Saturday, October 28, 2017

Dollar Revaluation and Increase of Valuation of Risk Financial Assets, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, IMF View of World Economy and Finance, United States Commercial Banks Assets and Liabilities, Cyclically Stagnating Real Private Fixed Investment, United States Housing, World Cyclical Slow Growth and Global Recession Risk: Part I

CANNOT UPLOAD CHARTS AND IMAGES

Dollar Revaluation and Increase of Valuation of Risk Financial Assets, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend, IMF View of World Economy and Finance, United States Commercial Banks Assets and Liabilities, Cyclically Stagnating Real Private Fixed Investment, United States Housing, World Cyclical Slow Growth and Global Recession Risk

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017

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

II IMF View of World Economy and Finance

IIA United States Commercial Banks Assets and Liabilities

IA Transmission of Monetary Policy

IB Functions of Banking

IC United States Commercial Banks Assets and Liabilities

ID Theory and Reality of Economic History, Cyclical Slow Growth Not Secular Stagnation and Monetary Policy Based on Fear of Deflation

IIB United States Housing Collapse

IIA1 Sales of New Houses

IIA2 United States House Prices

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

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

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

I 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 14.2 percent below trend. Section IA1 Stagnating Real Private Fixed Investment analyzes weakness in investment.

There is socio-economic stress in the combination of adverse events and cyclical performance:

and earlier http://cmpassocregulationblog.blogspot.com/2015/07/fluctuating-risk-financial-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html 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)

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 33 quarters from IIIQ2009 to IIIQ2017. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the first estimate of GDP for IIIQ2017 (https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp3q17_adv.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by dividing 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 https://cmpassocregulationblog.blogspot.com/2017/10/destruction-of-household-nonfinancial.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, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989, 4.7 percent from IQ1983 to IIQ1989, 4.7 percent from IQ1983 to IIIQ1989, 4.5 percent from IQ1983 to IVQ1989. 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990, 4.0 percent from IQ1983 to IVQ1990, 3.8 percent from IQ1983 to IQ1991 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier https://cmpassocregulationblog.blogspot.com/2017/10/destruction-of-household-nonfinancial.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). 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 IIIQ2017 would have accumulated to 33.4 percent. GDP in IIIQ2017 would be $19,999.1 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2842.2 billion than actual $17,156.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 21.1 million unemployed or underemployed equivalent to actual unemployment/underemployment of 12.5 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2017/10/twenty-one-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/09/twenty-two-million-unemployed-or.html). US GDP in IIIQ2017 is 14.2 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $17,156.9 billion in IIIQ2017 or 14.4 percent at the average annual equivalent rate of 1.4 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 of manufacturing at average 3.1 percent per year from Sep 1919 to Sep 2017. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.2393 in Dec 2007 to 145.7662 in Sep 2017. The actual index NSA in Sep 2017 is 104.2863, which is 28.5 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Sep 2017. Using trend growth of 2.0 percent per year, the index would increase to 131.2915 in Sep 2017. The output of manufacturing at 104.2863 in Sep 2017 is 20.6 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, 2.2 percent in 2012, 1.7 percent in 2013, 2.6 percent in 2014 and 2.9 percent in 2015. GDP growth was 1.5 percent in 2016. The following calculations show that actual growth is around 2.1 percent per year. The rate of growth of 1.3 percent in the entire cycle from 2007 to 2016 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) provides valuable 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

1929-2016

3.2

1947-2016

3.2

Whole Cycles

1980-1989

3.5

2006-2016

1.4

2007-2016

1.3

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

IQ1983 to IVQ1988

IQ1983 to IQ1989

IQ1983 to IIQ1989

IQ1983 to IIIQ1989

IQ1983 to IVQ1989

IQ1983 to IQ1990

IQ1983 to IIQ1990

IQ1983 to IIIQ1990

IQ1983 to IVQ1990

5.9

5.7

5.4

5.2

5.0

5.0

4.9

5.0

4.9

4.9

4.8

4.8

4.8

4.7

4.7

4.5

4.5

4.4

4.3

4.0

IQ1983 to IQ1991

3.8

First Four Quarters IQ1983 to IVQ1983

7.8

IIIQ2009 to IIIQ2017

2.2

First Four Quarters IIIQ2009 to IIQ2010

2.7

Real Disposable Income

Real Disposable Income per Capita

Long-Term

1929-2016

3.2

2.0

1947-1999

3.7

2.3

Whole Cycles

1980-1989

3.5

2.6

2006-2016

1.8

1.0

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 2.1 percent per year. Table Summary GDP provides the data.

1. Average Annual Growth in the Past Twenty-Two Quarters. GDP growth in the four quarters of 2012, the four quarters of 2013, the four quarters of 2014, the four quarters of 2015, the four quarters of 2016 and the three quarters of 2017 accumulated to 12.9 percent. This growth is equivalent to 2.1 percent per year, obtained by dividing GDP in IIIQ2017 of $17,156.9 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/23: {[($17,156.9/$15,190.3)4/23 -1]100 = 2.1 percent}.

2. Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters from IIQ2016 to IIIQ2017 accumulated to 2.3 percent that is equivalent to 2.3 percent in a year. This is obtained by dividing GDP in IIIQ2017 of $17,156.9 billion by GDP in IIIQ2006 of $16,778.1 billion and compounding by 4/4: {[($17,156.9/$16,778.1)4/4 -1]100 = 2.3%}. The US economy grew 2.3 percent in IIIQ2017 relative to the same quarter a year earlier in IIIQ2016. Growth was at annual equivalent 4.6 percent in IIQ2014 and 5.2 percent IIIQ2014 and only at 2.0 percent in IVQ2014. GDP grew at annual equivalent 3.2 percent in IQ2015, 2.7 percent in IIQ2015, 1.6 percent in IIIQ2015 and 0.5 percent in IVQ2015. GDP grew at annual equivalent 0.6 percent in IQ2016 and at 2.2 percent annual equivalent in IIQ2016. GDP increased at 2.8 percent annual equivalent in IIIQ2016 and at 1.8 percent in IVQ2016. GDP grew at annual equivalent 1.2 percent in IQ2017 and at annual equivalent 3.1 percent in IIQ2017. GDP grew at annual equivalent 3.0 percent in IIIQ2017. 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 0.2 percent in IQ2014. The rate of growth of GDP in the revision of IIIQ2013 is 3.1 percent in seasonally adjusted annual rate (SAAR).

Table Summary GDP, 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

IVQ2011

15,190.3

1.3

1.1

1.7

IQ2012

15,291.0

2.0

0.7

2.8

IIQ2012

15,362.4

2.5

0.5

2.5

IIIQ2012

15,380.8

2.6

0.1

2.4

IVQ2012

15,384.3

2.6

0.0

1.3

IQ2013

15,491.9

3.3

0.7

1.3

IIQ2013

15,521.6

3.5

0.2

1.0

IIIQ2013

15,641.3

4.3

0.8

1.7

IVQ2013

15,793.9

5.4

1.0

2.7

IQ2014

15,757.6

5.1

-0.2

1.7

IIQ2014

15,935.8

6.3

1.1

2.7

IIIQ2014

16,139.5

7.7

1.3

3.2

IVQ2014

16,220.2

8.2

0.5

2.7

IQ2015

16,350.0

9.1

0.8

3.8

IIQ2015

16,460.9

9.8

0.7

3.3

IIIQ2015

16,527.6

10.2

0.4

2.4

IVQ2015

16,547.6

10.4

0.1

2.0

IQ2016

16,571.6

10.5

0.1

1.4

IIQ2016

16,663.5

11.2

0.6

1.2

IIIQ2016

16,778.1

11.9

0.7

1.5

IVQ2016

16,851.4

12.4

0.4

1.8

IQ2017

16,903.2

12.7

0.3

2.0

IIQ2017

17,031.1

13.6

0.8

2.2

IIIQ2017

17,156.9

14.4

0.7

2.3

Cumulative ∆% IQ2012 to IIIQ2017

12.9

13.0

Annual Equivalent ∆%

2.1

2.2

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

Chart GDP of the US Bureau of Economic Analysis provides the rates of growth of GDP at SAAR (seasonally adjusted annual rate) in the 16 quarters from IVQ2013 to IIIQ2017. Growth has been fluctuating.

Chart GDP, Seasonally Adjusted Quarterly Rates of Growth of United States GDP, ∆%

Source: US Bureau of Economic Analysis

http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm

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 Jul 27, 2016 and the first estimate for IIIQ2017 GDP (https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp3q17_adv.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 thirty-two quarters of expansion from IQ1983 to IVQ1990, 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, 5.4, 4.1, 3.2, 3.0, 0.9, 4.5, 1.6, 0.1, minus 3.4 and minus 1.9, 3.1 and 1.9. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). Table III-1 shows weaker performance in IIQ1990 and IIIQ1990 and contractions at 3.4 percent in IVQ1990 and 1.9 percent in IQ1991. In contrast, the percentage growth rates in the first thirty-one quarters of expansion from IIIQ2009 to IQ2017 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, 2.7, 1.9, 0.5, 0.1, 2.8, 0.8, 3.1, 4.0, minus 0.9, 4.6, 5.2, 2.0, 3.2, 2.7, 1.6, 0.5, 0.6, 2.2, 2.8, 1.8, 1.2, 3.1 and 3.0. Economic growth and employment creation continued at slow rhythm during 2012 and in 2013-2017 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

2.7

II

1.9

1.9

III

4.1

0.5

IV

2.1

0.1

1987

2013

I

2.8

2.8

II

4.6

0.8

III

3.7

3.1

IV

6.8

4.0

1988

2014

I

2.3

-0.9

II

5.4

4.6

III

2.3

5.2

IV

5.4

2.0

1989

2015

I

4.1

3.2

II

3.2

2.7

III

3.0

1.6

IV

0.9

0.5

1990

2016

I

4.5

0.6

II

1.6

2.2

III

0.1

2.8

IV

-3.4

1.8

1991

2017

I

-1.9

1.2

II

3.1

3.1

III

1.9

3.0

IV

1.8

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 2016. Growth after the global recession from IVQ2007 to IIQ2009 has not been sufficiently high to compensate for the contraction as it had in past economic cycles. 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 2016 is 3.2 percent. The average growth rate from IV2007 to IIIQ2017 is only 1.4 percent with 2.8 percent annual equivalent from the end of the recession in IVQ2001 to the end of the expansion in IVQ2007. 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 33 quarters from IIIQ2009 to IIIQ2017. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the first estimate of GDP for IIIQ2017 (https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp3q17_adv.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by dividing 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 https://cmpassocregulationblog.blogspot.com/2017/10/destruction-of-household-nonfinancial.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, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989, 4.7 percent from IQ1983 to IIQ1989, 4.7 percent from IQ1983 to IIIQ1989, 4.5 percent from IQ1983 to IVQ1989. 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990, 4.0 percent from IQ1983 to IVQ1990, 3.8 percent from IQ1983 to IQ1991 and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier https://cmpassocregulationblog.blogspot.com/2017/10/destruction-of-household-nonfinancial.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). 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 IIIQ2017 would have accumulated to 33.4 percent. GDP in IIIQ2017 would be $19,999.1 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2842.2 billion than actual $17,156.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 21.1 million unemployed or underemployed equivalent to actual unemployment/underemployment of 12.5 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2017/10/twenty-one-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/09/twenty-two-million-unemployed-or.html). US GDP in IIIQ2017 is 14.2 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $17,156.9 billion in IIIQ2017 or 14.4 percent at the average annual equivalent rate of 1.4 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 of manufacturing at average 3.1 percent per year from Sep 1919 to Sep 2017. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.2393 in Dec 2007 to 145.7662 in Sep 2017. The actual index NSA in Sep 2017 is 104.2863, which is 28.5 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Sep 2017. Using trend growth of 2.0 percent per year, the index would increase to 131.2915 in Sep 2017. The output of manufacturing at 104.2863 in Sep 2017 is 20.6 percent below trend under this alternative calculation.

Chart I-1A, US, Real GDP 1929-2016

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 2017. 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 expansions and there could be another contraction or conventional recession in the future. The average rate of growth from 1947 to 2016 is 3.2 percent. The annual equivalent growth rate from IVQ2007 to IIIQ2017 is only 1.4 percent with 2.8 percent from the end of the recession in IVQ2001 to the end of the expansion in IVQ2007.

Chart I-2, US, Real GDP, Quarterly, 1947-2017

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 1983-1990. 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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

Chart I-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1990

Source: US Bureau of Economic Analysis

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

In contrast, growth rates in the comparable first thirty quarters of expansion from 2009 to 2017 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 2009-2017

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 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, 4.2 percent in 1988 and 3.7 percent in 1989. In contrast, GDP grew 2.5 percent in 2010, 1.6 percent in 2011, 2.2 percent in 2012, 1.7 percent in 2013, 2.6 percent in 2014 and 2.9 percent in 2015. GDP grew 1.5 percent in 2016. Actual annual equivalent GDP growth in the twenty-three quarters from IQ2012 to III2017 is 2.1 percent and 2.3 percent in the four quarters ending in IIIQ2017. GDP grew at 4.2 percent in 1985, 3.5 percent in 1986, 3.5 percent in 1987, 4.2 percent in 1988 and 3.7 percent in 1989. The forecasts of the central tendency of participants of the Federal Open Market Committee (FOMC) are in the range of 2.2 to 2.5 percent in 2017 (https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20170920.pdf) with less reliable forecast of 2.0 to 2.3 percent in 2018 (https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20170920.pdf). Growth of GDP in the expansion from IIIQ2009 to IIIQ2017 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

1939

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

2.2

1943

17.0

1993

2.7

2013

1.7

1944

8.0

1994

4.0

2014

2.6

1945

-1.0

1995

2.7

2015

2.9

1946

-11.6

1996

3.8

2016

1.5

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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

Chart I-7 provides the rates of growth during the 2000s. Growth rates in the initial thirty-two 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 13.1 percent of the effective US labor force (https://cmpassocregulationblog.blogspot.com/2017/09/twenty-two-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/08/data-dependent-monetary-policy-with.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 in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.7 percent, which is almost equal to the decline of 4.2 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.4 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

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

Number of Quarters

Cumulative Percentage Contraction

Average Percentage Rate

IIQ1953 to IIQ1954

3

-2.4

-0.8

IIIQ1957 to IIQ1958

3

-3.0

-1.0

IVQ1973 to IQ1975

5

-3.1

-0.6

IQ1980 to IIIQ1980

2

-2.2

-1.1

IIIQ1981 to IVQ1982

4

-2.5

-0.64

IVQ2007 to IIQ2009

6

-4.2

-0.72

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

Table I-5 shows the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the thirty-three quarters of the current cyclical expansion from IIIQ2009 to IIIQ2017. 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
  • 4.8 percent in the first twenty-four quarters of expansion from IQ1983 to IVQ1988
  • 4.8 percent in the first twenty-five quarters of expansion from IQ1983 to IQ1989
  • 4.7 percent in the first twenty-six quarters of expansion from IQ1983 to IIQ1989
  • 4.7 percent in the first twenty-seven quarters of expansion from IQ1983 to IIIQ1989
  • 4.5 percent in the first twenty-eight quarters of expansion from IQ1983 to IVQ1989
  • 4.5 percent in the first twenty-nine quarters of expansion from IQ1983 to IQ1990
  • 4.4 percent in the first thirty quarters of expansion from IQ1983 to IIQ1990
  • 4.3 percent in the first thirty-one quarters of expansion from IQ1983 to IIIQ1990
  • 4.0 percent in the first thirty-two quarters of expansion from IQ1983 to IVQ1990
  • 3.8 percent in the first thirty-three quarters of expansion from IQ1983 to IQ1991

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 relative to historical experience with annual growth of 2.5 percent in 2010 decelerating to 1.6 percent annual growth in 2011, 2.2 percent in 2012, 1.7 percent in 2013, 2.6 percent in 2014, 2.9 percent in 2015 and 1.5 percent in 2016 (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. 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989, 4.7 percent from IQ1983 to IIQ1989, 4.7 percent from IQ1983 to IIIQ1989. 4.5 percent from IQ1983 to IVQ1989, 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990. 4.0 percent from IQ1983 to IVQ1990. 3.8 percent from IQ1983 to IQ1991 and at 7.8 percent from IQ1983 to IVQ1983. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). GDP grew 2.7 percent in the first four quarters of the expansion from IIIQ2009 to IIQ2010. GDP growth in the twenty-three quarters from 2012 to 2017 accumulated to 12.9 percent. This growth is equivalent to 2.1 percent per year, obtained by dividing GDP in IIIQ2017 of $17,156.9 billion by GDP in IVQ2011 of $15,190.3 billion and compounding by 4/23: {[($17,156.9/$15,190.3)4/23 -1]100 = 2.1 percent}.

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

Number
of
Quarters

Cumulative Growth

∆%

Average Annual Equivalent Growth Rate

IIIQ 1954 to IQ1957

11

12.8

4.5

First Four Quarters IIIQ1954 to IIQ1955

4

7.8

IIQ1958 to IIQ1959

5

10.0

7.9

First Four Quarters

IIIQ1958 to IIQ1959

4

9.2

IIQ1975 to IVQ1976

8

8.3

4.1

First Four Quarters IIIQ1975 to IIQ1976

4

6.1

IQ1983-IQ1986

IQ1983-IIIQ1986

IQ1983-IVQ1986

IQ1983-IQ1987

IQ1983-IIQ1987

IQ1983 to IIIQ1987

IQ1983 to IVQ1987

IQ1983 to IQ1988

IQ1983 to IIQ1988

IQ1983 to IIIQ1988

IQ1983 to IVQ1988

IQ1983 to IQ1989

IQ1983 to IIQ1989

IQ1983 to IIIQ1989

IQ1983 to IVQ1989

IQ1983 to IQ1990

IQ1983 to IIQ1990

IQ1983 to IIIQ1990

IQ1983 to IVQ1990

IQ1983 to IQ1991

13

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

19.9

21.6

22.3

23.1

24.5

25.6

27.7

28.4

30.1

30.9

32.6

34.0

35.0

36.0

36.3

37.8

38.3

38.4

37.2

36.5

5.7

5.4

5.2

5.0

5.0

4.9

5.0

4.9

4.9

4.8

4.8

4.8

4.7

4.7

4.5

4.5

4.4

4.3

4.0

3.8

First Four Quarters IQ1983 to IVQ1983

4

7.8

Average First Four Quarters in Four Expansions*

7.7

IIIQ2009 to IIIQ2017

33

19.5

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 1990. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

Chart I-8, US, Real GDP, 1980-1990

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 2017. The economy has underperformed during the first thirty 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, 2007-2017

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 19.5 percent (first to the last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IIIQ2017 with the second estimate and revisions is higher by only 14.4 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 IIIQ2017 would have accumulated to 33.4 percent. GDP in IIIQ2017 would be $19,999.1 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2842.2 billion than actual $17,156.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 21.1 million unemployed or underemployed equivalent to actual unemployment/underemployment of 12.5 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2017/10/twenty-one-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/09/twenty-two-million-unemployed-or.html). US GDP in IIIQ2017 is 14.2 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $17,156.9 billion in IIIQ2017 or 14.4 percent at the average annual equivalent rate of 1.4 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 of manufacturing at average 3.1 percent per year from Sep 1919 to Sep 2017. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.2393 in Dec 2007 to 145.7662 in Sep 2017. The actual index NSA in Sep 2017 is 104.2863, which is 28.5 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Sep 2017. Using trend growth of 2.0 percent per year, the index would increase to 131.2915 in Sep 2017. The output of manufacturing at 104.2863 in Sep 2017 is 20.6 percent below trend under this alternative calculation.

Table I-6 shows that the contraction 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 0.7 percent relative to IVQ2011 and 2.8 percent relative to IQ2011, decelerating to 0.5 percent in IIQ2012 and 2.5 percent relative to IIQ2011 and 0.1 percent in IIIQ2012 and 2.4 percent relative to IIIQ2011. Growth was 0.0 percent in IVQ2012 with 1.3 percent relative to a year earlier but mostly because of deduction of 1.54 percentage points of inventory divestment and 0.42 percentage points of reduction of one-time national defense expenditures. Growth was 0.7 percent in IQ2013 and 1.3 percent relative to IQ2012 in large part because of burning savings to consume caused by financial repression of zero interest rates. There is similar growth of 0.2 percent in IIQ2013 and 1.0 percent relative to a year earlier. In IIIQ2013, GDP grew 0.8 percent relative to the prior quarter and 1.7 percent relative to the same quarter a year earlier with inventory accumulation contributing 1.60 percentage points to growth at 3.1 percent SAAR in IIIQ2013. GDP increased 1.0 percent in IVQ2013 and 2.7 percent relative to a year earlier. GDP fell 0.2 percent in IQ2014 and grew 1.7 percent relative to a year earlier. Inventory divestment deducted 1.69 percentage points from GDP growth in IQ2014. GDP grew 1.1 percent in IIQ2014, 2.7 percent relative to a year earlier and at 4.6 SAAR with inventory change contributing 0.91 percentage points. GDP grew 1.3 percent in IIIQ2014 and 3.2 percent relative to a year earlier. GDP grew 0.5 percent in IVQ2014 and 2.7 percent relative to a year earlier. GDP increased 0.8 percent in IQ2015 and increased 3.8 percent relative to a year earlier partly because of low level during contraction of 0.2 percent in IQ2014. GDP grew 0.7 percent in IIQ2015 and 3.3 percent relative to a year earlier. GDP grew 0.4 percent in IIIQ2015 and 2.4 percent relative to a year earlier. GDP grew 0.1 percent in IVQ2015 and increased 2.0 percent relative to a year earlier. GDP grew 0.1 percent in IQ2016 and increased 1.4 percent relative to a year earlier. GDP grew 0.6 percent in IIQ2016 and increased 1.2 percent relative to a year earlier. GDP grew 0.7 percent in IIIQ2016 and increased 1.5 percent relative to a year earlier. GDP grew 0.4 percent in IVQ2016 and increased 1.8 percent relative to a year earlier. GDP grew 0.3 percent in IQ2017 and increased 2.0 percent relative to a year earlier. GDP grew 0.8 percent in IIQ2017 and 2.2

percent relative to a year earlier. GDP increased 0.7 percent in IIIQ2017 and increased 2.3 percent relative to a year earlier. 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 in the form of zero interest rates and bloated balance sheet of the Fed.

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

15,291.0

2.0

0.7

2.8

IIQ2012

15,362.4

2.5

0.5

2.5

IIIQ2012

15,380.8

2.6

0.1

2.4

IVQ2012

15,384.3

2.6

0.0

1.3

IQ2013

15,491.9

3.3

0.7

1.3

IIQ2013

15,521.6

3.5

0.2

1.0

IIIQ2013

15,641.3

4.3

0.8

1.7

IVQ2013

15,793.9

5.4

1.0

2.7

IQ2014

15,757.6

5.1

-0.2

1.7

IIQ2014

15,935.8

6.3

1.1

2.7

IIIQ2014

16,139.5

7.7

1.3

3.2

IVQ2014

16,220.2

8.2

0.5

2.7

IQ2015

16,350.0

9.1

0.8

3.8

IIQ2015

16,460.9

9.8

0.7

3.3

IIIQ2015

16,527.6

10.2

0.4

2.4

IVQ2015

16,547.6

10.4

0.1

2.0

IQ2016

16,571.6

10.5

0.1

1.4

IIQ2016

16,663.5

11.2

0.6

1.2

IIIQ2016

16,778.1

11.9

0.7

1.5

IVQ2016

16,851.4

12.4

0.4

1.8

IQ2017

16,903.2

12.7

0.3

2.0

IIQ2017

17,031.1

13.6

0.8

2.2

IIIQ2017

17,156.9

14.4

0.7

2.3

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 1991. 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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

Chart I-10, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1991

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 2007-2017

Source: US Bureau o 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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

Chart I-12, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1991

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 2017. 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 2007-2017

Source: US Bureau of Economic Analysis

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

The revised estimates and earlier estimates from IQ2008 to IQ2016 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 revision of Jul 20, 2015, reduced significantly the rate of growth in 2013. The revision of Jul 27, 2016, increased the growth rate in 2013 and 2014. 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 29, 2016

Rev Jul 30, 2015

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

2.7

2.3

3.7

2.0

II

1.9

1.6

1.2

1.3

III

0.5

2.5

2.8

3.1

IV

0.1

0.1

0.1

0.4

2013

I

2.8

1.9

2.7

1.1

1.8

II

0.8

1.1

1.8

2.5

III

3.1

3.0

4.5

4.1

IV

4.0

3.8

3.5

2.6

2014

I

-1.2

-0.9

-2.1

-2.9

II

4.0

4.6

III

5.0

4.3

IV

2.3

2.1

2015

I

2.0

0.6

II

2.6

III

2.0

IV

0.9

2016

I

0.8

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 IQ1990 than from IIIQ2009 to IIIQ2017, 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 2017. 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 3.1 percent consisted of positive contribution of 1.28 percentage points of personal consumption expenditures (PCE) plus positive contribution of 2.08 percentage points of gross private domestic investment (GDI) of which 1.60 percentage points of inventory investment (∆PI), contribution of net exports (trade or exports less imports) of 0.13 percentage points and deduction of 0.37 percentage points of government consumption expenditures and gross investment (GOV) partly because of one-time deduction of national defense expenditures of 0.31 percentage points. Growth at 4.0 percent in IVQ2013 had strongest contributions of 2.29 percentage points of PCE and 1.29 percentage points of trade. Growth of GDP at minus 0.9 percent in IQ2014 is mostly contribution of 1.27 percentage points by PCE with deduction of 0.93 percentage points by GDI, inventory divestment of 1.69 percentage points and trade deducting 1.14 percentage points. Growth at 4.6 percent in IIQ2014 consists of contributions of 2.33 percentage points by PCE and 2.47 percentage points by GDI with 0.91 percentage points by inventory change. Trade deducted 0.40 percentage points and government added 0.20 percentage points mostly because of contribution of 0.31 percentage points of expenditures by state and local government. Growth at 5.2 percent in IIIQ2014 consists of contribution of 2.65 percentage points by PCE, 1.90 percentage points by GDI, 0.28 percentage points by trade and 0.39 percentage points by government of which 0.11 percentage points by national defense expenditures growing at 2.4 percent in annual equivalent. Growth at 2.0 percent in IVQ2014 consists of contribution of 3.36 percentage points by PCE and deduction of 0.21 percentage points by GDI and deduction of 0.26 percentage points by inventory investment. Net trade deducted 1.02 percentage points while government deducted 0.11 percentage mostly because of deduction of 0.48 percentage points by national defense expenditure declining at 10.9 percent in IVQ2014. Growth of GDP at 3.2 percent in IQ2015 consisted mostly of contributions of 2.48 percentage points by personal consumption expenditures and 1.45 percentage points by inventory accumulation while trade deducted 1.64 percentage points and government contributed 0.27 percentage points. Growth at 2.7 percent in IIQ2015 consisted mostly of contributions of 2.03 percentage points by personal consumption expenditures, 0.14 percentage points by gross domestic investment, deduction of 0.03 percentage points by net trade and contribution of 0.60 percentage points by government consumption and expenditures. Growth at 1.6 percent in IIIQ2015 consisted mostly of contribution of personal consumption expenditures (PCE) of 1.86 percentage points with government adding 0.21 percentage points. Gross domestic investment (GDI) contributed 0.33 percentage points with deduction of inventory divestment of 0.22 percentage points while net trade deducted 0.77 percentage points. Growth at 0.5 percent in IVQ2015 consisted mostly of contribution of 1.80 percentage points by personal consumption expenditures (PCE). GDI deducted 1.08 percentage points while trade deducted 0.28 percentage points and inventory divestment deducted 0.68 percentage points. Growth at 0.6 percent in IQ2016 consisted mostly of contribution of 1.23 percentage points by personal consumption expenditures (PCE). There were deductions of 0.68 percentage points by gross domestic investment (GDI) and 0.64 percentage points by inventory change. Net trade subtracted 0.28 percentage points and government added 0.32 percentage points. Growth at 2.2 percent in IIQ2016 consisted mostly of contribution of 2.57 percentage points by PCE with GDI deducting 0.45 percentage points. Inventory divestment deducted 0.67 percentage points. Growth at 2.8 percent in IIIQ2016 consisted mostly of contribution of 1.92 by PCE with GDI adding 0.40 percentage points. Inventory investment contributed 0.16 percentage points and trade added 0.36 percentage points. Growth at 1.8 percent in IVQ2016 had positive contributions of 1.99 percentage points of PCE, 1.34 of GDI and 0.03 of GOV. Inventory investment added 1.06 percentage points and net trade deducted 1.61 percentage points. Growth at 1.2 percent in IQ2017 originated in contributions of 1.32 percentage points by PCE and 0.22 percentage points by net trade. GOV deducted 0.11 percentage points and inventory divestment subtracted 1.46 percentage points. Growth of GDP at 3.1 percent in IIQ217 originated in contributions of 2.24 percentage points by PCE, 0.64 percentage points by GDI, 0.21 percentage points by net trade and 0.12 percentage points by inventory investment. Government deducted 0.03 percentage points. Growth at 3.0 percent in IIIQ2017 consisted of positive contributions of 1.62 percentage points by PCE, 0.98 percentage points by GDI, 0.73 percentage points by inventory investment and 0.41 percentage points by net trade. GOV deducted 0.02 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

2017

I

1.2

1.32

-0.20

-1.46

0.22

-0.11

II

3.1

2.24

0.64

0.12

0.21

-0.03

III

3.0

1.62

0.98

0.73

0.41

-0.02

2016

I

0.6

1.23

-0.68

-0.64

-0.28

0.32

II

2.2

2.57

-0.45

-0.67

0.28

-0.16

III

2.8

1.92

0.40

0.16

0.36

0.09

IV

1.8

1.99

1.34

1.06

-1.61

0.03

2015

I

3.2

2.48

2.12

1.45

-1.64

0.27

II

2.7

2.03

0.14

-0.63

-0.03

0.60

III

1.6

1.86

0.33

-0.22

-0.77

0.21

IV

0.5

1.80

-1.08

-0.68

-0.28

0.05

2014

I

-0.9

1.27

-0.93

-1.69

-1.14

-0.11

II

4.6

2.33

2.47

0.91

-0.40

0.20

III

5.2

2.65

1.90

0.44

0.28

0.39

IV

2.0

3.36

-0.21

-0.26

-1.02

-0.11

2013

I

2.8

1.32

2.04

0.92

0.30

-0.83

II

0.8

0.58

0.78

0.08

-0.21

-0.37

III

3.1

1.28

2.08

1.60

0.13

-0.37

IV

4.0

2.29

0.91

-0.11

1.29

-0.53

2012

I

2.7

1.63

1.47

-0.53

-0.02

-0.40

II

1.9

0.45

1.53

0.56

0.28

-0.39

III

0.5

0.72

-0.18

-0.18

0.16

-0.22

IV

0.1

0.78

-0.51

-1.54

0.58

-0.75

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

1989

I

4.1

1.18

2.41

1.80

0.85

-0.35

II

3.2

1.20

-0.70

-0.79

1.35

1.34

III

3.0

2.52

-0.64

-1.84

0.44

0.70

IV

0.9

1.13

-0.53

0.37

-0.20

0.45

1990

I

4.5

2.21

0.69

-0.10

0.25

1.30

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

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

Source: US Bureau of Economic Analysis

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

The Bureau of Economic Analysis (BEA) (pages 1-2) explains growth of GDP in IIIQ2017 as follows (https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp3q17_adv.pdf):

“Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the third quarter of 2017 (table 1), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.1 percent. The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see “Source Data for the Advance Estimate” on page 2). The "second" estimate for the third quarter, based on more complete data, will be released on November 29, 2017.

The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, exports, and federal government spending. These increases were partly offset by negative contributions from residential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased (table 2).

The deceleration in real GDP growth in the third quarter primarily reflected decelerations in PCE, in nonresidential fixed investment, and in exports that were partly offset by an acceleration in private inventory investment and a downturn in imports.”

There are positive contributions to growth in IIIQ2017 shown in Table I-9:

  • Personal consumption expenditures (PCE) growing at 2.4 percent
  • Durable goods growing at 8.3 percent
  • Growth of nonresidential fixed investment (NRFI) at 3.9 percent
  • Growth of exports at 2.3 percent
  • Growth of federal government expenditures at 1.1 percent and national defense expenditures at 2.3 percent
  • Inventory investment adding 0.73 percentage points
  • Imports, which are a deduction from growth, contracting at 0.8 percent

There were negative contributions in IIIQ2017:

  • Residential fixed investment contracting at 6.0 percent
  • Contraction of state and local government expenditures at 0.9 percent
  • Government expenditures contracting at 0.1 percent

The BEA explains acceleration in real GDP growth in IIIQ2017 by:

  • Growth of consumption of durable goods at 8.3 percent in IIIQ2017 compared with growth at 7.6 percent in IIQ2017
  • Contraction of government expenditures at 0.1 percent in IIIQ2017 compared with contraction at 0.2 percent in IIQ2017
  • Contraction of residential fixed investment at 6.0 percent in IIIQ2017 compared with contraction at 7.3 percent in IIQ2017
  • Contraction of imports that are a deduction from growth at 0.8 percent in IIIQ2017 compared with growth at 1.5 percent in IIQ2017
  • Contribution of 0.73 percentage points by inventory investment compared with contribution of 0.12 percentage points in IIQ2017
  • Contraction of state and local government expenditures at 0.9 percent in IIIQ2017 compared with contraction at 1.5 percent in IIQ2017

The BEA finds offsetting decelerating factors:

· Growth of PCE at 2.4 percent in IIIQ2017 compared with growth at 3.3 percent in IIQ2017

· Growth of NRFI at 3.9 percent in IIIQ2017 compared with 6.7 percent in IIQ2017

· Growth of exports at 2.3 percent in IIIQ2017 compared with growth at 3.5 percent in IIQ2017

· Growth of federal government expenditures at 1.1 percent in IIIQ2017 compared with 3.5 percent in IIQ2017

· Growth of national defense expenditures at 2.3 percent in IIIQ2017 compared with 4.7 percent in IIQ2017

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 decreased at the rate of 0.5 percent in IIIQ2013 compared with a year earlier. Contraction of real disposable income of 2.8 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 2.5 percent in IQ2014 relative to a year earlier and 3.2 percent in IIQ2014 relative to a year earlier. Real disposable personal income increased 3.7 percent in IIIQ2014 relative to a year earlier and 4.9 percent in IVQ2014 compared with a year earlier. Real disposable personal income grew 4.9 percent in IQ2015 relative to a year earlier partly because of contraction of energy prices and increased at 4.6 percent in IIQ2015. Real disposable personal income grew at 4.0 percent in IIIQ2015 relative to a year earlier and at 3.2 percent in IVQ2015 relative to a year earlier. Real disposable income grew at 2.2 percent in IQ2016 relative to a year earlier and at 1.7 percent in IIQ2016 relative to a year earlier. Real disposable income grew at 1.4 percent in IIIQ2016 relative to a year earlier and at 0.2 percent in IVQ2016 compared with a year earlier. Real disposable income grew at 0.9 percent in IQ2017 relative to a year earlier and grew at 1.2 percent in IIQ2017 relative to a year earlier. Real disposable income grew at 1.2 percent in IIIQ2017 relative to a year earlier. The effects of financial repression, or zero interest, are vividly shown in the decline of the savings rate, or personal saving as percent of disposable income from 9.2 percent in IVQ2012 to 5.3 percent in IIIQ2013 and 4.7 percent in IVQ2013. The savings rate eased to 5.3 percent in IQ2014, increasing to 5.7 percent in IIQ2014 and stabilizing to 5.8 percent in IIIQ2014. The savings rate moved to 5.9 percent in IVQ2014, increasing to 6.0 percent in IQ2015. The savings rate increased to 6.2 percent in IIQ2015, 6.0 percent in IIIQ2015 and 6.1 percent in IVQ2015. The savings ratio moved to 5.7 percent in IQ2016 and 5.3 percent in IIQ2016. The savings ratio eased at 4.8 percent in IIIQ2016 and at 3.6 percent in IVQ2016. The savings ratio reached 3.9 percent in IQ2017 and 3.8 percent in IIQ2017. The savings ratio eased to 3.4 percent in IIIQ2017. 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, %

IIIQ 

2016

IVQ 

2016

IQ 2017

II

Q2017

III

Q2017

GDP

2.8

1.8

1.2

3.1

3.0

PCE

2.8

2.9

1.9

3.3

2.4

Durable Goods

9.4

9.2

-0.1

7.6

8.3

NRFI

3.4

0.2

7.2

6.7

3.9

RFI

-4.5

7.1

11.1

-7.3

-6.0

Exports

6.4

-3.8

7.3

3.5

2.3

Imports

2.7

8.1

4.3

1.5

-0.8

GOV

0.5

0.2

-0.6

-0.2

-0.1

Federal GOV

1.6

-0.5

-2.4

1.9

1.1

National Defense

2.5

-3.2

-3.3

4.7

2.3

Cont to GDP Growth % Points

0.10

-0.13

-0.13

0.18

0.09

State/Local GOV

-0.2

0.6

0.5

-1.5

-0.9

∆ PI (PP)

0.16

1.06

-1.46

0.12

0.73

Final Sales of Domestic Product

2.6

0.7

2.7

2.9

2.3

Gross Domestic Purchases

2.4

3.3

1.0

2.8

2.5

Prices Gross
Domestic Purchases

1.5

1.8

2.6

0.9

1.8

Prices of GDP

1.4

2.0

2.0

1.0

2.2

Prices of GDP Excluding Food and Energy

1.9

1.6

2.4

1.1

1.7

Prices of PCE

1.7

2.0

2.2

0.3

1.5

Prices of PCE Excluding Food and Energy

2.0

1.3

1.8

0.9

1.3

Prices of Market Based PCE

1.4

1.9

2.3

-0.4

1.3

Prices of Market Based PCE Excluding Food and Energy

1.6

1.1

1.9

0.3

1.0

Real Disposable Personal Income*

1.4

0.2

0.9

1.2

1.2

Personal Saving As % Disposable Income

4.8

3.6

3.9

3.8

3.4

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 in Table I-10. PCE (personal consumption expenditures) is equivalent to 68.9 percent of GDP and is under pressure with stagnant real disposable income per person, elevated 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, %

IIIQ2017

GDP

100.0

PCE

68.9

   Goods

22.0

            Durable

7.6

            Nondurable

14.5

   Services

46.9

Gross Private Domestic Investment

16.6

    Fixed Investment

16.4

        NRFI

12.6

            Structures

2.9

            Equipment & Software

5.7

            Intellectual Property

4.1

        RFI

3.8

     Change in Private
      Inventories

0.2

Net Exports of Goods and Services

-2.7

       Exports

12.0

                    Goods

7.9

                    Services

4.1

       Imports

14.8

                     Goods

12.0

                     Services

2.7

Government

17.2

        Federal

6.5

           National Defense

3.8

           Nondefense

2.7

        State and Local

10.7

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, 2014 2015 and 2016. 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, 2.2 percent in 2012 after 14 quarters of expansion, 1.7 percent in 2013 after 18 consecutive quarters of expansion, 2.6 percent in 2014 after 22 consecutive quarters of expansion and 2.9 percent in 2015 after twenty-six consecutive quarters of expansion. GDP grew at 1.5 percent in 2016 after thirty 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, 2014, 2015 and 2016.

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

1988

4.2

2.66

0.45

-0.13

0.81

0.28

1989

3.7

1.86

0.72

0.17

0.51

0.59

1990

1.9

1.31

-0.45

-0.21

0.40

0.66

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

2.2

1.01

1.52

0.14

0.08

-0.38

2013

1.7

1.00

0.95

0.19

0.29

-0.56

2014

2.6

1.95

0.90

-0.07

-0.16

-0.12

2015

2.9

2.47

0.87

0.23

-0.73

0.25

2016

1.5

1.86

-0.28

-0.40

-0.23

0.13

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 2016 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 GDI 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, 2014, 2015 and 2016. PCE contributed 1.55 PPs in 2011 after 1.32 PPs in 2010. The contribution of PCE fell to 1.01 points in 2012 and to 1.00 PPs in 2013, increasing to 1.95 PPs in 2014. PCE contributed 2.47 percentage points in 2015 and added 1.86 PPs in 2016. The breakdown into goods and services is similar but with contributions in 2012 of 0.63 PPs of goods and 0.38 PPs of services. In 2013, goods contributed 0.71 PPs and services 0.28 PPs. Goods contributed 0.88 PPs in 2014 and services contributed 1.07 PPs. Goods contributed 1.03 percentage points in 2015 and services 1.44 percentage points. Goods contributed 0.81 PPs in 2016 and services contributed 1.05 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 1.52 PPs with fixed investment increasing its contribution to 1.38 PPs and residential investment contributing 0.33 PPs for the first time since 2009. GDI contributed 1.52 PPs in 2012 with 1.38 PPs from fixed investment and 0.14 PPs from inventory change. GDI contributed 0.95 PPs in 2013, 0.90 PPs in 2014 and 0.87 PPs in 2015. GDI deducted 0.28 PPs in 2016 with contribution of 0.12 PPs of fixed investment and deduction of 0.40 PPP by inventory change. Net exports of goods and services deducted marginally in 2011 with 0.02 PPs and added 0.08 PPs in 2012. Net trade contributed 0.29 PPs in 2013 and deducted 0.16 PPs in 2014. Net trade deducted 0.73 percentage points in 2015 and deducted 0.23 PPs in 2016. The contribution of exports fell from 1.33 PPs in 2010 and 0.87 PPs in 2011 to only 0.46 PPs in 2012, 0.47 PPs in 2013 and 0.58 PPs in 2014. Exports contributed only 0.05 percentage points in 2015 and deducted 0.04 percentage points in 2016. Government deducted 0.65 PPs in 2011, 0.38 PPs in 2012 and 0.56 PPs in 2013. Government deducted 0.12 PPs in 2014 and contributed 0.25 PPs in 2015, contributing 0.13 PPs in 2016. Demand weakened in 2013 with lower contribution of personal consumption expenditures of 1.00 PPs and of gross domestic investment of 0.95 PPs. PCE contributed 1.95 PPs in 2014 and GDI 0.90 PPs. PCE contributed 2.47 PPs in 2015 and GDI contributed 0.87 PPs. PCE contributed 1.86 PPs in 2016 and GDI deducted 0.28 PPs. Net trade contributed only 0.29 PPs in 2013 and deducted 0.16 PPs in 2014, deducting 0.73 PPs in 2015. Net trade deducted 0.23 PPs in 2016. 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

2015

GDP Growth ∆%

-2.8

2.5

1.6

2.2

1.7

2.6

2.9

Personal Consumption Expenditures (PCE)

-1.08

1.32

1.55

1.01

1.00

1.95

2.47

  Goods

-0.68

0.77

0.71

0.63

0.71

0.88

1.03

     Durable

-0.41

0.43

0.43

0.53

0.45

0.50

0.57

     Nondurable

-0.27

0.34

0.28

0.10

0.27

0.38

0.47

  Services

-0.40

0.55

0.84

0.38

0.28

1.07

1.44

Gross Private Domestic Investment (GPDI)

-3.52

1.66

0.73

1.52

0.95

0.90

0.87

Fixed Investment

-2.77

0.21

0.86

1.38

0.76

0.97

0.64

    Nonresidential

-2.04

0.28

0.85

1.05

0.43

0.86

0.30

      Structures

-0.70

-0.49

0.06

0.32

0.04

0.30

-0.06

     Equipment, software

-1.29

0.70

0.66

0.58

0.26

0.39

0.21

      Intellectual Property

-0.05

0.07

0.13

0.15

0.13

0.18

0.15

    Residential

-0.73

-0.07

0.01

0.33

0.33

0.11

0.34

Change Private Inventories

-0.76

1.45

-0.14

0.14

0.19

-0.07

0.23

Net Exports of Goods and Services

1.19

-0.46

-0.02

0.08

0.29

-0.16

-0.73

   Exports

-1.07

1.33

0.87

0.46

0.47

0.58

0.05

      Goods

-1.03

1.08

0.57

0.34

0.29

0.42

-0.03

      Services

-0.04

0.25

0.29

0.12

0.18

0.16

0.09

   Imports

2.26

-1.79

-0.89

-0.38

-0.18

-0.74

-0.78

      Goods

2.15

-1.69

-0.78

-0.30

-0.17

-0.67

-0.67

      Services

0.10

-0.10

-0.11

-0.09

-0.02

-0.07

-0.11

Government Consumption Expenditures and Gross Investment

0.64

0.02

-0.65

-0.38

-0.56

-0.12

0.25

  Federal

0.44

0.37

-0.24

-0.15

-0.46

-0.18

-0.01

    National Defense

0.27

0.18

-0.13

-0.18

-0.34

-0.18

-0.09

    Nondefense

0.17

0.19

-0.11

0.03

-0.12

0.01

0.09

  State and Local

0.20

-0.35

-0.41

-0.22

-0.09

0.06

0.26

2013

2014

2015

2016

GDP Growth ∆%

1.7

2.6

2.9

1.5

Personal Consumption Expenditures (PCE)

1.00

1.95

2.47

1.86

  Goods

0.71

0.88

1.03

0.81

     Durable

0.45

0.50

0.57

0.41

     Nondurable

0.27

0.38

0.47

0.40

  Services

0.28

1.07

1.44

1.05

Gross Private Domestic Investment (GPDI)

0.95

0.90

0.87

-0.28

Fixed Investment

0.76

0.97

0.64

0.12

    Nonresidential

0.43

0.86

0.30

-0.08

      Structures

0.04

0.30

-0.06

-0.12

     Equipment, software

0.26

0.39

0.21

-0.20

      Intellectual Property

0.13

0.18

0.15

0.25

    Residential

0.33

0.11

0.34

0.20

Change Private Inventories

0.19

-0.07

0.23

-0.40

Net Exports of Goods and Services

0.29

-0.16

-0.73

-0.23

   Exports

0.47

0.58

0.05

-0.04

      Goods

0.29

0.42

-0.03

0.02

      Services

0.18

0.16

0.09

-0.06

   Imports

-0.18

-0.74

-0.78

-0.19

      Goods

-0.17

-0.67

-0.67

-0.11

      Services

-0.02

-0.07

-0.11

-0.09

Government Consumption Expenditures and Gross Investment

-0.56

-0.12

0.25

0.13

  Federal

-0.46

-0.18

-0.01

0.00

    National Defense

-0.34

-0.18

-0.09

-0.03

    Nondefense

-0.12

0.01

0.09

0.03

  State and Local

-0.09

0.06

0.26

0.13

Source: US Bureau of Economic Analysis

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

Manufacturing jobs not seasonally adjusted increased 118,000 from Sep 2016 to
Sep 2017 or at the average monthly rate of 9,833. Industrial production increased 0.3 percent in Sep 2017 and decreased 0.7 percent in Aug 2017 after decreasing 0.7 percent in Jul 2017, with all data seasonally adjusted. The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on Mar 31, 2017 (https://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm):

“The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization.[1] On net, the revisions were small, and the contour of total IP is little changed. Total IP is still reported to have moved up about 22 percent from the end of the recession in mid-2009 through late 2014, to have declined in 2015, and to have moved sideways in 2016. The most notable difference between the current and the previous estimates is that total IP is now reported to have decreased about 2 3/4 percent in 2015, whereas it previously showed a decline of about 1 3/4 percent.[2] The incorporation of detailed data for manufacturing from the U.S. Census Bureau's 2015 Annual Survey of Manufactures (ASM) accounts for the majority of the differences between the current and the previously published estimates.

Capacity for total industry is now reported to have expanded about 1 percent in 2015, a lower rate of increase than was reported earlier. Capacity was little changed in 2016 and is expected to increase 1 percent in 2017. Compared with prior reports, the rates of change in 2016 and 2017 are now a little smaller. In the fourth quarter of 2016, capacity utilization for total industry stood at 75.8 percent, a rate 0.4 percentage point higher than previously published but still 4.1 percentage points below its long-run (1972–2016) average. Relative to earlier estimates, the utilization rates in recent years are now a little higher.” Manufacturing fell 22.3 from the peak in Jun 2007 to the trough in Apr 2009 and increased 15.5 percent from the trough in Apr 2009 to Dec 2016. Manufacturing grew 19.3 percent from the trough in Apr 2009 to Sep 2017. Manufacturing in Sep 2017 is lower by 7.4 percent relative to 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 IIIQ2017 would have accumulated to 33.4 percent. GDP in IIIQ2017 would be $19,999.1 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2842.2 billion than actual $17,156.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 21.1 million unemployed or underemployed equivalent to actual unemployment/underemployment of 12.5 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2017/10/twenty-one-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/09/twenty-two-million-unemployed-or.html). US GDP in IIIQ2017 is 14.2 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $17,156.9 billion in IIIQ2017 or 14.4 percent at the average annual equivalent rate of 1.4 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. 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 of manufacturing at average 3.1 percent per year from Sep 1919 to Sep 2017. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.2393 in Dec 2007 to 145.7662 in Sep 2017. The actual index NSA in Sep 2017 is 104.2863, which is 28.5 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Sep 2017. Using trend growth of 2.0 percent per year, the index would increase to 131.2915 in Sep 2017. The output of manufacturing at 104.2863 in Sep 2017 is 20.6 percent below trend under this alternative calculation.

Table I-13 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 87.1 percent in IIQ2017. Most of US national income is in the form of services. In Sep 2017, there were 146.880 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 124.604 million NSA in Aug 2017 accounted for 84.8 percent of total nonfarm jobs of 146.880 million, of which 12.490 million, or 10.0 percent of total private jobs and 8.5 percent of total nonfarm jobs, were in manufacturing. Private service-providing jobs were 104.269 million NSA in Sep 2017, or 71.0 percent of total nonfarm jobs and 83.7 percent of total private-sector jobs. Manufacturing has share of 10.1 percent in US national income in IIQ2017 and durable goods 5.9 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 IQ2017

% Total

SAAR IIQ2017

% Total

National Income WCCA

16,281.6

100.0

16,426.5

100.0

Domestic Industries

16,067.4

98.7

16,224.1

98.8

Private Industries

14,157.8

87.0

14,303.4

87.1

Agriculture

134.1

0.8

114.9

0.7

Mining

142.0

0.9

156.8

1.0

Utilities

195.2

1.2

196.6

1.2

Construction

815.9

5.0

817.2

5.0

Manufacturing

1630.1

10.0

1657.2

10.1

Durable Goods

960.2

5.9

973.2

5.9

Nondurable Goods

670.0

4.1

684.0

4.2

Wholesale Trade

908.5

5.6

934.4

5.7

Retail Trade

1132.0

7.0

1147.3

7.0

Transportation & WH

503.8

3.1

527.0

3.2

Information

612.0

3.8

623.4

3.8

Finance, Insurance, RE

2906.0

17.8

2878.8

17.5

Professional & Business Services

2333.0

14.3

2369.4

14.4

Education, Health Care

1652.0

10.1

1673.2

10.2

Arts, Entertainment

714.8

4.4

724.3

4.4

Other Services

478.1

2.9

482.9

2.9

Government

1909.6

11.7

1920.7

11.7

Rest of the World

214.3

1.3

202.4

1.2

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

Source: US Bureau of Economic Analysis

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

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. The National Bureau of Economic Research dates another cycle from Jul 1990 (IIIQ1981) to Mar 1991 (IQ1991) (http://www.nber.org/cycles.html), showing in Table III-1 with contractions of fixed investment in the final three quarters of 1990 and the first quarter of 1991. There is quite different behavior of private fixed investment in the thirty-two quarters of cyclical expansion from IIIQ2009 to IIQ2017. 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 robust growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 12.5 percent. Growth has fallen from the SAAR of 17.3 percent in IIIQ2011 to 0.1 percent in IIIQ2012, recovering to 6.9 percent in IVQ2012 and increasing to 7.0 percent in IQ2013. The SAAR of fixed investment fell to 2.9 percent in IIIQ2013 and to 6.6 percent in IVQ2013. The SAAR of fixed investment decreased to 5.1 percent in IQ2014. Fixed investment grew at the SAAR of 10.2 percent in IIQ2014 and at 9.2 percent in IIIQ2014. Fixed investment grew at 0.3 percent in IVQ2014, 4.1 percent in IQ2015 and 4.7 percent in IIQ2015. Fixed investment grew at 3.4 percent in IIIQ2015 and fell at 2.4 percent in IVQ2015. Fixed investment decreased at 0.2 percent in IQ2016 and increased at 1.4 percent in IIQ2016. Fixed investment increased at 1.5 percent in IIIQ2016 and increased at 1.7 percent in IVQ2016. Fixed investment increased at 8.1 percent in IQ2017 and increased at 3.2 percent in IIQ2017. Fixed investment grew at 1.5 percent in IIIQ2017. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012.

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

Q

1981

1982

1983

1984

2008

2009

2010

I

3.8

-12.2

9.4

13.1

-7.1

-27.4

0.8

II

3.2

-12.1

16.0

16.6

-5.5

-14.2

13.6

III

0.1

-9.3

24.4

8.2

-12.1

-0.5

-0.4

IV

-1.5

0.2

24.3

7.3

-23.9

-2.8

8.5

1985

2011

I

3.7

-0.9

II

5.2

8.2

III

-1.6

17.3

IV

7.8

9.9

1986

2012

I

1.1

14.7

II

0.1

6.9

III

-1.8

0.1

IV

3.1

6.9

1987

2013

I

-6.7

7.0

II

6.3

4.3

III

7.1

2.9

IV

-0.2

6.6

1988

2014

I

0.2

5.1

II

8.1

10.2

III

1.9

9.2

IV

4.8

0.3

1989

2015

IQ

3.6

4.1

IIQ

0.5

4.7

IIIQ

7.2

3.4

IVQ

-5.0

-2.4

1990

2016

IQ

4.8

-0.2

IIQ

-7.7

1.4

IIIQ

-3.3

1.5

IVQ

-9.8

1.7

1991

2017

I

-10.6

8.1

II

1.2

3.2

III

0.5

1.5

IV

1.7

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 1980 to 1991. 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. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm).

Chart IA1-1, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 1980-1991

Source: US Bureau of Economic Analysis

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

Weak behavior of real private fixed investment from 2007 to 2017 is in Chart IA1-2. Growth rates of real private fixed investment were much lower during the initial phase of 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, 2007-2017

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 IIIQ2017 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 $1,137.1 billion in IQ1991 or 19.5 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). Real gross private domestic investment in the US increased 13.9 percent from $2605.2 billion in IVQ2007 to $2,967.5 billion in IIIQ2017. Real private fixed investment increased 12.5 percent from $2,586.3 billion of chained 2009 dollars in IVQ2007 to $2,909.4 billion in IIIQ2017. Private fixed investment fell relative to IVQ2007 in all quarters preceding IQ2014 and increased 0.4 percent in IIIQ2016, increasing 0.3 percent in IIQ2016 and falling 0.1 percent in IQ2016. Private fixed investment increased 0.4 percent in IVQ2016. Private fixed investment increased 2.0 percent in IQ2017 and increased 0.8 percent in IIQ2017. Private fixed investment increased 0.4 percent in IIIQ2017. 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 is 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

2360.4

-8.7

3.5

12.5

IIQ2012

2399.8

-7.2

1.7

12.1

IIIQ2012

2400.4

-7.2

0.0

7.8

IVQ2012

2441.0

-5.6

1.7

7.0

IQ2013

2482.7

-4.0

1.7

5.2

IIQ2013

2508.8

-3.0

1.1

4.5

IIIQ2013

2526.7

-2.3

0.7

5.3

IVQ2013

2567.2

-0.7

1.6

5.2

IQ2014

2599.4

0.5

1.3

4.7

IIQ2014

2663.0

3.0

2.4

6.1

IIIQ2014

2722.5

5.3

2.2

7.7

IVQ2014

2724.2

5.3

0.1

6.1

IQ2015

2751.5

6.4

1.0

5.9

IIQ2015

2783.4

7.6

1.2

4.5

IIIQ2015

2808.6

8.6

0.9

3.2

IVQ2015

2789.4

7.9

-0.7

2.4

IQ2016

2787.8

7.8

-0.1

1.3

IIQ2016

2797.5

8.2

0.3

0.5

IIIQ2016

2808.2

8.6

0.4

0.0

IVQ2016

2820.3

9.0

0.4

1.1

IQ2017

2875.7

11.2

2.0

3.2

IIQ2017

2898.5

12.1

0.8

3.6

IIIQ2017

2909.4

12.5

0.4

3.6

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 chained dollars of 2009 from 2007 to 2017. Real private fixed investment increased 12.5 percent from $2,586.3 billion of chained 2009 dollars in IVQ2007 to $2,909.4 billion in IIIQ2017.

Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2009 Dollars, 2007 to 2017

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 1991. Real gross private domestic investment climbed 19.5 percent to $1,137.1 billion of 2009 dollars in IQ1991 above the level of $951.6 billion in IQ1980. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991.

Chart IA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2009 Dollars at Seasonally Adjusted Annual Rate, 1980-1990

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 2007 to 2017. Real gross private domestic investment reached a level of $2,967.5 billion in IIIQ2017, which was only 13.9 percent higher than the level of $2,605.2 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, 2007-2017

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

Table IA1-3 shows that the share of gross private domestic investment in GDP has fallen from 19.8 percent in IIIQ2000 and 19.3 percent in IIIQ2006 to 16.6 percent in IIIQ2017. There are declines in percentage shares in GDP of all components with sharp reduction of residential investment from 4.7 percent in IIIQ2000 and 5.9 percent in IIIQ2006 to 3.8 percent in IIIQ2017. The share of fixed investment in GDP fell from 19.3 percent in IIIQ2000 and 18.7 percent in IIIQ2006 to 16.4 percent in IIIQ2017.

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

IIIQ2017

IIIQ2006

IIIQ2000

Gross Private Domestic Investment

16.6

19.3

19.8

  Fixed Investment

16.4

18.7

19.3

     Nonresidential

12.6

12.9

14.6

          Structures

2.9

3.1

3.2

          Equipment

          and Software

5.7

6.2

7.5

          Intellectual
           Property

4.1

3.7

4.0

     Residential

3.8

5.9

4.7

   Change in Private Inventories

0.2

0.6

0.6

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

Broader perspective is in Chart IA1-6 with the percentage share of gross private domestic investment in GDP in annual data from 1929 to 2016. 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, 1929-2016

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 2016. 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, 1929-2016

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 2016. 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, 1929-2016

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 2016. 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, 1929-2016

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 2016. 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, 1929-2016

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 2016 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, 1979-2016

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 2016. 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, 1929-2016

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 2016. The share stabilized in the 2000s.

Chart IA1-13, US, Percentage Share of Intellectual Property Investment in Gross Domestic Product, Quarterly, 1979-2016

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 IVQ1988 and from IIIQ2009 to IVQ2016. GDI contributed 2.12 percentage points to GDP in IQ2015 with 0.67 percentage points by PFI, 1.45 percentage points by inventory accumulation and deduction of 0.11 percentage points by intellectual property products. GDI contributed 0.14 percentage points to GDP growth in IIQ2015: 0.77 percentage points in PFI, 0.38 percentage points in NRES and 0.39 percentage points in RES. Inventory investment deducted 0.63 percentage points and IPP added 0.19 percentage points. GDI added 0.33 percentage points to GDP growth in IIIQ2015 with deduction of 0.22 percentage points by inventory divestment while BSE deducted 0.50 percentage points. PFI added 0.55 percentage points, nonresidential investment added 0.19 percentage points and residential investment added 0.36 percentage points. IPP added 0.11 percentage points. GDI deducted 1.08 percentage points in IVQ2015 with percentage point deductions of 0.67 by NRES, 0.41 by PFI, 0.69 by BES and 0.68 by inventory divestment. Percentage point contributions were 0.31 by IPP and 0.26 by RES. GDI deducted 0.68 percentage points from GDP growth in IQ2016 with percentage point deduction of 0.05 by fixed investment, 0.52 by nonresidential investment and 0.64 by inventory change. Residential investment added 0.47 percentage points and intellectual property products contributed 0.24 percentage points. GDI deducted 0.45 percentage points from GDP growth in IIQ2016 with deductions of 0.18 by RES and 0.67 percentage points by inventory change. IPP added 0.43 percentage points, NRES contributed 0.41 and PFI added 0.22. GDI contributed 0.40 percentage points to GDP growth in IIIQ2016 with contributions by NRES, BES, IPP and inventory investment. PFI added 0.25 percentage points and RES deducted 0.18 percentage points. GDI contributed 1.34 percentage points to GDP growth in IVQ2016 with contributions by NRES, RES and inventory investment. PFI added 0.28 percentage points, RES added 0.26 percentage points and inventory investment added 1.06 percentage points. GDI deducted 0.20 percentage points to GDP growth in IQ2017 with contributions by all segments except for deduction of 1.46 percentage points by inventory divestment. PFI contributed 1.27 percentage points. NRES contributed 0.86 percentage points and RES added 0.41 percentage points. BES contributed 0.39 percentage points and IPP added 0.23 percentage points. GDI added 0.64 percentage points to GDP growth in IIQ2017 with contributions of 0.53 PPs by PFI, 0.82 PPs by NRES, 0.20 PPs by BES and 0.15 PPs by IPP. RES deducted 0.30 PPs and inventory change added 0.12 PPs. GDI added 0.98 percentage points to GDP growth in IIIQ2017 with contributions of 0.25 PPs by PFI, 0.49 PPs by NRES and 0.17 PPs by IPP. BES deducted 0.15 PPs, RES deducted 0.24 PPs and inventory change added 0.73 PPs.

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

GDP

GDI

PFI

NRES

BES

IPP

RES

∆INV

2017

I

1.2

-0.20

1.27

0.86

0.39

0.23

0.41

-1.46

II

3.1

0.64

0.53

0.82

0.20

0.15

-0.30

0.12

III

3.0

0.98

0.25

0.49

-0.15

0.17

-0.24

0.73

2016

I

0.6

-0.68

-0.05

-0.52

0.06

0.24

0.47

-0.64

II

2.2

-0.45

0.22

0.41

0.01

0.43

-0.18

-0.67

III

2.8

0.40

0.25

0.42

0.37

0.17

-0.18

0.16

IV

1.8

1.34

0.28

0.02

-0.06

-0.02

0.26

1.06

2015

I

3.2

2.12

0.67

0.30

-0.07

-0.11

0.37

1.45

II

2.7

0.14

0.77

0.38

0.14

0.19

0.39

-0.63

III

1.6

0.33

0.55

0.19

-0.50

0.11

0.36

-0.22

IV

0.5

-1.08

-0.41

-0.67

-0.69

0.31

0.26

-0.68

2014

I

-0.9

-0.93

0.76

0.85

0.57

0.26

-0.09

-1.69

II

4.6

2.47

1.56

1.16

0.36

0.19

0.40

0.91

III

5.2

1.90

1.45

1.31

-0.05

0.29

0.14

0.44

IV

2.0

-0.21

0.04

-0.30

0.14

0.31

0.35

-0.26

2013

I

2.8

2.04

1.12

0.72

-0.14

0.29

0.41

0.92

II

0.8

0.78

0.70

0.35

0.27

-0.13

0.35

0.08

III

3.1

2.08

0.48

0.29

0.44

0.14

0.18

1.60

IV

4.0

0.91

1.01

1.16

0.06

0.04

-0.15

-0.11

2012

I

2.7

1.47

2.00

1.37

0.48

0.07

0.63

-0.53

II

1.9

1.53

0.98

0.88

0.27

0.14

0.10

0.56

III

0.5

-0.18

0.00

-0.27

-0.12

0.05

0.27

-0.18

IV

0.1

-0.51

1.03

0.46

-0.21

0.26

0.57

-1.54

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

I IMF View of World Economy and Finance. The International Financial Institutions (IFI) consist of the International Monetary Fund, World Bank Group, Bank for International Settlements (BIS) and the multilateral development banks, which are the European Investment Bank, Inter-American Development Bank and the Asian Development Bank (Pelaez and Pelaez, International Financial Architecture (2005), The Global Recession Risk (2007), 8-19, 218-29, Globalization and the State, Vol. II (2008b), 114-48, Government Intervention in Globalization (2008c), 145-54). There are four types of contributions of the IFIs:

1. Safety Net. The IFIs contribute to crisis prevention and crisis resolution.

i. Crisis Prevention. An important form of contributing to crisis prevention is by surveillance of the world economy and finance by regions and individual countries. The IMF and World Bank conduct periodic regional and country evaluations and recommendations in consultations with member countries and jointly with other international organizations. The IMF and the World Bank have been providing the Financial Sector Assessment Program (FSAP) by monitoring financial risks in member countries that can serve to mitigate them before they can become financial crises.

ii. Crisis Resolution. The IMF jointly with other IFIs provides assistance to countries in resolution of those crises that do occur. Currently, the IMF is cooperating with the government of Greece, European Union and European Central Bank in resolving the debt difficulties of Greece as it has done in the past in numerous other circumstances. Programs with other countries involved in the European debt crisis may also be developed.

2. Surveillance. The IMF conducts surveillance of the world economy, finance and public finance with continuous research and analysis. Important documents of this effort are the World Economic Outlook (http://www.imf.org/external/ns/cs.aspx?id=29), Global Financial Stability Report (http://www.imf.org/external/pubs/ft/gfsr/index.htm) and Fiscal Monitor (http://www.imf.org/external/ns/cs.aspx?id=262).

3. Infrastructure and Development. The IFIs also engage in infrastructure and development, in particular, the World Bank Group and the multilateral development banks.

4. Soft Law. Significant activity by IFIs has consisted of developing standards and codes under multiple forums. It is easier and faster to negotiate international agreements under soft law that are not binding but can be very effective (on soft law see Pelaez and Pelaez, Globalization and the State, Vol. II (2008c), 114-25). These norms and standards can solidify world economic and financial arrangements.

The objective of this section is to analyze current projections of the IMF database for the most important indicators.

Table I-1 is constructed with the database of the IMF (http://www.imf.org/external/ns/cs.aspx?id=29) to show GDP in dollars in 2016 and the growth rate of real GDP of the world and selected regional countries from 2016 to 2019. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has changed its forecast of the world economy to 3.6 percent in 2017 but accelerating to 3.7 percent in 2018 and 3.7 percent in 2019. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $35,516 billion of world output of $75,368 billion, or 47.1 percent, but are projected to grow at much lower rates than world output, 1.7 percent on average from 2016 to 2019, in contrast with 3.6 percent for the world as a whole. While the world would grow 15.0 percent in the four years from 2016 to 2018, the G7 as a whole would grow 7.1 percent. The difference in dollars of 2016 is high: growing by 15.0 percent would add around $11.3 trillion of output to the world economy, or roughly, over two times the output of the economy of Japan of $4,937 billion but growing by 7.1 percent would add $5.4 trillion of output to the world, or about the output of Japan in 2016. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2016 of $29,183 billion, or 38.7 percent of world output. The EMDEs would grow cumulatively 20.2 percent or at the average yearly rate of 4.7 percent, contributing $5.9 trillion from 2016 to 2019 or the equivalent of somewhat more than one half the GDP of $11,232 billion of China in 2016. The final four countries in Table I-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output in 2016 adds to $16,578 billion, or 22.0 percent of world output, which is equivalent to 46.7 percent of the combined output of the major advanced economies of the G7.

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

GDP USD Billions 2016

Real GDP ∆%
2016

Real GDP ∆%
2017

Real GDP ∆%
2018

Real GDP ∆%
2019

World

75,368

3.2

3.6

3.7

3.7

G7

35,516

1.4

2.0

1.9

1.6

Canada

1,530

1.5

3.0

2.1

1.7

France

2,466

1.2

1.6

1.8

1.9

DE

3,479

1.9

2.1

1.8

1.5

Italy

1,851

0.9

1.5

1.1

0.9

Japan

4,937

1.0

1.5

0.7

0.8

UK

2,629

1.8

1.7

1.5

1.6

US

18,624

1.5

2.2

2.3

1.9

Euro Area

11,923

1.7

2.1

1.9

1.7

DE

3,479

1.9

2.1

1.8

1.5

France

2,466

1.2

1.6

1.8

1.9

Italy

1,851

0.9

1.5

1.1

0.9

POT

205

1.4

2.5

2.0

1.7

Ireland

304

5.2

4.1

3.4

3.0

Greece

195

0.0

1.8

2.6

1.9

Spain

1,233

3.2

3.1

2.5

2.0

EMDE

29,183

4.3

4.6

4.9

5.0

Brazil

1,799

-3.6

0.7

1.5

2.0

Russia

1,283

-0.2

1.8

1.6

1.5

India

2,264

7.1

6.7

7.4

7.8

China

11,232

6.7

6.8

6.5

6.3

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

Source: IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx). Table I-2 is constructed with the WEO database to provide rates of unemployment from 2015 to 2019 for major countries and regions. In fact, unemployment rates for 2015 in Table I-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high in 2015 for the countries with sovereign debt difficulties in Europe: 12.4 percent for Portugal (POT), 9.5 percent for Ireland, 24.9 percent for Greece, 22.1 percent for Spain and 11.9 percent for Italy, which is lower but still high. The G7 rate of unemployment is 5.8 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.

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

% Labor Force 2015

% Labor Force 2016

% Labor Force 2017

% Labor Force 2018

% Labor Force 2019

World

NA

NA

NA

NA

NA

G7

5.8

5.4

5.0

4.8

4.8

Canada

6.9

7.0

6.5

6.3

6.2

France

10.4

10.0

9.5

9.0

8.7

DE

4.6

4.2

3.8

3.7

3.7

Italy

11.9

11.7

11.4

11.0

10.6

Japan

3.4

3.2

2.9

2.9

2.9

UK

5.4

4.9

4.4

4.4

4.6

US

5.3

4.9

4.4

4.1

4.2

Euro Area

10.9

10.0

9.2

8.7

8.3

DE

4.6

4.2

3.8

3.7

3.7

France

10.4

10.0

9.5

9.0

8.7

Italy

11.9

11.7

11.4

11.0

10.6

POT

12.4

11.1

9.7

9.0

8.5

Ireland

9.5

7.9

6.4

5.9

5.8

Greece

24.9

23.6

22.3

20.7

19.5

Spain

22.1

19.6

17.1

15.6

15.0

EMDE

NA

NA

NA

NA

NA

Brazil

8.3

11.3

13.1

12.0

11.0

Russia

5.6

5.5

5.5

5.5

5.5

India

NA

NA

NA

NA

NA

China

4.1

4.0

4.0

4.0

4.0

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

Source: IMF World Economic Outlook

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

The database of the WEO (http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx) is used to construct the debt/GDP ratios of regions and countries in Table I-3. The concept used is general government debt, which consists of central government debt, such as Treasury debt in the US, and all state and municipal debt. Net debt is provided for all countries except for the only available gross debt for China, Russia and India. The net debt/GDP ratio of the G7 decreases from 82.3 in 2015 to 81.5 in 2019. G7 debt is pulled by the high debt of Japan that reaches 119.2 percent of GDP in 2019. US general government debt increases from 80.2 percent of GDP in 2015 to 81.0 percent of GDP in 2019. Debt/GDP ratios of countries with sovereign debt difficulties in Europe are particularly worrisome. General government net debts of Italy, Greece and Portugal exceed 100 percent of GDP or are expected to exceed 100 percent of GDP by 2019. The only country in that group with relatively lower debt/GDP ratio is Spain with 80.1 in 2015, increasing to 84.6 in 2019. Ireland’s debt/GDP ratio decreases from 65.8 in 2015 to 57.1 in 2019. Fiscal adjustment, voluntary or forced by defaults, may squeeze further economic growth and employment in many countries as analyzed by Blanchard (2012WEOApr). Defaults could feed through exposures of banks and investors to financial institutions and economies in countries with sounder fiscal affairs.

Table I-3, IMF World Economic Outlook Database Projections, General Government Net Debt as Percent of GDP

% Debt/
GDP 2015

% Debt/
GDP 2016

% Debt/
GDP 2017

% Debt/
GDP 2018

% Debt/
GDP 2019

World

NA

NA

NA

NA

G7

82.3

83.5

83.7

82.3

81.5

Canada

25.2

27.4

24.6

22.7

20.9

France

86.9

87.8

88.5

88.7

88.7

DE

50.5

48.3

45.8

43.2

40.6

Italy

119.8

120.6

121.2

119.9

117.5

Japan

118.4

119.8

120.9

120.7

119.2

UK

80.3

80.1

80.5

80.6

79.9

US

80.2

81.3

82.5

81.1

81.0

Euro Area

73.9

73.3

71.8

70.3

68.6

DE

50.5

48.3

45.8

43.2

40.6

France

86.9

87.8

88.5

88.7

88.7

Italy

119.8

120.6

121.2

119.9

117.5

POT

113.3

112.7

111.2

108.8

107.1

Ireland

65.8

63.8

60.9

58.9

57.1

Greece*

179.4

181.6

180.2

184.5

177.9

Spain

80.1

86.8

86.6

85.6

84.6

EMDE*

43.8

46.8

48.3

49.9

51.2

Brazil

35.6

46.2

53.1

57.7

61.3

Russia*

15.9

15.6

17.4

17.7

18.2

India*

69.5

69.6

68.7

67.1

65.2

China*

41.1

44.3

47.6

50.8

53.9

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); *General Government Gross Debt as percent of GDP

Source: IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

The primary balance consists of revenues less expenditures but excluding interest revenues and interest payments. It measures the capacity of a country to generate sufficient current revenue to meet current expenditures. There are various countries with primary surpluses in 2015: Germany 1.8 percent and Italy 1.3 percent. There are also various countries with expected primary surpluses by 2019: Portugal 2.2 percent, Italy 3.3 percent and so on. Most countries in Table I-4 face significant fiscal adjustment in the future without “fiscal space.” Investors in government securities may require higher yields when the share of individual government debts hit saturation shares in portfolios. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(Mt + Bt)/Pt = Et∫(1/Rt, t+Ï„)st+Ï„dÏ„ (1)

Equation (1) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+Ï„, of the future primary surpluses st+Ï„, which are equal to Tt+Ï„ – Gt+Ï„ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+Ï„. Expectations by investors of future primary balances of indebted governments may be less optimistic than those in Table I-4 because of government revenues constrained by low growth and government expenditures rigid because of entitlements. Political realities may also jeopardize structural reforms and fiscal austerity.

Table I-4, IMF World Economic Outlook Database Projections of General Government Primary Net Lending/Borrowing as Percent of GDP

% GDP 2015

% GDP 2016

% GDP 2017

% GDP 2018

% GDP 2019

World

NA

NA

NA

NA

NA

G7

-1.4

-1.8

-1.7

-1.2

-1.0

Canada

-0.5

-1.2

-1.5

-1.3

-0.9

France

-1.7

-1.7

-1.4

-1.4

-1.5

DE

1.8

1.9

1.7

1.4

1.6

Italy

1.3

1.4

1.5

2.3

3.3

Japan

-3.1

-4.0

-4.0

-3.4

-2.9

UK

-2.9

-1.3

-1.1

-0.6

0.2

US

-1.6

-2.3

-2.2

-1.5

-1.5

Euro Area

0.0

0.4

0.6

0.7

1.0

DE

1.8

1.9

1.7

1.4

1.6

France

-1.7

-1.7

-1.4

-1.4

-1.5

Italy

1.3

1.4

1.5

2.3

3.3

POT

-0.1

2.0

2.4

2.4

2.2

Ireland

0.4

1.5

1.5

1.6

1.6

Greece

0.5

4.2

1.7

2.2

3.5

Spain

-2.4

-2.0

-0.7

0.0

0.3

EMDE

-2.7

-3.1

-2.5

-2.2

-1.9

Brazil

-1.9

-2.5

-2.5

-2.3

-1.8

Russia

-3.1

-3.1

-1.6

-1.0

-0.4

India

-2.5

-1.8

-1.5

-1.5

-1.4

China

-2.2

-2.9

-2.8

-2.7

-2.8

*General Government Net Lending/Borrowing

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

Source: IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

The database of the World Economic Outlook of the IMF (http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx) is used to obtain government net lending/borrowing as percent of GDP in Table I-5. Interest on government debt is added to the primary balance to obtain overall government fiscal balance in Table I-5. For highly indebted countries there is an even tougher challenge of fiscal consolidation. Adverse expectations on the success of fiscal consolidation may drive up yields on government securities that could create hurdles to adjustment, growth and employment.

Table I-5, IMF World Economic Outlook Database Projections of General Government Net Lending/Borrowing as Percent of GDP

% GDP 2015

% GDP 2016

% GDP 2017

% GDP 2018

% GDP 2019

World

NA

NA

NA

NA

NA

G7

-3.0

-3.5

-3.4

-2.9

-2.8

Canada

-1.1

-1.9

-2.2

-1.8

-1.6

France

-3.6

-3.4

-3.0

-3.0

-3.2

DE

0.6

0.8

0.7

0.8

1.0

Italy

-2.7

-2.4

-2.2

-1.3

-0.3

Japan

-3.5

-4.2

-4.1

-3.3

-2.9

UK

-4.4

-2.9

-2.9

-2.3

-1.5

US

-3.5

-4.4

-4.3

-3.8

-4.0

Euro Area

-2.1

-1.5

-1.3

-1.0

-0.7

DE

0.6

0.8

0.7

0.8

1.0

France

-3.6

-3.4

-3.0

-3.0

-3.2

Italy

-2.7

-2.4

-2.2

-1.3

-0.3

POT

-4.4

-2.0

-1.5

-1.4

-1.5

Ireland

-1.9

-0.7

-0.5

-0.2

-0.2

Greece

-3.1

1.0

-1.7

-1.1

0.2

Spain

-5.1

-4.5

-3.2

-2.5

-2.1

EMDE

-4.5

-4.8

-4.4

-4.2

-4.0

Brazil

-10.3

-9.0

-9.2

-9.3

-8.8

Russia

-3.4

-3.7

-2.1

-1.5

-1.0

India

-7.1

-6.6

-6.4

-6.2

-5.9

China

-2.8

-3.7

-3.7

-3.7

-3.8

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

Source: IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

There were some hopes that the sharp contraction of output during the global recession would eliminate current account imbalances. Table I-6 constructed with the database of the WEO (http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx) shows that external imbalances have been maintained in the form of current account deficits and surpluses. China’s current account surplus is 2.7 percent of GDP for 2015 and is projected to stabilize at 0.9 percent of GDP in 2019. At the same time, the current account deficit of the US is 2.4 percent of GDP in 2015 and is projected at 2.8 percent of GDP in 2019. The current account surplus of Germany is 8.5 percent for 2015 and remains at a high 7.5 percent of GDP in 2019. Japan’s current account surplus is 3.1 percent of GDP in 2015 and increases to 3.7 percent of GDP in 2019.

Table I-6, IMF World Economic Outlook Databank Projections, Current Account of Balance of Payments as Percent of GDP

% CA/
GDP 2015

% CA/
GDP 2016

% CA/
GDP 2017

% CA/
GDP 2018

% CA/
GDP 2019

World

NA

NA

NA

NA

NA

G7

-0.5

-0.3

-0.3

-0.4

-0.4

Canada

-3.4

-3.3

-3.4

-2.9

-2.4

France

-0.4

-1.0

-1.1

-0.8

-0.5

DE

8.5

8.3

8.1

7.7

7.5

Italy

1.4

2.6

2.8

2.3

2.1

Japan

3.1

3.8

3.6

3.8

3.7

UK

-4.3

-4.4

-3.6

-3.3

-2.9

US

-2.4

-2.4

-2.4

-2.6

-2.8

Euro Area

3.2

3.5

3.1

3.0

2.9

DE

8.5

8.3

8.1

7.7

7.5

France

-0.4

-1.0

-1.1

-0.8

-0.5

Italy

1.4

2.6

2.8

2.3

2.1

POT

0.1

0.7

0.4

0.3

-0.1

Ireland

10.9

3.3

3.4

3.5

3.6

Greece

0.1

-0.6

-0.2

-0.1

-0.2

Spain

1.4

1.9

1.9

2.0

2.0

EMDE

-0.2

-0.3

-0.3

-0.4

-0.5

Brazil

-3.3

-1.3

-1.4

-1.8

-1.8

Russia

5.0

2.0

2.8

3.2

3.6

India

-1.1

-0.7

-1.4

-1.5

-1.6

China

2.7

1.7

1.4

1.2

0.9

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

Source: IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

The G7 meeting in Washington on Apr 21, 2006 of finance ministers and heads of central bank governors of the G7 established the “doctrine of shared responsibility” (G7 2006Apr):

“We, Ministers and Governors, reviewed a strategy for addressing global imbalances. We recognized that global imbalances are the product of a wide array of macroeconomic and microeconomic forces throughout the world economy that affect public and private sector saving and investment decisions. We reaffirmed our view that the adjustment of global imbalances:

  • Is shared responsibility and requires participation by all regions in this global process;
  • Will importantly entail the medium-term evolution of private saving and investment across countries as well as counterpart shifts in global capital flows; and
  • Is best accomplished in a way that maximizes sustained growth, which requires strengthening policies and removing distortions to the adjustment process.

In this light, we reaffirmed our commitment to take vigorous action to address imbalances. We agreed that progress has been, and is being, made. The policies listed below not only would be helpful in addressing imbalances, but are more generally important to foster economic growth.

  • In the United States, further action is needed to boost national saving by continuing fiscal consolidation, addressing entitlement spending, and raising private saving.
  • In Europe, further action is needed to implement structural reforms for labor market, product, and services market flexibility, and to encourage domestic demand led growth.
  • In Japan, further action is needed to ensure the recovery with fiscal soundness and long-term growth through structural reforms.

Others will play a critical role as part of the multilateral adjustment process.

  • In emerging Asia, particularly China, greater flexibility in exchange rates is critical to allow necessary appreciations, as is strengthening domestic demand, lessening reliance on export-led growth strategies, and actions to strengthen financial sectors.
  • In oil-producing countries, accelerated investment in capacity, increased economic diversification, enhanced exchange rate flexibility in some cases.
  • Other current account surplus countries should encourage domestic consumption and investment, increase micro-economic flexibility and improve investment climates.

We recognized the important contribution that the IMF can make to multilateral surveillance.”

The concern at that time was that fiscal and current account global imbalances could result in disorderly correction with sharp devaluation of the dollar after an increase in premiums on yields of US Treasury debt (see Pelaez and Pelaez, The Global Recession Risk (2007)). The IMF was entrusted with monitoring and coordinating action to resolve global imbalances. The G7 was eventually broadened to the formal G20 in the effort to coordinate policies of countries with external surpluses and deficits.

The database of the WEO (http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx) is used to construct Table I-7 with fiscal and current account imbalances projected for 2016 and 2018. The WEO finds the need to rebalance external and domestic demand (IMF 2011WEOSep xvii):

“Progress on this front has become even more important to sustain global growth. Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); others are not contributing enough (for example, key economies in emerging Asia). The first set needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation. The second set of economies needs significant currency appreciation alongside structural reforms to reduce high surpluses of savings over investment. Such policies would help improve their resilience to shocks originating in the advanced economies as well as their medium-term growth potential.”

The IMF (2012WEOApr, XVII) explains decreasing importance of the issue of global imbalances as follows:

“The latest developments suggest that global current account imbalances are no longer expected to widen again, following their sharp reduction during the Great Recession. This is largely because the excessive consumption growth that characterized economies that ran large external deficits prior to the crisis has been wrung out and has not been offset by stronger consumption in .surplus economies. Accordingly, the global economy has experienced a loss of demand and growth in all regions relative to the boom years just before the crisis. Rebalancing activity in key surplus economies toward higher consumption, supported by more market-determined exchange rates, would help strengthen their prospects as well as those of the rest of the world.”

The IMF (http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/c4.pdf) analyzes global imbalances as:

  • Global current account imbalances have narrowed by more than a third from

their peak in 2006. Key imbalances—the large deficit of the United States and

the large surpluses of China and Japan—have more than halved.

  • The narrowing in imbalances has largely been driven by demand contraction

(“expenditure reduction”) in deficit economies.

  • Exchange rate adjustment has facilitated rebalancing in China and the United

States, but in general the contribution of exchange rate changes (“expenditure

switching”) to current account adjustment has been relatively modest.

  • The narrowing of imbalances is expected to be durable, as domestic demand in

deficit economies is projected to remain well below pre-crisis trends.

  • Since flow imbalances have narrowed but not reversed, net creditor and debtor

positions have widened further. Weak growth has also contributed to still high

ratios of net external liabilities to GDP in some debtor economies.

  • Risks of a disruptive adjustment in global current account balances have

decreased, but global demand rebalancing remains a policy priority. Stronger

external demand will be instrumental for reviving growth in debtor countries and

reducing their net external liabilities.”

Table I-7, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2016 Dollar GDP

GDP
$B

2016

FD
%GDP
2016

CAD
%GDP
2016

Debt
%GDP
2016

FD%GDP
2018

CAD%GDP
2018

Debt
%GDP
2018

US

18624

-2.3

-2.4

81.3

-1.5

-2.7

81.1

Japan

4937

-4.0

3.8

119.8

-3.4

3.8

120.7

UK

2629

-1.3

-4.4

80.1

-0.6

-3.3

80.6

Euro

11923

0.4

3.5

73.3

0.7

3.0

70.3

Ger

3479

1.9

8.3

48.3

1.4

7.7

43.2

France

2466

-1.7

-1.0

87.8

-1.4

-0.8

88.7

Italy

1851

1.4

2.6

120.6

2.3

2.3

119.9

Can

1530

-1.2

-3.3

27.4

-1.3

-2.9

22.7

China

11232

-2.9

1.7

44.3

-2.7

1.2

50.8

Brazil

1799

-2.5

-1.3

46.2

-2.3

-1.8

57.7

Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit

FD is primary except total for China; Debt is net except gross for China

Source: IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30, 2011, the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt exceeding 100 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The prospects of survival of the euro zone are dire. Table I-8 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2017.

Table I-8, World and Selected Regional and Country GDP and Fiscal Situation

GDP 2017
USD Billions

Primary Net Lending Borrowing
% GDP 2017

General Government Net Debt
% GDP 2017

World

79,281

Euro Zone

12,526

0.6

71.8

Portugal

212

2.4

111.2

Ireland

326

1.5

60.9

Greece

204

1.7

180.2**

Spain

1,307

-0.7

86.6

Major Advanced Economies G7

36,600

-1.7

83.7

United States

19,362

-2.2

82.5

UK

2,565

-1.1

80.5

Germany

3,652

1.7

45.8

France

2,575

-1.4

88.5

Japan

4,884

-4.0

120.9

Canada

1,640

-1.5

24.6

Italy

1,921

1.5

121.2

China

11,938

-2.8

47.6***

*Net Lending/borrowing**Gross Debt

Source: IMF World Economic Outlook

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

The data in Table I-8 are used for some very simple calculations in Table I-9. The column “Net Debt USD Billions 2017” in Table I-9 is generated by applying the percentage in Table I-8 column “General Government Net Debt % GDP 2017” to the column “GDP 2017 USD Billions.” The total debt of France and Germany in 2017 is $3951.6 billion, as shown in row “B+C” in column “Net Debt USD Billions 2017.” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $4262.0 billion, adding rows D+E+F+G+H in column “Net Debt USD billions 2017.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table I-9. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8,213.6 billion, which would be equivalent to 131.9 percent of their combined GDP in 2017. Under this arrangement, the entire debt of selected members of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 224.9 percent if including debt of France and 162.5 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks. Analysis of fiscal stress is quite difficult without including another global recession in an economic cycle that is already mature by historical experience.

Table I-9, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

Net Debt USD Billions

2017

Debt as % of Germany Plus France GDP

Debt as % of Germany GDP

A Euro Area

8,993.7

B Germany

1,672.6

$8213.6 as % of $3652 =224.9%

$5934.7 as % of $3652 =162.5%

C France

2,278.9

B+C

3,951.6

GDP $6227

Total Debt

$8,213.6

Debt/GDP: 131.9%

D Italy

2,328.3

E Spain

1,131.9

F Portugal

235.7

G Greece

367.6

H Ireland

198.5

Subtotal D+E+F+G+H

4,262.0

Source: calculation with IMF data IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

World trade projections of the IMF are in Table I-10. There is decreasing growth of the volume of world trade of goods and services from 4.2 percent in 2017 to 4.0 percent in 2018, stabilizing to 4.0 percent in 2019. Growth stabilizes at 4.0 percent on average from 2017 to 2022. World trade would be slower for advanced economies while emerging and developing economies (EMDE) experience faster growth. World economic slowdown would be more challenging with lower growth of world trade.

Table I-10, IMF, Projections of World Trade, USD Billions, USD/Barrel and Annual ∆%

2017

2018

2019

Average ∆% 2017-2022

World Trade Volume (Goods and Services)

4.2

4.0

4.0

4.0

Exports Goods & Services

4.2

3.9

3.7

3.9

Imports Goods & Services

4.2

4.2

4.1

4.1

Exports Goods & Services

G7

3.8

3.3

3.3

3.4

EMDE

4.8

4.5

4.3

4.5

Imports Goods & Services

G7

4.0

3.5

3.5

3.4

EMDE

4.4

4.9

4.9

4.9

Terms of Trade Goods & Services

G7

-0.8

0.4

-0.1

-0.1

EMDE

0.1

-0.5

0.0

0.0

World Crude Oil Price $/Barrel

50.28

50.17

50.51

51.15

Crude Oil: Simple Average of three spot prices: Dated Brent, West Texas Intermediate and the Dubai Fateh

Source: International Monetary Fund World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017.

Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)