International Valuations of Financial Assets, Mediocre Cyclical United States Economic Growth, Stagnating Real Private Fixed Investment, Swelling Undistributed Corporate Profits, Stagnating Real Disposable Income, Financial Repression, United States Housing Collapse, World Cyclical Slow Growth and Global Recession Risk: Part II

 

International Valuations of Financial Assets, Mediocre Cyclical United States Economic Growth, Stagnating Real Private Fixed Investment, Swelling Undistributed Corporate Profits, Stagnating Real Disposable Income, Financial Repression, United States Housing Collapse, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

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

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 Stagnating Real Disposable Income and Consumption Expenditures

IB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Financial Repression

IIA 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/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.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 12.3 percent lower than what it would have been had it grown at trend of 3.0 percent
• Private fixed investment stagnating at increase of 3.3 percent in the entire cycle from IVQ2007 to IQ2015 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2015/06/dollar-revaluation-squeezing-corporate.html 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 five million or 14.9 percent of the effective labor force unemployed or underemployed in involuntary part-time jobs with stagnating or declining real wages (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html)
• Stagnating real disposable income per person or income per person after inflation and taxes (Section II and earlier http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier 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/2015/06/volatility-of-financial-asset.html and earlier 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/2015/06/higher-volatility-of-asset-prices-at.html and earlier 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 May 2015 at 19.5 percent below long-term trend since 1919 and at 14.1 percent below trend since 1986 (Section II and earlier 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/2015/06/fluctuating-financial-asset-valuations.html and earlier 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/2015/06/fluctuating-financial-asset-valuations.html and earlier 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 (http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.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 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 (Section II and earlier http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier 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 13.2 percent after adjusting for inflation in the entire cycle from IVQ2007 to IQ2015 when it would have grown over 24.8 percent at trend of 3.1 percent per year in real terms from 1945 to 2014 (http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html and earlier 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 $16.4 trillion while nonfinancial assets increased $1.5 trillion with likely concentration of wealth in those with access to sophisticated financial investments. Real estate assets adjusted for inflation fell 8.1 percent from 2007 to IQ2015

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 third estimate of GDP for IQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_3rd.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/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.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/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.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 $2,287.1 billion than actual $16,287.7 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.9 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html). US GDP in IQ2015 is 12.3 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,287.7 billion in IQ2015 or 8.6 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 May 1919 to May 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 126.2585 in May 2015. The actual index NSA in May 2015 is 101.5858, which is 19.5 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 118.3245 in May 2015. The output of manufacturing at 101.5858 in May 2015 is 14.1 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
1929-2014	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 7.2 percent. This growth is equivalent to 2.2 percent per year, obtained by dividing GDP in IQ2015 of $16,287.7 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/13: {[($16,287.7/$15,190.3)^4/13 -1]100 = 2.2 percent.

2. Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters of IQ2014 to IQ2015 accumulated to 2.9 percent that is equivalent to 2.9 percent in a year. This is obtained by dividing GDP in IQ2015 of $16,287.7 billion by GDP in IQ2014 of $15,831.7 billion and compounding by 4/4: {[($16,287.7/$15,831.7)^4/4 -1]100 = 2.9 %}. The US economy grew 2.9 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 0.2 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	16,287.7	8.6	0.0	2.9
Cumulative ∆% IQ2012 to IQ2015	7.2		7.2
Annual Equivalent ∆%	2.2		2.2

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 third estimate for IQ2015 GDP (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_3rd.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-three quarters of expansion from IQ1983 to IIIQ1988, 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, 6.8, 2.3, 5.4, 2.3 and 5.4. In contrast, the percentage growth rates in the first twenty-three 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 0.2. 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							-0.2

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 24.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.9 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html). US GDP in IQ2015 is 12.3 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,287.7 billion in IQ2015 or 8.6 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 May 1919 to May 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 126.2585 in May 2015. The actual index NSA in May 2015 is 101.5858, which is 19.5 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 118.3245 in May 2015. The output of manufacturing at 101.5858 in May 2015 is 14.1 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 1.2 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-5. 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 2.2 percent and 2.9 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 1.8 to 2.0 percent in 2015 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150617.pdf) with less reliable forecast of 2.4 to 2.7 percent in 2016 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150617.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 14.9 percent of the effective US labor force (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html).

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

Source: US Bureau of Economic Analysis

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

Characteristics of the four cyclical contractions are provided in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.7 percent, which is almost equal to the decline of 4.2 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 IIQ27009	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

1. 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 7.2 percent. This growth is equivalent to 2.2 percent per year, obtained by dividing GDP in IQ2015 of $16,287.7 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/13: {[($16,287.7/$15,190.3)^4/13 -1]100 = 2.2 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 IVQ2014	23	13.5	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 2015. 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 13.5 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 8.6 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 $2,287.1 billion than actual $16,287.7 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.9 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html). US GDP in IQ2015 is 12.3 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,287.7 billion in IQ2015 or 8.6 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 May 1919 to May 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 126.2585 in May 2015. The actual index NSA in May 2015 is 101.5858, which is 19.5 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 118.3245 in May 2015. The output of manufacturing at 101.5858 in May 2015 is 14.1 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 changed 0.0 percent in IQ2015 and increased 2.9 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	16,287.7	8.6	0.0	2.9

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 0.2 percent in IQ2015 consisted mostly of contributions of 1.43 percentage points by personal consumption expenditures and 0.45 percentage points by inventory accumulation while trade deducted 1.89 percentage points and government deducted 0.11 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	-0.2	1.43	0.40	0.45	-1.89	-0.11
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_3rd.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 0.2 percent in the first quarter of 2015, according to the "third" 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 "second" estimate issued last month. In the second estimate, the decrease in real GDP was 0.7 percent. With the third estimate for the first quarter, exports decreased less than previously estimated, and personal consumption expenditures (PCE) and imports increased more (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 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 2.1 percent
• Consumption of durable goods growing at 1.3 percent
• Residential fixed investment growing at 6.5 percent
• Inventory accumulation contributing 0.45 percentage points

There were negative contributions in IQ2015:

• Imports, which are a deduction from growth, growing at 7.1 percent
• Government expenditures contracting at 0.6 percent
• Nonresidential investment falling at 2.0 percent
• Exports contracting at 5.9 percent

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

• Contraction of nonresidential fixed investment at 2.0 percent in IQ20145compared with growth at 4.7 percent in IVQ2014
• Growth of consumption of durable goods at 1.3 percent in IQ2015 compared with 6.2 percent in IQ2015
• Contraction of exports at 5.9 percent compared with growth at 4.5 percent in IVQ2014

The BEA finds offsetting accelerating factors:

· Growth of imports at 7.1 percent in IQ2015 compared with 10.4 percent in the prior quarter

· Contraction of government expenditures at 0.6 percent in IQ2015 compared with contraction at 1.9 percent in the prior quarter

· Contraction of national defense expenditures at minus 1.2 percent in IQ2015 compared with contraction at minus 12.2 percent in the prior quarter

· Inventory accumulation contributing 0.45 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 5.4 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	-0.2
PCE	1.2	2.5	3.2	4.4	2.1
Durable Goods	3.2	14.1	9.2	6.2	1.3
NRFI	1.6	9.7	8.9	4.7	-2.0
RFI	-5.3	8.8	3.2	3.8	6.5
Exports	-9.2	11.1	4.5	4.5	-5.9
Imports	2.2	11.3	-0.9	10.4	7.1
GOV	-0.8	1.7	4.4	-1.9	-0.6
Federal GOV	-0.1	-0.9	9.9	-7.3	0.0
National Defense	-4.0	0.9	16.0	-12.2	-1.2
Cont to GDP Growth % Points	-0.18	0.04	0.66	-0.57	-0.05
State/Local GOV	-1.3	3.4	1.1	1.6	-1.0
∆ PI (PP)	-1.16	1.42	-0.03	-0.10	0.45
Final Sales of Domestic Product	-1.0	3.2	5.0	2.3	-0.6
Gross Domestic Purchases	-0.4	4.8	4.1	3.2	1.7
Prices Gross Domestic Purchases	1.4	2.0	1.4	-0.1	-1.6
Prices of GDP	1.3	2.1	1.4	0.1	0.0
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	0.6
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	5.4

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 68.7 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	68.5
Goods	22.2
Durable	7.5
Nondurable	14.7
Services	46.3
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	12.8
Goods	8.6
Services	4.2
Imports	15.9
Goods	13.1
Services	2.8
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 174,000 from May 2014 to
May 2015 or at the average monthly rate of 14,500. There are effects of the weaker economy and international trade together with the yearly adjustment of labor statistics. 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 0.2 percent in May after falling 0.5 percent in April. The decline in April was larger than previously reported, but the rates of change for previous months were generally revised higher, leaving the level of the index in April slightly above its initial estimate. Manufacturing output decreased 0.2 percent in May and was little changed, on net, from its level in January. In May, the index for mining moved down 0.3 percent after declining more than 1 percent per month, on average, in the previous four months. The slower rate of decrease for mining output last month was due in part to a reduced pace of decline in the index for oil and gas well drilling and servicing. The output of utilities increased 0.2 percent in May. At 105.1 percent of its 2007 average, total industrial production in May was 1.4 percent above its year-earlier level. Capacity utilization for the industrial sector decreased 0.2 percentage point in May to 78.1 percent, a rate that is 2.0 percentage points below its long-run (1972–2014) average.” In the six months ending in May 2015, United States national industrial production accumulated change of minus 1.1 percent at the annual equivalent rate of minus 2.2 percent, which is lower than growth of 1.4 percent in the 12 months ending in May 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 three of the past six months and changed 0.0 percent in three months. Industrial production contracted at annual equivalent 2.8 percent in the most recent quarter from Mar 2015 to May 2015 and contracted at 1.6 percent in the prior quarter Dec 2014 to Feb 2015. Business equipment accumulated contraction of 1.0 percent in the six months from Dec 2014 to May 2015 at the annual equivalent rate of minus 2.0 percent, which is lower than growth of 1.9 percent in the 12 months ending in May 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 0.2 percentage point in May to 78.1 percent, a rate that is 2.0 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 26.3 percent from the trough in Apr 2009 to May 2015. Manufacturing output in May 2015 is 1.4 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 $2,310.7 billion than actual $16,264.1 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.9 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.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 May 1919 to May 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 126.2585 in May 2015. The actual index NSA in May 2015 is 101.5858, which is 19.5 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 118.3245 in May 2015. The output of manufacturing at 101.5858 in May 2015 is 14.1 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 88.1 percent in IQ2015. Most of US national income is in the form of services. In May 2015, there were 142.420 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 120.102 million NSA in May 2015 accounted for 84.3 percent of total nonfarm jobs of 142.420 million, of which 12.314 million, or 10.3 percent of total private jobs and 8.6 percent of total nonfarm jobs, were in manufacturing. Private service-providing jobs were 100.509 million NSA in May 2015, or 70.6 percent of total nonfarm jobs and 83.7 percent of total private-sector jobs. Manufacturing has share of 11.6 percent in US national income in IQ2015 and durable goods 6.6 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	15,911.7	100.0
Domestic Industries	15,407.1	98.8	15,756.4	99.0
Private Industries	13,674.0	87.7	14,011.9	88.1
Agriculture	167.6	1.1	156.7	1.0
Mining	266.1	1.7	262.8	1.7
Utilities	212.8	1.4	233.3	1.5
Construction	699.9	4.5	718.9	4.5
Manufacturing	1766.7	11.3	1852.4	11.6
Durable Goods	1019.5	6.5	1062.3	6.7
Nondurable Goods	747.1	4.8	790.1	5.0
Wholesale Trade	955.8	6.1	960.8	6.0
Retail Trade	1085.7	7.0	1110.5	7.0
Transportation & WH	478.8	3.1	510.3	3.2
Information	577.8	3.7	617.6	3.9
Finance, Insurance, RE	2770.6	17.8	2841.4	17.9
Professional & Business Services	2107.9	13.5	2121.2	13.3
Education, Health Care	1516.3	9.7	1539.0	9.7
Arts, Entertainment	628.4	4.0	644.8	4.1
Other Services	439.6	2.8	442.4	2.8
Government	1733.1	11.1	1744.5	11.0
Rest of the World	192.5	1.2	155.3	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

IA1. Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 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 third estimate of GDP for IQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_3rd.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/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.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/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.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 $2,287.1 billion than actual $16,287.7 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.9 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html). US GDP in IQ2015 is 12.3 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,287.7 billion in IQ2015 or 8.6 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 May 1919 to May 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 126.2585 in May 2015. The actual index NSA in May 2015 is 101.5858, which is 19.5 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 118.3245 in May 2015. The output of manufacturing at 101.5858 in May 2015 is 14.1 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 0.3 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.

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

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			-0.3

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 2015 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 7.2 percent from $2605.2 billion in IVQ2007 to $2,792.8 billion in IQ2015. As shown in Table IAI-2, real private fixed investment increased 3.3 percent from $2,586.3 billion of chained 2009 dollars in IVQ2007 to $2,670.7 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	2670.7	3.3	-0.1	5.3

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 IQ2015

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 $2,792.8 billion in IQ2015, which was only 7.2 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 2014. 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 0.40 percentage points to GDP in IQ2015 with 0.45 percentage points by inventory accumulation and 0.19 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 0.19 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 0.60 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 0.21 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	-0.2	0.40	-0.05	-0.26	-0.60	0.19	0.21	0.45
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. 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 67.6 percent in nominal terms from IVQ2007 to IQ2015 while net dividends increased 15.1 percent and undistributed corporate profits swelled 149.0 percent from $107.7 billion in IQ2007 to $268.2 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 11.8 percent from IVQ2007 to IQ2015, which is much lower than nominal increase of 24.0 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	10,123.4	24.0
Consumption of Fixed Capital	1,216.5	1,489.7	22.5
Net Value Added	6,949.4	8,633.7	24.2
Compensation of Employees	4,945.8	5,828.0	17.8
Taxes on Production and Imports Less Subsidies	688.5	809.9	17.6
Net Operating Surplus	1,315.1	1,995.8	51.8
Net Interest and Misc	204.2	210.6	3.1
Business Current Transfer Payment Net	68.9	101.0	46.6
Corporate Profits with IVA and CCA Adjustments	1,042.0	1,684.2	61.6
Taxes on Corporate Income	408.8	623.0	52.4
Profits after Tax with IVA and CCA Adjustment	633.2	1,061.2	67.6
Net Dividends	689.1	792.9	15.1
Undistributed Profits with IVA and CCA Adjustment	-55.9	268.2	NA ∆% 149.0 relative to 107.7 in IQ2007
Billions of Chained USD 2009 SAAR
Gross Value Added of Nonfinancial Corporate Business	7,519.3	8,409.9	11.8
Consumption of Fixed Capital	1,066.0	1,235.1	15.9
Net Value Added	6,453.4	7174.8	11.2

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 11.8 percent between IVQ2007 and IQ2015 while net value added adjusted for inflation increased 37.8 percent between IQ1980 and IIQ1988 but only 11.2 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 0.612 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 0.096 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	0.612
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	0.146
Taxes on Corporate Income	0.038	0.050
Profits after Tax with IVA and CCA Adjustment	0.076	0.096
	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 5.2 percent in IQ2015 and fell at 8.8 percent after taxes. Corporate profits with IVA and CCA increased 4.5 percent in IQ2015 relative to IQ2014 and profits after tax with IVA and CCA increased 1.9 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 2.2 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 22.7 percent in IQ2015 and increased 1.4 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	-5.2	4.5
Corporate Income Taxes	4.3	25.0	8.1	-0.9	-0.8	4.2	10.8
After Tax Profits with IVA and CCA	4.1	-8.3	8.6	4.7	-1.6	-8.8	1.9
Net Dividends	12.0	-5.7	-0.1	-0.4	2.1	0.6	2.2
Und Profits with IVA and CCA	-5.3	-12.0	24.9	12.4	-6.6	-22.7	1.4

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 $110.8 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 $136.1 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 $5.8 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 $141.8 billion in IQ2015. Undistributed corporate profits swelled 149.0 percent from $107.7 billion in IQ2007 to $268.2 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 $110.8 billion in IQ2015 with decrease of domestic industries at $81.8 billion, mostly because of decline of nonfinancial business at $79.6 billion, and decrease of profits from operations in the rest of the world at $29.0 billion. Receipts from the rest of the world fell at $40.0 billion. Total corporate profits with IVA and CCA were $2029.5 billion in IQ2015 of which $1684.2 billion from domestic industries, or 83.0 percent of the total, and $345.3 billion, or 17.0 percent, from the rest of the world. Nonfinancial corporate profits of $1230.7 billion account for 60.6 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	-110.8
Corporate Income Taxes	19.5	118.3	45.7	-5.5	-4.8	25.3
After Tax Profits with IVA and CCA	64.6	-135.4	118.4	70.1	-25.8	-136.1
Net Dividends	102.5	-54.5	-0.5	-3.9	18.6	5.8
Und Profits with IVA and CCA	-37.9	-80.9	118.8	73.9	-44.3	-141.8
Corporate Profits with IVA and CCA	84.1	-17.1	164.1	64.5	-30.4	-110.8
Domestic Industries	82.8	-8.0	167.6	48.1	5.7	-81.8
Financial	38.5	-41.4	33.3	16.1	-12.5	-2.1
Nonfinancial	44.4	33.4	134.3	32.0	18.1	-79.6
Rest of the World	1.3	-9.0	-3.6	16.5	-36.1	-29.0
Receipts from Rest of the World	12.8	11.7	2.7	14.4	-36.5	-40.0
Payments to the Rest of the World	11.5	20.8	6.3	-2.1	-0.4	-11.0

Source: Bureau of Economic Analysis

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

  II IB Stagnating Real Disposable Income and Consumption Expenditures. The Bureau of Economic Analysis (BEA) provides important revisions and enhancements of data on personal income and outlays since 1929 (http://www.bea.gov/iTable/index_nipa.cfm). There are waves of changes in personal income and expenditures in Table IB-1 that correspond somewhat to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html) because of the influence through price indexes. Data are distorted in Nov and Dec 2012 by the rush to realize income of all forms in anticipation of tax increases beginning in Jan 2013. There is major distortion in Jan 2013 because of higher contributions in payrolls to government social insurance that caused sharp reduction in personal income and disposable personal income. The Bureau of Economic Analysis (BEA) explains as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

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

In the first wave in Jan-Apr 2011 with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 8.1 percent, nominal disposable personal income (NDPI) at 5.2 percent and nominal personal consumption expenditures (NPCE) at 5.9 percent. Real disposable income (RDPI) increased at the annual equivalent rate of 1.2 percent and real personal consumption expenditures (RPCE) rose at annual equivalent 1.5 percent. In the second wave in May-Aug 2011 under risk aversion, NPI rose at annual equivalent 4.9 percent, NPDI at 4.9 percent and NPCE at 3.7 percent. RDPI increased at 1.8 percent annual equivalent and RPCE at 0.9 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec 2011, NPI rose at 2.4 percent annual equivalent, NDPI at 2.4 percent and NPCE at 2.1 percent. RDPI increased at 1.5 percent annual equivalent and RPCE at 1.5 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased at 9.6 percent annual equivalent, NDPI at 8.7 percent and NPCE at 6.2 percent. Real disposable income (RDPI) is more dynamic in the revisions, growing at 5.7 percent annual equivalent and RPCE at 3.7 percent. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 6.2 percent and real consumption (RPCE) at 3.7 percent. In the fifth wave in Apr-Jul 2012, NPI increased at annual equivalent 0.9 percent, NDPI at 0.9 percent and RDPI at 0.0 percent. Financial repression failed to stimulate consumption with NPCE growing at 2.1 percent annual equivalent and RPCE at 1.8 percent. In the sixth wave in Aug-Oct 2012, in another wave of carry trades into commodity futures, NPI increased at 7.9 percent annual equivalent and NDPI increased at 7.0 percent while real disposable income (RDPI) increased at 3.7 percent annual equivalent. NPCE increased at 4.9 percent and RPCE at 1.2 percent. Data for Nov-Dec 2012 have illusory increases: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In the seventh wave, anticipations of tax increases in Jan 2013 caused exceptional income gains that increased personal income to annual equivalent 28.3 percent in Nov-Dec 2012, nominal disposable income at 27.5 percent and real disposable personal income at 28.3 percent with likely effects on nominal personal consumption that increased at 2.4 percent and real personal consumption at 3.0 percent with subdued prices. The numbers in parentheses show that without the exceptional effects NDPI (nominal disposable personal income) increased at 5.5 percent and RDPI (real disposable personal income) at 8.7 percent. In the eighth wave, nominal personal income fell 5.1 percent in Jan 2013 or at the annual equivalent rate of decline of 46.6 percent; nominal disposable personal income fell 5.8 percent or at the annual equivalent rate of decline of 51.2 percent; real disposable income fell 5.9 percent or at the annual rate of decline of 51.8 percent; nominal personal consumption expenditures increased 0.5 percent or at the annual equivalent rate of 6.2 percent; and real personal consumption expenditures increased 0.4 percent or at the annual equivalent rate of 4.9 percent. The savings rate fell significantly from 10.5 percent in Dec 2012 to 4.5 percent in Jan 2013. The Bureau of Economic Analysis explains as follows (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 3):

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

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

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

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

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

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf). In the ninth wave in Feb-Mar 2013, nominal personal income increased at 7.4 percent and nominal disposable income at 6.8 percent annual equivalent, while real disposable income increased at 5.5 percent annual equivalent. Nominal personal consumption expenditures grew at 4.3 percent annual equivalent and real personal consumption expenditures at 2.4 percent annual equivalent. The savings rate collapsed from 7.1 percent in Oct 2012, 8.2 percent in Nov 2012 and 10.5 percent in Dec 2012 to 4.5 percent in Jan 2013, 4.7 percent in Feb 2013 and 4.9 percent in Mar 2013. In the tenth wave from Apr to Sep 2013, personal income grew at 3.7 percent annual equivalent, nominal disposable income increased at annual equivalent 3.9 percent and nominal personal consumption expenditures at 3.2 percent. Real disposable income grew at 2.8 percent annual equivalent and real personal consumption expenditures at 2.2 percent. In the eleventh wave, nominal personal income fell at 1.2 percent annual equivalent in Oct 2013, nominal disposable income at 2.4 percent and real disposable income at 3.5 percent. Nominal personal consumption expenditures increased at 4.9 percent annual equivalent and real personal consumption expenditures at 3.7 percent. In the twelfth wave, nominal personal income increased at 3.7 percent annual equivalent in Nov 2013, nominal disposable income at 2.4 percent and nominal personal consumption expenditures at 7.4 percent. Real disposable income increased at annual equivalent 1.2 percent and real personal consumption expenditures at 6.2 percent. In the thirteenth wave, nominal personal income changed at 0.0 percent annual equivalent in Dec 2013 and nominal disposable income fell at 1.2 percent while real disposable income fell at 2.4 percent annual equivalent. Nominal personal consumption expenditures increased at 1.2 percent annual equivalent and 0.0 percent for real personal consumption expenditures. In the fourteenth wave, nominal personal income increased at 7.0 percent annual equivalent in Jan-Mar 2014, nominal disposable income at 7.4 percent and nominal consumption expenditures at 4.1 percent. Real disposable personal income increased at 6.2 percent and real personal consumption expenditures at 2.8 percent. In the fifteenth wave, nominal personal income increased at 3.9 percent in annual equivalent in Apr-Aug 2014 and nominal disposable income at 3.9 percent. Real disposable income increased at 2.2 percent in annual equivalent in Apr-Aug 2014. Nominal personal consumption increased at 4.4 percent annual equivalent in Apr-Aug 2014 and real personal consumption expenditures increased at 2.7 percent. In the sixteenth wave, nominal personal income increased at 4.6 percent annual equivalent in Sep-Dec 20154, nominal disposable income at 3.7 percent and nominal personal consumption at 2.4 percent. Real disposable income increased at 4.6 percent in Sep-Dec 2014 and real personal consumption expenditure at 3.7 percent. In the seventeenth wave, nominal personal income increased at 4.3 percent annual equivalent in Jan-Feb 2015 and nominal disposable income at 5.5 percent while nominal personal consumption expenditures fell at 0.6 percent. Real disposable income increased at 5.5 percent and real personal consumption expenditures at 1.2 percent. In the eighteenth wave, nominal personal income (NPI) increased at 4.1 percent and nominal disposable personal income (NDPI) increased at 2.4 percent annual equivalent in Mar-May 2015. Real disposable income (RDPI) increased at 1.6 percent. Nominal consumption expenditures (NPCE) increased at 6.6 percent and real personal consumption expenditures (RPCE) increased at 4.5 percent.

The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions.

Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. 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 third estimate of GDP for IQ2015 (http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp1q15_3rd.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/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.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/2015/06/dollar-revaluation-squeezing-corporate.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.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 $2,287.1 billion than actual $16,287.7 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.9 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2015/06/higher-volatility-of-asset-prices-at.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/quite-high-equity-valuations-and.html). US GDP in IQ2015 is 12.3 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $16,287.7 billion in IQ2015 or 8.6 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 May 1919 to May 2015. Growth at 3.3 percent per year would raise the NSA index of manufacturing output from 99.2392 in Dec 2007 to 126.2585 in May 2015. The actual index NSA in May 2015 is 101.5858, which is 19.5 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 118.3245 in May 2015. The output of manufacturing at 101.5858 in May 2015 is 14.1 percent below trend under this alternative calculation.

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

	NPI	NDPI	RDPI	NPCE	RPCE
2015
May	0.5	0.5	0.2	0.9	0.6
Apr	0.5	0.4	0.4	0.1	0.0
Mar	0.0	0.0	-0.2	0.6	0.5
AE ∆% Mar-May	4.1	2.4	1.6	6.6	4.5
Feb	0.4	0.4	0.3	0.2	0.0
Jan	0.3	0.2	0.6	-0.3	0.2
AE ∆% Jan-Feb	4.3	3.7	5.5	-0.6	1.2
2014
Dec	0.4	0.3	0.6	-0.2	0.1
Nov	0.5	0.4	0.5	0.4	0.5
Oct	0.4	0.4	0.3	0.4	0.4
Sep	0.2	0.1	0.1	0.2	0.2
AE ∆% Sep-Dec	4.6	3.7	4.6	2.4	3.7
Aug	0.4	0.3	0.4	0.6	0.7
Jul	0.3	0.2	0.1	0.2	0.1
Jun	0.4	0.4	0.2	0.5	0.3
May	0.3	0.4	0.2	0.3	0.1
Apr	0.2	0.3	0.1	0.2	-0.1
AE ∆% Apr-Sep	3.9	3.9	2.2	4.4	2.7
Mar	0.6	0.6	0.5	0.8	0.6
Feb	0.6	0.6	0.5	0.4	0.4
Jan	0.5	0.6	0.5	-0.2	-0.3
AE ∆% Jan-Mar	7.0	7.4	6.2	4.1	2.8
2013
Dec	0.0	-0.1	-0.2	0.1	0.0
AE ∆% Dec	0.0	-1.2	-2.4	1.2	0.0
Nov	0.3	0.2	0.1	0.6	0.5
AE ∆% Nov	3.7	2.4	1.2	7.4	6.2
Oct	-0.1	-0.2	-0.3	0.4	0.3
AE ∆% Oct	-1.2	-2.4	-3.5	4.9	3.7
Sep	0.4	0.4	0.3	0.4	0.3
Aug	0.4	0.4	0.4	0.2	0.2
Jul	0.0	0.0	-0.1	0.2	0.1
Jun	0.4	0.5	0.2	0.5	0.2
May	0.4	0.5	0.4	0.3	0.2
Apr	0.2	0.1	0.2	0.0	0.1
AE ∆% Apr-Sep	3.7	3.9	2.8	3.2	2.2
Mar	0.3	0.3	0.4	0.1	0.1
Feb	0.9	0.8	0.5	0.6	0.3
AE ∆% Feb-Mar	7.4	6.8	5.5	4.3	2.4
Jan	-5.1	-5.8 (0.1)a	-5.9	0.5	0.4
AE ∆% Jan	-46.6	-51.2 (3.7)a	-51.8	6.2	4.9
2012
∆% Jan-Dec 2012***	9.0	8.6	7.0	3.9	2.3
Dec	2.8	2.8 (0.3)*	2.8 (0.5)*	0.2	0.2
Nov	1.4	1.3 (0.6)*	1.4 (0.9)*	0.2	0.3
AE ∆% Nov-Dec	28.3	27.5 (5.5)*	28.3 (8.7)*	2.4	3.0
Oct	0.8	0.8	0.6	0.2	-0.1
Sep	0.9	0.8	0.5	0.7	0.4
Aug	0.2	0.1	-0.2	0.3	0.0
AE ∆% Aug-Oct	7.9	7.0	3.7	4.9	1.2
Jul	-0.2	-0.2	-0.3	0.4	0.4
Jun	0.2	0.2	0.1	0.0	0.0
May	0.0	0.0	0.0	0.0	0.0
Apr	0.3	0.3	0.2	0.3	0.2
AE ∆% Apr-Jul	0.9	0.9	0.0	2.1	1.8
Mar	0.5	0.4	0.2	0.1	-0.1
Feb	0.8	0.7	0.5	0.7	0.5
Jan	1.0	1.0	0.7	0.7	0.5
AE ∆% Jan-Mar	9.6	8.7	5.7	6.2	3.7
2011
∆% Jan-Dec 2011*	5.1	4.1	1.2	4.3	1.8
Dec	0.8	0.8	0.8	0.0	0.0
Nov	0.0	0.0	-0.1	0.0	-0.1
Oct	0.1	0.1	0.1	0.3	0.3
Sep	-0.1	-0.1	-0.3	0.4	0.3
AE ∆% Sep-Dec	2.4	2.4	1.5	2.1	1.5
Aug	0.2	0.2	-0.1	0.2	-0.1
Jul	0.6	0.6	0.4	0.5	0.3
Jun	0.5	0.5	0.4	0.2	0.2
May	0.3	0.3	-0.1	0.3	-0.1
AE ∆% May-Aug	4.9	4.9	1.8	3.7	0.9
Apr	0.2	0.2	-0.3	0.4	0.0
Mar	0.3	0.2	-0.1	0.7	0.3
Feb	0.6	0.6	0.3	0.4	0.1
Jan	1.5	0.7	0.5	0.4	0.1
AE ∆% Jan-Apr	8.1	5.2	1.2	5.9	1.5
2010
∆% Jan-Dec 2010**	4.9	4.3	2.9	4.4	2.9
Dec	0.9	0.9	0.7	0.3	0.1
Nov	0.5	0.5	0.3	0.5	0.4
Oct	0.5	0.5	0.2	0.7	0.5
IVQ2010∆%	1.9	1.8	1.2	1.5	1.0
IVQ2010 AE ∆%	7.9	7.4	4.9	6.2	4.1

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

Percentage change month to month seasonally adjusted

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

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

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

The 12-month rate of increase of real disposable income fell to 0.0 percent in Oct 2013 and minus 1.3 percent in Nov 2013 partly because of the much higher level in late 2012 in anticipation of incomes to avoid increases in taxes in 2013. Real disposable income fell 4.2 percent in the 12 months ending in Dec 2013 primarily because of the much higher level in late 2012 in anticipation of income to avoid increases in taxes in 2013. Real disposable income increased 2.3 percent in the 12 months ending in Jan 2014, partly because of the low level in Jan 2013 after anticipation of incomes in late 2012 in avoiding the fiscal cliff episode. Real disposable income increased 3.5 percent in the 12 months ending in May 2015.

RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 3.4 percent in May 2015. Subdued growth of RPCE could affect revenues of business. Growth rates of personal consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-month rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). Growth of consumption of goods and, in particular, of consumer durable goods drives the faster expansion of the economy while growth of consumption of services is much more moderate. The 12-month rates of growth of RPCEGD have fallen from around 10 percent and even higher in several months from Sep 2010 to Feb 2011 to the range of 5.8 to 10.0 percent from May 2014 to May 2015. RPCEG growth rates have fallen from around 5 percent late in 2010 and early Jan-Feb 2011 to the range of 3.2 to 5.2 percent from May 2014 to May 2015. In May 2015, RPCEG increased 4.6 percent in 12 months and RPCEGD 7.5 percent while RPCES increased 2.8 percent. There are limits to sustained growth based on financial repression in an environment of weak labor markets and real labor remuneration.

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

Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2015
May	3.5	3.4	4.6	7.5	2.8
Apr	3.5	2.9	3.4	6.5	2.7
Mar	3.2	2.8	3.6	5.8	2.4
Feb	3.9	3.0	3.5	7.1	2.8
Jan	4.1	3.4	5.2	10.0	2.5
2014
Dec	4.0	2.9	4.2	8.9	2.3
Nov	3.1	2.8	4.2	7.9	2.1
Oct	2.7	2.8	3.8	7.4	2.3
Sep	2.1	2.7	3.7	8.5	2.2
Aug	2.3	2.9	4.4	8.4	2.1
Jul	2.3	2.4	3.3	7.0	1.9
Jun	2.1	2.4	3.5	7.0	1.8
May	2.1	2.3	3.2	7.2	1.9
Apr	2.3	2.4	3.8	6.5	1.7
Mar	2.4	2.5	3.8	8.2	1.9
Feb	2.3	2.0	2.1	3.5	2.0
Jan	2.3	1.9	1.2	2.0	2.3
2013
Dec	-4.2	2.7	3.1	3.5	2.4
Nov	-1.3	2.9	3.9	6.8	2.4
Oct	0.0	2.7	3.8	7.4	2.2
Sep	0.9	2.3	3.2	5.0	1.9
Aug	1.1	2.4	3.3	7.7	2.0
Jul	0.6	2.2	3.7	7.5	1.5
Jun	0.4	2.5	3.8	8.1	1.8
May	0.4	2.3	3.5	7.5	1.7
Apr	0.0	2.1	2.7	6.8	1.8
Mar	0.0	2.3	2.9	5.8	1.9
Feb	-0.2	2.0	3.3	7.0	1.4
Jan	-0.1	2.2	3.8	8.0	1.5
2012
Dec	7.0	2.3	3.8	8.8	1.6
Nov	4.8	2.0	3.1	8.2	1.5
Oct	3.2	1.6	2.2	5.4	1.3
Sep	2.7	1.9	3.5	8.5	1.1
Aug	1.9	1.8	3.5	8.7	0.9
Jul	2.0	1.8	2.8	7.3	1.3
Jun	2.7	1.7	2.6	8.4	1.2
May	3.0	1.9	3.0	7.6	1.3
Apr	2.9	1.8	2.4	6.5	1.5
Mar	2.4	1.5	2.2	5.8	1.2
Feb	2.1	1.9	2.4	6.9	1.7
Jan	1.8	1.5	1.8	5.8	1.4
Dec 2011	1.6	1.2	1.4	5.0	1.1
Dec 2010	2.9	2.9	4.7	8.4	2.1

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

Numbers are percentage changes from the same month a year earlier

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

Chart IB-1 shows US real personal consumption expenditures (RPCE) between 1999 and 2015. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.

Chart IB-1, US, Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1999-2015

Source: US Bureau of Economic Analysis

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

Percent changes from the prior period in seasonally adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart IB-2 from 1995 to 2015. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart IB-2 that the average rate of growth of RPCE was higher before the recession than during the past twenty-three quarters of expansion that began in IIIQ2009.

Chart IB-2, Percent Change from Prior Period in Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1995-2015

Source: US Bureau of Economic Analysis

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

Personal income and its disposition are shown in Table IB-3. The latest estimates and revisions have changed movements in five forms. (1) Increase in May 2015 of personal income by $79.0 billion or 0.5 percent and increase of disposable income of $65.5 billion or 0.5 percent with increase of wages and salaries of 0.5 percent. (2) Increase of personal income of $717.7 billion from Dec 2013 to Dec 2014 or 5.0 percent while disposable income increased $601.1 billion or 4.8 percent. Wages and salaries increased $414.0 billion or 5.7 percent. (3) Decrease of personal income of $302.9 billion from Dec 2012 to Dec 2013 or by 2.1 percent and decrease of disposable income of $397.7 billion or by 3.1 percent. Wages and salaries increased $30.8 billion from Dec 2012 to Dec 2013 or by 0.4 percent. Large part of these declines occurred because of the comparison of high levels in late 2012 in anticipation of tax increases in 2013. In 2012, personal income increased $1203.0 billion or 9.0 percent while wages and salaries increased 7.5 percent and disposable income 8.6 percent. Significant part of these gains occurred in Dec 2012 in anticipation of incomes because of tax increases beginning in Jan 2013. (4) Increase of $651.3 billion of personal income in 2011 or by 5.1 percent with increase of salaries of 2.7 percent and disposable income of 4.1 percent. (5) Increase of the rate of savings as percent of disposable income from 5.9 percent in Dec 2010 to 6.4 percent in Dec 2011, decreasing to 4.1 percent in Dec 2013. The savings rate increased to 5.0 percent in Dec 2014, 5.2 percent in Mar 2015 and 5.6 percent in Apr 2015.

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

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
May       2015	15,307.0	7,761.4	1,877.7	13,429.3	5.1
Apr      2015	15,228.0	7,724.3	1,864.2	13,363.8	5.4
Change May 2015/      Apr 2015	79.0 ∆% 0.5	37.1 ∆% 0.5	13.5 ∆% 0.7	65.5 ∆% 0.5
Dec 2014	15,037.7	7,628.1	1,811.7	13,225.9	5.0
Change Dec 2014/Dec 2013	717.7 ∆% 5.0	414.0 ∆% 5.7	116.4 ∆% 6.9	601.1 ∆% 4.8
Dec 2013	14,320.0	7,214.1	1,695.3	12,624.8	4.1
Dec 2012	14,622.9	7,183.3	1,600.4	13,022.5	10.5
Change Dec 2013/ Dec 2012	-302.9 ∆% -2.1	30.8 ∆% 0.4	94.9 ∆% 5.9	-397.7 ∆% -3.1
Change Dec 2012/ Dec 2011	1203.0 ∆% 9.0	500.4 ∆% 7.5	169.1 ∆% 11.8	1033.9 ∆% 8.6
Dec 2011	13,419.9	6,682.9	1,431.3	11,988.6	6.4
Dec 2010	12,768.6	6,506.0	1,254.2	11,514.5	5.9
Change Dec 2011/ Dec 2010	651.3 ∆% 5.1	176.9  ∆% 2.7	177.1     ∆% 14.1	474.1    ∆% 4.1

Source: US Bureau of Economic Analysis

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

The Bureau of Economic Analysis (BEA) provides a wealth of revisions and enhancements of US personal income and outlays since 1929 (http://www.bea.gov/iTable/index_nipa.cfm). Table IB-4 provides growth rates of real disposable income and real disposable income per capita in the long-term and selected periods. Real disposable income consists of after-tax income adjusted for inflation. Real disposable income per capita is income per person after taxes and inflation. There is remarkable long-term trend of growth of real disposable income of 3.2 percent per year on average from 1929 to 2014 and 2.0 percent in real disposable income per capita. Real disposable income increased at the average yearly rate of 3.7 percent from 1947 to 1999 and real disposable income per capita at 2.3 percent. These rates of increase broadly accompany rates of growth of GDP. Institutional arrangements in the United States provided the environment for growth of output and income after taxes, inflation and population growth. There is significant break of growth by much lower 2.3 percent for real disposable income on average from 1999 to 2014 and 1.4 percent in real disposable per capita income. Real disposable income grew at 3.5 percent from 1980 to 1989 and real disposable per capita income at 2.6 percent. In contrast, real disposable income grew at only 1.5 percent on average from 2006 to 2014 and real disposable income per capita at 0.7 percent. The United States has interrupted its long-term and cyclical dynamism of output, income and employment growth. Recovery of this dynamism could prove to be a major challenge. Cyclical uncommonly slow growth explains weakness in the current whole cycle instead of the allegation of secular stagnation.

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

RDPI Average ∆%
1929-2014	3.2
1947-1999	3.7
1999-2014	2.3
1999-2006	3.2
1980-1989	3.5
2006-2014	1.5
RDPIPC Average ∆%
1929-2014	2.0
1947-1999	2.3
1999-2014	1.4
1999-2006	2.2
1980-1989	2.6
2006-2014	0.7

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

Chart IB-3 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2014/07/financial-irrational-exuberance.html http://cmpassocregulationblog.blogspot.com/2014/07/world-inflation-waves-united-states.html). Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982.

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

Source: US Bureau of Economic Analysis

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

A different evolution of personal income is shown in Chart IB-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2012, nominal disposable personal income grew at the SAAR of 13.8 percent and real disposable personal income at 11.8 percent (Table 2.1 http://bea.gov/iTable/index_nipa.cfm). The BEA explains as follows: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”

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

In IQ2013, personal income fell at the SAAR of minus 8.6 percent; real personal income excluding current transfer receipts at minus 11.9 percent; and real disposable personal income at minus 12.6 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi1014.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

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

In IIQ2013, personal income grew at 4.5 percent, real personal income excluding current transfer receipts at 4.6 percent and real disposable income at 3.8 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi1114.pdf). In IIIQ2013, personal income grew at 3.3 percent, real personal income excluding current transfers at 1.5 percent and real disposable income at 2.0 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0215.pdf). In IVQ2013, personal income grew at 1.8 percent and real disposable income at 0.2 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IQ2014, personal income grew at 4.9 percent in nominal terms and 3.2 percent in real terms excluding current transfer receipts while nominal disposable income grew at 4.8 percent and real disposable income at 3.4 percent (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IIQ2014, personal income grew at 4.9 percent and 2.2 percent in real terms excluding current transfers. Nominal disposable income grew at 5.5 percent and at 3.1 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IIIQ2014, personal income grew at 4.2 percent, real personal income excluding current transfers at 2.7 percent and real disposable personal income at 2.4 percent (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IVQ2014, personal income grew at 4.6 percent in nominal terms and at 5.5 percent in real terms excluding current transfers while nominal disposable income grew at 3.7 percent in nominal terms and at 4.1 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IQ2015, nominal personal income grew at 4.2 percent and at 5.4 percent in real terms excluding current transfer receipts while nominal disposable income grew at 3.2 percent and at 5.3 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf).

Chart IB-4, US, Personal Income, Current Billions of Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2015

Source: US Bureau of Economic Analysis

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

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

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

Source: US Bureau of Economic Analysis

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

Chart IB-6 provides real disposable income from 2007 to 2015. In IQ2013, personal income fell at the SAAR of minus 8.6 percent; real personal income excluding current transfer receipts at minus 11.9 percent; and real disposable personal income at minus 12.6 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi1014.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

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

In IIQ2013, personal income grew at 4.5 percent, real personal income excluding current transfer receipts at 4.6 percent and real disposable income at 3.8 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi1114.pdf). In IIIQ2013, personal income grew at 3.3 percent, real personal income excluding current transfers at 1.5 percent and real disposable income at 2.0 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0215.pdf). In IVQ2013, personal income grew at 1.8 percent and real disposable income at 0.2 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IQ2014, personal income grew at 4.9 percent in nominal terms and 3.2 percent in real terms excluding current transfer receipts while nominal disposable income grew at 4.8 percent and real disposable income at 3.4 percent (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IIQ2014, personal income grew at 4.9 percent and 2.2 percent in real terms excluding current transfers. Nominal disposable income grew at 5.5 percent and at 3.1 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IIIQ2014, personal income grew at 4.2 percent, real personal income excluding current transfers at 2.7 percent and real disposable personal income at 2.4 percent (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IVQ2014, personal income grew at 4.6 percent in nominal terms and at 5.5 percent in real terms excluding current transfers while nominal disposable income grew at 3.7 percent in nominal terms and at 4.1 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IQ2015, nominal personal income grew at 4.2 percent and at 5.4 percent in real terms excluding current transfer receipts while nominal disposable income grew at 3.2 percent and at 5.3 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf).

Chart IB-6, US, Real Disposable Income, Billions of Chained 2009 Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2015

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

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

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

Source: US Bureau of Economic Analysis

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

Chart IB-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally adjusted annual rates from 2007 to 2015. There has been a period of positive rates followed by decline of rates and then negative and low rates in 2011. Recovery in 2012 has not reproduced the dynamism of the brief early phase of expansion. In IVQ2012, nominal disposable personal income grew at the SAAR of 13.8 percent and real disposable personal income at 11.8 percent (Table 2.1 http://bea.gov/iTable/index_nipa.cfm). The BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

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

In IIQ2013, personal income grew at 4.5 percent, real personal income excluding current transfer receipts at 4.6 percent and real disposable income at 3.8 percent (http://www.bea.gov/newsreleases/national/pi/2014/pdf/pi1114.pdf). In IIIQ2013, personal income grew at 3.3 percent, real personal income excluding current transfers at 1.5 percent and real disposable income at 2.0 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0215.pdf). In IVQ2013, personal income grew at 1.8 percent and real disposable income at 0.2 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IQ2014, personal income grew at 4.9 percent in nominal terms and 3.2 percent in real terms excluding current transfer receipts while nominal disposable income grew at 4.8 percent and real disposable income at 3.4 percent (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IIQ2014, personal income grew at 4.9 percent and 2.2 percent in real terms excluding current transfers. Nominal disposable income grew at 5.5 percent and at 3.1 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IIIQ2014, personal income grew at 4.2 percent, real personal income excluding current transfers at 2.7 percent and real disposable personal income at 2.4 percent (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IVQ2014, personal income grew at 4.6 percent in nominal terms and at 5.5 percent in real terms excluding current transfers while nominal disposable income grew at 3.7 percent in nominal terms and at 4.1 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). In IQ2015, nominal personal income grew at 4.2 percent and at 5.4 percent in real terms excluding current transfer receipts while nominal disposable income grew at 3.2 percent and at 5.3 percent in real terms (http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf).

Chart, IB-8, US, Real Disposable Income, Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2015

Source: US Bureau of Economic Analysis

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

The Bureau of Economic Analysis (BEA) estimates US personal income in May 2015 at the seasonally adjusted annual rate of $15,307.0 billion, as shown in Table IB-3 above (see Table 1 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). The major portion of personal income is compensation of employees of $9,591.7 billion, or 62.7 percent of the total. Wages and salaries are $7,761.4 billion, of which $6,518.7 billion by private industries and supplements to wages and salaries of $1,830.3 billion (contributions to social insurance are $569.7 billion). In Nov 1988 (at the comparable month after the end of the 23^rd quarter of cyclical expansion), US personal income was $4,395.0 billion at SAAR (http://www.bea.gov/iTable/index_nipa.cfm). Compensation of employees was $3,028.3 billion, or 68.9 percent of the total. Wages and salaries were $2,500.5 billion of which $2,038.7 billion by private industries. Supplements to wages and salaries were $527.8 billion with employer contributions to pension and insurance funds of $339.0 billion and $188.8 billion to government social insurance. Chart IB-9 provides US wages and salaries by private industries in the 1980s. Growth was robust after the interruption of the recessions.

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

Source: US Bureau of Economic Analysis

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

The Bureau of Economic Analysis (BEA) estimates US personal income in May 2015 at the seasonally adjusted annual rate of $15,307.0 billion, as shown in Table IB-3 above (see Table 1 at http://www.bea.gov/newsreleases/national/pi/2015/pdf/pi0515.pdf). The major portion of personal income is compensation of employees of $9,591.7 billion, or 62.7 percent of the total. Wages and salaries are $7,761.4 billion, of which $6,518.7 billion by private industries and supplements to wages and salaries of $1,830.3 billion (contributions to social insurance are $569.7 billion). Chart IB-10 provides US wages and salaries by private industries from 2007 to 2014. Growth was mediocre in the weak expansion phase after IIIQ2009.

Chart IB-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2015

Source: US Bureau of Economic Analysis

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

Chart IB-11 provides finer detail with monthly wages and salaries of private industries from 2007 to 2015. Anticipations of income in late 2012 to avoid tax increases in 2013 cloud comparisons.

Chart IB-11, US, Wages and Salaries, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2015

Source: US Bureau of Economic Analysis

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

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

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

Source: US Bureau of Economic Analysis

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

Table IB-5 provides the comparison between the cycle of the 1980s and the current cycle. Real per capita disposable income (RDPI-PC) increased 23.6 percent from Dec 1979 to Nov 1988. In the comparable period in the current cycle from Dec 2007 to May 2015, real per capita disposable income increased 6.9 percent.

Table IB-5, Percentage Changes of Real Disposable Personal Income Per Capita

Month	RDPI-PC ∆% 12/79	RDPI-PC ∆% YOY	Month	RDPI-PC ∆% 12/07	RDPI-PC ∆% YOY
11/1982	2.4	0.6	6/2009	-0.6	-2.4
12/1982	2.9	1.3	9/2009	-1.3	-0.6
12/1983	7.8	4.8	6/2010	-0.4	0.2
12/1987	20.4	2.7	6/2014	4.2	1.4
1/1988	20.6	2.6	7/2014	4.2	1.6
2/1988	21.2	2.6	8/2014	4.5	1.6
3/1988	21.6	2.9	9/2014	4.5	1.4
4/1988	21.9	7.4	10/2014	4.8	1.9
5/1988	22.0	3.3	11/2014	5.3	2.4
6/1988	22.4	3.9	12/2014	5.8	3.2
7/1988	22.7	4.0	1/2015	6.4	3.4
8/1988	23.0	3.8	2/2015	6.6	3.1
9/1988	23.1	4.0	3/2015	6.4	2.5
10/1988	23.6	3.9	4/2015	6.8	2.7
11/1988	23.6	3.5	5/2015	6.9	2.8

RDPI: Real Disposable Personal Income; RDPI-PC, Real Disposable Personal Income Per Capita

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

National Bureau of Economic Research

http://www.nber.org/cycles.html

Chart IB-13 provides monthly real disposable personal income per capita from 2007 to 2015. There was initial recovery from the drop during the global recession followed by stagnation.

Chart IB-13, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Chained 2009 Dollars 2007-2015

Source: US Bureau of Economic Analysis

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

Table IB-6 provides data for analysis of the current cycle. Real disposable income (RDPI) increased 13.3 percent from Dec 2007 to May 2015 (column RDPI ∆% 12/07). In the same period, real disposable income per capita increased 6.9 percent (column RDPI-PC ∆% 12/07). The annual equivalent rate of increase of real disposable income per capita is 1.0 percent, only a fraction of 2.0 percent on average from 1929 to 2014, and 1.7 percent for real disposable income, much lower than 3.2 percent on average from 1929 to 2014.

Table IB-6, Percentage Changes of Real Disposable Personal Income and Real Disposable Personal Income Per Capita

Month	RDPI ∆% 12/07	RDPI ∆% Month	RDPI ∆% YOY	RDPI-PC ∆% 12/07	RDPI-PC ∆% Month	RDPI-PC ∆% YOY
6/09	0.8	-1.7	-1.5	-0.6	-1.8	-2.4
9/09	0.3	0.1	0.3	-1.3	0.1	-0.6
6/10	1.8	0.0	1.0	-0.4	0.0	0.2
12/10	3.4	0.7	2.9	0.7	0.6	2.1
6/11	4.2	0.4	2.3	1.2	0.4	1.5
12/11	5.0	0.8	1.6	1.6	0.7	0.8
6/12	6.9	0.1	2.7	3.1	0.1	1.9
10/12	7.7	0.6	3.2	3.5	0.5	2.5
11/12	9.2	1.4	4.8	4.9	1.4	4.1
12/12	12.3	2.8	7.0	7.9	2.8	6.2
6/13	7.4	0.2	0.4	2.7	0.1	-0.3
12/13	7.6	-0.2	-4.2	2.5	-0.3	-4.9
1/14	8.1	0.5	2.3	3.0	0.4	1.6
2/14	8.6	0.5	2.3	3.4	0.4	1.6
3/14	9.1	0.5	2.4	3.8	0.4	1.7
4/14	9.2	0.1	2.3	3.9	0.1	1.5
5/14	9.4	0.2	2.1	4.0	0.1	1.3
6/14	9.7	0.2	2.1	4.2	0.2	1.4
7/14	9.8	0.1	2.3	4.2	0.1	1.6
8/14	10.2	0.4	2.3	4.5	0.3	1.6
9/14	10.3	0.1	2.1	4.5	0.0	1.4
10/14	10.6	0.3	2.7	4.8	0.3	1.9
11/14	11.2	0.5	3.1	5.3	0.5	2.4
12/14	11.8	0.6	4.0	5.8	0.5	3.2
1/15	12.5	0.6	4.1	6.4	0.6	3.4
2/15	12.8	0.3	3.9	6.6	0.2	3.1
3/15	12.6	-0.2	3.2	6.4	-0.2	2.5
4/15	13.1	0.4	3.5	6.8	0.3	2.7
5/15	13.3	0.2	3.5	6.9	0.1	2.8

RDPI: Real Disposable Personal Income; RDPI-PC, Real Disposable Personal Income Per Capita

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

National Bureau of Economic Research

http://www.nber.org/cycles.html

IA2 Financial Repression. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6; for historical analysis see Pelaez 1975). Theory and evidence support the role of financial institutions in efficiency and growth (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 22-6, Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 37-44). Excessive official regulation frustrates financial development required for growth (Haber 2011). Emphasis on disclosure can reduce bank fragility and corruption, empowering investors to enforce sound governance (Barth, Caprio and Levine 2006). Banking was important in facilitating economic growth in historical periods (Cameron 1961, 1967, 1972; Cameron et al. 1992). Banking is also important currently because small- and medium-size business may have no other form of financing than banks in contrast with many options for larger and more mature companies that have access to capital markets. Calomiris and Haber (2014) find that broad voting rights and institutions restricting coalitions of bankers and populists ensure stable banking systems and access to credit. Interest rate ceilings on deposits and loans have been commonly used. The Banking Act of 1933 imposed prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.

Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 0.0 percent in the 12 months ending in Apr 2015 (http://www.bls.gov/cpi/) but rising during waves of carry trades from zero interest rates to commodity futures exposures (http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/interest-rate-policy-and-dollar.html). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:

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

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

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

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

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

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

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

Chart IB-14 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2014. There was a long-term downward sloping trend from 12 percent in the early 1980s to 2.0 percent in Jul 2005. The savings rate then rose during the contraction and in the expansion. In 2011 and into 2012 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The savings rate increased in the final segment of Chart IB-14 in 2012 because of the “fiscal cliff” episode followed by another decline because of the pain of the opportunity cost of zero remuneration for hard-earned savings.

Chart IB-14, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2015

Source: US Bureau of Economic Analysis

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

Chart IB-14A provides the US personal savings rate, or personal savings as percent of disposable personal income, on an annual basis from 1929 to 2014. The US savings rate shows decline from around 10 percent in the 1960s to around 5 percent currently.

Chart IB-14A, US, Personal Savings as a Percentage of Disposable Personal Income, Annual, 1929-2014

Source: US Bureau of Economic Analysis

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

Table IB-7 provides personal savings as percent of disposable income and annual change of real disposable personal income in selected years since 1930. Savings fell from 4.4 percent of disposable personal income in 1930 to minus 0.8 percent in 1933 while real disposable income contracted 6.3 percent in 1930 and 2.9 percent in 1933. Savings as percent of disposable personal income swelled during World War II to 27.9 percent in 1944 with increase of real disposable income of 3.1 percent. Savings as percent of personal disposable income fell steadily over decades from 11.5 percent in 1982 to 2.5 percent in 2005. Savings as percent of disposable personal income was 4.9 percent in 2013 while real disposable income fell 0.2 percent. The savings rate was 4.9 percent of GDP in 2014 with growth of real disposable income of 2.5 percent. The average ratio of savings as percent of disposable income fell from 9.3 percent in 1980 to 1989 to 5.3 percent on average from 2007 to 2014. Real disposable income grew on average at 3.5 percent from 1980 to 1989 and at 1.5 percent on average from 2007 to 2014.

Table IB-7, US, Personal Savings as Percent of Disposable Personal Income, Annual, Selected Years 1929-1913

	Personal Savings as Percent of Disposable Personal Income	Annual Change of Real Disposable Personal Income
1930	4.4	-6.3
1933	-0.8	-2.9
1944	27.9	3.1
1947	6.3	-4.1
1954	10.3	1.4
1958	11.4	1.1
1960	10.0	2.6
1970	12.6	4.6
1975	13.0	2.5
1982	11.5	2.1
1989	7.8	3.0
1992	8.9	4.3
2002	5.0	3.1
2003	4.8	2.7
2004	4.6	3.6
2005	2.5	1.5
2006	3.3	4.0
2007	3.0	2.1
2008	4.9	1.5
2009	6.1	-0.4
2010	5.6	1.0
2011	6.0	2.5
2012	7.2	3.0
2013	4.9	-0.2
2014	4.9	2.5
Average Savings Ratio
1980-1989	9.3
2007-2014	5.3
Average Yearly ∆% Real Disposable Income
1980-1989		3.5
2007-2014		1.5

Source: US Bureau of Economic Analysis

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

Chart IB-15 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to May 2015. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 7.9 percent in May 2008 (http://www.bea.gov/iTable/index_nipa.cfm). The second peak occurred at 8.1 percent in May 2009. There was another rising trend until 5.9 percent in Jun 2010 and then steady downward trend until 5.6 percent in Nov 2011. This was followed by an upward trend with 7.1 percent in Jun 2012 but decline to 6.4 percent in Aug 2012 followed by jump to 10.5 percent in Dec 2012. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2013 caused the jump of the savings rate to 10.5 percent in Dec 2012. The BEA explains as “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). There was a reverse effect in Jan 2013 with decline of the savings rate to 4.5 percent. Real disposable personal income fell 5.9 percent and real disposable per capita income fell from $38,699 in Dec 2012 to $36.378 in Jan 2013 or by 6.0 percent (http://www.bea.gov/iTable/index_nipa.cfm), which is explained by the Bureau of Economic Analysis as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf):

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

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

Chart IB-15, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2015

Source: US Bureau of Economic Analysis

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

Table IB-8 provides personal saving as percent of disposable income, change of real disposable income relative to Dec 2007 (RDPI ∆% 12/07), monthly percentage change of real disposable income (RDPI ∆% month) and percentage change of real disposable income in a month relative to the same month a year earlier (RDPI ∆% YOY). The ratio of personal saving to disposable income eased to 5.1 percent in May 2015 with cumulative growth of real disposable income of 13.3 percent since Dec 2007 at the rate of 1.7 percent annual equivalent, which is much lower than 3.2 percent over the long term from 1929 to 2014.

Table IB-8, US, Savings Ratio and Real Disposable Income, % and ∆%

	Personal Saving as % Disposable Income	RDPI ∆% 12/07	RDPI ∆% Month	RDPI ∆% YOY
May 2008	7.9	5.1	4.8	5.7
May 2009	8.1	2.5	1.6	-2.5
Jun 2010	5.9	1.8	0.0	1.0
Nov 2011	5.6	4.2	-0.1	1.5
Jun 2012	7.1	6.9	0.1	2.7
Aug 2012	6.4	6.5	-0.2	1.9
Dec 2012	10.5	12.3	2.8	7.0
Jan 2013	4.5	5.6	-5.9	-0.1
Feb 2013	4.7	6.2	0.5	-0.2
Mar 2013	4.9	6.5	0.4	0.0
Apr 2013	5.1	6.8	0.2	0.0
May 2013	5.2	7.2	0.4	0.4
Jun 2013	5.3	7.4	0.2	0.4
Jul 2013	5.1	7.3	-0.1	0.6
Aug 2013	5.3	7.7	0.4	1.1
Sep 2013	5.2	8.0	0.3	0.9
Oct 2013	4.7	7.7	-0.3	0.0
Nov 2013	4.3	7.8	0.1	-1.3
Dec 2013	4.1	7.6	-0.2	-4.2
Jan 2014	4.9	8.1	0.5	2.3
Feb 2014	5.0	8.6	0.5	2.3
Mar 2014	4.8	9.1	0.5	2.4
Apr 2014	5.0	9.2	0.1	2.3
May 2014	5.1	9.4	0.2	2.1
Jun 2014	5.1	9.7	0.2	2.1
Jul 2014	5.1	9.8	0.1	2.3
Aug 2014	4.7	10.2	0.4	2.3
Sep 2014	4.6	10.3	0.1	2.1
Oct 2014	4.6	10.6	0.3	2.7
Nov 2014	4.5	11.2	0.5	3.1
Dec 2014	5.0	11.8	0.6	4.0
Jan 2015	5.5	12.5	0.6	4.1
Feb 2015	5.7	12.8	0.3	3.9
Mar 2015	5.1	12.6	-0.2	3.2
Apr 2015	5.4	13.1	0.4	3.5
May 2015	5.1	13.3	0.2	3.5

Source: US Bureau of Economic Analysis

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

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