7 percent in the core in Mar-Jul 2014. In the sixteenth wave, annual equivalent inflation was minus 1.8 percent for the headline FD index and minus 1.2 percent for the core FD index in Aug-Sep 2014. In the seventeenth wave, annual equivalent inflation was 3.7 percent for the headline FD and 6.2 percent for the core FD in Oct 2014. In the eighteenth wave, annual equivalent inflation was minus 3.0 percent for the headline FDI and 1.8 percent for the core in Nov-Dec 2014. In the nineteenth wave, annual equivalent inflation was minus 7.5 percent for the general index and minus 3.5 percent for the core in Jan-Feb 2015. It is almost impossible to forecast PPI inflation and its relation to CPI inflation. “Inflation surprise” by monetary policy could be proposed to climb along a downward sloping Phillips curve, resulting in higher inflation but lower unemployment (see Kydland and Prescott 1977, Barro and Gordon 1983 and past comments of this blog 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 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). The architects of monetary policy would require superior inflation forecasting ability compared to forecasting naivety by everybody else. In practice, we are all naïve in forecasting inflation and other economic variables and events.

Table I-6B, US, Headline and Core Final Demand Producer Price Inflation Monthly SA and 12-Month NSA ∆%

 

Final Demand
SA
Month

Final Demand
NSA 12 months

Final Demand Core SA
Month

Final Demand Core NSA
12 months

Feb 2015

-0.5

-0.6

-0.5

1.0

Jan

-0.8

0.0

-0.1

1.6

AE ∆% Jan-Feb

-7.5

  

-3.5

  

Dec 2014

-0.2

1.1

0.3

2.1

Nov

-0.3

1.4

0.0

1.8

AE ∆% Nov-Dec

-3.0

  

1.8

  

Oct

0.3

1.5

0.5

1.9

AE ∆% Oct

3.7

  

6.2

  

Sep

-0.2

1.6

-0.2

1.6

Aug

-0.1

1.9

0.0

1.9

AE ∆% Aug-Sep

-1.8

  

-1.2

  

Jul

0.3

1.9

0.5

1.9

Jun

0.1

1.8

0.0

1.6

May

0.3

2.1

0.3

2.1

Apr

0.1

1.8

0.0

1.5

Mar

0.3

1.6

0.3

1.6

AE ∆% Mar-Jul

2.7

  

2.7

  

Feb

0.2

1.2

0.2

1.6

Jan

0.3

1.3

0.3

1.4

Dec 2013

0.1

1.2

-0.1

1.2

AE ∆% Dec-Feb

2.4

  

1.6

  

Nov

0.1

1.1

0.2

1.4

Oct

0.2

1.3

0.2

1.7

Sep

0.1

1.1

0.1

1.6

AE ∆% Sep-Nov

1.6

  

2.0

  

Aug

0.0

1.7

-0.1

1.8

Jul

0.3

2.0

0.3

1.7

Jun

0.4

1.7

0.5

1.3

May

0.0

0.9

-0.3

0.9

AE ∆%  May-Aug

2.1

  

1.2

  

Apr

-0.2

0.9

0.2

1.3

Mar

-0.1

1.3

0.2

1.5

AE ∆%  Mar-Apr

-1.8

  

2.4

  

Feb

0.3

1.6

0.0

1.4

Jan

0.1

1.6

0.1

1.7

AE ∆%  Jan-Feb

2.4

  

0.6

  

Dec 2012

0.1

1.9

0.2

2.0

Nov

0.1

1.7

0.4

1.8

Oct

0.1

1.9

0.1

1.6

AE ∆%  Oct-Dec

1.2

  

2.8

  

Sep

0.7

1.5

0.3

1.4

Aug

0.2

1.2

-0.1

1.2

AE ∆% Aug-Sep

5.5

  

1.2

  

Jul

0.0

1.0

-0.1

1.7

Jun

-0.2

1.3

-0.1

1.9

AE ∆% Jun-Jul

-1.2

  

-1.2

  

May

-0.1

1.6

0.2

2.2

Apr

0.2

2.0

0.3

2.1

AE ∆% Apr-May

0.6

  

3.0

  

Mar

0.2

2.4

0.2

2.3

Feb

0.3

2.8

0.3

2.6

Jan

0.4

3.1

0.4

2.5

AE ∆% Jan-Mar

3.7

  

3.7

  

Dec 2011

-0.1

3.2

0.0

2.6

Nov

0.2

3.7

0.2

2.7

Oct

-0.3

3.7

-0.3

2.7

AE ∆% Oct-Dec

-0.8

  

-0.4

  

Sep

0.4

4.5

0.2

2.9

Aug

0.2

4.4

0.3

3.0

Jul

0.2

4.5

0.3

2.7

AE ∆% Jul-Sep

3.2

  

3.2

  

Jun

0.1

4.3

0.2

2.6

May

0.3

4.2

0.1

2.3

AE ∆%  May-Jun

2.4

  

1.8

  

Apr

0.5

4.2

0.4

2.5

Mar

0.7

4.0

0.5

NA

Feb

0.6

3.3

0.3

NA

Jan

0.6

2.4

0.4

NA

AE ∆%  Jan-Apr

7.4

  

4.9

  

Dec 2010

0.3

2.8

0.1

NA

Nov

0.3

2.6

0.1

NA

Oct

0.4

NA

0.1

NA

Sep

0.3

NA

0.2

NA

Aug

0.2

NA

0.0

NA

Jul

0.2

NA

0.2

NA

Jun

-0.2

NA

-0.1

NA

May

0.2

NA

0.3

NA

Apr

0.3

NA

NA

NA

Mar

0.1

NA

NA

NA

Feb

-0.2

NA

NA

NA

Jan

0.9

NA

NA

NA

Note: Core: excluding food and energy; AE: annual equivalent

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

Chart I-24B provides the FD PPI NSA from 2009 to 2015. There is persistent inflation with periodic declines in inflation waves similar to those worldwide.

clip_image061

Chart I-24B, US, Final Demand Producer Price Index, NSA, 2009-2015

Source: US Bureau of Labor Statistics

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

Twelve-month percentage changes of the FD PPI from 2010 to 2015 are in Chart I-25B. There are fluctuations in the rates with evident trend of decline to more subdued inflation. Reallocations of investment portfolios of risk financial assets from commodities to stocks explain much lower FD PPI inflation.

clip_image062

Chart I-25B, US, Final Demand Producer Price Index, 12-Month Percentage Change NSA, 2010-2015

Source: US Bureau of Labor Statistics

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

The core FD PPI NSA is in Chart I-26B. The behavior is similar to the headline index but with much less cumulative inflation.

clip_image063

Chart I-26B, US, Final Demand Producer Price Index Excluding Food and Energy, NSA, 2009-2015

Source: US Bureau of Labor Statistics

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

Percentage changes in 12 months of the core FD PPI are in Chart I-27B. There are fluctuations in 12 months percentage changes but with evident declining trend to more moderate inflation.

clip_image064

Chart I-27B, US, Final Demand Producer Price Index Excluding Food and Energy, 12-Month Percentage Change, NSA, 2010-2015

Source: US Bureau of Labor Statistics

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

The energy FD PPI NSA is in Chart I-28B. The index increased during the reposition of carry trades after the discovery of lack of toxic assets in banks that caused flight away from risk financial assets into government obligations of the US (Cochrane and Zingales 2009). Alternating risk aversion and appetite with reallocations among classes of risk financial assets explain the behavior of the index after late 2010.

clip_image065

Chart I-28B, US, Final Demand Energy Producer Price Index, NSA, 2009-2015

Source: US Bureau of Labor Statistics

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

Twelve-month percentage changes of the FD energy PPI are in Chart I-29B. Rates moderated from late 2010 to the present. There are multiple negative rates. Investors create and reverse carry trades from zero interest rates to derivatives of commodities in accordance with relative risk evaluations of classes of risk financial assets.

clip_image066

Chart I-29B, US, Final Demand Energy Producer Price Index, 12-Month Percentage Change, NSA, 2010-2015

Source: US Bureau of Labor Statistics

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

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015.

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