CMP Associates Regulation Blog: Dollar Revaluation Squeezing Corporate Profits, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, Stagnating Real Private Fixed Investment, Swelling Undistributed Corporate Profits, United States Housing Collapse, World Cyclical Slow Growth and Global Recession Risk: Part II

Dollar Revaluation Squeezing Corporate Profits, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, Stagnating Real Private Fixed Investment, Swelling Undistributed Corporate Profits, United States Housing Collapse, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

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

IA Mediocre Cyclical United States Economic Growth

IA1 Stagnating Real Private Fixed Investment

IA2 Swelling Undistributed Corporate Profits

II United States Housing Collapse

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

I Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend. Section IA Mediocre Cyclical United States Economic Growth provides the analysis of long-term and cyclical growth of GDP in the US with GDP two trillion dollars or 12.4 percent below trend. Section IA1 Contracting Real Private Fixed Investment analyzes weakness in investment. There is socio-economic stress in the combination of adverse events and cyclical performance:

Mediocre economic growth below potential and long-term trend, resulting in idle productive resources with GDP two trillion dollars below trend (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html). US GDP grew at the average rate of 3.3 percent per year from 1929 to 2014 with similar performance in whole cycles of contractions and expansions but only at 1.1 percent per year on average from 2007 to 2014. GDP in IQ2015 is 12.4 percent lower than what it would have been had it grown at trend of 3.0 percent
Private fixed investment stagnating at increase of 3.0 percent in the entire cycle from IVQ2007 to IQ2015 (Section I and earlier (http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html)
Twenty six million or 15.4 percent of the effective labor force unemployed or underemployed in involuntary part-time jobs with stagnating or declining real wages (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html)
Stagnating real disposable income per person or income per person after inflation and taxes (http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/global-competitive-devaluation-rules.html)
Depressed hiring that does not afford an opportunity for reducing unemployment/underemployment and moving to better-paid jobs (http://cmpassocregulationblog.blogspot.com/2015/05/fluctuating-valuations-of-financial.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/dollar-revaluation-recovery-without.html and earlier 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)

Productivity growth fell from 2.2 percent per year on average from 1947 to 2014 and average 2.3 percent per year from 1947 to 2007 to 1.4 percent per year on average from 2007 to 2014, deteriorating future growth and prosperity (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html and earlier 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/2014/12/financial-risks-twenty-six-million.html)
Output of manufacturing in Apr 2015 at 19.7 percent below long-term trend since 1919 and at 14.4 percent below trend since 1986 (http://cmpassocregulationblog.blogspot.com/2015/05/fluctuating-valuations-of-financial.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/global-portfolio-reallocations-squeeze.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/impatience-with-monetary-policy-of.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/02/world-financial-turbulence-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2015/01/exchange-rate-conflicts-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html and earlier http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html and earlier http://cmpassocregulationblog.blogspot.com/2014/10/imf-view-squeeze-of-economic-activity.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html)
Unsustainable government deficit/debt and balance of payments deficit (http://cmpassocregulationblog.blogspot.com/2015/03/impatience-with-monetary-policy-of.html and earlier 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 http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html http://cmpassocregulationblog.blogspot.com/2014/08/monetary-policy-world-inflation-waves.html http://cmpassocregulationblog.blogspot.com/2014/06/valuation-risks-world-inflation-waves.html http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html http://cmpassocregulationblog.blogspot.com/2014/03/interest-rate-risks-world-inflation.html http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html)
Worldwide waves of inflation (http://cmpassocregulationblog.blogspot.com/2015/05/interest-rate-policy-and-dollar.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/global-portfolio-reallocations-squeeze.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2015/01/competitive-currency-conflicts-world.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html and earlier (http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html and earlier http://cmpassocregulationblog.blogspot.com/2014/10/financial-oscillations-world-inflation.html http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/08/monetary-policy-world-inflation-waves.html http://cmpassocregulationblog.blogspot.com/2014/07/world-inflation-waves-united-states.html)
Deteriorating terms of trade and net revenue margins of production across countries in squeeze of economic activity by carry trades induced by zero interest rates (ES and earlier http://cmpassocregulationblog.blogspot.com/2015/04/global-portfolio-reallocations-squeeze.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/impatience-with-monetary-policy-of.html and earlier http://cmpassocregulationblog.blogspot.com/2015/02/world-financial-turbulence-squeeze-of.html http://cmpassocregulationblog.blogspot.com/2015/01/exchange-rate-conflicts-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html and earlier http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html and earlier http://cmpassocregulationblog.blogspot.com/2014/10/imf-view-squeeze-of-economic-activity.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html)
Financial repression of interest rates and credit affecting the most people without means and access to sophisticated financial investments with likely adverse effects on income distribution and wealth disparity (http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html and earlier 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/2014/12/valuations-of-risk-financial-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2014/11/valuations-of-risk-financial-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2014/11/growth-uncertainties-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/10/world-financial-turbulence-twenty-seven.html)
45 million in poverty and 41 million without health insurance with family income adjusted for inflation regressing to 1995 levels (http://cmpassocregulationblog.blogspot.com/2014/09/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html)
Net worth of households and nonprofits organizations increasing by 11.1 percent after adjusting for inflation in the entire cycle from IVQ2007 to IVQ2014 when it would have grown over 23.8 percent at trend of 3.1 percent per year in real terms from 1945 to 2014 (http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/valuations-of-risk-financial-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/financial-volatility-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/06/financial-indecision-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/03/global-financial-risks-recovery-without.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/collapse-of-united-states-dynamism-of.html). Financial assets increased $15.0 trillion while nonfinancial assets increased $898.5 billion with likely concentration of wealth in those with access to sophisticated financial investments. Real estate assets adjusted for inflation fell 9.9 percent from 2007 to IVQ2014

Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 23 quarters from IIIQ2009 to IQ2015. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the second estimate of GDP for IQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_2nd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2015 would have accumulated to 23.9 percent. GDP in IQ2015 would be $18,574.8 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,310.7 billion than actual $16,264.1 billion. There are about two trillion dollars of GDP less than at trend, explaining the 25.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 15.4 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html). US GDP in IQ2015 is 12.4 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,264.1 billion in IQ2015 or 8.5 percent at the average annual equivalent rate of 1.1 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 Apr 1919 to Apr 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.9172 in Apr 2015. The actual index NSA in Apr 2015 is 101.1122, which is 19.7 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014. Using trend growth of 2.4 percent per year, the index would increase to 118.0899 in Apr 2015. The output of manufacturing at 101.1122 in Apr 2015 is 14.4 percent below trend under this alternative calculation.

The economy of the US can be summarized in growth of economic activity or GDP as fluctuating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.6 percent in 2011, 2.3 percent in 2012, 2.2 percent in 2013 and 2.4 percent in 2014. The following calculations show that actual growth is around 2.2 percent per year. The rate of growth of 1.1 percent in the entire cycle from 2007 to 2014 is well below 3 percent per year in trend from 1870 to 2010, which the economy of the US always attained for entire cycles in expansions after events such as wars and recessions (Lucas 2011May). Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.

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

	GDP
Long-Term
1929-2014	3.3
1947-2014	3.2
Whole Cycles
1980-1989	3.5
2006-2014	1.2
2007-2014	1.1
Cyclical Contractions ∆%
IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982	-4.7
IVQ2007 to IIQ2009	-4.2
Cyclical Expansions Average Annual Equivalent ∆%
IQ1983 to IVQ1985 IQ1983-IQ1986 IQ1983-IIIQ1986 IQ1983-IVQ1986 IQ1983-IQ1987 IQ1983-IIQ1987 IQ1983-IIIQ1987 IQ1983 to IVQ1987 IQ1983 to IQ1988 IQ1983 to IIQ1988 IQ1983 to IIIQ1988	5.9 5.7 5.4 5.2 5.0 5.0 4.9 5.0 4.9 4.9 4.8
First Four Quarters IQ1983 to IVQ1983	7.8
IIIQ2009 to IQ2015	2.2
First Four Quarters IIIQ2009 to IIQ2010	2.7
	Real Disposable Income	Real Disposable Income per Capita
Long-Term
1929-2013	3.2	2.0
1947-1999	3.7	2.3
Whole Cycles
1980-1989	3.5	2.6
2006-2014	1.5	0.7

Source: Bureau of Economic Analysis

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

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

1. Average Annual Growth in the Past Twelve Quarters. GDP growth in the four quarters of 2012, the four quarters of 2013, the four quarters of 2014 and IQ2015 accumulated to 7.1 percent. This growth is equivalent to 2.1 percent per year, obtained by dividing GDP in IQ2015 of $16,264.1 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/13: {[($16,264.1/$15,190.3)^4/13 -1]100 = 2.1 percent.

2. Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters of IQ2014 to IQ2015 accumulated to 2.7 percent that is equivalent to 2.7 percent in a year. This is obtained by dividing GDP in IQ2015 of $16,264.1 billion by GDP in IQ2014 of $15,831.7 billion and compounding by 4/4: {[($16,264.1/$15,831.7)^4/4 -1]100 = 2.7 %}. The US economy grew 2.7 percent in IQ2015 relative to the same quarter a year earlier in IQ2014. Growth was at annual equivalent 4.6 percent in IIQ2014 and 5.0 percent IIIQ2014 and only at 2.2 percent in IVQ2014. GDP fell at annual equivalent 0.7 percent in IQ2015. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, which is in the borderline of contraction, and negative in IQ2014. US GDP fell 0.5 percent in IQ2014. The rate of growth of GDP in the revision of IIIQ2013 is 4.5 percent in seasonally adjusted annual rate (SAAR). Inventory accumulation contributed 1.49 percentage points to this rate of growth. The actual rate without this impulse of unsold inventories would have been 3.0 percent, or 0.74 percent in IIIQ2013, such that annual equivalent growth in 2013 is closer to 2.9 percent {[(1.007)(1.004)(1.0074)(1.010)^4/4-1]100 = 2.9%}, compounding the quarterly rates and converting into annual equivalent. Inventory divestment deducted 1.16 percentage points from GDP growth in IQ2014. Without this deduction of inventory divestment, GDP growth would have been minus 0.9 percent in IQ2014, such that the actual growth rates in the four quarters ending in IQ2014 is closer to 2.2 percent {[(1.004)(1.011)(1.009)(0.9977)]^4/4 -1]100 = 2.2%}.

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

	Real GDP, Billions Chained 2009 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,991.8	NA	0.4	1.9
IVQ2011	15,190.3	1.3	1.1	1.7
IQ2012	15,275.0	1.9	0.6	2.6
IIQ2012	15,336.7	2.3	0.4	2.3
IIIQ2012	15,431.3	2.9	0.6	2.7
IVQ2012	15,433.7	2.9	0.0	1.6
IQ2013	15,538.4	3.6	0.7	1.7
IIQ2013	15,606.6	4.1	0.4	1.8
IIIQ2013	15,779.9	5.3	1.1	2.3
IVQ2013	15,916.2	6.2	0.9	3.1
IQ2014	15,831.7	5.6	-0.5	1.9
IIQ2014	16,010.4	6.8	1.1	2.6
IIIQ2014	16,205.6	8.1	1.2	2.7
IVQ2014	16,294.7	8.7	0.5	2.4
IQ2015	16,264.1	8.5	-0.2	2.7
Cumulative ∆% IQ2012 to IQ2015	7.1		7.0
Annual Equivalent ∆%	2.1		2.1

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

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

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

	IQ	IIQ	IIIQ	IV
R IIQ1953-IIQ1954
1953			-2.2	-5.9
1954	-1.8
E IIIQ1954-IIQ1955
1954			4.6	8.0
1955	11.9	6.7
R IIIQ1957-IIQ1958
1957				-4.0
1958	-10.0
E IIIQ1958-IIQ1959
1958			9.6	9.7
1959	7.7	10.1
R IVQ1969-IV1970
1969				-1.7
1970	-0.7
E IIQ1970-IQ1971
1970		0.7	3.6	-4.0
1971	11.1
R IVQ1973-IQ1975
1973				3.8
1974	-3.3	1.1	-3.8	-1.6
1975	-4.7
E IIQ1975-IQ1976
1975		3.1	6.8	5.5
1976	9.3
R IQ1980-IIIQ1980
1980	1.3	-7.9	-0.6
R IQ1981-IVQ1982
1981	8.5	-2.9	4.7	-4.6
1982	-6.5	2.2	-1.4	0.4
E IQ1983-IVQ1983
1983	5.3	9.4	8.1	8.5
R IVQ2007-IIQ2009
2008	-2.7	2.0	-1.9	-8.2
2009	-5.4	-0.5
E IIIQ2009-IIQ2010
2009			1.3	3.9
2010	1.7	3.9

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

The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.7 percent is more comparable to the latest revised 4.2 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). Table I-2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981 to 1982 and 2007 to 2009, using the latest major revision published on July 31, 2013 and the second estimate for IQ2015 GDP (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_2nd.pdf), which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There were four quarters of contraction in 1981-1982 ranging in rate from -1.4 percent to -6.5 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.5 percent to -8.2 percent. The striking difference is that in the first twenty quarters of expansion from IQ1983 to IIIQ1987, shown in Table I-2 in relief, GDP grew at the high quarterly percentage growth rates of 5.3, 9.4, 8.1, 8.5, 8.2, 7.2, 4.0, 3.2, 4.0, 3.7, 6.4, 3.0, 3.8, 1.9, 4.1, 2.1, 2.8, 4.6, 3.7 and 6.8. In contrast, the percentage growth rates in the first twenty quarters of expansion from IIIQ2009 to IQ2015 shown in relief in Table I-2 were mediocre: 1.3, 3.9, 1.7, 3.9, 2.7, 2.5, -1.5, 2.9, 0.8, 4.6, 2.3, 1.6, 2.5, 0.1, 2.7, 1.8, 4.5, 3.5, minus 2.1, 4.6, 5.0, 2.2 and minus 0.7. Inventory accumulation contributed 2.80 percentage points to the rate of growth of 4.6 percent in IVQ2011 and 0.70 percentage points to the rate of growth in IQ2013. Inventory divestment deducted 1.16 percentage points from GDP growth in IQ2014 and contributed 1.42 percentage points to the rate of growth in IIQ2014. Economic growth and employment creation continued at slow rhythm during 2012 and in 2013-2014 while much stronger growth would be required in movement to full employment. The cycle is now long by historical standards and growth rates are typically weaker in the final periods of cyclical expansions.

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

Q	1981	1982	1983	1984	2008	2009	2010
I	8.5	-6.5	5.3	8.2	-2.7	-5.4	1.7
II	-2.9	2.2	9.4	7.2	2.0	-0.5	3.9
III	4.7	-1.4	8.1	4.0	-1.9	1.3	2.7
IV	-4.6	0.4	8.5	3.2	-8.2	3.9	2.5
				1985			2011
I				4.0			-1.5
II				3.7			2.9
III				6.4			0.8
IV				3.0			4.6
				1986			2012
I				3.8			2.3
II				1.9			1.6
III				4.1			2.5
IV				2.1			0.1
				1987			2013
I				2.8			2.7
II				4.6			1.8
III				3.7			4.5
IV				6.8			3.5
				1988			2014
I				2.3			-2.1
II				5.4			4.6
III				2.3			5.0
IV				5.4			2.2
							2015
I							-0.7

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

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

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

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

Chart I-1A provides real GDP annually from 1929 to 2014. Growth after the global recession from IVQ2007 to IIQ2009 has not been sufficiently high to compensate for the contraction as it had occurred in past economic cycles. There are about two trillion dollars of GDP less than at trend, explaining the 25.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 15.4 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html). US GDP in IQ2015 is 12.4 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,264.1 billion in IQ2015 or 8.5 percent at the average annual equivalent rate of 1.1 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 Apr 1919 to Apr 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.9172 in Apr 2015. The actual index NSA in Apr 2015 is 101.1122, which is 19.7 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014. Using trend growth of 2.4 percent per year, the index would increase to 118.0899 in Apr 2015. The output of manufacturing at 101.1122 in Apr 2015 is 14.4 percent below trend under this alternative calculation.

Chart I-1A, US, Real GDP 1929-2014

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

Chart I-2 provides the growth of real quarterly GDP in the US between 1947 and 2014. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery compared with return to trend at 3.0 percent from 1870 to 2010 after events such as wars and recessions (Lucas 2011May) and a standstill that can lead to growth recession, or low rates of economic growth. The expansion is relatively long compared to earlier expansion and there could be even another contraction or conventional recession in the future. The average rate of growth from 1947 to 2014 is 3.2 percent. The average growth rate from IV2007 to IQ2015 is only 1.1 percent with 2.8 percent annual equivalent from the end of the recession in IVQ2001 to the end of the expansion in IVQ2007.

Chart I-2, US, Real GDP, Quarterly, 1947-2015

Source: US Bureau of Economic Analysis

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

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

Chart I-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1988

Source: US Bureau of Economic Analysis

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

In contrast, growth rates in the comparable first twenty-three quarters of expansion from 2009 to 2015 in Chart I-4 have been mediocre. As a result, growth has not provided the exit from unemployment and underemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.

Chart I-4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2015

Source: US Bureau of Economic Analysis

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

Table I-3 provides percentage change of real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). Data are available for the 1930s only on a yearly basis. US GDP fell 4.7 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1981 to IVQ1982 and 4.2 percent cumulatively in the recession from IVQ2007 to IIQ2009. It is instructive to compare the first years of the expansions in the 1980s and the current expansion. GDP grew at 4.6 percent in 1983, 7.3 percent in 1984, 4.2 percent in 1985, 3.5 percent in 1986, 3.5 percent in 1987 and 4.2 percent in 1988. In contrast, GDP grew 2.5 percent in 2010, 1.6 percent in 2011, 2.3 percent in 2012, 2.2 percent in 2013 and 2.4 percent in 2014. Actual annual equivalent GDP growth in the four quarters of 2012, and nine quarters from IQ2013 to IQ2015 is 2.1 percent and 2.7 percent in the four quarters ending in IQ2015. GDP grew at 4.2 percent in 1985, 3.5 percent in 1986, 3.5 percent in 1987 and 4.2 percent in 1988. The forecasts of the central tendency of participants of the Federal Open Market Committee (FOMC) are in the range of 2.3 to 2.7 percent in 2015 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150318.pdf) with less reliable forecast of 2.3 to 2.7 percent in 2016 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150318.pdf). Growth of GDP in the expansion from IIIQ2009 to IQ2015 has been at average 2.2 percent in annual equivalent.

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

Year	GDP ∆%	Year	GDP ∆%	Year	GDP ∆%
1930	-8.5	1980	-0.2	2000	4.1
1931	-6.4	1981	2.6	2001	1.0
1932	-12.9	1982	-1.9	2002	1.8
1933	-1.3	1983	4.6	2003	2.8
1934	10.8	1984	7.3	2004	3.8
1935	8.9	1985	4.2	2005	3.3
1936	12.9	1986	3.5	2006	2.7
1937	5.1	1987	3.5	2007	1.8
1938	-3.3	1988	4.2	2008	-0.3
1930	8.0	1989	3.7	2009	-2.8
1940	8.8	1990	1.9	2010	2.5
1941	17.7	1991	-0.1	2011	1.6
1942	18.9	1992	3.6	2012	2.3
1943	17.0	1993	2.7	2013	2.2
1944	8.0	1994	4.0	2014	2.4

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

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

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

Source: US Bureau of Economic Analysis

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

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

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

Source: US Bureau of Economic Analysis9

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

Chart I-7 provides the rates of growth during the 2000s. Growth rates in the initial eighteen quarters of expansion have been relatively lower than during recessions after World War II. As a result, unemployment and underemployment continue at the rate of 15.4 percent of the effective US labor force (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html).

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

Source: US Bureau of Economic Analysis

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

Characteristics of the four cyclical contractions are provided in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.7 percent, which is almost equal to the decline of 4.2 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

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

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Rate
IIQ1953 to IIQ1954	3	-2.4	-0.8
IIIQ1957 to IIQ1958	3	-3.0	-1.0
IVQ1973 to IQ1975	5	-3.1	-0.6
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.5	-0.64
IVQ2007 to IIQ2009	6	-4.2	-0.72

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

Table I-5 shows the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the twenty-three quarters of the current cyclical expansion from IIIQ2009 to IQ2015. In sharp contrast, the average growth rate of GDP was:

5.7 percent in the first thirteen quarters of expansion from IQ1983 to IQ1986
5.4 percent in the first fifteen quarters of expansion from IQ1983 to IIIQ1986
5.2 percent in the first sixteen quarters of expansion from IQ1983 to IVQ1986
5.0 percent in the first seventeen quarters of expansion from IQ1983 to IQ1987
5.0 percent in the first eighteen quarters of expansion from IQ1983 to IIQ1987
4.9 percent in the first nineteen quarters of expansion from IQ1983 to IIIQ1987
5.0 percent in the first twenty quarters of expansion from IQ1983 to IVQ1987
4.9 percent in the first twenty-first quarters of expansion from IQ1983 to IQ1988
4.9 percent in the first twenty-two quarters of expansion from IQ1983 to IIQ1988
4.8 percent in the first twenty-three quarters of expansion from IQ1983 to IIIQ1988

The line “average first four quarters in four expansions” provides the average growth rate of 7.7 percent with 7.8 percent from IIIQ1954 to IIQ1955, 9.2 percent from IIIQ1958 to IIQ1959, 6.1 percent from IIIQ1975 to IIQ1976 and 7.8 percent from IQ1983 to IVQ1983. The United States missed this opportunity of high growth in the initial phase of recovery. BEA data show the US economy in standstill with annual growth of 2.5 percent in 2010 decelerating to 1.6 percent annual growth in 2011, 2.3 percent in 2012, 2.2 percent in 2013 and 2.4 percent in 2014 (http://www.bea.gov/iTable/index_nipa.cfm) The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.2 percent from IQ1983 to IVQ1986, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IQ1988, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988 and at 7.8 percent from IQ1983 to IVQ1983. GDP grew 2.7 percent in the first four quarters of the expansion from IIIQ2009 to IIQ2010. GDP growth in the four quarters of 2012, the four quarters of 2013, the four quarters of 2014 and IQ2015 accumulated to 7.1 percent. This growth is equivalent to 2.1 percent per year, obtained by dividing GDP in IQ2015 of $16,264.1 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/13: {[($16,264.1/$15,190.3)^4/13 -1]100 = 2.1 percent.

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

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.8	4.5
First Four Quarters IIIQ1954 to IIQ1955	4	7.8
IIQ1958 to IIQ1959	5	10.0	7.9
First Four Quarters IIIQ1958 to IIQ1959	4	9.2
IIQ1975 to IVQ1976	8	8.3	4.1
First Four Quarters IIIQ1975 to IIQ1976	4	6.1
IQ1983-IQ1986 IQ1983-IIIQ1986 IQ1983-IVQ1986 IQ1983-IQ1987 IQ1983-IIQ1987 IQ1983 to IIIQ1987 IQ1983 to IVQ1987 IQ1983 to IQ1988 IQ1983 to IIQ1988 IQ1983 to IIIQ1988	13 15 16 17 18 19 20 21 22 23	19.9 21.6 22.3 23.1 24.5 25.6 27.7 28.4 30.1 30.9	5.7 5.4 5.2 5.0 5.0 4.9 5.0 4.9 4.9 4.8
First Four Quarters IQ1983 to IVQ1983	4	7.8
Average First Four Quarters in Four Expansions*		7.7
IIIQ2009 to IQ2015	23	13.2	2.2
First Four Quarters IIIQ2009 to IIQ2010		2.7

*First Four Quarters: 7.8% IIIQ1954-IIQ1955; 9.2% IIIQ1958-IIQ1959; 6.1% IIIQ1975-IQ1976; 7.8% IQ1983-IVQ1983

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

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

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

Source: US Bureau of Economic Analysis

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

Chart I-9 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2014. The economy has underperformed during the first twenty-three quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.

Chart I-9, US, Real GDP, 2007-2015

Source: US Bureau of Economic Analysis

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

As shown in Tables I-4 and I-5 above the loss of real GDP in the US during the contraction was 4.2 percent but the gain in the cyclical expansion has been only 13.2 percent (first to the last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IQ2015 with the first estimate and revisions is higher by only 8.5 percent than the level of real GDP in IVQ2007. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2015 would have accumulated to 23.9 percent. GDP in IQ2015 would be $18,574.8 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,310.7 billion than actual $16,264.1 billion. There are about two trillion dollars of GDP less than at trend, explaining the 25.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 15.4 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html). US GDP in IQ2015 is 12.4 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,264.1 billion in IQ2015 or 8.5 percent at the average annual equivalent rate of 1.1 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 Apr 1919 to Apr 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.9172 in Apr 2015. The actual index NSA in Apr 2015 is 101.1122, which is 19.7 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014. Using trend growth of 2.4 percent per year, the index would increase to 118.0899 in Apr 2015. The output of manufacturing at 101.1122 in Apr 2015 is 14.4 percent below trend under this alternative calculation.

Table I-6 shows that the contraction actually concentrated in two quarters: decline of 2.1 percent in IVQ2008 relative to the prior quarter and decline of 1.4 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.5 percent {[(1-0.021) x (1-0.014) -1]100 = -3.5%}, or {[(IQ2009 $14,375.0)/(IIIQ2008 $14,891.6) – 1]100 = -3.5%} except for rounding. Those two quarters coincided with the worst effects of the financial crisis (Cochrane and Zingales 2009). GDP fell 0.1 percent in IIQ2009 but grew 0.3 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in five successive quarters from IVQ2009 to IVQ2010 of growth of 1.0 percent in IVQ2009, 0.4 percent in IQ2010, 1.0 percent in IIQ2010 and nearly equal growth at 0.7 percent in IIIQ2010 and 0.6 percent in IVQ2010 for cumulative growth in those five quarters of 3.8 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.004 x 1.01 x 1.007 x 1.006) – 1]100 = 3.8%} or {[(IVQ2010 $14,939.0)/(IIIQ2009 $14,402.5) – 1]100 = 3.7%} with minor rounding difference. The economy then stalled during the first half of 2011 with decline of 0.4 percent in IQ2011 and growth of 0.7 percent in IIQ2011 for combined annual equivalent rate of 0.6 percent {(0.996 x 1.007)²}. The economy grew 0.2 percent in IIIQ2011 for annual equivalent growth of 0.7 percent in the first three quarters {[(0.996 x 1.007 x 1.002)^4/3 -1]100 = 0.7%}. Growth picked up in IVQ2011 with 1.1 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.7 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 1.9 percent in IQ2011, 1.7 percent in IIQ2011, 1.2 percent in IIIQ2011 and 1.7 percent in IVQ2011. As shown below, growth of 1.1 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.6 percent relative to IVQ2011 and 2.6 percent relative to IQ2011, decelerating to 0.4 percent in IIQ2012 and 2.3 percent relative to IIQ2011 and 0.6 percent in IIIQ2012 and 2.7 percent relative to IIIQ2011 largely because of inventory accumulation and national defense expenditures. Growth was 0.0 percent in IVQ2012 with 1.6 percent relative to a year earlier but mostly because of deduction of 1.80 percentage points of inventory divestment and 1.12 percentage points of reduction of one-time national defense expenditures. Growth was 0.7 percent in IQ2013 and 1.7 percent relative to IQ2012 in large part because of burning savings to consume caused by financial repression of zero interest rates. There is similar growth of 0.4 percent in IIQ2013 and 1.8 percent relative to a year earlier. In IIIQ2013, GDP grew 1.1 percent relative to the prior quarter and 2.3 percent relative to the same quarter a year earlier with inventory accumulation contributing 1.49 percentage points to growth at 4.5 percent SAAR in IIIQ2013. GDP increased 0.9 percent in IVQ2013 and 3.1 percent relative to a year earlier. GDP fell 0.5 percent in IQ2014 and grew 1.9 percent relative to a year earlier. Inventory divestment deducted 1.16 percentage points from GDP growth in IQ2014. GDP grew 1.1 percent in IIQ2014, 2.6 percent relative to a year earlier and at 4.6 SAAR with inventory change contributing 1.42 percentage points. GDP grew 1.2 percent in IIIQ2014 and 2.7 percent relative to a year earlier. GDP grew 0.5 percent in IVQ2014 and 2.4 percent relative to a year earlier. GDP fell 0.2 percent in IQ2015 and increased 2.7 percent relative to a year earlier partly because of low level during contraction of 0.5 percent in IQ2014. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area and growth in China are common sources of doubts on the rate and direction of economic growth in the US. There is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.

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

	Real GDP, Billions Chained 2009 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,991.8	NA	0.4	1.9
IQ2008	14,889.5	-0.7	-0.7	1.1
IIQ2008	14,963.4	-0.2	0.5	0.8
IIIQ2008	14,891.6	-0.7	-0.5	-0.3
IVQ2008	14,577.0	-2.8	-2.1	-2.8
IQ2009	14,375.0	-4.1	-1.4	-3.5
IIQ2009	14,355.6	-4.2	-0.1	-4.1
IIIQ2009	14,402.5	-3.9	0.3	-3.3
IV2009	14,541.9	-3.0	1.0	-0.2
IQ2010	14,604.8	-2.6	0.4	1.6
IIQ2010	14,745.9	-1.6	1.0	2.7
IIIQ2010	14,845.5	-1.0	0.7	3.1
IVQ2010	14,939.0	-0.4	0.6	2.7
IQ2011	14,881.3	-0.7	-0.4	1.9
IIQ2011	14,989.6	0.0	0.7	1.7
IIIQ2011	15,021.1	0.2	0.2	1.2
IVQ2011	15,190.3	1.3	1.1	1.7
IQ2012	15,275.0	1.9	0.6	2.6
IIQ2012	15,336.7	2.3	0.4	2.3
IIIQ2012	15,431.3	2.9	0.6	2.7
IVQ2012	15,433.7	2.9	0.0	1.6
IQ2013	15,538.4	3.6	0.7	1.7
IIQ2013	15,606.6	4.1	0.4	1.8
IIIQ2013	15,779.9	5.3	1.1	2.3
IVQ2013	15,916.2	6.2	0.9	3.1
IQ2014	15,831.7	5.6	-0.5	1.9
IIQ2014	16,010.4	6.8	1.1	2.6
IIIQ2014	16,205.6	8.1	1.2	2.7
IVQ2014	16,294.7	8.7	0.5	2.4
IQ2015	16,264.1	8.5	-0.2	2.7

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

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

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

Source: US Bureau of Economic Analysis

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

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

Chart I-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2015

Source: US Bureau of Economic Analysis

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

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

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

Source: US Bureau of Economic Analysis

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

Chart I-13 provides growth rates in a quarter relative to the prior quarter from 2007 to 2015. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.

Chart I-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2015

Source: US Bureau of Economic Analysis

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

The revised estimates and earlier estimates from IQ2008 to IQ2014 in seasonally adjusted annual equivalent rates are shown in Table I-7. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent and minus 8.2 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent but then lowered to contraction of 5.3 percent and 5.4 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent and much lower to minus 1.9 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent and then increased to 4.0 percent but lowered to 3.9 percent. Growth in IQ2010 is lowered from 3.9 percent to 2.3 percent and 1.7 percent. Growth in IIQ2010 is upwardly revised to 3.8 percent but then lowered to 2.2 percent. The final revision increased growth in IIQ2010 to 3.9 percent. Revisions lowered growth of 1.9 percent in IQ2011 to minus 1.5 percent. The revisions increased growth of 1.8 percent in IQ2013 to 2.7 percent and increased growth of 2.0 percent in IQ2012 to 2.3 percent. The revision reduced the decline of GDP from 2.9 percent in IQ2014 to 2.1 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession with higher risks of contraction and continuing underperformance.

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

Quarters	Rev Jul 30, 2014	Rev Jul 31, 2013	Rev Jul 27, 2012	Rev Jul 29, 2011	Earlier Estimate
2008
I	-2.7	-2.7		-1.8	-0.7
II	2.0	2.0		1.3	0.6
III	-1.9	-2.0		-3.7	-4.0
IV	-8.2	-8.3		-8.9	-6.8
2009
I	-5.4	-5.4	-5.3	-6.7	-4.9
II	-0.5	-0.4	-0.3	-0.7	-0.7
III	1.3	1.3	1.4	1.7	1.6
IV	3.9	3.9	4.0	3.8	5.0
2010
I	1.7	1.6	2.3	3.9	3.7
II	3.9	3.9	2.2	3.8	1.7
III	2.7	2.8	2.6	2.5	2.6
IV	2.5	2.8	2.4	2.3	3.1
2011
I	-1.5	-1.3	0.1	0.4	1.9
II	2.9	3.2	2.5
III	0.8	1.4	1.3
IV	4.6	4.9	4.1
2012
I	2.3	3.7	2.0
II	1.6	1.2	1.3
III	2.5	2.8	3.1
IV	0.1	0.1	0.4
2013
I	2.7	1.1	1.8
II	1.8	2.5
III	4.5	4.1
IV	3.5	2.6
2014
I	-2.1	-2.9

Note: Rev: Revision

Source: US Bureau of Economic Analysis

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

Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase from IQ1983 to IIQ1988 than from IIIQ2009 to IQ2015, as shown in Table I-8. GDI provided the impulse of growth in 1983 and 1984, which has not been the case from 2009 to 2015. The investment decision in the US economy has been frustrated in the current cyclical expansion. Growth of GDP in IIIQ2013 at seasonally adjusted annual rate of 4.5 percent consisted of positive contribution of 1.39 percentage points of personal consumption expenditures (PCE) plus positive contribution of 2.50 percentage points of gross private domestic investment (GDI) of which 1.49 percentage points of inventory investment (∆PI), contribution of net exports (trade or exports less imports) of 0.59 percentage points and 0.04 percentage points of government consumption expenditures and gross investment (GOV) partly because of one-time contribution of national defense expenditures of 0.03 percentage points. Growth at 3.5 percent in IVQ2013 had strongest contributions of 2.51 percentage points of PCE and 1.08 percentage points of trade. Growth of GDP at minus 2.1 percent in IQ2014 is mostly contribution of 0.83 percentage points by PCE with deductions of 1.13 percentage points by GDI, inventory divestment of 1.16 percentage points and trade deducting 1.66 percentage points. Growth at 4.6 percent in IIQ2014 consists of contributions of 1.75 percentage points by PCE and 2.87 percentage points by GDI with 1.42 percentage points by inventory change. Trade deducted 0.34 percentage points and government added 0.31 percentage points mostly because of contribution of 0.38 percentage points of expenditures by state and local government. Growth at 5.0 percent in IIIQ2014 consists of contribution of 2.21 percentage points by PCE, 1.18 percentage points by GDI, 0.78 percentage points by trade and 0.80 percentage points by government of which 0.66 percentage points by national defense expenditures growing at 16.0 percent in annual equivalent. Growth at 2.2 percent in IVQ2014 consists of contribution of 2.98 percentage points by PCE, 0.61 percentage points by GDI with deduction of 0.10 percentage points by inventory investment. Net trade deducted 1.03 percentage points while government deducted 0.35 percentage mostly because of deduction of 0.57 percentage points by national defense expenditure declining at 12.2 percent in IVQ2014. Growth of GDP at minus 0.7 percent in IQ2015 consisted mostly of contributions of 1.23 percentage points by personal consumption expenditures and 0.33 percentage points by inventory accumulation while trade deducted 1.90 percentage points and government deducted 0.20 percentage points. The economy of the United States has lost the dynamic growth impulse of earlier cyclical expansions with mediocre growth resulting from consumption forced by one-time effects of financial repression, national defense expenditures and inventory accumulation.

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

	GDP	PCE	GDI	∆ PI	Trade	GOV
2015
I	-0.7	1.23	0.12	0.33	-1.90	-0.20
2014
I	-2.1	0.83	-1.13	-1.16	-1.66	-0.15
II	4.6	1.75	2.87	1.42	-0.34	0.31
III	5.0	2.21	1.18	-0.03	0.78	0.80
IV	2.2	2.98	0.61	-0.10	-1.03	-0.35
2013
I	2.7	2.45	1.12	0.70	-0.08	-0.75
II	1.8	1.23	1.03	0.30	-0.54	0.04
III	4.5	1.39	2.50	1.49	0.59	0.04
IV	3.5	2.51	0.62	-0.34	1.08	-0.71
2012
I	2.3	1.87	1.04	-0.20	-0.11	-0.56
II	1.6	0.86	0.88	0.27	-0.04	-0.08
III	2.5	1.32	0.26	-0.19	0.39	0.52
IV	0.1	1.32	-0.84	-1.80	0.79	-1.20
2011
I	-1.5	1.38	-1.07	-0.96	-0.24	-1.60
II	2.9	0.57	2.14	1.04	0.31	-0.08
III	0.8	1.20	0.15	-2.10	0.01	-0.52
IV	4.6	0.94	4.16	2.80	-0.21	-0.31
2010
I	1.7	1.46	1.77	1.66	-0.85	-0.63
II	3.9	2.23	2.86	1.09	-1.77	0.61
III	2.7	1.77	1.86	1.90	-0.83	-0.07
IV	2.5	2.79	-0.51	-1.63	1.12	-0.87
2009
I	-5.4	-0.86	-7.02	-2.26	2.30	0.15
II	-0.5	-1.19	-3.25	-1.12	2.34	1.56
III	1.3	1.68	-0.40	-0.38	-0.45	0.48
IV	3.9	-0.01	4.05	4.40	0.06	-0.17
1982
I	-6.5	1.61	-7.59	-5.33	-0.49	-0.05
II	2.2	0.89	-0.06	2.26	0.81	0.56
III	-1.4	1.88	-0.62	1.11	-3.22	0.53
IV	0.4	4.51	-5.37	-5.33	-0.10	1.35
1983
I	5.3	2.45	2.36	0.92	-0.29	0.82
II	9.4	5.06	5.96	3.43	-2.46	0.89
III	8.1	4.50	4.40	0.57	-2.25	1.42
IV	8.5	4.06	6.94	3.01	-1.14	-1.36
1984
I	8.2	2.26	7.23	4.94	-2.31	1.01
II	7.2	3.64	2.57	-0.29	-0.87	1.87
III	4.0	1.95	1.69	0.21	-0.36	0.70
IV	3.2	3.29	-1.08	-2.44	-0.56	1.58
1985
I	4.0	4.23	-2.14	-2.86	0.94	1.01
II	3.7	2.35	1.34	0.35	-1.90	1.93
III	6.4	4.82	-0.43	-0.15	-0.01	1.98
IV	3.0	0.62	2.80	1.40	-0.66	0.27
1986
I	3.8	2.10	0.04	-0.17	0.92	0.70
II	1.9	2.77	-1.30	-1.30	-1.33	1.70
III	4.1	4.55	-1.97	-1.62	-0.45	1.95
IV	2.1	1.62	0.24	-0.29	0.71	-0.48
1987
I	2.8	0.05	1.98	3.28	0.23	0.57
II	4.6	3.54	0.08	-0.99	0.14	0.81
III	3.7	2.97	0.03	-1.19	0.45	0.23
IV	6.8	0.57	4.94	4.95	0.18	1.08
1988
I	2.3	4.49	-3.62	-3.68	1.94	-0.54
II	5.4	1.89	1.72	0.33	1.44	0.34
III	2.3	2.17	0.38	0.05	-0.31	0.08
IV	5.4	2.93	1.11	0.27	-0.21	1.56

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

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

Source: US Bureau of Economic Analysis

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

The Bureau of Economic Analysis (BEA) (pages 1) conducted the annual revision of GDP (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp2q14_adv.pdf):

“The estimates released today reflect the results of the annual revision of the national income and product accounts (NIPAs) in conjunction with the "advance" estimate of GDP for the second quarter of 2014. In addition to the regular revision of estimates for the most recent 3 years and the first quarter of 2014, GDP and select components were revised back to the first quarter of 1999 (see the Technical Note). More information is available in "Preview of Upcoming NIPA Revision" in the May Survey of Current Business and on BEA's Web site. The August Survey will contain an article describing the annual revision in detail. “

The Bureau of Economic Analysis (BEA) (pages 1-2 http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_2nd.pdf) explains growth of GDP in IQ2015 as follows:

“Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- decreased at an annual rate of 0.7 percent in the first quarter of 2015, according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.2 percent. The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, real GDP increased 0.2 percent. With the second estimate for the first quarter, imports increased more and private inventory investment increased less than previously estimated (for more information, see "Revisions" on page 3). The decrease in real GDP in the first quarter primarily reflected negative contributions from exports, nonresidential fixed investment, and state and local government spending that were partly offset by positive contributions from personal consumption expenditures (PCE), private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.“

There are positive contributions to growth in IQ2015 shown in Table I-9:

Personal consumption expenditures (PCE) growing at 1.8 percent
Consumption of durable goods growing at 1.1 percent
Residential fixed investment growing at 5.0 percent
Inventory accumulation contributing 0.33 percentage points

There were negative contributions in IQ2015:

Imports, which are a deduction from growth, growing at 5.6 percent
Government expenditures contracting at 0.8 percent
Nonresidential investment falling at 2.8 percent
Exports contracting at 7.6 percent

The BEA explains deceleration in real GDP growth in IQ2015 by:

Contraction of nonresidential fixed investment at 2.8 percent in IQ20145compared with growth at 4.7 percent in IVQ2014
Growth of consumption of durable goods at 1.1 percent in IQ2015 compared with 6.2 percent in IQ2015
Contraction of exports at 7.6 percent compared with growth at 4.5 percent in IVQ2014

The BEA finds offsetting accelerating factors:

· Growth of imports at 5.6 percent in IQ2015 compared with 10.4 percent in the prior quarter

· Contraction of government expenditures at 1.1 percent in IQ2015 compared with contraction at 1.9 percent in the prior quarter

· Contraction of national defense expenditures at minus 1.0 percent in IQ2015 compared with contraction at minus 12.2 percent in the prior quarter

· Inventory accumulation contributing 0.33 percentage points in IQ2015 compared with deduction of 0.10 percentage points in the prior quarter

An important aspect of growth in the US is the decline in growth of real disposable personal income, or what is left after taxes and inflation, which increased at the rate of 0.9 percent in IIIQ2013 compared with a year earlier. Contraction of real disposable income of 1.9 percent in IVQ2013 relative to a year earlier is largely due to comparison with an artificially higher level in anticipations of income in Nov and Dec 2012 to avoid increases in taxes in 2013, an episode known as “fiscal cliff.” Real disposable personal income increased 2.4 percent in IQ2014 relative to a year earlier and 2.2 percent in IIQ2014 relative to a year earlier. Real disposable personal income increased 2.3 percent in IIIQ2014 relative to a year earlier and 3.3 percent in IVQ2014 compared with a year earlier. Real disposable personal income grew 3.7 percent in IQ2015 relative to a year earlier partly because of contraction of energy prices. The effects of financial repression, or zero interest, are vividly shown in the decline of the savings rate, or personal saving as percent of disposable income from 8.6 percent in IVQ2012 to 5.2 percent in IIIQ2013 and 4.4 percent in IVQ2013. The savings rate eased to 4.9 percent in IQ2014, increasing to 5.1 percent in IIQ2014 and moving to 4.8 percent in IIIQ2014. The savings rate fell to 4.7 percent in IVQ2014, increasing to 5.5 percent in IQ2015. Anticipation of income in IVQ2012 to avoid higher taxes in 2013 caused increases in income and savings while higher payroll taxes in 2013 restricted income growth and savings in IQ2013. Zero interest rates induce risky investments with high leverage and can contract balance sheets of families, business and financial institutions when interest rates inevitably increase in the future. There is a tradeoff of weaker economy in the future when interest rates increase by meager growth in the present with forced consumption by zero interest rates. Microeconomics consists of the analysis of allocation of scarce resources to alternative and competing ends. Zero interest rates cloud he calculus of risk and returns in consumption and investment, disrupting decisions that maintain the economy in its long-term growth path.

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

	IQ 2014	IIQ 2014	IIIQ 2014	IVQ 2014	I 2015
GDP	-2.1	4.6	5.0	2.2	-0.7
PCE	1.2	2.5	3.2	4.4	1.8
Durable Goods	3.2	14.1	9.2	6.2	1.1
NRFI	1.6	9.7	8.9	4.7	-2.8
RFI	-5.3	8.8	3.2	3.8	5.0
Exports	-9.2	11.1	4.5	4.5	-7.6
Imports	2.2	11.3	-0.9	10.4	5.6
GOV	-0.8	1.7	4.4	-1.9	-1.1
Federal GOV	-0.1	-0.9	9.9	-7.3	0.1
National Defense	-4.0	0.9	16.0	-12.2	-1.0
Cont to GDP Growth % Points	-0.18	0.04	0.66	-0.57	-0.04
State/Local GOV	-1.3	3.4	1.1	1.6	-1.8
∆ PI (PP)	-1.16	1.42	-0.03	-0.10	0.33
Final Sales of Domestic Product	-1.0	3.2	5.0	2.3	-1.1
Gross Domestic Purchases	-0.4	4.8	4.1	3.2	1.1
Prices Gross Domestic Purchases	1.4	2.0	1.4	-0.1	-1.5
Prices of GDP	1.3	2.1	1.4	0.1	-0.1
Prices of GDP Excluding Food and Energy	1.2	1.8	1.7	0.7	0.3
Prices of PCE	1.4	2.3	1.2	-0.4	-2.0
Prices of PCE Excluding Food and Energy	1.2	2.0	1.4	1.1	0.8
Prices of Market Based PCE	1.2	2.2	1.2	-0.9	-2.6
Prices of Market Based PCE Excluding Food and Energy	1.0	1.8	1.4	0.7	0.5
Real Disposable Personal Income*	2.4	2.2	2.3	3.3	3.7
Personal Saving As % Disposable Income	4.9	5.1	4.8	4.7	5.5

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

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

*Percent change from quarter one year ago

Source: Bureau of Economic Analysis

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

Percentage shares of GDP are shown in Table I-10. PCE (personal consumption expenditures) is equivalent to 68.6 percent of GDP and is under pressure with stagnant real disposable income per person, high levels of unemployment and underemployment and higher savings rates than before the global recession, temporarily interrupted by financial repression in the form of zero interest rates. Gross private domestic investment is also growing slowly even with about two trillion dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth. Bouts of risk aversion revalue the dollar relative to most currencies in the world as investors increase their holdings of dollar-denominated assets.

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

	IQ2015
GDP	100.0
PCE	68.6
Goods	22.2
Durable	7.5
Nondurable	14.7
Services	46.4
Gross Private Domestic Investment	16.7
Fixed Investment	16.1
NRFI	12.8
Structures	2.8
Equipment & Software	6.0
Intellectual Property	4.0
RFI	3.3
Change in Private Inventories	0.6
Net Exports of Goods and Services	-3.2
Exports	12.7
Goods	8.5
Services	4.2
Imports	15.9
Goods	13.1
Services	2.9
Government	17.9
Federal	6.9
National Defense	4.3
Nondefense	2.6
State and Local	11.0

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

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

Table I-11 shows percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009, 2010, 2011, 2012, 2013 and 2014. The data incorporate the new revisions released by the BEA. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 6.9 percent in 1959, 5.4 percent in 1976, and 4.6 percent in 1983 followed by 7.3 percent in 1984 and 4.2 percent in 1985. In contrast, GDP grew 2.5 percent in 2010 after six consecutive quarters of growth, 1.6 percent in 2011 after ten consecutive quarters of expansion, 2.3 percent in 2012 after 14 quarters of expansion, 2.2 percent in 2013 after 18 consecutive quarters of expansion and 2.4 percent in 2014 after 22 consecutive quarters of expansion. Annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions than in the expansion after the global recession of 2007. Gross domestic investment was much stronger in the earlier expansions than in 2010, 2011, 2012, 2013 and 2014.

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

	GDP	PCE	GDI	∆ PI	Trade	GOV
1958	-0.7	0.52	-1.16	-0.17	-0.87	0.77
1959	6.9	3.49	2.82	0.83	0.00	0.59
1975	-0.2	1.36	-2.90	-1.23	0.86	0.49
1976	5.4	3.41	2.91	1.37	-1.05	0.12
1982	-1.9	0.86	-2.55	-1.30	-0.59	0.38
1983	4.6	3.54	1.60	0.28	-1.32	0.81
1984	7.3	3.32	4.73	1.90	-1.54	0.76
1985	4.2	3.25	-0.01	-1.03	-0.39	1.38
1986	3.5	2.63	0.03	-0.31	-0.29	1.14
1987	3.5	2.14	0.53	0.41	0.17	0.63
2009	-2.8	-1.08	-3.52	-0.76	1.19	0.64
2010	2.5	1.32	1.66	1.45	-0.46	0.02
2011	1.6	1.55	0.73	-0.14	-0.02	-0.65
2012	2.3	1.25	1.33	0.15	0.04	-0.30
2013	2.2	1.64	0.76	0.06	0.22	-0.39
2014	2.4	1.73	0.92	0.09	-0.22	-0.03

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

Table I-12 provides more detail of the contributions to growth of GDP from 2009 to 2014 using annual-level data. PCEs contributed 1.32 PPs to GDP growth in 2010 of which 0.77 percentage points (PP) in goods and 0.55 PP in services. Gross private domestic investment (GPDI) deducted 3.52 PPs of GDP growth in 2009 of which -2.77 PPs by fixed investment and -0.76 PPs of inventory change (∆PI) and added 1.66 PPs of GPDI in 2010 of which 0.21 PPs of fixed investment and 1.45 PPs of inventory accumulation (∆PI). Trade, or exports of goods and services net of imports, contributed 1.19 PPs in 2009 of which exports deducted 1.07 PPs and imports added 2.26 PPs. In 2010, trade deducted 0.46 PPs with exports contributing 1.33 PPs and imports deducting 1.79 PPs likely benefitting from dollar revaluation. In 2009, government added 0.64 PP of which 0.44 PPs by the federal government and 0.20 PPs by state and local government; in 2010, government added 0.02 PPs of which 0.37 PPs by the federal government with state and local government deducting 0.35 PPs. Table I-12 provides the estimates for 2011, 2012, 2013 and 2014. PCE contributed 1.55 PPs in 2011 after 1.32 PPs in 2010. The contribution of PCE fell to 1.25 points in 2012 and increased to 1.64 PPs in 2013 and 1.73 PPs in 2014. The breakdown into goods and services is similar but with contributions in 2012 of 0.64 PPs of goods and 0.61 PPs of services. In 2013, goods contributed 0.78 PPs and services 0.86 PPs. Goods contributed 0.78 PPs in 2014 and services contributed 0.94 PPS. Gross private domestic investment contributed 1.66 PPs in 2010 with 1.45 PPs of change of private inventories but the contribution of gross private domestic investment was only 0.73 PPs in 2011. The contribution of GDI in 2012 increased to 1.33 PPs with fixed investment increasing its contribution to 1.17 PPs and residential investment contributing 0.33 PPs for the first time since 2009. GDI contributed 1.33 PPs in 2012 with 1.17 PPs from fixed investment and 0.15 PPs from inventory change. GDI contribute 0.76 PPs in 2013 and 0.92 PPs in 2014. Net exports of goods and services deducted marginally in 2011 with 0.02 PPs and added 0.04 PPs in 2012. Net trade contributed 0.22 PPs in 2013 and deducted 0.22 PPs in 2014. The contribution of exports fell from 1.33 PPs in 2010 and 0.87 PPs in 2011 to only 0.44 PPs in 2012, 0.41 PPs in 2013 and 0.43 PPs in 2014. Government deducted 0.65 PPs in 2011, 0.30 PPs in 2012 and 0.39 PPs in 2013. Government deducted 0.03 PPs in 2014. Demand weakened in 2013 with higher contribution of personal consumption expenditures of 1.64 PPs and of gross domestic investment of 0.76 PPs. PCE contributed 1.73 PPs in 2014 and GDI 0.92 PPs. Net trade contributed only 0.22 PPs in 2013 and deducted 0.22 PPs in 2014. The expansion since IIIQ2009 has been characterized by weak contributions of aggregate demand, which is the sum of personal consumption expenditures plus gross private domestic investment. The US did not recover strongly from the global recessions as typical in past cyclical expansions. Recoveries tend to be more sluggish as expansions mature. At the margin in IVQ2011, the acceleration of expansion was driven by inventory accumulation instead of aggregate demand of consumption and investment. Growth of PCE was partly the result of burning savings because of financial repression, which may not be sustainable in the future while creating multiple distortions of resource allocation and growth restraint.

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

	2009	2010	2011	2012	2013	2014
GDP Growth ∆%	-2.8	2.5	1.6	2.3	2.2	2.4
Personal Consumption Expenditures (PCE)	-1.08	1.32	1.55	1.25	1.64	1.73
Goods	-0.68	0.77	0.71	0.64	0.78	0.78
Durable	-0.41	0.43	0.43	0.52	0.49	0.50
Nondurable	-0.27	0.34	0.28	0.12	0.29	0.28
Services	-0.40	0.55	0.84	0.61	0.86	0.94
Gross Private Domestic Investment (GPDI)	-3.52	1.66	0.73	1.33	0.76	0.92
Fixed Investment	-2.77	0.21	0.86	1.17	0.70	0.83
Nonresidential	-2.04	0.28	0.85	0.84	0.37	0.78
Structures	-0.70	-0.49	0.06	0.32	-0.01	0.23
Equipment, software	-1.29	0.70	0.66	0.37	0.26	0.36
Intellectual Property	-0.05	0.07	0.13	0.15	0.13	0.19
Residential	-0.73	-0.07	0.01	0.33	0.33	0.05
Change Private Inventories	-0.76	1.45	-0.14	0.15	0.06	0.09
Net Exports of Goods and Services	1.19	-0.46	-0.02	0.04	0.22	-0.22
Exports	-1.07	1.33	0.87	0.44	0.41	0.43
Goods	-1.03	1.08	0.57	0.34	0.26	0.37
Services	-0.04	0.25	0.29	0.10	0.15	0.06
Imports	2.26	-1.79	-0.89	-0.40	-0.19	-0.65
Goods	2.15	-1.69	-0.78	-0.30	-0.13	-0.55
Services	0.10	-0.10	-0.11	-0.10	-0.06	-0.10
Government Consumption Expenditures and Gross Investment	0.64	0.02	-0.65	-0.30	-0.39	-0.03
Federal	0.44	0.37	-0.24	-0.15	-0.45	-0.14
National Defense	0.27	0.18	-0.13	-0.18	-0.33	-0.10
Nondefense	0.17	0.19	-0.11	0.03	-0.12	-0.04
State and Local	0.20	-0.35	-0.41	-0.15	0.06	0.11

Source: US Bureau of Economic Analysis

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

Manufacturing jobs not seasonally adjusted increased 192,000 from Apr 2014 to
Apr 2015 or at the average monthly rate of 16,000. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. Industrial production decreased 0.3 percent in Apr 2015 and decreased 0.3 percent in Mar 2015 after decreasing 0.1 percent in Feb 2015, with all data seasonally adjusted. The Federal Reserve completed its annual revision of industrial production and capacity utilization on Mar 28, 2014 (http://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm). The report of the Board of Governors of the Federal Reserve System states (http://www.federalreserve.gov/releases/g17/Current/default.htm):

“Industrial production decreased 0.3 percent in April for its fifth consecutive monthly loss. Manufacturing output was unchanged in April after recording an upwardly revised gain of 0.3 percent in March. In April, the index for mining moved down 0.8 percent, its fourth consecutive monthly decrease; a sharp fall in oil and gas well drilling has more than accounted for the overall decline in mining this year. The output of utilities fell 1.3 percent in April. At 105.2 percent of its 2007 average, total industrial production in April was 1.9 percent above its year-earlier level. Capacity utilization for the industrial sector decreased 0.4 percentage point in April to 78.2 percent, a rate that is 1.9 percentage points below its long-run (1972–2014) average.” In the six months ending in Apr 2015, United States national industrial production accumulated change of 0.0 percent at the annual equivalent rate of 0.0 percent, which is lower than growth of 1.9 percent in the 12 months ending in Apr 2015. Excluding growth of 1.1 percent in Nov 2014, growth in the remaining five months from Nov 2014 to Apr 2015 accumulated to minus 1.1 percent or minus 2.6 percent annual equivalent. Industrial production declined in five of the past six months. Industrial production contracted at annual equivalent 2.8 percent in the most recent quarter from Feb 2015 to Apr 2015 and expanded at 2.8 percent in the prior quarter Nov 2014 to Jan 2015. Business equipment accumulated growth of 0.0 percent in the six months from Nov 2014 to Apr 2015 at the annual equivalent rate of 0.0 percent, which is lower than growth of 2.2 percent in the 12 months ending in Apr 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 0.4 percentage point in April to 78.2 percent, a rate that is 1.9 percentage points below its long-run (1972–2014) average.” United States industry apparently decelerated to a lower growth rate followed by possible acceleration and weakening growth in past months.

Manufacturing fell 21.9 from the peak in Jun 2007 to the trough in Apr 2009 and increased by 25.1 percent from the trough in Apr 2009 to Dec 2014. Manufacturing grew 25.7 percent from the trough in Apr 2009 to Apr 2015. Manufacturing output in Apr 2015 is 1.9 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 IQ2015 would have accumulated to 23.9 percent. GDP in IQ2015 would be $18,574.8 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,270.0 billion than actual $16,304.8 billion. There are about two trillion dollars of GDP less than at trend, explaining the 25.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 15.4 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html). US GDP in IQ2015 is 12.2 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,304.8 billion in IQ2015 or 8.8 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 Apr 1919 to Apr 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.9172 in Apr 2015. The actual index NSA in Apr 2015 is 101.1122, which is 19.7 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014. Using trend growth of 2.4 percent per year, the index would increase to 118.0899 in Apr 2015. The output of manufacturing at 101.1122 in Apr 2015 is 14.4 percent below trend under this alternative calculation. Table I-13 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 87.7 percent in IVQ2014. Most of US national income is in the form of services. In Apr 2015, there were 141.462 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 119.126 million NSA in Apr 2015 accounted for 84.2 percent of total nonfarm jobs of 141.462 million, of which 12.272 million, or 10.3 percent of total private jobs and 8.7 percent of total nonfarm jobs, were in manufacturing. Private service-providing jobs were 99.738 million NSA in Apr 2015, or 70.5 percent of total nonfarm jobs and 83.7 percent of total private-sector jobs. Manufacturing has share of 11.3 percent in US national income in IVQ2014 and durable goods 6.5 percent, as shown in Table I-13. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

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

	SAAR IVQ2014	% Total	SAAR IQ2015	% Total
National Income WCCA	15,599.6	100.0	15,891.4	100.0
Domestic Industries	15,407.1	98.8	15,729.4	99.0
Private Industries	13,674.0	87.7	13,985.1	88.0
Agriculture	167.6	1.1
Mining	266.1	1.7
Utilities	212.8	1.4
Construction	699.9	4.5
Manufacturing	1766.7	11.3
Durable Goods	1019.5	6.5
Nondurable Goods	747.1	4.8
Wholesale Trade	955.8	6.1
Retail Trade	1085.7	7.0
Transportation & WH	478.8	3.1
Information	577.8	3.7
Finance, Insurance, RE	2770.6	17.8
Professional & Business Services	2107.9	13.5
Education, Health Care	1516.3	9.7
Arts, Entertainment	628.4	4.0
Other Services	439.6	2.8
Government	1733.1	11.1	1744.3	11.0
Rest of the World	192.5	1.2	162.1	1.0

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

Source: US Bureau of Economic Analysis

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

IA1. Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions. US economic growth has been at only 2.3 percent on average in the cyclical expansion in the 23 quarters from IIIQ2009 to IQ2015. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the first estimate of GDP for IQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_adv.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2015 would have accumulated to 23.9 percent. GDP in IQ2015 would be $18,574.8 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,270.0 billion than actual $16,304.8 billion. There are about two trillion dollars of GDP less than at trend, explaining the 26.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 16.1 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/03/global-competitive-devaluation-rules.html). US GDP in IQ2015 is 12.2 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,304.8 billion in IQ2015 or 8.8 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 Mar 1919 to Mar 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.5771 in Mar 2015. The actual index NSA in Mar 2015 is 101.8045, which is 18.9 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014, raising the index at trend to 117.2305 in Mar 2015. The output of manufacturing at 101.8045 in Mar 2015 is 13.2 percent below trend under this alternative calculation. Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. Table IA1-1 provides quarterly seasonally adjusted annual rates (SAAR) of growth of private fixed investment for the recessions of the 1980s and the current economic cycle. In the cyclical expansion beginning in IQ1983 (http://www.nber.org/cycles.html), real private fixed investment in the United States grew at the average annual rate of 14.7 percent in the first eight quarters from IQ1983 to IVQ1984. Growth rates fell to an average of 2.2 percent in the following eight quarters from IQ1985 to IVQ1986 and to an average of 1.9 percent in the 12 quarters of 1985, 1986 and 1987. The average rate of growth in the four quarters of 1988 was 3.7 percent. There were only four quarters of contraction of private fixed investment from IQ1983 to IVQ1987. There is quite different behavior of private fixed investment in the twenty-three quarters of cyclical expansion from IIIQ2009 to IQ2015. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 3.2 percent, which is significantly lower than 14.7 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only strong growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 11.1 percent. Growth has fallen from the SAAR of 17.3 percent in IIIQ2011 to 3.1 percent in IIIQ2012, recovering to 6.6 percent in IVQ2012 and falling to 2.7 percent in IQ2013. The SAAR of fixed investment rose to 6.6 percent in IIIQ2013 and fell to 6.3 percent in IVQ2013. The SAAR of fixed investment fell to 0.2 percent in IQ2014. Fixed investment grew at the SAAR of 9.5 percent in IIQ2014 and at 7.7 percent in IIIQ2014. Fixed investment grew at 4.5 percent in IVQ2014 and fell at 1.3 percent in IQ2015. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012.

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

Q	1981	1982	1983	1984	2008	2009	2010
I	3.8	-12.2	9.4	13.1	-7.1	-27.4	0.8
II	3.2	-12.1	16.0	16.6	-5.5	-14.2	13.6
III	0.1	-9.3	24.4	8.2	-12.1	-0.5	-0.4
IV	-1.5	0.2	24.3	7.3	-23.9	-2.8	8.5
				1985			2011
I				3.7			-0.9
II				5.2			8.2
III				-1.6			17.3
IV				7.8			9.9
				1986			2012
I				1.1			9.1
II				0.1			4.4
III				-1.8			3.1
IV				3.1			6.6
				1987			2013
I				-6.7			2.7
II				6.3			4.9
III				7.1			6.6
IV				-0.2			6.3
				1988		2014
I				0.2			0.2
II				8.1			9.5
III				1.9			7.7
IV				4.8			4.5
				1989		2015
IQ				3.6			-1.3

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

Chart IA1-1 of the US Bureau of Economic Analysis (BEA) provides seasonally adjusted annual rates of growth of real private fixed investment from 1981 to 1988. Growth rates recovered sharply during the first eight quarters, which was essential in returning the economy to trend growth and eliminating unemployment and most underemployment accumulated during the contractions.

Chart IA1-1, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 1981-1988

Source: US Bureau of Economic Analysis

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

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

Chart IA1-2, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2015

Source: US Bureau of Economic Analysis

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

Table IA1-2 provides real private fixed investment at seasonally adjusted annual rates from IVQ2007 to IVQ2014 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980, real gross private domestic investment in the US was $951.6 billion of chained 2009 dollars, growing to $1,229.7 billion in IIIQ1988 or 29.2 percent. Real gross private domestic investment in the US increased 6.7 percent from $2605.2 billion in IVQ2007 to $2,781.0 billion in IQ2015. As shown in Table IAI-2, real private fixed investment increased 3.0 percent from $2,586.3 billion of chained 2009 dollars in IVQ2007 to $2,664.2 billion in IQ2015. Private fixed investment fell relative to IVQ2007 in all quarters preceding IIQ2014. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012. The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash.

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

	Real PFI, Billions Chained 2009 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	2586.3	NA	-0.9	-1.4
IQ2008	2539.1	-1.8	-1.8	-3.0
IIQ2008	2503.4	-3.2	-1.4	-4.6
IIIQ2008	2424.1	-6.3	-3.2	-7.1
IV2008	2263.8	-12.5	-6.6	-12.5
IQ2009	2089.3	-19.2	-7.7	-17.7
IIQ2009	2011.0	-22.2	-3.7	-19.7
IIIQ2009	2008.4	-22.3	-0.1	-17.1
IVQ2009	1994.1	-22.9	-0.7	-11.9
IQ2010	1997.9	-22.8	0.2	-4.4
IIQ2010	2062.8	-20.2	3.2	2.6
IIIQ2010	2060.8	-20.3	-0.1	2.6
IVQ2010	2103.1	-18.7	2.1	5.5
IQ2011	2098.4	-18.9	-0.2	5.0
IIQ2011	2140.2	-17.2	2.0	3.8
IIIQ2011	2227.5	-13.9	4.1	8.1
IVQ2011	2280.6	-11.8	2.4	8.4
IQ2012	2330.7	-9.9	2.2	11.1
IIQ2012	2355.6	-8.9	1.1	10.1
IIIQ2012	2373.7	-8.2	0.8	6.6
IVQ2012	2412.0	-6.7	1.6	5.8
IQ2013	2428.0	-6.1	0.7	4.2
IIQ2013	2457.0	-5.0	1.2	4.3
IIIQ2013	2496.8	-3.5	1.6	5.2
IVQ2013	2535.0	-2.0	1.5	5.1
IQ2014	2536.1	-1.9	0.0	4.5
IIQ2014	2594.5	0.3	2.3	5.6
IIIQ2014	2643.3	2.2	1.9	5.9
IVQ2014	2672.8	3.3	1.1	5.4
IQ2015	2664.2	3.0	-0.3	5.1

PFI: Private Fixed Investment

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

Chart IA1-3 provides real private fixed investment in billions of chained 2009 dollars from IQ2007 to IQ2015. Real private fixed investment has not recovered, stabilizing at a level in IQ2015 that is barely higher relative to that in IVQ2007.

Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2009 Dollars, IQ2007 to IVQ2015

Source: US Bureau of Economic Analysis

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

Chart IA1-4 provides real gross private domestic investment in chained dollars of 2009 from 1980 to 1988. Real gross private domestic investment climbed 29.2 percent to $1,229.7 billion of 2009 dollars in IIIQ1988 above the level of $951.6 billion in IQ1980.

Chart IA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 1980-1988

Source: US Bureau of Economic Analysis

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

Chart IA1-5 provides real gross private domestic investment in the United States in billions of chained dollars of 2009 from 2006 to 2014. Real gross private domestic investment reached a level of $2,781.0 billion in IQ2015, which was only 6.7 percent higher than the level of $2605.2 billion in IVQ2007 (http://www.bea.gov/iTable/index_nipa.cfm).

Chart IA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 2007-2015

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

The share of gross private domestic investment in GDP has fallen from 19.4 percent in IQ2000 and 19.8 percent in IQ2006 to 16.7 percent in IQ2015. There are declines in percentage shares in GDP of all components with sharp reduction of residential investment from 4.8 percent in IQ2000 and 6.6 percent in IQ2006 to 3.3 percent in IQ2015. The share of fixed investment in GDP fell from 19.2 percent in IQ2000 and 19.2 percent in IQ2006 to 16.1 percent in IQ2015.

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

	IQ2015	IQ2006	IQ2000
Gross Private Domestic Investment	16.7	19.8	19.4
Fixed Investment	16.1	19.2	19.2
Nonresidential	12.8	12.7	14.4
Structures	2.8	2.8	3.0
Equipment and Software	6.0	6.2	7.5
Intellectual Property	4.0	3.6	4.0
Residential	3.3	6.6	4.8
Change in Private Inventories	0.6	0.5	0.2

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

Broader perspective is provided in Chart IA1-6 with the percentage share of gross private domestic investment in GDP in annual data from 1929 to 2014. There was sharp drop during the current economic cycle with almost no recovery in contrast with sharp recovery after the recessions of the 1980s.

Chart IA1-6, US, Percentage Share of Gross Private Domestic Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

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

Chart IA1-7 provides percentage shares of private fixed investment in GDP with annual data from 1929 to 2014. The sharp contraction after the recessions of the 1980s was followed by sustained recovery while the sharp drop in the current economic cycle has not been recovered.

Chart IA1-7, US, Percentage Share of Private Fixed Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

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

Chart IA1-8 provides percentage shares in GDP of nonresidential investment from 1929 to 2014. There is again recovery from sharp contraction in the 1980s but inadequate recovery in the current economic cycle.

Chart IA1-8, US, Percentage Share of Nonresidential Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

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

Chart IA1-9 provides percentage shares of business equipment and software in GDP with annual data from 1929 to 2014. There is again inadequate recovery in the current economic cycle.

Chart IA1-9, US, Percentage Share of Business Equipment and Software in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

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

Chart IA1-10 provides percentage shares of residential investment in GDP with annual data from 1929 to 2014. The salient characteristic of Chart IA1-10 is the vertical increase of the share of residential investment in GDP up to 2006 and subsequent collapse.

Chart IA1-10, US, Percentage Share of Residential Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

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

Finer detail is provided by the quarterly share of residential investment in GDP from 1979 to 2015 in Chart IA1-11. There was protracted growth of that share, accelerating sharply into 2006 followed with nearly vertical drop. The explanation of the sharp contraction of United States housing can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

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

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

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

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

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

W = Y/r (1)

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

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

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

Chart IA1-11, US, Percentage Share of Residential Investment in Gross Domestic Product, Quarterly, 1979-2015

Source: US Bureau of Economic Analysis

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

Chart IA1-12 provides the share of intellectual property products investment in GDP with annual data from 1929 to 2015. This is an important addition in the revision and enhancement of GDP provided by the Bureau of Economic Analysis. The share rose sharply over time but stabilized at a lower level in the past decade.

Chart IA1-12, US, Percentage Share of Intellectual Property Products Investment in Gross Domestic Product, Annual, 1929-2014

Source: US Bureau of Economic Analysis

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

Chart IA1-13 provides the percentage share of intellectual property investment in GDP on a quarterly basis from 1979 to 2015. The share stabilized in the 2000s.

Chart IA1-13, US, Percentage Share of Intellectual Property Investment in Gross Domestic Product, Quarterly, 1979-2015

Source: US Bureau of Economic Analysis

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

Table IA1-4 provides the seasonally adjusted annual rate of real GDP percentage change and contributions in percentage points in annual equivalent rate of gross domestic investment (GDI), real private fixed investment (PFI), nonresidential investment (NRES), business equipment and software (BES), residential investment (RES), intellectual property products (IPP) and change in inventories (∆INV) for the cyclical expansions from IQ1983 to IVQ1985 and from IIIQ2009 to IQ2015. GDI contributed 0.12 percentage points to GDP in IQ2015 with 0.14 percentage points by inventory accumulation and 0.14 percentage points by intellectual property products. GDI contributed 0.61 percentage points to GDP growth in IVQ2014: 0.72 percentage points in PFI, 0.60 percentage points in NRES and 0.12 percentage points in RES. Inventory investment deducted 0.10 percentage points and IPP added 0.39 percentage points. GDI added 1.18 percentage points to GDP growth in IIIQ2014: 1.21 percentage points in PFI, 1.10 percentage points in NRES and 0.10 percentage points in RES. Inventory divestment deducted 0.03 percentage points from GDP growth. GDI added 2.87 percentage points to GDP growth in IIQ2014: 1.45 for PFI, 1.18 for NRES, 0.63 for BES, 0.21 for IPP, 0.27 for RES and 1.42 for inventory change. GDI deducted 1.13 percentage points from GDP growth in IQ2014: 0.03 for PFI, 0.20 for NRES, minus 0.06 for BES and minus 0.17 for RES. IPP added 0.18 percentage points in IQ2014 and inventory change deducted 1.16 percentage points. GDI provided strong percentage points contributions to GDP growth in the critical first year of expansion in 1983 and also in several quarters in 1984 and 1985 while it has been muted in the cyclical expansion since IIIQ2009 with contributions largely only from IQ2010 to IVQ2011. Gross domestic investment added 0.62 percentage points to GDP growth in IVQ2013. Nonresidential investment added 1.23 percentage points while residential investment subtracted 0.28 percentage points. Inventory divestment deducted 0.34 percentage points. Gross domestic investment added 2.50 percentage points to GDP growth of 4.5 percent in IIIQ2013 partly because of change of inventories of 1.49 percentage points with PFI adding 1.01 percentage points. Nonresidential investment added 0.67 percentage points and residential investment added 0.34 percentage points to GDP growth of 4.5 percent in IIIQ2013. GDI added 1.03 percentage points to GDP growth of 1.8 percent in IIQ2013 with 0.30 percentage points from inventory change while nonresidential investment added 0.21 percentage points and residential investment 0.53 percentage points. GDI added 1.12 percentage points in IQ2013 mostly because of 0.70 percentage points of inventory investment while private fixed investment added 0.42 percentage points. Nonresidential investment added 0.20 percentage points in IQ2013. Business equipment and software added 0.28 percentage points and residential investment added 0.22 percentage points. Intellectual property products (IPP) added 0.24 percentage points in IQ2013, deducted 0.08 percentage points in IIQ2013 and added 0.11 percentage points in IIIQ2013. Intellectual property products added 0.14 percentage points in IVQ2013, 0.18 percentage points in IQ2014, 0.21 percentage points in IIQ2014, 0.34 percentage points in IIIQ2014 and 0.39 percentage points in IVQ2014. IPP added 0.14 percentage points in IQ2015. Much of the strong performance of GDI in the cyclical expansion after IQ1983 originated in contributions by real private fixed investment (PFI). Nonresidential investment also contributed strongly to growth in the expansion of the 1980s but has been muted in the current expansion. The contribution of business equipment and software collapsed to 0.03 percentage points in IIIQ2012 and added 0.44 percentage points in IVQ2012 as business scales down investment. BES rebounded with 0.76 percentage points in IVQ2013, 0.27 percentage points in IIQ2013 and 0.09 percentage points in IIQ2013. Business equipment deducted 0.06 percentage points in IQ2014, adding 0.63 percentage points in IIQ2014, 0.63 percentage points in IIIQ2014 and 0.04 percentage points in IVQ2014. Business equipment deducted 0.67 percentage points in IQ2015. Residential investment (RES) was relatively strong in 1983 but was muted in following quarters. Residential investment only contributed significantly to growth of GDP in the four quarters of 2012, IQ2013, IIQ2013 and IIIQ2013. Residential investment deducted 0.28 percentage points in IVQ2013 and 0.17 percentage points in IQ2014, raising concerns on the sustainability of housing recovery. Residential investment added 0.27 percentage points in IIQ2014, 0.10 percentage points in IIIQ2014 and 0.12 percentage points in IVQ2014. Residential investment added 0.16 percentage points in IQ2015.

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

	GDP	GDI	PFI	NRES	BES	IPP	RES	∆INV
2015
I	-0.7	0.12	-0.21	-0.37	-0.67	0.14	0.16	0.33
2014
I	-2.1	-1.13	0.03	0.20	0.08	0.18	-0.17	-1.16
II	4.6	2.87	1.45	1.18	0.35	0.21	0.27	1.42
III	5.0	1.18	1.21	1.10	0.14	0.34	0.10	-0.03
IV	2.2	0.61	0.72	0.60	0.17	0.39	0.12	-0.10
2013
I	2.7	1.12	0.42	0.20	-0.33	0.24	0.22	0.70
II	1.8	1.03	0.74	0.21	0.19	-0.08	0.53	0.30
III	4.5	2.50	1.01	0.67	0.29	0.11	0.34	1.49
IV	3.5	0.62	0.95	1.23	0.34	0.14	-0.28	-0.34
2012
I	2.3	1.04	1.24	0.66	0.46	0.03	0.59	-0.20
II	1.6	0.88	0.61	0.50	0.27	0.19	0.11	0.27
III	2.5	0.26	0.45	0.09	-0.04	0.10	0.36	-0.19
IV	0.1	-0.84	0.96	0.44	-0.19	0.19	0.52	-1.80
2011
I	-1.5	-1.07	-0.11	-0.09	-0.73	0.05	-0.02	-0.96
II	2.9	2.14	1.10	0.97	0.63	0.12	0.13	1.04
III	0.8	0.15	2.25	2.06	0.56	0.19	0.19	-2.10
IV	4.6	4.16	1.36	1.08	0.34	0.26	0.28	2.80
2010
I	1.7	1.77	0.11	0.46	1.25	-0.07	-0.35	1.66
II	3.9	2.86	1.76	1.21	1.02	-0.08	0.56	1.09
III	2.7	1.86	-0.04	0.90	0.83	0.22	-0.94	1.90
IV	2.5	-0.51	1.13	0.94	0.57	0.19	0.19	-1.63
2009
I	-5.4	-7.02	-4.75	-3.58	-2.25	-0.23	-1.17	-2.26
II	-0.5	-3.25	-2.13	-1.46	-0.60	0.16	-0.66	-1.12
III	1.3	-0.40	-0.02	-0.54	0.25	0.04	0.52	-0.38
IV	3.9	4.05	-0.36	-0.37	0.36	0.25	0.01	4.40
1982
I	-6.5	-7.59	-2.26	-1.45	-0.83	0.14	-0.81	-5.33
II	2.2	-0.06	-2.32	-1.89	-1.20	0.08	-0.44	2.26
III	-1.4	-0.62	-1.73	-1.72	-0.55	0.06	-0.02	1.11
IV	0.4	-5.37	-0.03	-1.05	-0.57	0.00	1.01	-5.33
1983
I	5.3	2.36	1.44	-0.92	-0.27	0.16	2.36	0.92
II	9.4	5.96	2.53	0.67	1.24	0.29	1.86	3.43
III	8.1	4.40	3.82	2.13	1.43	0.31	1.70	0.57
IV	8.5	6.94	3.93	3.14	2.32	0.35	0.79	3.01
1984
I	8.2	7.23	2.29	1.71	0.46	0.30	0.58	4.94
II	7.2	2.57	2.86	2.52	1.36	0.29	0.34	-0.29
III	4.0	1.69	1.48	1.70	0.88	0.25	-0.22	0.21
IV	3.2	-1.08	1.36	1.34	0.86	0.29	0.02	-2.44
1985
I	4.0	-2.14	0.72	0.67	-0.23	0.14	0.05	-2.86
II	3.7	1.34	0.99	0.83	0.64	0.20	0.16	0.35
III	6.4	-0.43	-0.28	-0.62	-0.38	0.13	0.34	-0.15
IV	3.0	2.80	1.40	1.00	0.53	0.26	0.40	1.40
1986
I	3.8	0.04	0.21	-0.55	-0.28	0.17	0.76	-0.17
II	1.9	-1.30	0.00	-1.12	0.34	0.15	1.12	-1.30
III	4.1	-1.97	-0.34	-0.63	-0.17	0.10	0.28	-1.62
IV	2.1	0.24	0.53	0.48	0.30	0.10	0.05	-0.29
1987
I	2.8	1.98	-1.30	-1.26	-0.97	0.07	-0.04	3.28
II	4.6	0.08	1.07	1.00	0.76	0.08	0.07	-0.99
III	3.7	0.03	1.22	1.39	0.70	0.11	-0.17	-1.19
IV	6.8	4.94	-0.01	-0.05	-0.48	0.16	0.04	4.95
1988
I	2.3	-3.62	0.06	0.41	0.82	0.15	-0.36	-3.68
II	5.4	1.72	1.39	1.14	0.67	0.18	0.25	0.33
III	2.3	0.38	0.33	0.32	0.29	0.22	0.01	0.05
IV	5.4	1.11	0.84	0.71	0.34	0.40	0.13	0.27

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

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

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

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

. IA2 Swelling Undistributed Corporate Profits. IA2 Swelling Undistributed Corporate Profits. Table IA1-5 provides value added of corporate business, dividends and corporate profits in billions of current dollars at seasonally adjusted annual rates (SAAR) in IVQ2007 and IQ2015 together with percentage changes. The last three rows of Table IA1-5 provide gross value added of nonfinancial corporate business, consumption of fixed capital and net value added in billions of chained 2009 dollars at SAARs. Deductions from gross value added of corporate profits down the rows of Table IA1-5 end with undistributed corporate profits. Profits after taxes with inventory valuation adjustment (IVA) and capital consumption adjustment (CCA) increased by 66.8 percent in nominal terms from IVQ2007 to IQ2015 while net dividends increased 15.9 percent and undistributed corporate profits swelled 139.2 percent from $107.7 billion in IQ2007 to $257.6 billion in IQ2015 and changed signs from minus $55.9 billion in current dollars in IVQ2007. The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Gross value added of nonfinancial corporate business adjusted for inflation increased 11.6 percent from IVQ2007 to IQ2015, which is much lower than nominal increase of 23.7 percent in the same period for gross value added of total corporate business.

Table IA1-5, US, Value Added of Corporate Business, Corporate Profits and Dividends, IVQ2007-IIIQ2014

	IVQ2007	IQ2015	∆%
Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)
Gross Value Added of Corporate Business	8,165.9	10,102.2	23.7
Consumption of Fixed Capital	1,216.5	1,491.1	22.6
Net Value Added	6,949.4	8,611.1	23.9
Compensation of Employees	4,945.8	5,827.8	17.8
Taxes on Production and Imports Less Subsidies	688.5	808.2	17.4
Net Operating Surplus	1,315.1	1,975.1	50.2
Net Interest and Misc	204.2	210.1	2.9
Business Current Transfer Payment Net	68.9	102.1	48.2
Corporate Profits with IVA and CCA Adjustments	1,042.0	1,662.9	59.6
Taxes on Corporate Income	408.8	607.0	48.5
Profits after Tax with IVA and CCA Adjustment	633.2	1,055.9	66.8
Net Dividends	689.1	798.4	15.9
Undistributed Profits with IVA and CCA Adjustment	-55.9	257.6	NA ∆% 139.2 relative to 107.7 in IQ2007
Billions of Chained USD 2009 SAAR
Gross Value Added of Nonfinancial Corporate Business	7,519.3	8,392.2	11.6
Consumption of Fixed Capital	1,066.0	1,235.0	15.9
Net Value Added	6,453.4	7157.2	10.9

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

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

Table IA1-6 provides comparable United States value added of corporate business, corporate profits and dividends from IQ1980 to IIIQ1988. There is significant difference both in nominal and inflation-adjusted data. Between IQ1980 and IIIQ1988, profits after tax with IVA and CCA increased 111.5 percent with dividends growing 174.1 percent and undistributed profits increasing 68.3 percent. There was much higher inflation in the 1980s than in the current cycle. For example, the consumer price index increased 49.6 from Mar 1980 to Sep 1988 but only 12.4 percent between Dec 2007 and Mar 2015 (http://www.bls.gov/cpi/data.htm). The comparison is still valid in terms of inflation-adjusted data: gross value added of nonfinancial corporate business adjusted for inflation increased 38.5 percent between IQ1980 and IIIQ1988 but only 11.6 percent between IVQ2007 and IQ2015 while net value added adjusted for inflation increased 37.8 percent between IQ1980 and IIQ1988 but only 10.9 percent between IVQ2007 and IQ2015.

Table IA1-6, US, Value Added of Corporate Business, Corporate Profits and Dividends, IQ1980-IQ1988

	IQ1980	IIIQ1988	∆%
Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)
Gross Value Added of Corporate Business	1,654.1	3,178.8	92.2
Consumption of Fixed Capital	200.5	403.1	101.0
Net Value Added	1,453.6	2,775.7	91.0
Compensation of Employees	1,072.9	2,022.4	88.5
Taxes on Production and Imports Less Subsidies	121.5	253.4	108.6
Net Operating Surplus	259.2	499.8	92.8
Net Interest and Misc.	50.4	114.3	126.8
Business Current Transfer Payment Net	11.5	27.0	134.8
Corporate Profits with IVA and CCA Adjustments	197.2	358.6	81.8
Taxes on Corporate Income	97.0	146.7	51.2
Profits after Tax with IVA and CCA Adjustment	100.2	211.9	111.5
Net Dividends	40.9	112.1	174.1
Undistributed Profits with IVA and CCA Adjustment	59.3	99.8	68.3
Billions of Chained USD 2009 SAAR
Gross Value Added of Nonfinancial Corporate Business	2,952.3	4,089.2	38.5
Consumption of Fixed Capital	315.6	456.2	44.6
Net Value Added	2,636.7	3,633.1	37.8

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

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

Chart IA1-14 of the US Bureau of Economic Analysis provides quarterly corporate profits after tax and undistributed profits with IVA and CCA from 1979 to 2015. There is tightness between the series of quarterly corporate profits and undistributed profits in the 1980s with significant gap developing from 1988 and to the present with the closest approximation peaking in IVQ2005 and surrounding quarters. These gaps widened during all recessions including in 1991 and 2001 and recovered in expansions with exceptionally weak performance in the current expansion.

Chart IA1-14, US, Corporate Profits after Tax and Undistributed Profits with Inventory Valuation Adjustment and Capital Consumption Adjustment, Quarterly, 1979-2014

Source: US Bureau of Economic Analysis

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

Table IA1-7 provides price, costs and profit per unit of gross value added of nonfinancial domestic corporate income for IVQ2007 and IQ2015 in the upper block and for IQ1980 and IIIQ1988 in the lower block. Compensation of employees or labor costs per unit of gross value added of nonfinancial domestic corporate income hardly changed from 0.577 in IVQ2007 to 0.613 in IQ2015 in a fractured labor market but increased from 0.340 in IQ1980 to 0.451 in IIIQ1988 in a more vibrant labor market. Unit nonlabor costs increased mildly from 0.270 per unit of gross value added in IVQ2007 to 0.290 in IQ2015 but increased from 0.124 in IQ1980 to 0.186 in IIIQ1988 in an economy closer to full employment of resources. Profits after tax with IVA and CCA per unit of gross value added of nonfinancial domestic corporate income increased from 0.076 in IVQ2007 to 0.094 in IQ2015 and from 0.029 in IQ1980 to 0.046 in IIIQ1988.

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

	IVQ2007	IQ2015
Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business	0.961	1.048
Compensation of Employees (Unit Labor Cost)	0.577	0.613
Unit Nonlabor Cost	0.270	0.290
Consumption of Fixed Capital	0.140	0.156
Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net)	0.093	0.098
Net Interest and Misc. Payments	0.037	0.036
Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production)	0.114	0.144
Taxes on Corporate Income	0.038	0.050
Profits after Tax with IVA and CCA Adjustment	0.076	0.094
	IQ1980	IIQ1988
Price per Unit of Real Gross Value Added of Nonfinancial Corporate Business	0.518	0.708
Compensation of Employees (Unit Labor Cost)	0.340	0.451
Unit Nonlabor Cost	0.124	0.186
Consumption of Fixed Capital	0.064	0.088
Taxes on Production and Imports less Subsidies plus Business Current Transfer Payments (net)	0.042	0.064
Net Interest and Misc. Payments	0.018	0.034
Corporate Profits with IVA and CCA Adjustment (Unit Profits from Current Production)	0.055	0.071
Taxes on Corporate Income	0.026	0.026
Profits after Tax with IVA and CCA Adjustment	0.029	0.046

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

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

Chart IA1-15 provides quarterly profits after tax with IVA and CCA per unit of gross value added of nonfinancial domestic corporate income from 1980 to 2014. In an environment of idle labor and other productive resources nonfinancial corporate income increased after tax profits with IVA and CCA per unit of gross value added at a faster pace in the weak economy from IVQ2007 to IQ2015 than in the vibrant expansion following the cyclical contractions of the 1980s. Part of the profits was distributed as dividends and significant part was retained as undistributed profits in the current economic cycle with frustrated investment decision.

Chart IA1-15, US, Profits after Tax with Inventory Valuation Adjustment and Capital Consumption Adjustment per Unit of Gross Value Added of Nonfinancial Domestic Corporate Income, 1980-2015

Source: US Bureau of Economic Analysis

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

Table IA1-8 provides percentage changes of corporate profits in 2013 and 2014 and seasonally adjusted annual rates of change of corporate profits from IIQ2014 to IQ2015. US Corporate profits with IVA and CCA rebounded at 1.8 percent in IIIQ2013 and at 1.8 percent after taxes. Corporate profits with IVA and CCA increased at 0.1 percent in IVQ2013 and fell at 1.5 percent after taxes. Corporate profits with IVA and CCA decreased at 9.4 percent in IQ2014 and fell at 16.3 percent after taxes. Corporate profits with IVA and CCA increased at 8.4 percent in IIQ2014 and at 8.6 percent after taxes. Corporate profits with IVA and CCA increased at 3.1 percent in IIIQ2014 and at 4.7 percent after taxes. Corporate profits with IVA and CCA fell at 1.4 percent in IVQ2014 and fell at 1.6 percent after taxes. Corporate profits with IVA and CCA fell at 5.9 percent in IQ2015 and fell at 8.7 percent after taxes. Corporate profits with IVA and CCA increased 3.7 percent in IQ2015 relative to IQ2014 and profits after tax with IVA and CCA increased 2.0 percent in IQ2015 relative to IQ2014. Net dividends fell at 17.0 percent in IIIQ2013 and increased at 8.8 percent in IVQ2013. Net dividends fell at 9.0 percent in IQ2014 and decreased at 0.1 percent in IIQ2014. Net dividends fell at 0.4 percent in IIIQ2014, increasing at 2.1 percent in IVQ2014. Net dividends increased at 0.6 percent in IQ2015 and increased 2.1 percent relative to a year earlier. Undistributed profits decreased at 13.8 percent in IVQ2013 and decreased at 27.3 percent in IQ2014. Undistributed profits increased at 24.9 percent in IIQ2014 and increased at 12.4 percent in IIIQ2014. Undistributed profits fell at 6.6 percent in IVQ201. Undistributed profits fell at 22.3 percent in IQ2015 and increased 1.8 percent in IQ2015 relative to IQ2014.

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

	2013	2014	IIQ 2014	IIIQ 2014	IVQ 2014	IQ 2015	IQ15/ IQ14
Corporate Profits with IVA and CCA	4.2	-0.8	8.4	3.1	-1.4	-5.9	3.7
Corporate Income Taxes	4.3	25.0	8.1	-0.9	-0.8	1.5	7.9
After Tax Profits with IVA and CCA	4.1	-8.3	8.6	4.7	-1.6	-8.7	2.0
Net Dividends	12.0	-5.7	-0.1	-0.4	2.1	0.6	2.1
Und Profits with IVA and CCA	-5.3	-12.0	24.9	12.4	-6.6	-22.3	1.8

Source: US Bureau of Economic Analysis

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

Table IA1-9 provides change from prior quarter of the level of seasonally adjusted annual rates of US corporate profits. There are three aspects. First, there is increase in undistributed corporate profits. Corporate profits with IVA and CCA rebounded with $3.1 billion in IVQ2013. Corporate profits with IVA and CCA fell $201.7 billion in IQ2014 and increased $164.1 billion in IIQ2014. Corporate profits with IVA and CCA increased $64.5 billion in IIIQ2014 and decreased 30.4 billion in IVQ2014. Corporate profits with IVA and CCA decreased $125.5 billion in IQ2015. In IVQ2013, profits after tax with IVA and CCA decreased $24.7 billion. In IQ2014, profits after tax with IVA and CCA decreased $268.6 billion. Profits after tax with IVA and CCA increased at $118.4 billion in IIQ2014 and at $70.1 billion in IIIQ2014. Profits after tax with IVA and CCA fell at $25.8 billion in IVQ2014 and decreased at $134.6 billion in IQ2015. Net dividends fell at $187.0 billion in IIIQ2013 and increased at $80.6 billion in IVQ2013. Net dividends fell at $89.5 billion in IQ2014 and fell at $0.5 billion in IIQ2014. Net dividends fell at $3.9 billion in IIIQ2014 and increased at $18.6 billion in IVQ2014. Net dividends increased at $5.1 billion in IQ2015. Undistributed profits with IVA and CCA fell at $105.5 billion in IVQ2013. Undistributed profits with IVA and CCA fell at $178.9 percent in IQ2014 and increased at $118.8 billion in IIQ2014 and at $73.9 billion in IIIQ2014. Undistributed corporate profits fell at $44.3 billion in IVQ2014 and decreased at $139.7 billion in IQ2015. Undistributed corporate profits swelled 139.2 percent from $107.7 billion in IQ2007 to $257.6 billion in IQ2015 and changed signs from minus $55.9 billion in current dollars in IVQ2007. Uncertainty originating in fiscal, regulatory and monetary policy causes wide swings in expectations and decisions by the private sector with adverse effects on investment, real economic activity and employment. Second, sharp and continuing strengthening of the dollar is affecting balance sheets of US corporations with foreign operations (http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010318) and the overall US economy. The bottom part of Table IA1-9 provides the breakdown of corporate profits with IVA and CCA in domestic industries and the rest of the world. Corporate profits with IVA and CCA fell at $125.5 billion in IQ2015 with decrease of domestic industries at $103.1 billion, mostly because of decline of nonfinancial business at $100.4 billion, and decrease of profits from operations in the rest of the world at $22.4 billion. Receipts from the rest of the world fell at $28.9 billion. Total corporate profits with IVA and CCA were $2014.8 billion in IQ2015 of which $1662.9 billion from domestic industries, or 82.5 percent of the total, and $351.9 billion, or 17.5 percent, from the rest of the world. Nonfinancial corporate profits of $1200.9 billion account for 60.1 percent of the total. Third, there is reduction in the use of corporate cash for investment. Vipal Monga, David Benoit and Theo Francis, writing on “Companies send more cash back to shareholders,” published on May 26, 2015 in the Wall Street Journal (http://www.wsj.com/articles/companies-send-more-cash-back-to-shareholders-1432693805?tesla=y), use data of a study by Capital IQ conducted for the Wall Street Journal. This study shows that companies in the S&P 500 reduced investment in plant and equipment to median 29 percent of operating cash flow in 2013 from 33 percent in 2003 while increasing dividends and buybacks to median 36 percent in 2013 from 18 percent in 2003.

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

	2013	2014	IIQ 2014	IIIQ 2014	IVQ 2014	IQ 2015
Corporate Profits with IVA and CCA	84.1	-17.1	164.1	64.5	-30.4	-125.5
Corporate Income Taxes	19.5	118.3	45.7	-5.5	4.8	9.3
After Tax Profits with IVA and CCA	64.6	-135.4	118.4	70.1	-25.8	-134.6
Net Dividends	102.5	-54.5	-0.5	-3.9	18.6	5.1
Und Profits with IVA and CCA	-37.9	-80.9	118.8	73.9	-44.3	-139.7
Corporate Profits with IVA and CCA	84.1	-17.1	164.1	64.5	-30.4	-125.5
Domestic Industries	82.8	-8.0	167.6	48.1	5.7	-103.1
Financial	38.5	-41.4	33.3	16.1	-12.5	-2.6
Nonfinancial	44.4	33.4	134.3	32.0	18.1	-100.4
Rest of the World	1.3	-9.0	-3.6	16.5	-36.1	-22.4
Receipts from Rest of the World	12.8	11.7	2.7	14.4	-36.5	-28.9
Payments to the Rest of the World	11.5	20.8	6.3	-2.1	-0.4	-6.5

Source: Bureau of Economic Analysis

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

IIA United States Housing Collapse. The objective of this section is to provide the latest data and analysis of US housing. Subsection IIB1 United New House Sales analyzes the collapse of US new house sales. Subsection IIB2 United States House Prices considers the latest available data on house prices. Subsection IIB3 Factors of US Housing Collapse provides the analysis of the causes of the housing crisis of the US.

IIB1 United States New House Sales. Data and other information continue to provide depressed conditions in the US housing market in a longer perspective, with recent improvement at the margin. Table IIB-1 shows sales of new houses in the US at seasonally adjusted annual equivalent rate (SAAR). House sales fell in 19 of 52 months from Jan 2011 to Apr 2015 with monthly declines of 5 in 2011, 4 in 2012, 4 in 2013, 5 in 2014 and 1 in 2015. In Jan-Apr 2012, house sales increased at the annual equivalent rate of 11.8 percent and at 22.3 percent in May-Sep 2012. There was significant strength in Sep-Dec 2011 with annual equivalent rate of 48.4 percent. Sales of new houses fell 7.0 percent in Oct 2012 with increase of 9.5 percent in Nov 2012. Sales of new houses rebounded 10.8 percent in Jan 2013 with annual equivalent rate of 51.5 percent from Oct 2012 to Jan 2013 because of the increase of 10.8 percent in Jan 2013. New house sales increased at annual equivalent 9.9 percent in Feb-Mar 2013. New house sales weakened, increasing at 0.8 percent in annual equivalent from Apr to Dec 2013 with significant volatility illustrated by decline of 18.8 percent in Jul 2013 and increase of 11.3 percent in Oct 2013. New house sales fell 1.1 percent in Dec 2013. New house sales increased 1.1 percent in Jan 2014 and fell 6.5 percent in Feb 2014 and 1.7 percent in Mar 2014. New house sales changed 0.0 percent in Apr 2014 and increased 11.5 percent in May 2014. New house sales fell 10.7 percent in Jun 2014 and decreased 1.2 percent in Jul 2014. New house sales jumped 12.7 percent in Aug 2014 and increased 1.1 percent in Sep 2014. New House sales increased 2.8 percent in Oct 2014 and fell 4.9 percent in Nov 2014. House sales fell at the annual equivalent rate of 4.6 percent in Sep-Nov 2014. New house sales increased 10.2 percent in Dec 2014 and increased 5.3 percent in Jan 2015. Sales of new houses increased 3.3 percent in Feb 2015 and fell 10.0 percent in Mar 2015. House sales fell 6.8 percent in Apr 2015. The annual equivalent rate in Dec 2014-Apr 2015 was 40.5 percent. There are with wide monthly oscillations. Robbie Whelan and Conor Dougherty, writing on “Builders fuel home sale rise,” on Feb 26, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324338604578327982067761860.html), analyze how builders have provided financial assistance to home buyers, including those short of cash and with weaker credit background, explaining the rise in new home sales and the highest gap between prices of new and existing houses. The 30-year conventional mortgage rate increased from 3.40 on Apr 25, 2013 to 4.58 percent on Aug 22, 2013 (http://www.federalreserve.gov/releases/h15/data.htm), which could also be a factor in recent weakness with improvement after the rate fell to 4.26 in Nov 2013. The conventional mortgage rate rose to 4.48 percent on Dec 26, 2013 and fell to 4.32 percent on Jan 30, 2014. The conventional mortgage rate increased to 4.37 percent on Feb 26, 2014 and 4.40 percent on Mar 27, 2014. The conventional mortgage rate fell to 4.14 percent on Apr 22, 2014, stabilizing at 4.14 on Jun 26, 2014. The conventional mortgage rate stood at 3.84 percent on May 21, 2015. The conventional mortgage rate measured in a survey by Freddie Mac (http://www.freddiemac.com/pmms/release.html) is the “contract interest rate on commitments for fixed-rate first mortgages” (http://www.federalreserve.gov/releases/h15/data.htm).

Table IIB-1, US, Sales of New Houses at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %

	SA Annual Rate Thousands	∆%
Apr 2015	517	6.8
Mar	484	-10.0
Feb	538	3.3
Jan	521	5.3
Dec 2014	495	10.2
AE ∆% Dec-Apr		40.5
Nov	449	-4.9
Oct	472	2.8
Sep	459	1.1
AE ∆% Sep-Nov		-4.6
Aug	454	12.7
Jul	403	-1.2
Jun	408	-10.7
May	457	11.5
Apr	410	0.0
Mar	410	-1.7
Feb	417	-6.5
Jan	446	1.1
AE ∆% Jan-Aug		4.6
Dec 2013	441	-1.1
Nov	446	0.5
Oct	444	11.3
Sep	399	5.0
Aug	380	1.1
Jul	376	-18.8
Jun	463	7.7
May	430	-4.7
Apr	451	0.4
AE ∆% Apr-Dec		-2.3
Mar	449	2.3
Feb	439	-0.7
AE ∆% Feb-Mar		9.9
Jan	442	10.8
Dec 2012	399	1.8
Nov	392	9.5
Oct	358	-7.0
AE ∆% Oct-Jan		51.5
Sep	385	2.7
Aug	375	1.6
Jul	369	2.5
Jun	360	-2.7
May	370	4.5
AE ∆% May-Sep		22.3
Apr	354	0.0
Mar	354	-3.3
Feb	366	9.3
Jan	335	-1.8
AE ∆% Jan-Apr		11.8
Dec 2011	341	4.0
Nov	328	3.8
Oct	316	3.9
Sep	304	1.7
AE ∆% Sep-Dec		48.4
Aug	299	1.0
Jul	296	-1.7
Jun	301	-1.3
May	305	-1.6
AE ∆% May-Aug		-10.3
Apr	310	3.3
Mar	300	11.1
Feb	270	-12.1
Jan	307	-5.8
AE ∆% Jan-Apr		-14.2
Dec 2010	326	13.6

AE: Annual Equivalent

Source: US Census Bureau

http://www.census.gov/construction/nrs/

There is additional information of the report of new house sales in Table IIB-2. The stock of unsold houses fell from rates of 6 to 7 percent of sales in 2011 to 4 to 5 percent in 2013 and 4.8 percent in Apr 2015. Robbie Whelan and Conor Dougherty, writing on “Builders fuel home sale rise,” on Feb 26, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324338604578327982067761860.html), find that inventories of houses have declined as investors acquire distressed houses of higher quality. Median and average house prices oscillate. In Apr 2015, median prices of new houses sold not seasonally adjusted (NSA) increased 4.1 percent after decreasing 2.2 percent in Mar 2015. Average prices decreased 0.5 percent in Apr 2014 and decreased 2.8 percent in Mar 2015. Between Dec 2010 and Apr 2015, median prices increased 23.3 percent, partly concentrated in increases of 14.5 percent in Oct 2014, 4.0 percent in Aug 2014, 4.0 percent in May 2014 and 5.2 percent in Mar 2014. Average prices increased 17.1 percent between Dec 2010 and Apr 2015, with increase of 20.3 percent in Oct 2014. Between Dec 2010 and Dec 2012, median prices increased 7.1 percent and average prices increased 2.6 percent. Price increases concentrated in 2012 with increase of median prices of 18.2 percent from Dec 2011 to Dec 2012 and of average prices of 13.8 percent. Median prices increased 16.9 percent from Dec 2012 to Dec 2014, with increase of 14.5 percent in Oct 2014, while average prices increased 24.8 percent, with increase of 20.3 percent in Oct 2014. Robbie Whelan, writing on “New homes hit record as builders cap supply,” on May 24, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323475304578500973445311276.html?mod=WSJ_economy_LeftTopHighlights), finds that homebuilders are continuing to restrict the number of new homes for sale. Restriction of available new homes for sale increases prices paid by buyers.

Table IIB-2, US, New House Stocks and Median and Average New Homes Sales Price

	Unsold* Stocks in Equiv. Months of Sales SA %	Median New House Sales Price USD NSA	Month ∆%	Average New House Sales Price USD NSA	Month ∆%
Apr 2015	4.8	297,300	4.1	341,500	-0.5
Mar	5.1	285,500	-2.2	343,300	-2.8
Feb	4.6	291,900	0.0	353,200	-0.8
Jan	4.8	292,000	-3.3	356,000	-4.7
Dec 2014	5.1	302,000	-0.2	373,500	4.1
Nov	5.6	302,700	1.1	358,800	-6.6
Oct	5.3	299,400	14.5	384,000	20.3
Sep	5.5	261,500	-10.4	319,100	-10.4
Aug	5.4	291,700	4.0	356,200	3.2
Jul	6.1	280,400	-2.3	345,200	2.1
Jun	5.8	287,000	0.5	338,100	4.5
May	5.1	285,600	4.0	323,500	-0.5
Apr	5.6	274,500	-2.8	325,100	-1.9
Mar	5.6	282,300	5.2	331,500	1.7
Feb	5.4	268,400	-0.5	325,900	-3.4
Jan	5.1	269,800	-2.1	337,300	5.0
Dec 2013	5.1	275,500	-0.6	321,200	-4.3
Nov	5.0	277,100	4.8	335,600	0.0
Oct	4.9	264,300	-2.0	335,700	4.4
Sep	5.5	269,800	5.7	321,400	3.4
Aug	5.5	255,300	-2.6	310,800	-5.8
Jul	5.4	262,200	0.9	329,900	7.8
Jun	4.1	259,800	-1.5	306,100	-2.5
May	4.5	263,700	-5.6	314,000	-6.8
Apr	4.3	279,300	8.5	337,000	12.3
Mar	4.1	257,500	-2.9	300,200	-3.9
Feb	4.2	265,100	5.4	312,500	1.8
Jan	4.0	251,500	-2.6	306,900	2.6
Dec 2012	4.5	258,300	5.4	299,200	2.9
Nov	4.6	245,000	-0.9	290,700	1.9
Oct	4.9	247,200	-2.9	285,400	-4.1
Sep	4.5	254,600	0.6	297,700	-2.6
Aug	4.6	253,200	6.7	305,500	8.2
Jul	4.6	237,400	2.1	282,300	3.9
Jun	4.8	232,600	-2.8	271,800	-3.2
May	4.7	239,200	1.2	280,900	-2.4
Apr	4.9	236,400	-1.4	287,900	1.5
Mar	4.9	239,800	0.0	283,600	3.5
Feb	4.8	239,900	8.2	274,000	3.1
Jan	5.3	221,700	1.4	265,700	1.1
Dec 2011	5.3	218,600	2.0	262,900	5.2
Nov	5.7	214,300	-4.7	250,000	-3.2
Oct	6.0	224,800	3.6	258,300	1.1
Sep	6.3	217,000	-1.2	255,400	-1.5
Aug	6.5	219,600	-4.5	259,300	-4.1
Jul	6.7	229,900	-4.3	270,300	-1.0
Jun	6.6	240,200	8.2	273,100	4.0
May	6.6	222,000	-1.2	262,700	-2.3
Apr	6.7	224,700	1.9	268,900	3.1
Mar	7.2	220,500	0.2	260,800	-0.8
Feb	8.1	220,100	-8.3	262,800	-4.7
Jan	7.3	240,100	-0.5	275,700	-5.5
Dec 2010	7.0	241,200	9.8	291,700	3.5

*Percent of new houses for sale relative to houses sold

Source: US Census Bureau

http://www.census.gov/construction/nrs/

The depressed level of residential construction and new house sales in the US is evident in Table IIB-3 providing new house sales not seasonally adjusted in Jan-Apr of various years. Sales of new houses are higher in Jan-Apr 2015 relative to Jan-Apr 2014 with increase of 21.9 percent. Sales of new houses in Jan-Apr 2015 are substantially lower than in any year between 1964 and 2014 with the exception of the years from 2009 to 2014. There are only five increases of 17.1 percent relative to Jan-Apr 2013, 47.1 percent relative to Jan-Apr 2012, 76.2 percent relative to Jan-Apr 2011, 39.1 percent relative to Jan-Apr 2010 and 53.4 percent relative to Jan-Apr 2009. Sales of new houses in Jan-Apr 2015 are lower by 6.3 percent relative to Jan-Apr 2008, 40.1 percent relative to 2007, 53.8 percent relative to 2006 and 59.9 percent relative to 2005. The housing boom peaked in 2005 and 2006 when increases in fed funds rates to 5.25 percent in Jun 2006 from 1.0 percent in Jun 2004 affected subprime mortgages that were programmed for refinancing in two or three years on the expectation that price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating full payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in Jan-Apr 2015 relative to the same period in 2004 fell 58.9 percent and 49.6 percent relative to the same period in 2003. Similar percentage declines are also observed for 2015 relative to years from 2000 to 2004. Sales of new houses in Jan-Apr 2015 fell 16.0 per cent relative to the same period in 1995. The population of the US was 179.3 million in 1960 and 281.4 million in 2000 (Hobbs and Stoops 2002, 16). Detailed historical census reports are available from the US Census Bureau at (http://www.census.gov/population/www/censusdata/hiscendata.html). The US population reached 308.7 million in 2010 (http://2010.census.gov/2010census/data/). The US population increased by 129.4 million from 1960 to 2010 or 72.2 percent. The final row of Table IIB-3 reveals catastrophic data: sales of new houses in Jan-Apr 2015 of 178 thousand units are lower by 4.8 percent relative to 187 thousand units of houses sold in Jan-Apr 1964, the second year when data become available. The civilian noninstitutional population increased from 122.416 million in 1963 to 247.947 million in 2014, or 102.5 percent (http://www.bls.gov/data/). The Bureau of Labor Statistics (BLS) defines the civilian noninstitutional population (http://www.bls.gov/lau/rdscnp16.htm#cnp): “The civilian noninstitutional population consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.”

Table IIB-3, US, Sales of New Houses Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan-Apr 2015	178
Jan-Apr 2014	146
∆% Jan-Apr 2015/Jan-Apr 2014	21.9
Jan-Apr 2013	152
∆% Jan-Apr 2015/Jan-Apr 2013	17.1
Jan-Apr 2012	121
∆% Jan-Apr 2015/Jan-Apr 2012	47.1
Jan-Apr 2011	101
∆% Jan-Apr 2015/Jan-Apr 2011	76.2
Jan-Apr 2010	128
∆% Jan-Apr 2015/ Jan-Apr 2010	39.1
Jan-Apr 2009	116
∆% Jan-Apr 2015/ Jan-Apr 2009	53.4
Jan-Apr 2008	190
∆% Jan-Apr 2015/ Jan-Apr 2008	-6.3
Jan-Apr 2007	297
∆% Jan-Apr 2015/ Jan-Apr 2007	-40.1
Jan-Apr 2006	385
∆% Jan-Apr 2015/Jan-Apr 2006	-53.8
Jan-Apr 2005	444
∆% Jan-Apr 2015/Jan-Apr 2005	-59.9
Jan-Apr 2004	423
∆% Jan-Apr 2015/Jan-Apr 2004	-57.9
Jan-Apr 2003	347
∆% Jan-Apr 2015/ Jan-Apr 2003	-48.7
Jan-Apr 2002	326
∆% Jan-Apr 2015/ Jan-Apr 2002	-45.4
Jan-Apr 2001	335
∆% Jan-Apr 2015/ Jan-Apr 2001	-46.9
Jan-Apr 2000	311
∆% Jan-Apr 2015/ Jan-Apr 2000	-42.8
Jan-Apr 1995	212
∆% Jan-Apr 2015/ Jan-Apr 1995	-16.0
Jan-Apr 1964	187
∆% Jan-Apr 2015/ Jan-Apr 1964	-4.8

*Computed using unrounded data

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Table IIB-4 provides the entire available annual series of new house sales from 1963 to 2014. The revised level of 306 thousand new houses sold in 2011 is the lowest since 560 thousand in 1963 in the 48 years of available data while the level of 368 thousand in 2012 is only higher than 323 thousand in 2010. The level of sales of new houses of 437 thousand in 2014 is the lowest from 1963 to 2009 with exception of 412 thousand in 1982 and 436 thousand in 1981. The population of the US increased 129.4 million from 179.3 million in 1960 to 308.7 million in 2010, or 72.2 percent. The civilian noninstitutional population of the US increased from 122.416 million in 1963 to 247.947 million in 2014 or 102.5 percent (http://www.bls.gov/data/). The Bureau of Labor Statistics (BLS) defines the civilian noninstitutional population (http://www.bls.gov/lau/rdscnp16.htm#cnp): “The civilian noninstitutional population consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.”

The civilian noninstitutional population is the universe of the labor force. In fact, there is no year from 1963 to 2013 in Table IIA-4 with sales of new houses below 400 thousand with the exception of the immediately preceding years of 2009, 2010, 2011 and 2012.

Table IIB-4, US, New Houses Sold, NSA Thousands

Period	Sold During Period
1963	560
1964	565
1965	575
1966	461
1967	487
1968	490
1969	448
1970	485
1971	656
1972	718
1973	634
1974	519
1975	549
1976	646
1977	819
1978	817
1979	709
1980	545
1981	436
1982	412
1983	623
1984	639
1985	688
1986	750
1987	671
1988	676
1989	650
1990	534
1991	509
1992	610
1993	666
1994	670
1995	667
1996	757
1997	804
1998	886
1999	880
2000	877
2001	908
2002	973
2003	1,086
2004	1,203
2005	1,283
2006	1,051
2007	776
2008	485
2009	375
2010	323
2011	306
2012	368
2013	429
2014	437

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Chart IIB-1 of the US Bureau of the Census shows the sharp decline of sales of new houses in the US. Sales rose temporarily until about mid 2010 but then declined to a lower plateau followed by increase and stability.

Chart IIB-1, US, New One-Family Houses Sold in the US, SAAR (Seasonally Adjusted Annual Rate)

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr051.html

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table IIB-5. The percentage change of new house sales from 1963 to 2014 is minus 22.0 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 6.0 percent. Between 1995 and 2005 sales of new houses increased 92.4 percent at the yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2005. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). Sales of new houses sold in 2014 fell 34.5 percent relative to the same period in 1995 and 65.9 percent relative to 2005.

Table IIB-5, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2014	-22.0	NA
1991-2001	78.4	6.0
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2014	-34.5	NA
2000-2014	-50.2	NA
2005-2014	-65.9	NA

NA: Not Applicable

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Chart IIB-2 of the US Bureau of the Census provides the entire monthly sample of new houses sold in the US between Jan 1963 and Apr 2015 without seasonal adjustment. The series is almost stationary until the 1990s. There is sharp upward trend from the early 1990s to 2005-2006 after which new single-family houses sold collapse to levels below those in the beginning of the series.

Chart IIB-2, US, New Single-family Houses Sold, NSA, 1963-2015

Source: US Census Bureau

http://www.census.gov/construction/nrs/

The available historical annual data of median and average prices of new houses sold in the US between 1963 and 2014 is provided in Table IIB-6. On a yearly basis, median and average prices reached a peak in 2007 and then fell substantially. There is recovery in 2012-2014.

Table IIB-6, US, Median and Average Prices of New Houses Sold, Annual Data

Period	Median	Average
1963	$18,000	$19,300
1964	$18,900	$20,500
1965	$20,000	$21,500
1966	$21,400	$23,300
1967	$22,700	$24,600
1968	$24,700	$26,600
1969	$25,600	$27,900
1970	$23,400	$26,600
1971	$25,200	$28,300
1972	$27,600	$30,500
1973	$32,500	$35,500
1974	$35,900	$38,900
1975	$39,300	$42,600
1976	$44,200	$48,000
1977	$48,800	$54,200
1978	$55,700	$62,500
1979	$62,900	$71,800
1980	$64,600	$76,400
1981	$68,900	$83,000
1982	$69,300	$83,900
1983	$75,300	$89,800
1984	$79,900	$97,600
1985	$84,300	$100,800
1986	$92,000	$111,900
1987	$104,500	$127,200
1988	$112,500	$138,300
1989	$120,000	$148,800
1990	$122,900	$149,800
1991	$120,000	$147,200
1992	$121,500	$144,100
1993	$126,500	$147,700
1994	$130,000	$154,500
1995	$133,900	$158,700
1996	$140,000	$166,400
1997	$146,000	$176,200
1998	$152,500	$181,900
1999	$161,000	$195,600
2000	$169,000	$207,000
2001	$175,200	$213,200
2002	$187,600	$228,700
2003	$195,000	$246,300
2004	$221,000	$274,500
2005	$240,900	$297,000
2006	$246,500	$305,900
2007	$247,900	$313,600
2008	$232,100	$292,600
2009	$216,700	$270,900
2010	$221,800	$272,900
2011	$227,200	$267,900
2012	$245,200	$292,200
2013	$268,900	$324,500
2014	$282,800	$345,800

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Percentage changes of median and average prices of new houses sold in selected years are shown in Table IIB-7. Prices rose sharply between 2000 and 2005. In fact, prices in 2014 are higher than in 2000. Between 2006 and 2014, median prices of new houses sold increased 14.7 percent and average prices increased 13.0 percent. Between 2013 and 2014, median prices increased 5.2 percent and average prices increased 6.6 percent.

Table IIB-7, US, Percentage Change of New Houses Median and Average Prices, NSA, ∆%

	Median New Home Sales Prices ∆%	Average New Home Sales Prices ∆%
∆% 2000 to 2003	15.4	19.0
∆% 2000 to 2005	42.5	43.5
∆% 2000 to 2014	67.7	66.8
∆% 2005 to 2014	17.4	16.4
∆% 2000 to 2006	45.9	47.8
∆% 2006 to 2014	14.7	13.0
∆% 2009 to 2014	30.5	27.6
∆% 2010 to 2014	27.5	26.7
∆% 2011 to 2014	24.5	29.1
∆% 2012 to 2014	15.3	18.3
∆% 2013 to 2014	5.2	6.6

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Chart IIB-3 of the US Census Bureau provides the entire series of new single-family sales median prices from Jan 1963 to Apr 2015. There is long-term sharp upward trend with few declines until the current collapse. Median prices increased sharply during the Great Inflation of the 1960s and 1970s and paused during the savings and loans crisis of the late 1980s and the recession of 1991. Housing subsidies throughout the 1990s caused sharp upward trend of median new house prices that accelerated after the fed funds rate of 1 percent from 2003 to 2004. There was sharp reduction of prices after 2006 with recovery recently toward earlier prices.

Chart IIB-3, US, Median Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1963-2015

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Chart IIB-4 of the US Census Bureau provides average prices of new houses sold from the mid-1970s to Apr 2015. There is similar behavior as with median prices of new houses sold in Chart IIB-3. The only stress occurred in price pauses during the savings and loans crisis of the late 1980s and the collapse after 2006 with recent recovery.

Chart IIB-4, US, Average Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1975-2015

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Chart IIB-5 of the Board of Governors of the Federal Reserve System provides the rate for the 30-year conventional mortgage, the yield of the 30-year Treasury bond and the rate of the overnight federal funds rate, monthly, from 1954 to 2015. All rates decline throughout the period from the Great Inflation of the 1970s through the following Great Moderation and until currently. In Apr 1971, the fed funds rate was 4.15 percent and the conventional mortgage rate 7.31 percent. In November 2012, the fed funds rate was 0.16 percent, the yield of the 30-year Treasury 2.80 percent and the conventional mortgage rate 3.35. The final segment shows an increase in the yield of the 30-year Treasury to 3.61 percent in July 2013 with the fed funds rate at 0.09 percent and the conventional mortgage at 4.37 percent. The final data point shows marginal decrease of the conventional mortgage rate to 3.67 percent in Apr 2015 with the yield of the 30-year Treasury bond at 2.59 percent and overnight rate on fed funds at 0.11 percent. The recent increase in interest rates if sustained could affect the US real estate market. Shayndi Raice and Nick Timiraos, writing on “Banks cut as mortgage boom ends,” on Jan 9, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303754404579310940019239208), analyze the drop in mortgage applications to a 13-year low, as measured by the Mortgage Bankers Association. Nick Timiraos, writing on “Demand for home loans plunges,” on Apr 24, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304788404579522051733228402?mg=reno64-wsj), analyzes data in Inside Mortgage Finance that mortgage lending of $235 billion in IQ2014 is 58 percent lower than a year earlier and 23 percent below IVQ2013. Mortgage lending collapsed to the lowest level in 14 years. In testimony before the Committee on the Budget of the US Senate on May 8, 2004, Chair Yellen provides analysis of the current economic situation and outlook (http://www.federalreserve.gov/newsevents/testimony/yellen20140507a.htm): “One cautionary note, though, is that readings on housing activity--a sector that has been recovering since 2011--have remained disappointing so far this year and will bear watching.”

Chart IIB-5, US, Thirty-year Conventional Mortgage, Thirty-year Treasury Bond and Overnight Federal Funds Rate, Monthly, 1954-2015

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/H15/default.htm

Table IIB-8 provides the monthly data in Chart IIB-5 from Dec 2012 to Feb 2015. While the fed funds rate fell from 0.16 percent in Dec 2012 to 0.07 percent in Jan 2014, the yield of the constant maturity 30-year Treasury bond rose from 2.88 percent in Dec 2012 to 3.77 percent in Jan 2014 and the conventional mortgage rate increased from 3.35 percent in Dec 2012 to 4.43 percent in Jan 2014. In Apr 2015, the fed funds rate stabilized at 0.12 percent with decrease to 2.59 percent of the 30-year yield and decline at 3.67 percent of the conventional mortgage rate.

Table IIB-8, US, Fed Funds Rate, Thirty Year Treasury Bond and Conventional Mortgage Rate, Monthly, Percent per Year, Dec 2012 to Apr 2015

	Fed Funds Rate	Yield of Thirty Year Constant Maturity Bond	Conventional Mortgage Rate
2012-12	0.16	2.88	3.35
2013-01	0.14	3.08	3.41
2013-02	0.15	3.17	3.53
2013-03	0.14	3.16	3.57
2013-04	0.15	2.93	3.45
2013-05	0.11	3.11	3.54
2013-06	0.09	3.4	4.07
2013-07	0.09	3.61	4.37
2013-08	0.08	3.76	4.46
2013-09	0.08	3.79	4.49
2013-10	0.09	3.68	4.19
2013-11	0.08	3.8	4.26
2013-12	0.09	3.89	4.46
2014-01	0.07	3.77	4.43
2014-02	0.07	3.66	4.3
2014-03	0.08	3.62	4.34
2014-04	0.09	3.52	4.34
2014-05	0.09	3.39	4.19
2014-06	0.1	3.42	4.16
2014-07	0.09	3.33	4.13
2014-08	0.09	3.2	4.12
2014-09	0.09	3.26	4.16
2014-10	0.09	3.04	4.04
2014-11	0.09	3.04	4
2014-12	0.12	2.83	3.86
2015-01	0.11	2.46	3.71
2015-02	0.11	2.57	3.71
2015-03	0.11	2.63	3.77
2015-04	0.12	2.59	3.67

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/H15/default.htm

IIB2 United States House Prices. The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, provides the FHFA House Price Index (HPI) that “is calculated using home sales price information from Fannie Mae and Freddie Mac-acquired mortgages” (http://fhfa.gov/webfiles/24216/q22012hpi.pdf 1). Table IIA2-1 provides the FHFA HPI for purchases only, which shows behavior similar to that of the Case-Shiller index but with lower magnitudes. House prices catapulted from 2000 to 2003, 2005 and 2006. From IVQ2000 to IVQ2006, the index for the US as a whole rose 55.0 percent, with 62.1 percent for New England, 72.0 percent for Middle Atlantic, 71.2 percent for South Atlantic but only by 33.1 percent for East South Central. Prices fell relative to 2014 for the US and all regions from 2006 with exception of increase of 2.6 percent for East South Central. Prices for the US increased 4.9 percent in IVQ2014 relative to IVQ2013 and 12.9 percent from IVQ2012 to IVQ2014. From IVQ2000 to IVQ2014, prices rose for the US and the four regions in Table IIA2-1.

Table IIA2-1, US, FHFA House Price Index Purchases Only NSA ∆%

	United States	New England	Middle Atlantic	South Atlantic	East South Central
IVQ2000 to IVQ2003	24.0	40.6	35.8	25.9	11.0
IVQ2000 to IVQ2005	50.5	65.0	67.6	62.9	25.4
IVQ2000 to IVQ2006	55.0	62.1	72.0	71.2	33.1
IVQ2005 to IVQ2014	-1.5	-8.7	-2.3	-7.4	8.9
IVQ2006 to IVQ2014	-4.4	-7.1	-4.8	-11.9	2.6
IVQ2007 to IVQ2014	-1.9	-5.1	-5.0	-8.6	0.7
IVQ2011 to IVQ2014	18.9	7.3	6.9	19.9	11.8
IVQ2012 to IVQ2014	12.9	6.8	5.7	13.8	8.6
IVQ2013 to IVQ2014	4.9	2.5	2.2	5.1	4.2
IVQ2000 to IVQ2014	48.3 144.27	50.6 138.40	63.7 127.30	50.9 140.28	36.6 146.07

Source: Federal Housing Finance Agency

http://www.fhfa.gov/KeyTopics/Pages/House-Price-Index.aspx

Data of the FHFA HPI for the remaining US regions are in Table IIA2-2. Behavior is not very different from that in Table IIA2-1 with the exception of East North Central. House prices in the Pacific region doubled between 2000 and 2006. Although prices of houses declined sharply from 2005 and 2006 to 2014 with exception of West South Central and West North Central, there was still appreciation relative to 2000.

Table IIA2-2, US, FHFA House Price Index Purchases Only NSA ∆%

	West South Central	West North Central	East North Central	Mountain	Pacific
IVQ2000 to IVQ2003	11.1	18.3	14.7	18.9	44.6
IVQ2000 to IVQ2005	23.9	31.0	23.8	58.0	107.7
IVQ2000 to IVQ2006	31.6	33.7	23.7	68.6	108.7
IVQ2005 to IVQ2014	26.6	4.7	-5.4	-2.6	-14.7
IVQ2006 to IVQ2014	19.1	2.6	-5.4	-8.7	-15.1
IVQ2007 to IVQ2014	15.2	3.2	-2.1	-5.6	-6.0
IVQ2011 to IVQ2014	18.1	13.5	14.2	32.9	37.6
IVQ2012 to IVQ2014	12.1	8.9	11.1	17.9	24.4
IVQ2013 to IVQ2014	5.9	4.0	4.6	5.5	7.3
IVQ2000 to IVQ2014	56.8 145.53	37.1 158.59	17.1 155.13	53.9 172.46	77.1 132.21

Source: Federal Housing Finance Agency

http://www.fhfa.gov/KeyTopics/Pages/House-Price-Index.aspx

Monthly and 12-month percentage changes of the FHFA House Price Index are in Table IIA2-3. Percentage monthly increases of the FHFA index were positive from Apr to Jul 2011 with exception of declines in May and Aug 2011 while 12 months percentage changes improved steadily from around minus 6 percent in Mar to May 2011 to minus 4.3 percent in Jun 2011. The FHFA house price index fell 0.5 percent in Oct 2011 and fell 3.0 percent in the 12 months ending in Oct 2011. There was significant recovery in Nov 2012 with increase in the house price index of 0.4 percent and reduction of the 12-month rate of decline to 2.2 percent. The house price index rose 0.4 percent in Dec 2011 and the 12-month percentage change improved to minus 1.2 percent. There was further improvement with revised change of minus 0.1 percent in Jan 2012 and decline of the 12-month percentage change to minus 1.0 percent. The index improved to positive change of 0.1 percent in Feb 2012 and increase of 0.2 percent in the 12 months ending in Feb 2012. There was strong improvement in Mar 2012 with gain in prices of 1.0 percent and 2.3 percent in 12 months. The house price index of FHFA increased 0.6 percent in Apr 2012 and 2.8 percent in 12 months and improvement continued with increase of 0.6 percent in May 2012 and 3.6 percent in the 12 months ending in May 2012. Improvement consolidated with increase of 0.3 percent in Jun 2012 and 3.6 percent in 12 months. In Jul 2012, the house price index increased 0.1 percent and 3.5 percent in 12 months. Strong increase of 0.5 percent in Aug 2012 pulled the 12-month change to 4.3 percent. There was another increase of 0.7 percent in Oct and 5.3 percent in 12 months followed by increase of 0.6 percent in Nov 2012 and 5.4 percent in 12 months. The FHFA house price index increased 0.8 percent in Jan 2013 and 6.4 percent in 12 months. Improvement continued with increase of 0.5 percent in Apr 2013 and 7.2 percent in 12 months. In May 2013, the house price indexed increased 0.8 percent and 7.4 percent in 12 months. The FHFA house price index increased 0.6 percent in Jun 2013 and 7.8 percent in 12 months. In Jul 2013, the FHFA house price index increased 0.7 percent and 8.4 percent in 12 months. Improvement continued with increase of 0.4 percent in Aug 2013 and 8.3 percent in 12 months. In Sep 2013, the house price index increased 0.5 percent and 8.2 percent in 12 months. The house price index increased 0.5 percent in Oct 2013 and 8.0 percent in 12 months. In Nov 2013, the house price index changed 0.0 percent and increased 7.3 percent in 12 months. The house price index rose 0.7 percent in Dec 2013 and 7.7 percent in 12 months. Improvement continued with increase of 0.6 percent in Jan 2014 and 7.4 percent in 12 months. In Feb 2014, the house price index increased 0.4 percent and 7.0 percent in 12 months. The house price index increased 0.5 percent in Mar 2014 and 6.4 percent in 12 months. In Apr 2014, the house price index increased 0.2 percent and increased 6.1 percent in 12 months. The house price index increased 0.3 percent in May 2014 and 5.6 percent in 12 months. In Jun 2014, the house price index increased 0.4 percent and 5.4 percent in 12 months. The house price index increased 0.3 percent in Jul 2014 and 4.9 percent in 12 months. In Sep 2014, the house price index increased 0.1 percent and increased 4.6 percent in 12 months. The house price index increased 0.5 percent in Oct 2014 and 4.6 percent in 12 months. In Nov 2014, the house price index increased 0.7 percent and 5.3 percent in 12 months. The house price index increased 0.8 percent in Dec 2014 and increased 5.4 percent in 12 months. In Feb 2015, the house price index increased 0.3 percent and increased 5.1 percent in 12 months. The house price index increased 0.6 percent in Feb 2015 and 5.4 percent in 12 months. In Mar 2015, the house price index increased 0.3 percent and 5.2 percent in 12 months.

Table IIA2-3, US, FHFA House Price Index Purchases Only SA. Month and NSA 12-Month ∆%

	Month ∆% SA	12 Month ∆% NSA
Mar 2015	0.3	5.2
Feb	0.6	5.4
Jan	0.3	5.1
Dec 2014	0.8	5.4
Nov	0.7	5.3
Oct	0.5	4.6
Sep	0.1	4.6
Aug	0.5	5.0
Jul	0.3	4.9
Jun	0.4	5.4
May	0.3	5.6
Apr	0.2	6.1
Mar	0.5	6.4
Feb	0.4	7.0
Jan	0.6	7.4
Dec 2013	0.7	7.7
Nov	0.0	7.3
Oct	0.5	8.0
Sep	0.5	8.2
Aug	0.4	8.3
Jul	0.7	8.4
Jun	0.6	7.8
May	0.8	7.4
Apr	0.5	7.2
Mar	1.2	7.4
Feb	0.8	7.1
Jan	0.8	6.4
Dec 2012	0.4	5.5
Nov	0.6	5.4
Oct	0.7	5.3
Sep	0.5	4.1
Aug	0.5	4.3
Jul	0.1	3.5
Jun	0.3	3.6
May	0.6	3.6
Apr	0.6	2.8
Mar	1.0	2.3
Feb	0.1	0.2
Jan	-0.1	-1.0
Dec 2011	0.4	-1.2
Nov	0.4	-2.2
Oct	-0.5	-3.0
Sep	0.6	-2.4
Aug	-0.3	-3.7
Jul	0.2	-3.4
Jun	0.4	-4.3
May	-0.1	-5.9
Apr	0.2	-5.8
Mar	-1.0	-6.0
Feb	-1.1	-5.0
Jan	-0.4	-4.6
Dec 2010		-3.8
Dec 2009		-2.0
Dec 2008		-10.2
Dec 2007		-3.2
Dec 2006		2.5
Dec 2005		9.8
Dec 2004		10.2
Dec 2003		8.0
Dec 2002		7.8
Dec 2001		6.7
Dec 2000		7.2
Dec 1999		6.1
Dec 1998		5.9
Dec 1997		3.4
Dec 1996		2.8
Dec 1995		2.9
Dec 1994		2.6
Dec 1993		3.1
Dec 1992		2.4

Source: Federal Housing Finance Agency

http://www.fhfa.gov/DataTools

The bottom part of Table IIA2-3 provides 12-month percentage changes of the FHFA house price index since 1992 when data become available for 1991. Table IIA2-4 provides percentage changes and average rates of percent change per year for various periods. Between 1992 and 2014, the FHFA house price index increased 108.2 percent at the yearly average rate of 3.4 percent. In the period 1992-2000, the FHFA house price index increased 39.4 percent at the average yearly rate of 4.2 percent. The average yearly rate of price increase accelerated to 7.5 percent in the period 2000-2003, 8.5 percent in 2000-2005 and 7.5 percent in 2000-2006. At the margin, the average rate jumped to 10.0 percent in 2003-2005 and 7.5 percent in 2003-2006. House prices measured by the FHFA house price index declined 3.1 percent between 2006 and 2014 and 0.7 percent between 2005 and 2014.

Table IIA2-4, US, FHFA House Price Index, Percentage Change and Average Rate of Percentage Change per Year, Selected Dates 1992-2013

Dec	∆%	Average ∆% per Year
1992-2014	108.1	3.4
1992-2000	39.4	4.2
2000-2003	24.2	7.5
2000-2005	50.4	8.5
2003-2005	21.1	10.0
2005-2014	-0.7	NA
2000-2006	54.1	7.5
2003-2006	24.1	7.5
2006-2014	-3.1	NA

Source: Federal Housing Finance Agency

http://www.fhfa.gov/DataTools

The explanation of the sharp contraction of household wealth can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

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

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

W = Y/r (1)

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

There are significant elements of the theory of bank financial fragility of Diamond and Dybvig (1983) and Diamond and Rajan (2000, 2001a, 2001b) that help to explain the financial fragility of banks during the credit/dollar crisis (see also Diamond 2007). The theory of Diamond and Dybvig (1983) as exposed by Diamond (2007) is that banks funding with demand deposits have a mismatch of liquidity (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 58-66). A run occurs when too many depositors attempt to withdraw cash at the same time. All that is needed is an expectation of failure of the bank. Three important functions of banks are providing evaluation, monitoring and liquidity transformation. Banks invest in human capital to evaluate projects of borrowers in deciding if they merit credit. The evaluation function reduces adverse selection or financing projects with low present value. Banks also provide important monitoring services of following the implementation of projects, avoiding moral hazard that funds be used for, say, real estate speculation instead of the original project of factory construction. The transformation function of banks involves both assets and liabilities of bank balance sheets. Banks convert an illiquid asset or loan for a project with cash flows in the distant future into a liquid liability in the form of demand deposits that can be withdrawn immediately.

In the theory of banking of Diamond and Rajan (2000, 2001a, 2001b), the bank creates liquidity by tying human assets to capital. The collection skills of the relationship banker convert an illiquid project of an entrepreneur into liquid demand deposits that are immediately available for withdrawal. The deposit/capital structure is fragile because of the threat of bank runs. In these days of online banking, the run on Washington Mutual was through withdrawals online. A bank run can be triggered by the decline of the value of bank assets below the value of demand deposits.

Pelaez and Pelaez (Regulation of Banks and Finance 2009b, 60, 64-5) find immediate application of the theories of banking of Diamond, Dybvig and Rajan to the credit/dollar crisis after 2007. It is a credit crisis because the main issue was the deterioration of the credit portfolios of securitized banks as a result of default of subprime mortgages. It is a dollar crisis because of the weakening dollar resulting from relatively low interest rate policies of the US. It caused systemic effects that converted into a global recession not only because of the huge weight of the US economy in the world economy but also because the credit crisis transferred to the UK and Europe. Management skills or human capital of banks are illustrated by the financial engineering of complex products. The increasing importance of human relative to inanimate capital (Rajan and Zingales 2000) is revolutionizing the theory of the firm (Zingales 2000) and corporate governance (Rajan and Zingales 2001). Finance is one of the most important examples of this transformation. Profits were derived from the charter in the original banking institution. Pricing and structuring financial instruments was revolutionized with option pricing formulas developed by Black and Scholes (1973) and Merton (1973, 1974, 1998) that permitted the development of complex products with fair pricing. The successful financial company must attract and retain finance professionals who have invested in human capital, which is a sunk cost to them and not of the institution where they work.

The complex financial products created for securitized banking with high investments in human capital are based on houses, which are as illiquid as the projects of entrepreneurs in the theory of banking. The liquidity fragility of the securitized bank is equivalent to that of the commercial bank in the theory of banking (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 65). Banks created off-balance sheet structured investment vehicles (SIV) that issued commercial paper receiving AAA rating because of letters of liquidity guarantee by the banks. The commercial paper was converted into liquidity by its use as collateral in SRPs at the lowest rates and minimal haircuts because of the AAA rating of the guarantor bank. In the theory of banking, default can be triggered when the value of assets is perceived as lower than the value of the deposits. Commercial paper issued by SIVs, securitized mortgages and derivatives all obtained SRP liquidity on the basis of illiquid home mortgage loans at the bottom of the pyramid. The run on the securitized bank had a clear origin (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 65):

“The increasing default of mortgages resulted in an increase in counterparty risk. Banks were hit by the liquidity demands of their counterparties. The liquidity shock extended to many segments of the financial markets—interbank loans, asset-backed commercial paper (ABCP), high-yield bonds and many others—when counterparties preferred lower returns of highly liquid safe havens, such as Treasury securities, than the risk of having to sell the collateral in SRPs at deep discounts or holding an illiquid asset. The price of an illiquid asset is near zero.”

Gorton and Metrick (2010H, 507) provide a revealing quote to the work in 1908 of Edwin R. A. Seligman, professor of political economy at Columbia University, founding member of the American Economic Association and one of its presidents and successful advocate of progressive income taxation. The intention of the quote is to bring forth the important argument that financial crises are explained in terms of “confidence” but as Professor Seligman states in reference to historical banking crises in the US the important task is to explain what caused the lack of confidence. It is instructive to repeat the more extended quote of Seligman (1908, xi) on the explanations of banking crises:

“The current explanations may be divided into two categories. Of these the first includes what might be termed the superficial theories. Thus it is commonly stated that the outbreak of a crisis is due to lack of confidence,--as if the lack of confidence was not in itself the very thing which needs to be explained. Of still slighter value is the attempt to associate a crisis with some particular governmental policy, or with some action of a country’s executive. Such puerile interpretations have commonly been confined to countries like the United States, where the political passions of democracy have had the fullest way. Thus the crisis of 1893 was ascribed by the Republicans to the impending Democratic tariff of 1894; and the crisis of 1907 has by some been termed the ‘[Theodore] Roosevelt panic,” utterly oblivious of the fact that from the time of President Jackson, who was held responsible for the troubles of 1837, every successive crisis had had its presidential scapegoat, and has been followed by a political revulsion. Opposed to these popular, but wholly unfounded interpretations, is the second class of explanations, which seek to burrow beneath the surface and to discover the more occult and fundamental causes of the periodicity of crises.”

Scholars ignore superficial explanations in the effort to seek good and truth. The problem of economic analysis of the credit/dollar crisis is the lack of a structural model with which to attempt empirical determination of causes (Gorton and Metrick 2010SB). There would still be doubts even with a well-specified structural model because samples of economic events do not typically permit separating causes and effects. There is also confusion is separating the why of the crisis and how it started and propagated, all of which are extremely important.

In true heritage of the principles of Seligman (1908), Gorton (2009EFM) discovers a prime causal driver of the credit/dollar crisis. The objective of subprime and Alt-A mortgages was to facilitate loans to populations with modest means so that they could acquire a home. These borrowers would not receive credit because of (1) lack of funds for down payments; (2) low credit rating and information; (3) lack of information on income; and (4) errors or lack of other information. Subprime mortgage “engineering” was based on the belief that both lender and borrower could benefit from increases in house prices over the short run. The initial mortgage would be refinanced in two or three years depending on the increase of the price of the house. According to Gorton (2009EFM, 13, 16):

“The outstanding amounts of Subprime and Alt-A [mortgages] combined amounted to about one quarter of the $6 trillion mortgage market in 2004-2007Q1. Over the period 2000-2007, the outstanding amount of agency mortgages doubled, but subprime grew 800%! Issuance in 2005 and 2006 of Subprime and Alt-A mortgages was almost 30% of the mortgage market. Since 2000 the Subprime and Alt-A segments of the market grew at the expense of the Agency (i.e., the government sponsored entities of Fannie Mae and Freddie Mac) share, which fell from almost 80% (by outstanding or issuance) to about half by issuance and 67% by outstanding amount. The lender’s option to rollover the mortgage after an initial period is implicit in the subprime mortgage. The key design features of a subprime mortgage are: (1) it is short term, making refinancing important; (2) there is a step-up mortgage rate that applies at the end of the first period, creating a strong incentive to refinance; and (3) there is a prepayment penalty, creating an incentive not to refinance early.”

The prime objective of successive administrations in the US during the past 20 years and actually since the times of Roosevelt in the 1930s has been to provide “affordable” financing for the “American dream” of home ownership. The US housing finance system is mixed with public, public/private and purely private entities. The Federal Home Loan Bank (FHLB) system was established by Congress in 1932 that also created the Federal Housing Administration in 1934 with the objective of insuring homes against default. In 1938, the government created the Federal National Mortgage Association, or Fannie Mae, to foster a market for FHA-insured mortgages. Government-insured mortgages were transferred from Fannie Mae to the Government National Mortgage Association, or Ginnie Mae, to permit Fannie Mae to become a publicly-owned company. Securitization of mortgages began in 1970 with the government charter to the Federal Home Loan Mortgage Corporation, or Freddie Mac, with the objective of bundling mortgages created by thrift institutions that would be marketed as bonds with guarantees by Freddie Mac (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 42-8). In the third quarter of 2008, total mortgages in the US were $12,057 billion of which 43.5 percent, or $5423 billion, were retained or guaranteed by Fannie Mae and Freddie Mac (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 45). In 1990, Fannie Mae and Freddie Mac had a share of only 25.4 percent of total mortgages in the US. Mortgages in the US increased from $6922 billion in 2002 to $12,088 billion in 2007, or by 74.6 percent, while the retained or guaranteed portfolio of Fannie and Freddie rose from $3180 billion in 2002 to $4934 billion in 2007, or by 55.2 percent.

According to Pinto (2008) in testimony to Congress:

“There are approximately 25 million subprime and Alt-A loans outstanding, with an unpaid principal amount of over $4.5 trillion, about half of them held or guaranteed by Fannie and Freddie. Their high risk activities were allowed to operate at 75:1 leverage ratio. While they may deny it, there can be no doubt that Fannie and Freddie now own or guarantee $1.6 trillion in subprime, Alt-A and other default prone loans and securities. This comprises over 1/3 of their risk portfolios and amounts to 34% of all the subprime loans and 60% of all Alt-A loans outstanding. These 10.5 million unsustainable, nonprime loans are experiencing a default rate 8 times the level of the GSEs’ 20 million traditional quality loans. The GSEs will be responsible for a large percentage of an estimated 8.8 million foreclosures expected over the next 4 years, accounting for the failure of about 1 in 6 home mortgages. Fannie and Freddie have subprimed America.”

In perceptive analysis of growth and macroeconomics in the past six decades, Rajan (2012FA) argues that “the West can’t borrow and spend its way to recovery.” The Keynesian paradigm is not applicable in current conditions. Advanced economies in the West could be divided into those that reformed regulatory structures to encourage productivity and others that retained older structures. In the period from 1950 to 2000, Cobet and Wilson (2002) find that US productivity, measured as output/hour, grew at the average yearly rate of 2.9 percent while Japan grew at 6.3 percent and Germany at 4.7 percent (see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). In the period from 1995 to 2000, output/hour grew at the average yearly rate of 4.6 percent in the US but at lower rates of 3.9 percent in Japan and 2.6 percent in the US. Rajan (2012FA) argues that the differential in productivity growth was accomplished by deregulation in the US at the end of the 1970s and during the 1980s. In contrast, Europe did not engage in reform with the exception of Germany in the early 2000s that empowered the German economy with significant productivity advantage. At the same time, technology and globalization increased relative remunerations in highly-skilled, educated workers relative to those without skills for the new economy. It was then politically appealing to improve the fortunes of those left behind by the technological revolution by means of increasing cheap credit. As Rajan (2012FA) argues:

“In 1992, Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act, partly to gain more control over Fannie Mae and Freddie Mac, the giant private mortgage agencies, and partly to promote affordable homeownership for low-income groups. Such policies helped money flow to lower-middle-class households and raised their spending—so much so that consumption inequality rose much less than income inequality in the years before the crisis. These policies were also politically popular. Unlike when it came to an expansion in government welfare transfers, few groups opposed expanding credit to the lower-middle class—not the politicians who wanted more growth and happy constituents, not the bankers and brokers who profited from the mortgage fees, not the borrowers who could now buy their dream houses with virtually no money down, and not the laissez-faire bank regulators who thought they could pick up the pieces if the housing market collapsed. The Federal Reserve abetted these shortsighted policies. In 2001, in response to the dot-com bust, the Fed cut short-term interest rates to the bone. Even though the overstretched corporations that were meant to be stimulated were not interested in investing, artificially low interest rates acted as a tremendous subsidy to the parts of the economy that relied on debt, such as housing and finance. This led to an expansion in housing construction (and related services, such as real estate brokerage and mortgage lending), which created jobs, especially for the unskilled. Progressive economists applauded this process, arguing that the housing boom would lift the economy out of the doldrums. But the Fed-supported bubble proved unsustainable. Many construction workers have lost their jobs and are now in deeper trouble than before, having also borrowed to buy unaffordable houses. Bankers obviously deserve a large share of the blame for the crisis. Some of the financial sector’s activities were clearly predatory, if not outright criminal. But the role that the politically induced expansion of credit played cannot be ignored; it is the main reason the usual checks and balances on financial risk taking broke down.”

In fact, Raghuram G. Rajan (2005) anticipated low liquidity in financial markets resulting from low interest rates before the financial crisis that caused distortions of risk/return decisions provoking the credit/dollar crisis and global recession from IVQ2007 to IIQ2009. Near zero interest rates of unconventional monetary policy induced excessive risks and low liquidity in financial decisions that were critical as a cause of the credit/dollar crisis after 2007. Rajan (2012FA) argues that it is not feasible to return to the employment and income levels before the credit/dollar crisis because of the bloated construction sector, financial system and government budgets.

Dan Strumpf and Pedro Nicolaci da Costa, writing on “Fed’s Yellen: Stock Valuations ‘Generally are Quite High,’” on May 6, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/feds-yellen-cites-progress-on-bank-regulation-1430918155?tesla=y ), quote Chair Yellen at open conversation with Christine Lagarde, Managing Director of the IMF, finding “equity-market valuations” as “quite high” with “potential dangers” in bond valuations. The DJIA fell 0.5 percent on May 6, 2015, after the comments and then increased 0.5 percent on May 7, 2015 and 1.5 percent on May 8, 2015.

Fri May 1

Mon 4

Tue 5

Wed 6

Thu 7

Fri 8

DJIA

18024.06

-0.3%

1.0%

18070.40

0.3%

17928.20

-0.5%

-0.8%

17841.98

-1.0%

-0.5%

17924.06

-0.6%

0.5%

18191.11

0.9%

1.5%

There are two approaches in theory considered by Bordo (2012Nov20) and Bordo and Lane (2013). The first approach is in the classical works of Milton Friedman and Anna Jacobson Schwartz (1963a, 1987) and Karl Brunner and Allan H. Meltzer (1973). There is a similar approach in Tobin (1969). Friedman and Schwartz (1963a, 66) trace the effects of expansionary monetary policy into increasing initially financial asset prices: “It seems plausible that both nonbank and bank holders of redundant balances will turn first to securities comparable to those they have sold, say, fixed-interest coupon, low-risk obligations. But as they seek to purchase these they will tend to bid up the prices of those issues. Hence they, and also other holders not involved in the initial central bank open-market transactions, will look farther afield: the banks, to their loans; the nonbank holders, to other categories of securities-higher risk fixed-coupon obligations, equities, real property, and so forth.”

The second approach is by the Austrian School arguing that increases in asset prices can become bubbles if monetary policy allows their financing with bank credit. Professor Michael D. Bordo provides clear thought and empirical evidence on the role of “expansionary monetary policy” in inflating asset prices (Bordo2012Nov20, Bordo and Lane 2013). Bordo and Lane (2013) provide revealing narrative of historical episodes of expansionary monetary policy. Bordo and Lane (2013) conclude that policies of depressing interest rates below the target rate or growth of money above the target influences higher asset prices, using a panel of 18 OECD countries from 1920 to 2011. Bordo (2012Nov20) concludes: “that expansionary money is a significant trigger” and “central banks should follow stable monetary policies…based on well understood and credible monetary rules.” Taylor (2007, 2009) explains the housing boom and financial crisis in terms of expansionary monetary policy.

Another hurdle of exit from zero interest rates is “competitive easing” that Professor Raghuram Rajan, governor of the Reserve Bank of India, characterizes as disguised “competitive devaluation” (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). The fed has been considering increasing interest rates. The European Central Bank (ECB) announced, on Mar 5, 2015, the beginning on Mar 9, 2015 of its quantitative easing program denominated as Public Sector Purchase Program (PSPP), consisting of “combined monthly purchases of EUR 60 bn [billion] in public and private sector securities” (http://www.ecb.europa.eu/mopo/liq/html/pspp.en.html). Expectation of increasing interest rates in the US together with euro rates close to zero or negative cause revaluation of the dollar (or devaluation of the euro and of most currencies worldwide). US corporations suffer currency translation losses of their foreign transactions and investments (http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010318) while the US becomes less competitive in world trade (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), Government Intervention in Globalization (2008c)). The DJIA fell 1.5 percent on Mar 6, 2015 and the dollar revalued 2.2 percent from Mar 5 to Mar 6, 2015. The euro has devalued 44.6 percent relative to the dollar from the high on Jul 15, 2008 to May 29, 2015.

Fri 27 Feb

Mon 3/2

Tue 3/3

Wed 3/4

Thu 3/5

Fri 3/6

USD/ EUR

1.1197

1.6%

0.0%

1.1185

0.1%

1.1176

0.2%

0.1%

1.1081

1.0%

0.9%

1.1030

1.5%

0.5%

1.0843

3.2%

1.7%

Chair Yellen explained the removal of the word “patience” from the advanced guidance at the press conference following the FOMC meeting on Mar 18, 2015(http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20150318.pdf):

“In other words, just because we removed the word “patient” from the statement doesn’t mean we are going to be impatient. Moreover, even after the initial increase in the target funds rate, our policy is likely to remain highly accommodative to support continued progress toward our objectives of maximum employment and 2 percent inflation.”

Exchange rate volatility is increasing in response of “impatience” in financial markets with monetary policy guidance and measures:

Fri Mar 6

Mon 9

Tue 10

Wed 11

Thu 12

Fri 13

USD/ EUR

1.0843

3.2%

1.7%

1.0853

-0.1%

1.0700

1.3%

1.4%

1.0548

2.7%

1.4%

1.0637

1.9%

-0.8%

1.0497

3.2%

1.3%

Fri Mar 13

Mon 16

Tue 17

Wed 18

Thu 19

Fri 20

USD/ EUR

1.0497

3.2%

1.3%

1.0570

-0.7%

1.0598

-1.0%

-0.3%

1.0864

-3.5%

-2.5%

1.0661

-1.6%

1.9%

1.0821

-3.1%

-1.5%

Fri Apr 24

Mon 27

Tue 28

Wed 29

Thu 30

May Fri 1

USD/ EUR

1.0874

-0.6%

-0.4%

1.0891

-0.2%

1.0983

-1.0%

-0.8%

1.1130

-2.4%

-1.3%

1.1223

-3.2%

-0.8%

1.1199

-3.0%

0.2%

In a speech at Brown University on May 22, 2015, Chair Yellen stated (http://www.federalreserve.gov/newsevents/speech/yellen20150522a.htm):

“For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term. After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual. The various headwinds that are still restraining the economy, as I said, will likely take some time to fully abate, and the pace of that improvement is highly uncertain.”

The US dollar appreciated 3.8 percent relative to the euro in the week of May 22, 2015:

Fri May 15

Mon 18

Tue 19

Wed 20

Thu 21

Fri 22

USD/ EUR

1.1449

-2.2%

-0.3%

1.1317

1.2%

1.1150

2.6%

1.5%

1.1096

3.1%

0.5%

1.1113

2.9%

-0.2%

1.1015

3.8%

0.9%

The apparent improvement in Table IIA-4A is mostly because of increases in valuations of risk financial assets by the carry trade from zero interest rates to leveraged exposures in risk financial assets such as stocks, high-yield bonds, emerging markets, commodities and so on. Zero interest rates also act to increase net worth by reducing debt or liabilities. The net worth of households has become an instrument of unconventional monetary policy by zero interest rates in the theory that increases in net worth increase consumption that accounts for 68.5 percent of GDP in IVQ2014 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html), generating demand to increase aggregate economic activity and employment. There are neglected and counterproductive risks in unconventional monetary policy. Between 2007 and IVQ2014, real estate increased in value by $898.5 billion and financial assets increased $15,022.4 billion for net gain of real estate and financial assets of $15,920.9 billion, explaining most of the increase in net worth of $16,162.4 billion obtained by adding the decrease in liabilities of $241.4 billion to the increase of assets of $15,921.0 billion. Net worth increased from $66,749.8 billion in 2007 to $82,912.2 billion in IVQ2014 by $16,162.4 billion or 24.2 percent. The US consumer price index for all items increased from 210.036 in Dec 2007 to 234.812 in Dec 2014 (http://www.bls.gov/cpi/data.htm) or 11.8 percent. Net worth adjusted by CPI inflation increased 11.1 percent from 2007 to IVQ2014. Real estate assets adjusted for CPI inflation fell 9.9 percent from 2007 to IVQ2014. There are multiple complaints that unconventional monetary policy concentrates income on wealthier individuals because of their holdings of financial assets while the middle class has gained less because of fewer holdings of financial assets and higher share of real estate in family wealth. There is nothing new in these arguments. Interest rate ceilings on deposits and loans have been commonly used. The Banking Act of 1933 imposed prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q. Friedman (1970, 26-7) predicted the future:

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

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

“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.” US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 23 quarters from IIIQ2009 to IQ2015. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the second estimate of GDP for IQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_2nd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2015 would have accumulated to 23.9 percent. GDP in IQ2015 would be $18,574.8 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,310.7 billion than actual $16,264.1 billion. There are about two trillion dollars of GDP less than at trend, explaining the 25.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 15.4 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html). US GDP in IQ2015 is 12.4 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,264.1 billion in IQ2015 or 8.5 percent at the average annual equivalent rate of 1.1 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 Apr 1919 to Apr 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.9172 in Apr 2015. The actual index NSA in Apr 2015 is 101.1122, which is 19.7 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014. Using trend growth of 2.4 percent per year, the index would increase to 118.0899 in Apr 2015. The output of manufacturing at 101.1122 in Apr 2015 is 14.4 percent below trend under this alternative calculation.

Table IIA-4A, US, Difference of Balance Sheet of Households and Nonprofit Organizations Billions of Dollars from 2007 to 2011, 2013 and IVQ2014

	Value 2007	Change to 2011	Change to 2013	Change to IVQ2014
Assets	81,145.7	-3,904.2	11,489.9	15,921.0
Nonfinancial	28,176.0	-4,800.9	-487.5	898.5
Real Estate	23,366.5	-5,117.0	-1,051.3	172.1
Financial	52,969.8	896.5	11,977.4	15,022.4
Liabilities	14,395.9	-822.1	-604.5	-241.4
Net Worth	66,749.8	-3,082.1	12,094.4	16,162.4

Net Worth = Assets – Liabilities

Source: Net Worth = Assets – Liabilities

Source: Board of Governors of the Federal Reserve System.

Source: Board of Governors of the Federal Reserve System. 2014. Flow of funds, balance sheets and integrated macroeconomic accounts: fourth quarter 2014. Washington, DC, Federal Reserve System, Mar 12. http://www.federalreserve.gov/releases/z1/.

The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and from IVQ1979) to IIQ1988 and from IVQ2007 to IVQ2014 is provided in Table IIA-5. The data reveal the following facts for the cycles in the 1980s:

IVQ1979 to IIQ1988. Net worth increased 108.9 percent from IVQ1979 to IIQ1988, the all items CPI index increased 53.8 percent from 76.7 in Dec 1979 to 118.0 in Jun 1988 and real net worth increased 35.8 percent.
IQ1980 to IVQ1985. Net worth increased 65.4 percent, the all items CPI index increased 36.5 percent from 80.1 in Mar 1980 to 109.3 in Dec 1985 and real net worth increased 21.2 percent.
IVQ1979 to IVQ1985. Net worth increased 68.8 percent, the all items CPI index increased 42.5 percent from 76.7 in Dec 1979 to 109.3 in Dec 1985 and real net worth increased 18.5 percent.
IQ1980 to IIQ1988. Net worth increased 104.6 percent, the all items CPI index increased 47.3 percent from 80.1 in Mar 1980 to 118.0 in Jun 1988 and real net worth increased 38.9 percent.

There is disastrous performance in the current economic cycle:

IVQ2007 to IVQ2014. Net worth increased 24.2 percent, the all items CPI increased 11.8 percent from 210.036 in Dec 2007 to 234.812 in Dec 2014 and real or inflation adjusted net worth increased 11.1 percent. Real estate assets adjusted for inflation fell 9.9 percent.

The explanation is partly in the sharp decline of wealth of households and nonprofit organizations and partly in the mediocre growth rates of the cyclical expansion beginning in IIIQ2009. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 23 quarters from IIIQ2009 to IQ2015. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the second estimate of GDP for IQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_2nd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[$14,745.9/$14,355.6 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2015 would have accumulated to 23.9 percent. GDP in IQ2015 would be $18,574.8 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,310.7 billion than actual $16,264.1 billion. There are about two trillion dollars of GDP less than at trend, explaining the 25.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 15.4 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/volatility-of-valuations-of-financial.html). US GDP in IQ2015 is 12.4 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,264.1 billion in IQ2015 or 8.5 percent at the average annual equivalent rate of 1.1 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 Apr 1919 to Apr 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 125.9172 in Apr 2015. The actual index NSA in Apr 2015 is 101.1122, which is 19.7 percent below trend. Manufacturing output grew at average 2.4 percent between Dec 1986 and Dec 2014. Using trend growth of 2.4 percent per year, the index would increase to 118.0899 in Apr 2015. The output of manufacturing at 101.1122 in Apr 2015 is 14.4 percent below trend under this alternative calculation.

Table IIA-5, Net Worth of Households and Nonprofit Organizations in Billions of Dollars, IVQ1979 to IVQ1985 and IVQ2007 to IVQ2012

Period IQ1980 to IIQ1988
Net Worth of Households and Nonprofit Organizations USD Millions
IVQ1979 IQ1980	9,047.8 9,238.6
IVQ1985 IIIQ1986 IVQ1986 IQ1987 IIQ1987 IIIQ1987 IVQ1987 IQ1988 II1988	15,277.2 16,290.7 16,840.3 17,494.6 17,784.0 18,195.2 18,021.9 18,459.2 18,900.2
∆ USD Billions IVQ1985 IVQ1979 to IIQ1988 IQ1980-IVQ1985 IQ1980-IIIQ1986 IQ1980-IVQ1986 IQ1980-IQ1987 IQ1980-IIQ1987 IQ1980-IIIQ1987 IQ1980-IVQ1987 IQ1980-IQ1988 IQ1980-IIQ1988	+6,229.4 ∆%68.8 R∆%18.5 +9852.4 ∆%108.9 R∆%35.8 +6,038.6 ∆%65.4 R∆%21.2 +7,052.1 ∆%76.3 R∆%28.2 +7,601.7 ∆%82.3 R∆%32.1 +8,256.0 ∆%89.4 R∆%35.3 +8,545.4 ∆%92.5 R∆%35.9 +8,956.6 ∆%96.9 R∆%37.2 +8783.3 ∆%95.1 R∆%35.4 +9226.6 ∆%100.2 R∆%37.6 +9661.6 ∆%104.6 R∆38.9
Period IVQ2007 to IVQ2014
Net Worth of Households and Nonprofit Organizations USD Millions
IVQ2007	66,749.8
IVQ2014	82,912.2
∆ USD Billions	+16,162.4 ∆%24.2 R∆%11.1

Net Worth = Assets – Liabilities. R∆% real percentage change or adjusted for CPI percentage change.

Chart IIA-1 of the Board of Governors of the Federal Reserve System provides US wealth of households and nonprofit organizations from IVQ2007 to IIIQ2014. There is remarkable stop and go behavior in this series with two sharp declines and two standstills in the 22 quarters of expansion of the economy beginning in IIIQ2009. The increase in net worth of households and nonprofit organizations is the result of increases in valuations of risk financial assets and compressed liabilities resulting from zero interest rates. Wealth of households and nonprofits organization increased 11.1 percent from IVQ2007 to IVQ2014 when adjusting for consumer price inflation.

Chart IIA-1, Net Worth of Households and Nonprofit Organizations in Millions of Dollars, IVQ2007 to IVQ2014

Chart IIA-2 of the Board of Governors of the Federal Reserve System provides US wealth of households and nonprofit organizations from IVQ1979 to IIQ1988. There are changes in the rates of growth of wealth suggested by the changing slopes but there is smooth upward trend. There was significant financial turmoil during the 1980s. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5657.7 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.65 percent of GDP in a year. US GDP in 2014 is estimated at $17,418.9 billion, such that the bailout would be equivalent to cost to taxpayers of about $461.6 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. Money center banks were under extraordinary pressure from the default of sovereign debt by various emerging nations that represented a large share of their net worth (see Pelaez 1986). Net worth of households and nonprofit organizations increased 108.9 percent from IVQ1979 to IIQ1988 and 35.8 percent when adjusting for consumer price inflation. Net worth of households and nonprofit organizations increased 104.6 percent from IQ1980 to IIQ1988 and 38.9 percent when adjusting for consumer price inflation.

Chart IIA-2, Net Worth of Households and Nonprofit Organizations in Millions of Dollars, IVQ1979 to IIQ1988

Chart IIA-3 of the Board of Governors of the Federal Reserve System provides US wealth of households and nonprofit organizations from IVQ1945 at $767.3 billion to IVQ2014 at $82,912.2 billion or increase of 10,705.7 percent. The consumer price index not seasonally adjusted was 18.2 in Dec 1945 jumping to 234.812 in Dec 2014 or increase of 1,190.2 percent. There was a gigantic increase of US net worth of households and nonprofit organizations over 69 years with inflation-adjusted increase from $42.159 in dollars of 1945 to $353.100 in IVQ2014 or 737.5 percent. In a simple formula: {[($82,912.2/$767.3)/(234.812/18.2)-1]100 = 737.5%}. Wealth of households and nonprofit organizations increased from $767.3 billion at year-end 1945 to $82,912.2 billion at the end of IVQ2014 or 10,705.7 percent. The consumer price index increased from 18.2 in Dec 1945 to 234.812 in Dec 2014 or 1190.2 percent. Net wealth of households and nonprofit organizations in dollars of 1945 increased from $42.159 in 1945 to $353.100 in IVQ2014 or 737.5 percent at the average yearly rate of 3.1 percent. US real GDP grew at the average rate of 2.9 percent from 1945 to 2014 (http://www.bea.gov/iTable/index_nipa.cfm). The combination of collapse of values of real estate and financial assets during the global recession of IVQ2007 to IIQ2009 caused sharp contraction of net worth of US households and nonprofit organizations. Recovery has been in stop-and-go fashion during the worst cyclical expansion in the 68 years when US GDP grew at 2.2 percent on average in the twenty-three quarters between IIIQ2009 and IQ2015 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html). US GDP was $228.2 billion in 1945 and net worth of households and nonprofit organizations $767.3 billion for ratio of wealth to GDP of 3.36. The ratio of net worth of households and nonprofits of $66,749.8 billion in 2007 to GDP of $14,477.6 billion was 4.61. The ratio of net worth of households and nonprofits of $82,912.2 billion in 2014 to GDP of 17,418.9 billion was 4.75. The final data point in Chart IIA-3 is net worth of household and nonprofit institutions at $82,912.2 billion in IVQ2014 for increase of 10,705.7 percent relative to $767.3 billion in IVQ1945. CPI adjusted net worth of household and nonprofit institutions increased from $42.159 in IVQ1945 to $353.100 in IVQ2014 or 737.5 percent at the annual equivalent rate of 3.1 percent.

Chart IIA-3, Net Worth of Households and Nonprofit Organizations in Millions of Dollars, IVQ1945 to IVQ2014

Table IIA-6 shows the euphoria of prices during the housing boom and the subsequent decline. House prices rose 94.8 percent in the 10-city composite of the Case-Shiller home price index, 77.8 percent in the 20-city composite and 62.2 percent in the US national home price index between Mar 2000 and Mar 2005. Prices rose around 100 percent from Mar 2000 to Mar 2006, increasing 118.8 percent for the 10-city composite, 99.8 percent for the 20-city composite and 80.1 percent in the US national index. House prices rose 37.5 percent between Mar 2003 and Mar 2005 for the 10-city composite, 32.1 percent for the 20-city composite and 27.3 percent for the US national propelled by low fed funds rates of 1.0 percent between Jun 2003 and Jun 2004. Fed funds rates increased by 0.25 basis points at every meeting of the Federal Open Market Committee (FOMC) from Jun 2004 until Jun 2006, reaching 5.25 percent. Simultaneously, the suspension of auctions of the 30-year Treasury bond caused decline of yields of mortgage-backed securities with intended decrease in mortgage rates. Similarly, between Mar 2003 and Mar 2006, the 10-city index gained 54.5 percent, the 20-city index increased 48.4 percent and the US national 41.3 percent. House prices have fallen from Mar 2006 to Mar 2015 by 15.1 percent for the 10-city composite, 14.0 percent for the 20-city composite and 8.1 percent for the US national. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in Mar 2015, house prices increased 4.7 percent in the 10-city composite, increased 5.0 percent in the 20-city composite and 4.1 percent in the US national. Table IIA-6 also shows that house prices increased 85.9 percent between Mar 2000 and Mar 2015 for the 10-city composite, increased 71.8 percent for the 20-city composite and 65.6 percent for the US national. House prices are close to the lowest level since peaks during the boom before the financial crisis and global recession. The 10-city composite fell 16.0 percent from the peak in Jun 2006 to Mar 2015 and the 20-city composite fell 15.2 percent from the peak in Jul 2006 to Mar 2015. The US national fell 9.0 percent from the peaks of the 10-city composite to Mar 2015 and 9.0 percent from the peak of the 20-city composite to Mar 2015. The final part of Table II-2 provides average annual percentage rates of growth of the house price indexes of Standard & Poor’s Case-Shiller. The average annual growth rate between Dec 1987 and Dec 2014 for the 10-city composite was 3.7 percent and 3.4 percent for the US national. Data for the 20-city composite are available only beginning in Jan 2000. House prices accelerated in the 1990s with the average rate of the 10-city composite of 5.0 percent between Dec 1992 and Dec 2000 while the average rate for the period Dec 1987 to Dec 2000 was 3.8 percent. The average rate for the US national was 3.4 percent from Dec 1987 to Dec 2014 and 3.6 percent from Dec 1987 to Dec 2000. Although the global recession affecting the US between IVQ2007 (Dec) and IIQ2009 (Jun) caused decline of house prices of slightly above 30 percent, the average annual growth rate of the 10-city composite between Dec 2000 and Dec 2014 was 3.7 percent while the rate of the 20-city composite was 3.2 percent and 3.1 percent for the US national.

Table IIA-1, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite	US National
∆% Mar 2000 to Mar 2003	41.7	34.6	27.4
∆% Mar 2000 to Mar 2005	94.8	77.8	62.2
∆% Mar 2003 to Mar 2005	37.5	32.1	27.3
∆% Mar 2000 to Mar 2006	118.8	99.8	80.1
∆% Mar 2003 to Mar 2006	54.5	48.4	41.3
∆% Mar 2005 to Mar 2015	-4.6	-3.4	2.1
∆% Mar 2006 to Mar 2015	-15.1	-14.0	-8.1
∆% Mar 2009 to Mar 2015	25.5	25.1	14.6
∆% Mar 2010 to Mar 2015	21.7	22.2	17.0
∆% Mar 2011 to Mar 2015	25.9	27.3	21.9
∆% Mar 2012 to Mar 2015	30.0	30.7	23.6
∆% Mar 2013 to Mar 2015	17.9	18.0	13.5
∆% Mar 2014 to Mar 2015	4.7	5.0	4.1
∆% Mar 2000 to Mar 2015	85.9	71.8	65.6
∆% Peak Jun 2006 Mar 2015	-16.0		-9.0
∆% Peak Jul 2006 Mar 2015		-15.2	-9.0
Average ∆% Dec 1987-Dec 2014	3.7	NA	3.4
Average ∆% Dec 1987-Dec 2000	3.8	NA	3.6
Average ∆% Dec 1992-Dec 2000	5.0	NA	4.5
Average ∆% Dec 2000-Dec 2014	3.7	3.2	3.1

Source: http://us.spindices.com/index-family/real-estate/sp-case-shiller

Price increases measured by the Case-Shiller house price indices show that “home prices continued their rise across the country over the last 12 months” (https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/185742_cshomeprice-release-0526.pdf?force_download=true). Monthly house prices increased sharply from Feb 2013 to Jan 2014 for both the 10- and 20-city composites, as shown in Table IIA-7. In Jan 2013, the seasonally adjusted 10-city composite increased 0.9 percent and the 20-city increased 1.0 percent while the 10-city not seasonally adjusted changed 0.0 percent and the 20-city changed 0.0 percent. House prices increased at high monthly percentage rates from Feb to Nov 2013. With the exception of Mar through Apr 2012, house prices seasonally adjusted declined in every month for both the 10-city and 20-city Case-Shiller composites from Dec 2010 to Jan 2012, as shown in Table I-6. The most important seasonal factor in house prices is school changes for wealthier homeowners with more expensive houses. Without seasonal adjustment, house prices fell from Dec 2010 throughout Mar 2011 and then increased in every month from Apr to Aug 2011 but fell in every month from Sep 2011 to Feb 2012. The not seasonally adjusted index registers decline in Mar 2012 of 0.1 percent for the 10-city composite and is flat for the 20-city composite. Not seasonally adjusted house prices increased 1.4 percent in Apr 2012 and at high monthly percentage rates until Sep 2012. House prices not seasonally adjusted stalled from Oct 2012 to Jan 2013 and surged from Feb to Sep 2013, decelerating in Oct 2013-Feb 2014. House prices grew at fast rates in Mar 2014. The 10-city NSA index increased 0.8 percent in Mar 2015 and the 20-city increased 0.9 percent. The 10-city SA increased 0.9 percent in Feb 2015 and the 20-city composite SA increased 1.0 percent. Declining house prices cause multiple adverse effects of which two are quite evident. (1) There is a disincentive to buy houses in continuing price declines. (2) More mortgages could be losing fair market value relative to mortgage debt. Another possibility is a wealth effect that consumers restrain purchases because of the decline of their net worth in houses.

Table IIA-2, US, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted and Not Seasonally Adjusted, ∆%

	10-City Composite SA	10-City Composite NSA	20-City Composite SA	20-City Composite NSA
Mar 2015	0.9	0.8	1.0	0.9
Feb	1.2	0.5	1.2	0.5
Jan	0.9	-0.1	0.9	-0.1
Dec 2014	0.9	0.1	0.9	0.0
Nov	0.7	-0.3	0.7	-0.2
Oct	0.6	-0.1	0.7	-0.1
Sep	0.2	-0.1	0.3	-0.1
Aug	-0.1	0.2	0.0	0.2
Jul	-0.3	0.6	-0.3	0.6
Jun	-0.1	1.0	-0.2	1.0
May	-0.4	1.1	-0.4	1.1
Apr	0.2	1.1	0.2	1.2
Mar	1.0	0.8	1.0	0.9
Feb	0.7	0.0	0.7	0.0
Jan	0.9	-0.1	0.8	-0.1
Dec 2013	0.7	-0.1	0.7	-0.1
Nov	0.9	0.0	0.9	-0.1
Oct	1.0	0.2	1.0	0.2
Sep	1.0	0.7	1.0	0.7
Aug	1.1	1.3	1.1	1.3
Jul	0.9	1.9	0.9	1.8
Jun	1.0	2.2	1.0	2.2
May	1.0	2.5	1.0	2.5
Apr	1.7	2.6	1.6	2.6
Mar	1.5	1.3	1.5	1.3
Feb	1.1	0.3	1.1	0.2
Jan	0.9	0.0	1.0	0.0
Dec 2012	1.0	0.2	1.0	0.2
Nov	0.7	-0.3	0.8	-0.2
Oct	0.6	-0.2	0.7	-0.1
Sep	0.5	0.3	0.6	0.3
Aug	0.5	0.8	0.6	0.9
Jul	0.4	1.5	0.5	1.6
Jun	0.9	2.1	1.0	2.3
May	0.8	2.2	0.9	2.4
Apr	0.5	1.4	0.5	1.4
Mar	0.2	-0.1	0.3	0.0
Feb	-0.1	-0.9	0.0	-0.8
Jan	-0.2	-1.1	-0.1	-1.0
Dec 2011	-0.4	-1.2	-0.4	-1.1
Nov	-0.5	-1.4	-0.5	-1.3
Oct	-0.6	-1.3	-0.6	-1.4
Sep	-0.4	-0.6	-0.5	-0.7
Aug	-0.2	0.1	-0.3	0.1
Jul	-0.1	0.9	-0.1	1.0
Jun	-0.1	1.0	0.0	1.2
May	-0.3	1.0	-0.3	1.0
Apr	-0.2	0.6	-0.2	0.6
Mar	-0.5	-1.0	-0.6	-1.0
Feb	-0.4	-1.3	-0.3	-1.2
Jan	-0.2	-1.1	-0.2	-1.1
Dec 2010	-0.2	-0.9	-0.2	-1.0

Source: http://us.spindices.com/index-family/real-estate/sp-case-shiller

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