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Continuing Dollar Devaluation, Mediocre Cyclical United States Economic Growth with GDP Two Trillion Dollars below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Cyclically Stagnating Real Private Fixed Investment, United States Housing, United States Commercial Banks, Theory and Reality of Economic History, Cyclical Slow Growth Not Secular Stagnation and Monetary Policy Based on Fear of Deflation, World Cyclical Slow Growth and Global Recession Risk
© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018
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
IIA United States Housing Collapse
IIA1 Sales of New Houses
IIA2 United States House Prices
IIB United States Commercial Banks Assets and Liabilities
IA Transmission of Monetary Policy
IB Functions of Banking
IC United States Commercial Banks Assets and Liabilities
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
VII Economic Indicators. Crude oil input in refineries decreased 1.3 percent to 17,072 thousand
barrels per day on average in the four weeks ending on Jan 19, 2018 from 17,301 thousand barrels per day in the four weeks ending on Jan 12, 2018, as shown in Table VII-1. The rate of capacity utilization in refineries continues at relatively high level of 94.0 percent on Jan 19, 2018, which is higher than 91.1 percent on Jan 20, 2017 and close to 95.2 percent on Jan 12, 2017. Hurricane Harvey reduced capacity utilization with recent recovery. Imports of crude oil decreased 0.6 percent from 6,655 thousand barrels per day on average in the four weeks ending on Jan 12, 2018 to 6,616 thousand barrels per day in the week of Jan 19, 2018. The Energy Information Administration (EIA) informs that: “US crude oil imports averaged over 8.0 million barrels per day last week, up by 91,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 2.5 percent less than the same four-week period last year” (https://www.eia.gov/petroleum/supply/weekly/). Marginally decreasing utilization in refineries with increasing imports at the margin in the prior week resulted in decrease of commercial crude oil stocks by 1.1 million barrels from 412.7 million barrels on Jan 12 to 411.6 million barrels on Jan 19. The US Energy Information Administration (EIA) states: “US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.9 million in the previous week. At 490.9 million barrels [on Apr 24, 2015], US crude oil inventories are at the highest level for this time of year in at least 80 years” (https://www.eia.gov/petroleum/supply/weekly/). Motor gasoline production decreased 2.3 percent to 9,569 thousand barrels per day in the week of Jan 19 from 9,791 thousand barrels per day on average in the week of Jan 12. Gasoline stocks increased 3.1 million barrels and stocks of fuel oil increased 0.6 million barrels. Supply of gasoline increased from 8,261 thousand barrels per day on Jan 20, 2017, to 8,707 thousand barrels per day on Jan 19, 2018, or by 5.4 percent, while fuel oil supply increased 15.3 percent. Part of the prior fall in consumption of gasoline had been due to high prices and part to the growth recession. WTI crude oil price traded at $63.38/barrel on Jan 19, 2018, increasing 21.1 percent relative to $52.33/barrel on Jan 20, 2017. Gasoline prices increased 10.4 percent from Jan 23, 2017 to Jan 22, 2018. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion.
Table VII-1, US, Energy Information Administration Weekly Petroleum Status Report
| Four Weeks Ending Thousand Barrels/Day | 01/19/18 | 1/12/18 | 01/20/17 |
| Crude Oil Refineries Input | 17,072 Week ∆%: -1.3% | 17,301 | 16,578 |
| Refinery Capacity Utilization % | 94.0 | 95.2 | 91.1 |
| Motor Gasoline Production | 9,569 Week ∆%: -2.3 | 9,791 | 9,228 |
| Distillate Fuel Oil Production | 5,196 Week ∆%: -3.0% | 5,359 | 4,985 |
| Crude Oil Imports | 6,616 Week ∆%: -0.6% | 6,655 | 7,427 |
| Motor Gasoline Supplied | 8,707 ∆% 2017/2016 = 5.4% | 8,904 | 8,261 |
| Distillate Fuel Oil Supplied | 3,957 ∆% 2016/2016 = 15.3% | 4,077 | 3,433 |
| 01/12/18 | 1/05/18 | 01/13/17 | |
| Crude Oil Stocks | 411.6 ∆= -1.1 MB | 412.7 | 488.3 |
| Motor Gasoline Million B | 244.0 ∆= 3.1 MB | 240.9 | 253.2 |
| Distillate Fuel Oil Million B | 139.8 | 139.2 | 169.1 |
| WTI Crude Oil Price $/B | 63.38 ∆% 2017/2016 = 21.1 | 64.22 | 52.33 |
| 01/22/18 | 01/15/18 | 01/23/17 | |
| Regular Motor Gasoline $/G | 2.567 ∆% 2017/2016 | 2.557 | 2.326 |
B: barrels; G: gallon
Source: US Energy Information Administration
http://www.eia.gov/petroleum/supply/weekly/
Chart VII-1 of the US Energy Information Administration (EIA) shows commercial stocks of crude oil in the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks but with fluctuations followed by sharp increases alternating with declines. Stocks reached 411,583 thousand barrels in the week of Jan 19, 2017.
Chart VII-1, US, Weekly Crude Oil Ending Stocks
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W
Chart VII-2 of the US Energy Information Administration provides US average retail prices of regular gasoline. The US average was $2.567 gallon on Jan 22, 2018, increasing $0.241 relative to the price a year earlier on a comparable day.
Chart VII-2, US, Regular Gasoline Prices
Source: US Energy Information Administration
There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. The peak in Chart VII-3 is $145.18/barrel on Jul 14, 2008 in the midst of deep global recession, falling to $33,87/barrel on Dec 19, 2008 (data for US Energy Information Administration http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D). Prices collapsed in the flight to government obligations caused by proposals of withdrawing “toxic assets” in the Troubled Asset Relief Program (TARP), as analyzed by Cochrane and Zingales (2009). Risk appetite with zero interest rates after stress tests of US banks resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. The price of the crude oil contract was $64.47/barrel on Jan 23, 2018.
Chart VII-3, US, Crude Oil Futures Contract
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D
There is typically significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims increased 17,000 from 216,000 on Jan 13, 2017 to 233,000 on Jan 20, 2018. Claims not adjusted for seasonality decreased 91,749 from 354,050 on Jan 13, 2018 to 262,301 on Jan 20, 2018.
Table VII-2, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| Jan 20, 2018 | 233,000 | 262,301 | 240,000 |
| Jan 13, 2018 | 216,000 | 354,050 | 243,500 |
| Change | +17,000 | -91,749 | -3,500 |
| Jan 6, 2018 | 261,000 | 403,619 | 250,750 |
| Prior Year | 252,000 | 284,030 | 244,750 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average
Source: https://www.dol.gov/ui/data.pdf
Table VII-3 provides seasonally adjusted and not seasonally adjusted claims in the comparable week for the years from 2001 to 2018. Data for earlier years are less comparable because of population and labor force growth. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted decreased from 763,987 on Jan 17, 2009 to 378,747 on Jan 16, 2016, 284,030 on Jan 21, 2017 and 262,301 on Jan 20, 2018. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (https://cmpassocregulationblog.blogspot.com/2018/01/dollar-devaluation-and-rising.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/fomc-increases-interest-rates-with.html). There is continuing unemployment and underemployment of 22.6 million or 13.3 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html).
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Jan 20, 2001 | 398,188 | 343,000 |
| Jan 19, 2002 | 558,297 | 405,000 |
| Jan 18, 2003 | 542,563 | 402,000 |
| Jan 24, 2004 | 382,262 | 353,000 |
| Jan 22, 2005 | 360,583 | 329,000 |
| Jan 21, 2006 | 317,926 | 290,000 |
| Jan 20, 2007 | 367,583 | 335,000 |
| Jan 19, 2008 | 415,397 | 321,000 |
| Jan 17, 2009 | 763,987 | 591,000 |
| Jan 23, 2010 | 507,651 | 471,000 |
| Jan 22, 2011 | 485,950 | 446,000 |
| Jan 21, 2012 | 416,880 | 381,000 |
| Jan 19, 2013 | 437,360 | 341,000 |
| Jan 18, 2014 | 416,116 | 325,000 |
| Jan 17, 2015 | 383,538 | 297,000 |
| Jan 16, 2016 | 378,747 | 291,000 |
| Jan 21, 2017 | 284,030 | 252,000 |
| Jan 20, 2018 | 262,301 | 233,00 |
Source: https://oui.doleta.gov/unemploy/claims.asp
VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In the three months from Oct 2017 to Dec 2017, CPI inflation for all items seasonally adjusted was 2.4 percent in annual equivalent, obtained by calculating accumulated inflation from Oct 2017 to Dec 2017 and compounding for a full year. In the 12 months ending in Dec 2017, CPI inflation of all items not seasonally adjusted was 2.1 percent. Inflation in Dec 2017 seasonally adjusted was 0.1 percent relative to Nov 2017, or 1.2 percent annual equivalent (https://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 1.8 percent in 12 months, 2.4 percent in annual equivalent Oct 2017-Dec 2017 and 0.3 percent in Dec 2017 or 3.7 percent in annual equivalent. The Wall Street Journal provides the yield curve of US Treasury securities (http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000). The shortest term is 1.233 percent for one month, 1.427 percent for three months, 1.646 percent for six months, 1.799 percent for one year, 2.112 percent for two years, 2.236 percent for three years, 2.470 percent for five years, 2.598 percent for seven years, 2.662 percent for ten years and 2.913 percent for 30 years. The Irving Fisher (1930) definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by the Wall Street Journal, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Inflation in Jun 2017 is low in 12 months because of the unwinding of carry trades from zero interest rates to commodity futures prices but could ignite again with subdued risk aversion. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (https://www.federalreserve.gov/aboutthefed.htm):
“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”
Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.
Table VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%
| % RI | ∆% 12 Months Dec 2017/ Dec | ∆% Annual Equivalent Oct 2017 to Dec 2017 SA | ∆% Dec 2017/Nov 2017 SA | |
| CPI All Items | 100.000 | 2.1 | 2.4 | 0.1 |
| CPI ex Food and Energy | 78.938 | 1.8 | 2.4 | 0.3 |
Table % RI: Percent Relative Importance
Source: US Bureau of Labor Statistics http://www.bls.gov/cpi/
Professionals use a variety of techniques in measuring interest rate risk (Fabozzi, Buestow and Johnson, 2006, Chapter Nine, 183-226):
- Full valuation approach in which securities and portfolios are shocked by 50, 100, 200 and 300 basis points to measure their impact on asset values
- Stress tests requiring more complex analysis and translation of possible events with high impact even if with low probability of occurrence into effects on actual positions and capital
- Value at Risk (VaR) analysis of maximum losses that are likely in a time horizon
- Duration and convexity that are short-hand convenient measurement of changes in prices resulting from changes in yield captured by duration and convexity
- Yield volatility
Analysis of these methods is in Pelaez and Pelaez (International Financial Architecture (2005), 101-162) and Pelaez and Pelaez, Globalization and the State, Vol. (I) (2008a), 78-100). Frederick R. Macaulay (1938) introduced the concept of duration in contrast with maturity for analyzing bonds. Duration is the sensitivity of bond prices to changes in yields. In economic jargon, duration is the yield elasticity of bond price to changes in yield, or the percentage change in price after a percentage change in yield, typically expressed as the change in price resulting from change of 100 basis points in yield. The mathematical formula is the negative of the yield elasticity of the bond price or –[dB/d(1+y)]((1+y)/B), where d is the derivative operator of calculus, B the bond price, y the yield and the elasticity does not have dimension (Hallerbach 2001). The duration trap of unconventional monetary policy is that duration is higher the lower the coupon and higher the lower the yield, other things being constant. Coupons and yields are historically low because of unconventional monetary policy. Duration dumping during a rate increase may trigger the same crossfire selling of high duration positions that magnified the credit crisis. Traders reduced positions because capital losses in one segment, such as mortgage-backed securities, triggered haircuts and margin increases that reduced capital available for positioning in all segments, causing fire sales in multiple segments (Brunnermeier and Pedersen 2009; see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 217-24). Financial markets are currently experiencing fear of duration and riskier asset classes resulting from the debate within and outside the Fed on increasing interest rates. Table VIII-2 provides the yield curve of Treasury securities on Jan 26, 2018, Dec 31, 2013, May 1, 2013, Jan 26, 2017 and Jan 26, 2006. There is oscillating steepening of the yield curve for longer maturities, which are also the ones with highest duration. The 10-year yield increased from 1.45 percent on Jul 26, 2012 to 3.04 percent on Dec 31, 2013 and 2.66 percent on Jan 26, 2018, as measured by the United States Treasury. Assume that a bond with maturity in 10 years were issued on Dec 31, 2013, at par or price of 100 with coupon of 1.45 percent. The price of that bond would be 86.3778 with instantaneous increase of the yield to 3.04 percent for loss of 13.6 percent and far more with leverage. Assume that the yield of a bond with exactly ten years to maturity and coupon of 2.66 percent would jump instantaneously from yield of 2.66 percent on Jan 26, 2018 to 4.53 percent as occurred on Jan 26, 2006 when the economy was closer to full employment. The price of the hypothetical bond issued with coupon of 2.66 percent would drop from 100 to 85.0953 after an instantaneous increase of the yield to 4.53 percent. The price loss would be 14.9 percent. Losses absorb capital available for positioning triggering crossfire sales in multiple asset classes (Brunnermeier and Pedersen 2009). What is the path of adjustment of zero interest rates on fed funds and artificially low bond yields? There is no painless exit from unconventional monetary policy. Chris Dieterich, writing on “Bond investors turn to cash,” on Jul 25, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323971204578625900935618178.html), uses data of the Investment Company Institute (https://www.ici.org/) in showing withdrawals of $43 billion in taxable mutual funds in Jun, which is the largest in history, with flows into cash investments such as $8.5 billion in the week of Jul 17 into money-market funds.
Table VIII-2, United States, Treasury Yields
| 01/26/18 | 12/31/13 | 5/01/13 | 01/26/17 | 01/26/06 | |
| 1 M | 1.24 | 0.00 | 0.03 | 0.49 | 4.17 |
| 3 M | 1.41 | 0.01 | 0.06 | 0.51 | 4.45 |
| 6 M | 1.64 | 0.07 | 0.08 | 0.62 | 4.54 |
| 1 Y | 1.80 | 0.25 | 0.11 | 0.82 | 4.52 |
| 2 Y | 2.13 | 0.56 | 0.20 | 1.21 | 4.49 |
| 3 Y | 2.24 | 0.91 | 0.30 | 1.49 | 4.45 |
| 5 Y | 2.47 | 1.43 | 0.65 | 1.95 | 4.44 |
| 7 Y | 2.60 | 1.80 | 1.07 | 2.30 | 4.46 |
| 10 Y | 2.66 | 3.04 | 1.66 | 2.51 | 4.53 |
| 20 Y | 2.79 | 3.72 | 2.44 | 2.82 | 4.76 |
| 30 Y | 2.91 | 3.96 | 2.83 | 3.08 | NA |
M: Months; Y: Years
Source: United States Treasury
There are collateral effects of unconventional monetary policy. Chart VIII-1 of the Board of Governors of the Federal Reserve System provides the rate on the overnight fed funds rate and the yields of the 10-year constant maturity Treasury and the Baa seasoned corporate bond. Table VIII-3 provides the data for selected points in Chart VIII-1. There are two important economic and financial events, illustrating the ease of inducing carry trade with extremely low interest rates and the resulting financial crash and recession of abandoning extremely low interest rates.
- The Federal Open Market Committee (FOMC) lowered the target of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85). Central bank commitment to maintain the fed funds rate at 1.00 percent induced adjustable-rate mortgages (ARMS) linked to the fed funds rate. Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment. The exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at interest rates close to zero, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV). The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper with the objective of purchasing default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever-increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity by the penalty in the form of low interest rates and unsound credit decisions. 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). The FOMC implemented increments of 25 basis points of the fed funds target from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006, as shown in Chart VIII-1. The gradual exit from the first round of unconventional monetary policy from 1.00 percent in Jun 2004 (http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040630/default.htm) to 5.25 percent in Jun 2006 (http://www.federalreserve.gov/newsevents/press/monetary/20060629a.htm) caused the financial crisis and global recession.
- On Dec 16, 2008, the policy determining committee of the Fed decided (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm): “The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.” Policymakers emphasize frequently that there are tools to exit unconventional monetary policy at the right time. At the confirmation hearing on nomination for Chair of the Board of Governors of the Federal Reserve System, Vice Chair Yellen (2013Nov14 http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm), states that: “The Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.” Perception of withdrawal of $2671 billion, or $2.7 trillion, of bank reserves (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1), would cause Himalayan increase in interest rates that would provoke another recession. There is no painless gradual or sudden exit from zero interest rates because reversal of exposures created on the commitment of zero interest rates forever.
In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):
“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”
Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and re the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+re). Thus, g = [(r/re) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dre>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Friedman 1957). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:
W = Y/r (1)
Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.
Dan Strumpf and Pedro Nicolaci da Costa, writing on “Fed’s Yellen: Stock Valuations ‘Generally are Quite High,’” on May 6, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/feds-yellen-cites-progress-on-bank-regulation-1430918155?tesla=y ), quote Chair Yellen at open conversation with Christine Lagarde, Managing Director of the IMF, finding “equity-market valuations” as “quite high” with “potential dangers” in bond valuations. The DJIA fell 0.5 percent on May 6, 2015, after the comments and then increased 0.5 percent on May 7, 2015 and 1.5 percent on May 8, 2015.
| Fri May 1 | Mon 4 | Tue 5 | Wed 6 | Thu 7 | Fri 8 |
| DJIA 18024.06 -0.3% 1.0% | 18070.40 0.3% 0.3% | 17928.20 -0.5% -0.8% | 17841.98 -1.0% -0.5% | 17924.06 -0.6% 0.5% | 18191.11 0.9% 1.5% |
There are two approaches in theory considered by Bordo (2012Nov20) and Bordo and Lane (2013). The first approach is in the classical works of Milton Friedman and Anna Jacobson Schwartz (1963a, 1987) and Karl Brunner and Allan H. Meltzer (1973). There is a similar approach in Tobin (1969). Friedman and Schwartz (1963a, 66) trace the effects of expansionary monetary policy into increasing initially financial asset prices: “It seems plausible that both nonbank and bank holders of redundant balances will turn first to securities comparable to those they have sold, say, fixed-interest coupon, low-risk obligations. But as they seek to purchase these they will tend to bid up the prices of those issues. Hence they, and also other holders not involved in the initial central bank open-market transactions, will look farther afield: the banks, to their loans; the nonbank holders, to other categories of securities-higher risk fixed-coupon obligations, equities, real property, and so forth.”
The second approach is by the Austrian School arguing that increases in asset prices can become bubbles if monetary policy allows their financing with bank credit. Professor Michael D. Bordo provides clear thought and empirical evidence on the role of “expansionary monetary policy” in inflating asset prices (Bordo2012Nov20, Bordo and Lane 2013). Bordo and Lane (2013) provide revealing narrative of historical episodes of expansionary monetary policy. Bordo and Lane (2013) conclude that policies of depressing interest rates below the target rate or growth of money above the target influences higher asset prices, using a panel of 18 OECD countries from 1920 to 2011. Bordo (2012Nov20) concludes: “that expansionary money is a significant trigger” and “central banks should follow stable monetary policies…based on well understood and credible monetary rules.” Taylor (2007, 2009) explains the housing boom and financial crisis in terms of expansionary monetary policy. Professor Martin Feldstein (2016), at Harvard University, writing on “A Federal Reserve oblivious to its effects on financial markets,” on Jan 13, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/a-federal-reserve-oblivious-to-its-effect-on-financial-markets-1452729166), analyzes how unconventional monetary policy drove values of risk financial assets to high levels. Quantitative easing and zero interest rates distorted calculation of risks with resulting vulnerabilities in financial markets.
Another hurdle of exit from zero interest rates is “competitive easing” that Professor Raghuram Rajan, governor of the Reserve Bank of India, characterizes as disguised “competitive devaluation” (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). The fed has been considering increasing interest rates. The European Central Bank (ECB) announced, on Mar 5, 2015, the beginning on Mar 9, 2015 of its quantitative easing program denominated as Public Sector Purchase Program (PSPP), consisting of “combined monthly purchases of EUR 60 bn [billion] in public and private sector securities” (http://www.ecb.europa.eu/mopo/liq/html/pspp.en.html). Expectation of increasing interest rates in the US together with euro rates close to zero or negative cause revaluation of the dollar (or devaluation of the euro and of most currencies worldwide). US corporations suffer currency translation losses of their foreign transactions and investments (http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010318) while the US becomes less competitive in world trade (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), Government Intervention in Globalization (2008c)). The DJIA fell 1.5 percent on Mar 6, 2015 and the dollar revalued 2.2 percent from Mar 5 to Mar 6, 2015. The euro has devalued 28.0 percent relative to the dollar from the high on Jul 15, 2008 to Jan 26, 2018.
| Fri 27 Feb | Mon 3/2 | Tue 3/3 | Wed 3/4 | Thu 3/5 | Fri 3/6 |
| USD/ EUR 1.1197 1.6% 0.0% | 1.1185 0.1% 0.1% | 1.1176 0.2% 0.1% | 1.1081 1.0% 0.9% | 1.1030 1.5% 0.5% | 1.0843 3.2% 1.7% |
Chair Yellen explained the removal of the word “patience” from the advanced guidance at the press conference following the FOMC meeting on Mar 18, 2015 (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20150318.pdf):
“In other words, just because we removed the word “patient” from the statement doesn’t mean we are going to be impatient. Moreover, even after the initial increase in the target funds rate, our policy is likely to remain highly accommodative to support continued progress toward our objectives of maximum employment and 2 percent inflation.”
Exchange rate volatility is increasing in response of “impatience” in financial markets with monetary policy guidance and measures:
| Fri Mar 6 | Mon 9 | Tue 10 | Wed 11 | Thu 12 | Fri 13 |
| USD/ EUR 1.0843 3.2% 1.7% | 1.0853 -0.1% -0.1% | 1.0700 1.3% 1.4% | 1.0548 2.7% 1.4% | 1.0637 1.9% -0.8% | 1.0497 3.2% 1.3% |
| Fri Mar 13 | Mon 16 | Tue 17 | Wed 18 | Thu 19 | Fri 20 |
| USD/ EUR 1.0497 3.2% 1.3% | 1.0570 -0.7% -0.7% | 1.0598 -1.0% -0.3% | 1.0864 -3.5% -2.5% | 1.0661 -1.6% 1.9% | 1.0821 -3.1% -1.5% |
| Fri Apr 24 | Mon 27 | Tue 28 | Wed 29 | Thu 30 | May Fri 1 |
| USD/ EUR 1.0874 -0.6% -0.4% | 1.0891 -0.2% -0.2% | 1.0983 -1.0% -0.8% | 1.1130 -2.4% -1.3% | 1.1223 -3.2% -0.8% | 1.1199 -3.0% 0.2% |
In a speech at Brown University on May 22, 2015, Chair Yellen stated (http://www.federalreserve.gov/newsevents/speech/yellen20150522a.htm):
“For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term. After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual. The various headwinds that are still restraining the economy, as I said, will likely take some time to fully abate, and the pace of that improvement is highly uncertain.”
The US dollar appreciated 3.8 percent relative to the euro in the week of May 22, 2015:
| Fri May 15 | Mon 18 | Tue 19 | Wed 20 | Thu 21 | Fri 22 |
| USD/ EUR 1.1449 -2.2% -0.3% | 1.1317 1.2% 1.2% | 1.1150 2.6% 1.5% | 1.1096 3.1% 0.5% | 1.1113 2.9% -0.2% | 1.1015 3.8% 0.9% |
The Managing Director of the International Monetary Fund (IMF), Christine Lagarde, warned on Jun 4, 2015, that: (http://blog-imfdirect.imf.org/2015/06/04/u-s-economy-returning-to-growth-but-pockets-of-vulnerability/):
“The Fed’s first rate increase in almost 9 years is being carefully prepared and telegraphed. Nevertheless, regardless of the timing, higher US policy rates could still result in significant market volatility with financial stability consequences that go well beyond US borders. I weighing these risks, we think there is a case for waiting to raise rates until there are more tangible signs of wage or price inflation than are currently evident. Even after the first rate increase, a gradual rise in the federal fund rates will likely be appropriate.”
The President of the European Central Bank (ECB), Mario Draghi, warned on Jun 3, 2015 that (http://www.ecb.europa.eu/press/pressconf/2015/html/is150603.en.html):
“But certainly one lesson is that we should get used to periods of higher volatility. At very low levels of interest rates, asset prices tend to show higher volatility…the Governing Council was unanimous in its assessment that we should look through these developments and maintain a steady monetary policy stance.”
The Chair of the Board of Governors of the Federal Reserve System, Janet L. Yellen, stated on Jul 10, 2015 that (http://www.federalreserve.gov/newsevents/speech/yellen20150710a.htm):
“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step. I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time. The projections of most of my FOMC colleagues indicate that they have similar expectations for the likely path of the federal funds rate. But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”
There is essentially the same view in the Testimony of Chair Yellen in delivering the Semiannual Monetary Policy Report to the Congress on Jul 15, 2015 (http://www.federalreserve.gov/newsevents/testimony/yellen20150715a.htm).
At the press conference after the meeting of the FOMC on Sep 17, 2015, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20150917.pdf 4):
“The outlook abroad appears to have become more uncertain of late, and heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets. Developments since our July meeting, including the drop in equity prices, the further appreciation of the dollar, and a widening in risk spreads, have tightened overall financial conditions to some extent. These developments may restrain U.S. economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Given the significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears close watching.”
Some equity markets fell on Fri Sep 18, 2015:
| Fri Sep 11 | Mon 14 | Tue 15 | Wed 16 | Thu 17 | Fri 18 |
| DJIA 16433.09 2.1% 0.6% | 16370.96 -0.4% -0.4% | 16599.85 1.0% 1.4% | 16739.95 1.9% 0.8% | 16674.74 1.5% -0.4% | 16384.58 -0.3% -1.7% |
| Nikkei 225 18264.22 2.7% -0.2% | 17965.70 -1.6% -1.6% | 18026.48 -1.3% 0.3% | 18171.60 -0.5% 0.8% | 18432.27 0.9% 1.4% | 18070.21 -1.1% -2.0% |
| DAX 10123.56 0.9% -0.9% | 10131.74 0.1% 0.1% | 10188.13 0.6% 0.6% | 10227.21 1.0% 0.4% | 10229.58 1.0% 0.0% | 9916.16 -2.0% -3.1% |
Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. Chair Yellen, in a lecture on “Inflation dynamics and monetary policy,” on Sep 24, 2015 (http://www.federalreserve.gov/newsevents/speech/yellen20150924a.htm), states that (emphasis added):
· “The economic outlook, of course, is highly uncertain”
· “Considerable uncertainties also surround the outlook for economic activity”
· “Given the highly uncertain nature of the outlook…”
Is there a “science” or even “art” of central banking under this extreme uncertainty in which policy does not generate higher volatility of money, income, prices and values of financial assets?
Lingling Wei, writing on Oct 23, 2015, on China’s central bank moves to spur economic growth,” published in the Wall Street Journal (http://www.wsj.com/articles/chinas-central-bank-cuts-rates-1445601495), analyzes the reduction by the People’s Bank of China (http://www.pbc.gov.cn/ http://www.pbc.gov.cn/english/130437/index.html) of borrowing and lending rates of banks by 50 basis points and reserve requirements of banks by 50 basis points. Paul Vigna, writing on Oct 23, 2015, on “Stocks rally out of correction territory on latest central bank boost,” published in the Wall Street Journal (http://blogs.wsj.com/moneybeat/2015/10/23/stocks-rally-out-of-correction-territory-on-latest-central-bank-boost/), analyzes the rally in financial markets following the statement on Oct 22, 2015, by the President of the European Central Bank (ECB) Mario Draghi of consideration of new quantitative measures in Dec 2015 (https://www.youtube.com/watch?v=0814riKW25k&rel=0) and the reduction of bank lending/deposit rates and reserve requirements of banks by the People’s Bank of China on Oct 23, 2015. The dollar revalued 2.8 percent from Oct 21 to Oct 23, 2015, following the intended easing of the European Central Bank. The DJIA rose 2.8 percent from Oct 21 to Oct 23 and the DAX index of German equities rose 5.4 percent from Oct 21 to Oct 23, 2015.
| Fri Oct 16 | Mon 19 | Tue 20 | Wed 21 | Thu 22 | Fri 23 |
| USD/ EUR 1.1350 0.1% 0.3% | 1.1327 0.2% 0.2% | 1.1348 0.0% -0.2% | 1.1340 0.1% 0.1% | 1.1110 2.1% 2.0% | 1.1018 2.9% 0.8% |
| DJIA 17215.97 0.8% 0.4% | 17230.54 0.1% 0.1% | 17217.11 0.0% -0.1% | 17168.61 -0.3% -0.3% | 17489.16 1.6% 1.9% | 17646.70 2.5% 0.9% |
| Dow Global 2421.58 0.3% 0.6% | 2414.33 -0.3% -0.3% | 2411.03 -0.4% -0.1% | 2411.27 -0.4% 0.0% | 2434.79 0.5% 1.0% | 2458.13 1.5% 1.0% |
| DJ Asia Pacific 1402.31 1.1% 0.3% | 1398.80 -0.3% -0.3% | 1395.06 -0.5% -0.3% | 1402.68 0.0% 0.5% | 1396.03 -0.4% -0.5% | 1415.50 0.9% 1.4% |
| Nikkei 225 18291.80 -0.8% 1.1% | 18131.23 -0.9% -0.9% | 18207.15 -0.5% 0.4% | 18554.28 1.4% 1.9% | 18435.87 0.8% -0.6% | 18825.30 2.9% 2.1% |
| Shanghai 3391.35 6.5% 1.6% | 3386.70 -0.1% -0.1% | 3425.33 1.0% 1.1% | 3320.68 -2.1% -3.1% | 3368.74 -0.7% 1.4% | 3412.43 0.6% 1.3% |
| DAX 10104.43 0.1% 0.4% | 10164.31 0.6% 0.6% | 10147.68 0.4% -0.2% | 10238.10 1.3% 0.9% | 10491.97 3.8% 2.5% | 10794.54 6.8% 2.9% |
Ben Leubsdorf, writing on “Fed’s Yellen: December is “Live Possibility” for First Rate Increase,” on Nov 4, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/feds-yellen-december-is-live-possibility-for-first-rate-increase-1446654282) quotes Chair Yellen that a rate increase in “December would be a live possibility.” The remark of Chair Yellen was during a hearing on supervision and regulation before the Committee on Financial Services, US House of Representatives (http://www.federalreserve.gov/newsevents/testimony/yellen20151104a.htm) and a day before the release of the employment situation report for Oct 2015 (Section I). The dollar revalued 2.4 percent during the week. The euro has devalued 28.0 percent relative to the dollar from the high on Jul 15, 2008 to Jan 26, 2018.
| Fri Oct 30 | Mon 2 | Tue 3 | Wed 4 | Thu 5 | Fri 6 |
| USD/ EUR 1.1007 0.1% -0.3% | 1.1016 -0.1% -0.1% | 1.0965 0.4% 0.5% | 1.0867 1.3% 0.9% | 1.0884 1.1% -0.2% | 1.0742 2.4% 1.3% |
The release on Nov 18, 2015 of the minutes of the FOMC (Federal Open Market Committee) meeting held on Oct 28, 2015 (http://www.federalreserve.gov/monetarypolicy/fomcminutes20151028.htm) states:
“Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions [for interest rate increase] could well be met by the time of the next meeting. Nonetheless, they emphasized that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period… It was noted that beginning the normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow.”
Markets could have interpreted a symbolic increase in the fed funds rate at the meeting of the FOMC on Dec 15-16, 2015 (http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm) followed by “shallow” increases, explaining the sharp increase in stock market values and appreciation of the dollar after the release of the minutes on Nov 18, 2015:
| Fri Nov 13 | Mon 16 | Tue 17 | Wed 18 | Thu 19 | Fri 20 |
| USD/ EUR 1.0774 -0.3% 0.4% | 1.0686 0.8% 0.8% | 1.0644 1.2% 0.4% | 1.0660 1.1% -0.2% | 1.0735 0.4% -0.7% | 1.0647 1.2% 0.8% |
| DJIA 17245.24 -3.7% -1.2% | 17483.01 1.4% 1.4% | 17489.50 1.4% 0.0% | 17737.16 2.9% 1.4% | 17732.75 2.8% 0.0% | 17823.81 3.4% 0.5% |
| DAX 10708.40 -2.5% -0.7% | 10713.23 0.0% 0.0% | 10971.04 2.5% 2.4% | 10959.95 2.3% -0.1% | 11085.44 3.5% 1.1% | 11119.83 3.8% 0.3% |
In testimony before The Joint Economic Committee of Congress on Dec 3, 2015 (http://www.federalreserve.gov/newsevents/testimony/yellen20151203a.htm), Chair Yellen reiterated that the FOMC (Federal Open Market Committee) “anticipates that even after employment and inflation are near mandate-consistent levels, economic condition may, for some time, warrant keeping the target federal funds rate below the Committee views as normal in the longer run.” Todd Buell and Katy Burne, writing on “Draghi says ECB could step up stimulus efforts if necessary,” on Dec 4, 2015, published in the Wall Street Journal (http://www.wsj.com/articles/draghi-says-ecb-could-step-up-stimulus-efforts-if-necessary-1449252934), analyze that the President of the European Central Bank (ECB), Mario Draghi, reassured financial markets that the ECB will increase stimulus if required to raise inflation the euro area to targets. The USD depreciated 3.1 percent on Thu Dec 3, 2015 after weaker than expected measures by the European Central Bank. DJIA fell 1.4 percent on Dec 3 and increased 2.1 percent on Dec 4. DAX fell 3.6 percent on Dec 3.
| Fri Nov 27 | Mon 30 | Tue 1 | Wed 2 | Thu 3 | Fri 4 |
| USD/ EUR 1.0594 0.5% 0.2% | 1.0565 0.3% 0.3% | 1.0634 -0.4% -0.7% | 1.0616 -0.2% 0.2% | 1.0941 -3.3% -3.1% | 1.0885 -2.7% 0.5% |
| DJIA 17798.49 -0.1% -0.1% | 17719.92 -0.4% -0.4% | 17888.35 0.5% 1.0% | 17729.68 -0.4% -0.9% | 17477.67 -1.8% -1.4% | 17847.63 0.3% 2.1% |
| DAX 11293.76 1.6% -0.2% | 11382.23 0.8% 0.8% | 11261.24 -0.3% -1.1% | 11190.02 -0.9% -0.6% | 10789.24 -4.5% -3.6% | 10752.10 -4.8% -0.3% |
At the press conference following the meeting of the FOMC on Dec 16, 2015, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20151216.pdf page 8):
“And we recognize that monetary policy operates with lags. We would like to be able to move in a prudent, and as we've emphasized, gradual manner. It's been a long time since the Federal Reserve has raised interest rates, and I think it's prudent to be able to watch what the impact is on financial conditions and spending in the economy and moving in a timely fashion enables us to do this.”
The implication of this statement is that the state of the art is not accurate in analyzing the effects of monetary policy on financial markets and economic activity. The US dollar appreciated and equities fluctuated:
| Fri Dec 11 | Mon 14 | Tue 15 | Wed 16 | Thu 17 | Fri 18 |
| USD/ EUR 1.0991 -1.0% -0.4% | 1.0993 0.0% 0.0% | 1.0932 0.5% 0.6% | 1.0913 0.7% 0.2% | 1.0827 1.5% 0.8% | 1.0868 1.1% -0.4% |
| DJIA 17265.21 -3.3% -1.8% | 17368.50 0.6% 0.6% | 17524.91 1.5% 0.9% | 17749.09 2.8% 1.3% | 17495.84 1.3% -1.4% | 17128.55 -0.8% -2.1% |
| DAX 10340.06 -3.8% -2.4% | 10139.34 -1.9% -1.9% | 10450.38 -1.1% 3.1% | 10469.26 1.2% 0.2% | 10738.12 3.8% 2.6% | 10608.19 2.6% -1.2% |
On January 29, 2016, the Policy Board of the Bank of Japan introduced a new policy to attain the “price stability target of 2 percent at the earliest possible time” (https://www.boj.or.jp/en/announcements/release_2016/k160129a.pdf). The new framework consists of three dimensions: quantity, quality and interest rate. The interest rate dimension consists of rates paid to current accounts that financial institutions hold at the Bank of Japan of three tiers zero, positive and minus 0.1 percent. The quantitative dimension consists of increasing the monetary base at the annual rate of 80 trillion yen. The qualitative dimension consists of purchases by the Bank of Japan of Japanese government bonds (JGBs), exchange traded funds (ETFs) and Japan real estate investment trusts (J-REITS). The yen devalued sharply relative to the dollar and world equity markets soared after the new policy announced on Jan 29, 2016:
| Fri 22 | Mon 25 | Tue 26 | Wed 27 | Thu 28 | Fri 29 |
| JPY/ USD 118.77 -1.5% -0.9% | 118.30 0.4% 0.4% | 118.42 0.3% -0.1% | 118.68 0.1% -0.2% | 118.82 0.0% -0.1% | 121.13 -2.0% -1.9% |
| DJIA 16093.51 0.7% 1.3% | 15885.22 -1.3% -1.3% | 16167.23 0.5% 1.8% | 15944.46 -0.9% -1.4% | 16069.64 -0.1% 0.8% | 16466.30 2.3% 2.5% |
| Nikkei 16958.53 -1.1% 5.9% | 17110.91 0.9% 0.9% | 16708.90 -1.5% -2.3% | 17163.92 1.2% 2.7% | 17041.45 0.5% -0.7% | 17518.30 3.3% 2.8% |
| Shanghai 2916.56 0.5% 1.3 | 2938.51 0.8% 0.8% | 2749.79 -5.7% -6.4% | 2735.56 -6.2% -0.5% | 2655.66 -8.9% -2.9% | 2737.60 -6.1% 3.1% |
| DAX 9764.88 2.3% 2.0% | 9736.15 -0.3% -0.3% | 9822.75 0.6% 0.9% | 9880.82 1.2% 0.6% | 9639.59 -1.3% -2.4% | 9798.11 0.3% 1.6% |
In testimony on the Semiannual Monetary Policy Report to the Congress on Feb 10-11, 2016, Chair Yellen (http://www.federalreserve.gov/newsevents/testimony/yellen20160210a.htm) states: “U.S. real gross domestic product is estimated to have increased about 1-3/4 percent in 2015. Over the course of the year, subdued foreign growth and the appreciation of the dollar restrained net exports. In the fourth quarter of last year, growth in the gross domestic product is reported to have slowed more sharply, to an annual rate of just 3/4 percent; again, growth was held back by weak net exports as well as by a negative contribution from inventory investment.”
Jon Hilsenrath, writing on “Yellen Says Fed Should Be Prepared to Use Negative Rates if Needed,” on Feb 11, 2016, published in the Wall Street Journal (http://www.wsj.com/articles/yellen-reiterates-concerns-about-risks-to-economy-in-senate-testimony-1455203865), analyzes the statement of Chair Yellen in Congress that the FOMC (Federal Open Market Committee) is considering negative interest rates on bank reserves. The Wall Street Journal provides yields of two and ten-year sovereign bonds with negative interest rates on shorter maturities where central banks pay negative interest rates on excess bank reserves:
| Sovereign Yields 2/12/16 | Japan | Germany | USA |
| 2 Year | -0.168 | -0.498 | 0.694 |
| 10 Year | 0.076 | 0.262 | 1.744 |
On Mar 10, 2016, the European Central Bank (ECB) announced (1) reduction of the refinancing rate by 5 basis points to 0.00 percent; decrease the marginal lending rate to 0.25 percent; reduction of the deposit facility rate to 0,40 percent; increase of the monthly purchase of assets to €80 billion; include nonbank corporate bonds in assets eligible for purchases; and new long-term refinancing operations (https://www.ecb.europa.eu/press/pr/date/2016/html/pr160310.en.html). The President of the ECB, Mario Draghi, stated in the press conference (https://www.ecb.europa.eu/press/pressconf/2016/html/is160310.en.html): “How low can we go? Let me say that rates will stay low, very low, for a long period of time, and well past the horizon of our purchases…We don’t anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook.”
The dollar devalued relative to the euro and open stock markets traded lower after the announcement on Mar 10, 2016, but stocks rebounded on Mar 11:
| Fri 4 | Mon 7 | Tue 8 | Wed 9 | Thu10 | Fri 11 |
| USD/ EUR 1.1006 -0.7% -0.4% | 1.1012 -0.1% -0.1% | 1.1013 -0.1% 0.0% | 1.0999 0.1% 0.1% | 1.1182 -1.6% -1.7% | 1.1151 -1.3% 0.3% |
| DJIA 17006.77 2.2% 0.4% | 17073.95 0.4% 0.4% | 16964.10 -0.3% -0.6% | 17000.36 0.0% 0.2% | 16995.13 -0.1% 0.0% | 17213.31 1.2% 1.3% |
| DAX 9824.17 3.3% 0.7% | 9778.93 -0.5% 0.5% | 9692.82 -1.3% -0.9% | 9723.09 -1.0% 0.3% | 9498.15 -3.3% -2.3% | 9831.13 0.1% 3.5% |
At the press conference after the FOMC meeting on Sep 21, 2016, Chair Yellen states (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20160921.pdf ): “However, the economic outlook is inherently uncertain.” In the address to the Jackson Hole symposium on Aug 26, 2016, Chair Yellen states: “I believe the case for an increase in in federal funds rate has strengthened in recent months…And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course” (http://www.federalreserve.gov/newsevents/speech/yellen20160826a.htm). In a speech at the World Affairs Council of Philadelphia, on Jun 6, 2016 (http://www.federalreserve.gov/newsevents/speech/yellen20160606a.htm), Chair Yellen finds that “there is considerable uncertainty about the economic outlook.” There are fifteen references to this uncertainty in the text of 18 pages double-spaced. In the Semiannual Monetary Policy Report to the Congress on Jun 21, 2016, Chair Yellen states (http://www.federalreserve.gov/newsevents/testimony/yellen20160621a.htm), “Of course, considerable uncertainty about the economic outlook remains.” Frank H. Knight (1963, 233), in Risk, uncertainty and profit, distinguishes between measurable risk and unmeasurable uncertainty. Is there a “science” or even “art” of central banking under this extreme uncertainty in which policy does not generate higher volatility of money, income, prices and values of financial assets?
What is truly important is the fixing of the overnight fed funds at 1 to 1 ¼ percent with gradual consideration of further rate increases with all measures depending on “incoming data” (https://www.federalreserve.gov/newsevents/pressreleases/monetary20170920a.htm): “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data” (emphasis added).
The decisions of the FOMC (Federal Open Market Committee) depend on incoming data. There are unexpected swings in valuations of risk financial assets by “carry trades” from interest rates below inflation to exposures in stocks, commodities and their derivatives. Another issue is the unexpected “data surprises” such as the sharp decline in 12 months rates of increase of real disposable income, or what is left after taxes and inflation, and the price indicator of the FOMC, prices of personal consumption expenditures (PCE) excluding food and energy. There is no science or art of monetary policy that can deal with this uncertainty.
| Real Disposable Personal Income | Real Personal Consumption Expenditures | Prices of Personal Consumption Expenditures | PCE Prices Excluding Food and Energy |
| ∆%12M | ∆%12M | ∆%12M | ∆%12M |
| 6/2017 | 6/2017 | 6/2017 | 6/2017 |
| 1.2 | 2.4 | 1.4 | 1.5 |
Chart VIII-1, Fed Funds Rate and Yields of Ten-year Treasury Constant Maturity and Baa Seasoned Corporate Bond, Jan 2, 2001 to Oct 6, 2016
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/
Chart VIII-1A, Fed Funds Rate and Yield of Ten-year Treasury Constant Maturity, Jan 2, 2001 to Jan 25, 2018
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/
Table VIII-3, Selected Data Points in Chart VIII-1, % per Year
| Fed Funds Overnight Rate | 10-Year Treasury Constant Maturity | Seasoned Baa Corporate Bond | |
| 1/2/2001 | 6.67 | 4.92 | 7.91 |
| 10/1/2002 | 1.85 | 3.72 | 7.46 |
| 7/3/2003 | 0.96 | 3.67 | 6.39 |
| 6/22/2004 | 1.00 | 4.72 | 6.77 |
| 6/28/2006 | 5.06 | 5.25 | 6.94 |
| 9/17/2008 | 2.80 | 3.41 | 7.25 |
| 10/26/2008 | 0.09 | 2.16 | 8.00 |
| 10/31/2008 | 0.22 | 4.01 | 9.54 |
| 4/6/2009 | 0.14 | 2.95 | 8.63 |
| 4/5/2010 | 0.20 | 4.01 | 6.44 |
| 2/4/2011 | 0.17 | 3.68 | 6.25 |
| 7/25/2012 | 0.15 | 1.43 | 4.73 |
| 5/1/13 | 0.14 | 1.66 | 4.48 |
| 9/5/13 | 0.089 | 2.98 | 5.53 |
| 11/21/2013 | 0.09 | 2.79 | 5.44 |
| 11/26/13 | 0.09 | 2.74 | 5.34 (11/26/13) |
| 12/5/13 | 0.09 | 2.88 | 5.47 |
| 12/11/13 | 0.09 | 2.89 | 5.42 |
| 12/18/13 | 0.09 | 2.94 | 5.36 |
| 12/26/13 | 0.08 | 3.00 | 5.37 |
| 1/1/2014 | 0.08 | 3.00 | 5.34 |
| 1/8/2014 | 0.07 | 2.97 | 5.28 |
| 1/15/2014 | 0.07 | 2.86 | 5.18 |
| 1/22/2014 | 0.07 | 2.79 | 5.11 |
| 1/30/2014 | 0.07 | 2.72 | 5.08 |
| 2/6/2014 | 0.07 | 2.73 | 5.13 |
| 2/13/2014 | 0.06 | 2.73 | 5.12 |
| 2/20/14 | 0.07 | 2.76 | 5.15 |
| 2/27/14 | 0.07 | 2.65 | 5.01 |
| 3/6/14 | 0.08 | 2.74 | 5.11 |
| 3/13/14 | 0.08 | 2.66 | 5.05 |
| 3/20/14 | 0.08 | 2.79 | 5.13 |
| 3/27/14 | 0.08 | 2.69 | 4.95 |
| 4/3/14 | 0.08 | 2.80 | 5.04 |
| 4/10/14 | 0.08 | 2.65 | 4.89 |
| 4/17/14 | 0.09 | 2.73 | 4.89 |
| 4/24/14 | 0.10 | 2.70 | 4.84 |
| 5/1/14 | 0.09 | 2.63 | 4.77 |
| 5/8/14 | 0.08 | 2.61 | 4.79 |
| 5/15/14 | 0.09 | 2.50 | 4.72 |
| 5/22/14 | 0.09 | 2.56 | 4.81 |
| 5/29/14 | 0.09 | 2.45 | 4.69 |
| 6/05/14 | 0.09 | 2.59 | 4.83 |
| 6/12/14 | 0.09 | 2.58 | 4.79 |
| 6/19/14 | 0.10 | 2.64 | 4.83 |
| 6/26/14 | 0.10 | 2.53 | 4.71 |
| 7/2/14 | 0.10 | 2.64 | 4.84 |
| 7/10/14 | 0.09 | 2.55 | 4.75 |
| 7/17/14 | 0.09 | 2.47 | 4.69 |
| 7/24/14 | 0.09 | 2.52 | 4.72 |
| 7/31/14 | 0.08 | 2.58 | 4.75 |
| 8/7/14 | 0.09 | 2.43 | 4.71 |
| 8/14/14 | 0.09 | 2.40 | 4.69 |
| 8/21/14 | 0.09 | 2.41 | 4.69 |
| 8/28/14 | 0.09 | 2.34 | 4.57 |
| 9/04/14 | 0.09 | 2.45 | 4.70 |
| 9/11/14 | 0.09 | 2.54 | 4.79 |
| 9/18/14 | 0.09 | 2.63 | 4.91 |
| 9/25/14 | 0.09 | 2.52 | 4.79 |
| 10/02/14 | 0.09 | 2.44 | 4.76 |
| 10/09/14 | 0.08 | 2.34 | 4.68 |
| 10/16/14 | 0.09 | 2.17 | 4.64 |
| 10/23/14 | 0.09 | 2.29 | 4.71 |
| 11/13/14 | 0.09 | 2.35 | 4.82 |
| 11/20/14 | 0.10 | 2.34 | 4.86 |
| 11/26/14 | 0.10 | 2.24 | 4.73 |
| 12/04/14 | 0.12 | 2.25 | 4.78 |
| 12/11/14 | 0.12 | 2.19 | 4.72 |
| 12/18/14 | 0.13 | 2.22 | 4.78 |
| 12/23/14 | 0.13 | 2.26 | 4.79 |
| 12/30/14 | 0.06 | 2.20 | 4.69 |
| 1/8/15 | 0.12 | 2.03 | 4.57 |
| 1/15/15 | 0.12 | 1.77 | 4.42 |
| 1/22/15 | 0.12 | 1.90 | 4.49 |
| 1/29/15 | 0.11 | 1.77 | 4.35 |
| 2/05/15 | 0.12 | 1.83 | 4.43 |
| 2/12/15 | 0.12 | 1.99 | 4.53 |
| 2/19/15 | 0.12 | 2.11 | 4.64 |
| 2/26/15 | 0.11 | 2.03 | 4.47 |
| 3/5/215 | 0.11 | 2.11 | 4.58 |
| 3/12/15 | 0.11 | 2.10 | 4.56 |
| 3/19/15 | 0.12 | 1.98 | 4.48 |
| 3/26/15 | 0.11 | 2.01 | 4.56 |
| 4/03/15 | 0.12 | 1.92 | 4.47 |
| 4/9/15 | 0.12 | 1.97 | 4.50 |
| 4/16/15 | 0.13 | 1.90 | 4.45 |
| 4/23/15 | 0.13 | 1.96 | 4.50 |
| 5/1/15 | 0.08 | 2.05 | 4.65 |
| 5/7/15 | 0.13 | 2.18 | 4.82 |
| 5/14/15 | 0.13 | 2.23 | 4.97 |
| 5/21/15 | 0.12 | 2.19 | 4.94 |
| 5/28/15 | 0.12 | 2.13 | 4.88 |
| 6/04/15 | 0.13 | 2.31 | 5.03 |
| 6/11/15 | 0.13 | 2.39 | 5.10 |
| 6/18/15 | 0.14 | 2.35 | 5.17 |
| 6/25/15 | 0.13 | 2.40 | 5.20 |
| 7/1/15 | 0.13 | 2.43 | 5.26 |
| 7/9/15 | 0.13 | 2.32 | 5.20 |
| 7/16/15 | 0.14 | 2.36 | 5.24 |
| 7/23/15 | 0.13 | 2.28 | 5.13 |
| 7/30/15 | 0.14 | 2.28 | 5.16 |
| 8/06/15 | 0.14 | 2.23 | 5.15 |
| 8/20/15 | 0.15 | 2.09 | 5.13 |
| 8/27/15 | 0.14 | 2.18 | 5.33 |
| 9/03/15 | 0.14 | 2.18 | 5.35 |
| 9/10/15 | 0.14 | 2.23 | 5.35 |
| 9/17/15 | 0.14 | 2.21 | 5.39 |
| 9/25/15 | 0.14 | 2.13 | 5.29 |
| 10/01/15 | 0.13 | 2.05 | 5.36 |
| 10/08/15 | 0.13 | 2.12 | 5.40 |
| 10/15/15 | 0.13 | 2.04 | 5.33 |
| 10/22/15 | 0.12 | 2.04 | 5.30 |
| 10/29/15 | 0.12 | 2.19 | 5.40 |
| 11/05/15 | 0.12 | 2.26 | 5.44 |
| 11/12/15 | 0.12 | 2.32 | 5.51 |
| 11/19/15 | 0.12 | 2.24 | 5.44 |
| 11/25/15 | 0.12 | 2.23 | 5.44 |
| 12/03/15 | 0.13 | 2.33 | 5.51 |
| 12/10/15 | 0.14 | 2.24 | 5.43 |
| 12/17/15 | 0.37 | 2.24 | 5.45 |
| 12/23/15 | 0.36 | 2.27 | 5.53 |
| 12/30/15 | 0.35 | 2.31 | 5.54 |
| 1/07/2016 | 0.36 | 2.16 | 5.44 |
| 01/14/16 | 0.36 | 2.10 | 5.46 |
| 01/20/16 | 0.37 | 2.01 | 5.41 |
| 01/29/16 | 0.38 | 2.00 | 5.48 |
| 02/04/16 | 0.38 | 1.87 | 5.40 |
| 02/11/16 | 0.38 | 1.63 | 5.26 |
| 02/18/16 | 0.38 | 1.75 | 5.37 |
| 02/25/16 | 0.37 | 1.71 | 5.27 |
| 03/03/16 | 0.37 | 1.83 | 5.30 |
| 03/10/16 | 0.36 | 1.93 | 5.23 |
| 03/17/16 | 0.37 | 1.91 | 5.11 |
| 03/24/16 | 0.37 | 1.91 | 4.97 |
| 03/31/16 | 0.25 | 1.78 | 4.90 |
| 04/07/16 | 0.37 | 1.70 | 4.76 |
| 04/14/16 | 0.37 | 1.80 | 4.79 |
| 04/21/16 | 0.37 | 1.88 | 4.79 |
| 04/28/16 | 0.37 | 1.84 | 4.73 |
| 05/05/16 | 0.37 | 1.76 | 4.62 |
| 05/12/16 | 0.37 | 1.75 | 4.66 |
| 05/19/16 | 0.37 | 1.85 | 4.70 |
| 05/26/16 | 0.37 | 1.83 | 4.69 |
| 06/02/16 | 0.37 | 1.81 | 4.64 |
| 06/09/16 | 0.37 | 1.68 | 4.53 |
| 06/16/16 | 0.38 | 1.57 | 4.47 |
| 06/23/16 | 0.39 | 1.74 | 4.60 |
| 06/30/16 | 0.36 | 1.49 | 4.41 |
| 07/07/16 | 0.40 | 1.40 | 4.19 |
| 07/14/16 | 0.40 | 1.53 | 4.23 |
| 07/21/16 | 0.40 | 1.57 | 4.25 |
| 07/28/16 | 0.40 | 1.52 | 4.20 |
| 08/04/16 | 0.40 | 1.51 | 4.27 |
| 08/11/16 | 0.40 | 1.57 | 4.27 |
| 08/18/16 | 0.40 | 1.53 | 4.23 |
| 08/25/16 | 0.40 | 1.58 | 4.21 |
| 09/01/16 | 0.40 | 1.57 | 4.19 |
| 09/08/16 | 0.40 | 1.61 | 4.28 |
| 09/15/16 | 0.40 | 1.71 | 4.43 |
| 09/22/16 | 0.40 | 1.63 | 4.32 |
| 09/29/16 | 0.40 | 1.56 | 4.23 |
| 10/06/16 | 0.40 | 1.75 | 4.36 |
| 10/13/16 | 0.40 | 1.75 | NA* |
| 10/20/16 | 0.41 | 1.76 | NA* |
| 10/27/16 | 0.41 | 1.85 | NA* |
| 11/03/16 | 0.41 | 1.82 | NA* |
| 11/09/16 | 0.41 | 2.07 | NA* |
| 11/17/16 | 0.41 | 2.29 | NA* |
| 11/23/16 | 0.40 | 2.36 | NA* |
| 12/01/16 | 0.40 | 2.45 | NA* |
| 12/08/16 | 0.41 | 2.40 | NA* |
| 12/15/16 | 0.66 | 2.60 | NA* |
| 12/22/16 | 0.66 | 2.55 | NA* |
| 12/29/16 | 0.66 | 2.49 | NA* |
| 01/05/17 | 0.66 | 2.37 | NA* |
| 01/12/17 | 0.66 | 2.36 | NA* |
| 01/19/17 | 0.66 | 2.42 | NA* |
| 01/26/17 | 0.66 | 2.51 | NA* |
| 02/02/17 | 0.66 | 2.48 | NA* |
| 02/09/17 | 0.66 | 2.40 | NA* |
| 02/16/17 | 0.66 | 2.45 | NA* |
| 02/23/17 | 0.66 | 2.38 | NA* |
| 03/02/17 | 0.66 | 2.49 | NA* |
| 03/09/17 | 0.66 | 2.60 | NA* |
| 03/16/17 | 0.91 | 2.53 | NA* |
| 03/23/17 | 0.91 | 2.41 | NA* |
| 03/30/17 | 0.91 | 2.42 | NA* |
| 04/06/17 | 0.91 | 2.34 | NA* |
| 04/13/17 | 0.91 | 2.24 | NA* |
| 04/21/17 | 0.91 | 2.24 | NA* |
| 04/27/17 | 0.91 | 2.30 | NA* |
| 05/04/17 | 0.91 | 2.36 | NA* |
| 05/11/17 | 0.91 | 2.39 | NA* |
| 05/18/17 | 0.91 | 2.23 | NA* |
| 05/25/17 | 0.91 | 2.25 | NA* |
| 06/01/17 | 0.90 | 2.21 | NA* |
| 06/08/17 | 0.91 | 2.19 | NA* |
| 06/15/17 | 1.16 | 2.16 | NA* |
| 06/22/17 | 1.16 | 2.15 | NA* |
| 06/29/17 | 1.16 | 2.27 | NA* |
| 07/06/17 | 1.16 | 2.37 | NA* |
| 07/13/17 | 1.16 | 2.35 | NA* |
| 07/20/17 | 1.16 | 2.27 | NA* |
| 07/27/17 | 1.16 | 2.32 | NA* |
| 08/03/17 | 1.16 | 2.24 | NA* |
| 08/10/17 | 1.16 | 2.20 | NA* |
| 08/17/17 | 1.16 | 2.19 | NA* |
| 08/24/17 | 1.16 | 2.19 | NA* |
| 08/31/17 | 1.07 | 2.12 | NA* |
| 09/07/17 | 1.16 | 2.05 | NA* |
| 09/14/17 | 1.16 | 2.20 | NA* |
| 09/21/17 | 1.16 | 2.27 | NA* |
| 09/28/17 | 1.16 | 2.31 | NA* |
| 10/05/17 | 1.16 | 2.35 | NA* |
| 10/12/17 | 1.16 | 2.33 | NA* |
| 10/19/17 | 1.16 | 2.33 | NA* |
| 10/26/17 | 1.16 | 2.46 | NA* |
| 11/02/17 | 1.16 | 2.35 | NA* |
| 11/09/17 | 1.16 | 2.32 | NA* |
| 11/16/17 | 1.16 | 2.37 | NA* |
| 11/22/17 | 1.16 | 2.32 | NA* |
| 11/30/17 | 1.16 | 2.42 | NA* |
| 12/07/17 | 1.16 | 2.37 | NA* |
| 12/14/17 | 1.41 | 2.35 | NA* |
| 12/21/17 | 1.42 | 2.48 | NA* |
| 12/28/17 | 1.42 | 2.43 | NA* |
| 01/04/18 | 1.42 | 2.46 | NA* |
| 01/11/18 | 1.42 | 2.54 | NA* |
| 01/18/18 | 1.42 | 2.62 | NA* |
| 01/25/18 | 1.42 | 2.63 | NA* |
*Note: The Board of Governors of the Federal Reserve System discontinued the publication of the BAA bond yield.
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/releases/h15/
Chart VIII-2 of the Board of Governors of the Federal Reserve System provides the rate of US dollars (USD) per euro (EUR), USD/EUR. The rate depreciated from USD 1.0630/EUR on Jan 19, 2017 to USD 1.2238/EUR on Jan 19, 2018 or 15.1 percent. The euro has devalued 28.0 percent relative to the dollar from the high on Jul 15, 2008 to Jan 26, 2018. US corporations with foreign transactions and net worth experience losses in their balance sheets in converting revenues from depreciated currencies to the dollar. Corporate profits increased at $53.9 billion in IVQ2016. Corporate profits fell at $46.2 billion in IQ2017. Corporate profits increased at $14.4 billion in IIQ2017. Corporate profits increased $90.3 billion in IIIQ2017. Profits after tax with IVA and CCA increased at $71.6 billion in IVQ2016. Profits after tax with IVA and CCA fell at $43.0 billion in IQ2017. After tax profits increased at $1.1 billion in IIQ2017. Profits after tax with IVA and CCA increased at $94.4 billion in IIIQ2017. Net dividends increased at $2.8 billion in IVQ2016. Net dividends increased at $9.0 billion in IQ2017. Net dividends increased at $6.1 billion in IIQ2017. Net dividends increased at $4.4 billion in IIIQ2017. Undistributed corporate profits increased at $68.9 billion in IVQ2016. Undistributed profits fell at $52.0 billion in IQ2017. Undistributed profits decreased at $5.0 billion in IIQ2017. Undistributed profits increased at $90.0 billion in IIIQ2017. Undistributed corporate profits swelled 389.3 percent from $107.7 billion in IQ2007 to $527.0 billion in IIIQ2017 and changed signs from minus $55.9 billion in current dollars in IVQ2007. Uncertainty originating in fiscal, regulatory and monetary policy causes wide swings in expectations and decisions by the private sector with adverse effects on investment, real economic activity and employment. There is increase in corporate profits from devaluing the dollar with unconventional monetary policy of zero interest rates and decrease of corporate profits in revaluing the dollar with attempts at “normalization” or increases in interest rates. Conflicts arise while other central banks differ in their adjustment process. The current account deficit of the US not seasonally adjusted decreased from $126.0 billion in IIIQ2016 to $112.8 billion in IIIQ2017. The current account deficit seasonally adjusted at annual rate increased from 2.4 percent of GDP in IIIQ2016 to 2.6 percent of GDP in IIQ2017, decreasing to 2.1 percent of GDP in IIIQ2017. The absolute value of the net international investment position increases from minus $8.0 trillion in IIIQ2016 to minus $8.3 trillion in IVQ2016. The absolute value of the net international investment position decreases to minus $8.1 trillion in IQ2017 and decreases to minus $8.0 trillion in IIQ2017. The absolute value of the net international investment position decreased to $7.8 trillion in IIIQ2017. The BEA explains as follows (https://www.bea.gov/newsreleases/international/intinv/2017/pdf/intinv217.pdf):
“The U.S. net international investment position increased to -$7,768.7 billion (preliminary) at the end of the third quarter of 2017 from -$8,004.1 billion (revised) at the end of the second quarter, according to statistics released today by the Bureau of Economic Analysis (BEA). The $235.4 billion increase reflected a $1,001.2 billion increase in U.S. assets and a $765.8 billion increase in U.S. liabilities (table 1).”
The BEA explains further (https://www.bea.gov/newsreleases/international/intinv/2017/pdf/intinv317.pdf): “
“The $235.4 billion increase in the net investment position reflected net financial transactions of –$87.4 billion and net other changes in position, such as price and exchange-rate changes, of $322.8 billion (table A).
The net investment position increased 2.9 percent in the third quarter, compared with an increase of 1.1 percent in the second quarter, and an average quarterly decrease of 5.3 percent from the first quarter of 2011 through the first quarter of 2017.
U.S. assets increased $1,001.2 billion to $26,854.9 billion at the end of the third quarter, mostly reflecting increases in portfolio investment and direct investment assets that were partly offset by a decrease in financial derivatives.
· Assets excluding financial derivatives increased $1,227.5 billion to $25,149.7 billion. The increase resulted from other changes in position of $869.2 billion and financial transactions of $358.2 billion. Other changes in position mostly reflected foreign equity price increases that raised the equity value of portfolio investment and direct investment assets, and the appreciation of major foreign currencies against the U.S. dollar that raised the value of foreign-currency-denominated assets in dollar terms. Financial transactions mostly reflected net acquisition of portfolio investment assets.
· Financial derivatives decreased $226.2 billion to $1,705.1 billion, mostly in single-currency interest rate contracts.”
U.S. liabilities increased $765.8 billion to $34,623.6 billion at the end of the third quarter, mostly reflecting increases in portfolio investment and direct investment liabilities that were partly offset by a decrease in financial derivatives.
· Liabilities excluding financial derivatives increased $988.8 billion to $32,952.3 billion. The increase resulted from other changes in position of $524.6 billion and financial transactions of $464.2 billion (table A). Other changes in position mostly reflected U.S. equity price increases that raised the equity value of portfolio investment and direct investment liabilities. Financial transactions mostly reflected net incurrence of portfolio investment liabilities.
· Financial derivatives decreased $223.0 billion to $1,671.3 billion, mostly in single-currency interest rate contracts.”
Chart VIII-2, Exchange Rate of US Dollars (USD) per Euro (EUR), Jan 19, 2017 to Jan 19, 2018
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/releases/H10/default.htm
Chart VIII-3 of the Board of Governors of the Federal Reserve System provides the yield of the 10-year Treasury constant maturity note from 2.46 percent on Oct 26, 2017 to 2.623percent on Jan 25, 2018. There is turbulence in financial markets originating in a combination of intentions of normalizing or increasing US policy fed funds rate, quantitative easing in Europe and Japan and increasing perception of financial/economic risks.
Chart VIII-3, Yield of Ten-year Constant Maturity Treasury, Oct 26, 2017 to Jan 25, 2018
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/releases/h15/
IX Conclusion. The departing theoretical framework of Bordo and Haubrich (2012DR) is the plucking model of Friedman (1964, 1988). Friedman (1988, 1) recalls, “I was led to the model in the course of investigating the direction of influence between money and income. Did the common cyclical fluctuation in money and income reflect primarily the influence of money on income or of income on money?” Friedman (1964, 1988) finds useful for this purpose to analyze the relation between expansions and contractions. Analyzing the business cycle in the United States between 1870 and 1961, Friedman (1964, 15) found that “a large contraction in output tends to be followed on the average by a large business expansion; a mild contraction, by a mild expansion.” The depth of the contraction opens up more room in the movement toward full employment (Friedman 1964, 17):
“Output is viewed as bumping along the ceiling of maximum feasible output except that every now and then it is plucked down by a cyclical contraction. Given institutional rigidities and prices, the contraction takes in considerable measure the form of a decline in output. Since there is no physical limit to the decline short of zero output, the size of the decline in output can vary widely. When subsequent recovery sets in, it tends to return output to the ceiling; it cannot go beyond, so there is an upper limit to output and the amplitude of the expansion tends to be correlated with the amplitude of the contraction.”
Kim and Nelson (1999) test the asymmetric plucking model of Friedman (1964, 1988) relative to a symmetric model using reference cycles of the NBER and find evidence supporting the Friedman model. Bordo and Haubrich (2012DR) analyze 27 cycles beginning in 1872, using various measures of financial crises while considering different regulatory and monetary regimes. The revealing conclusion of Bordo and Haubrich (2012DR, 2) is that:
“Our analysis of the data shows that steep expansions tend to follow deep contractions, though this depends heavily on when the recovery is measured. In contrast to much conventional wisdom, the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis. In fact, on average, it is cycles without a financial crisis that show the weakest relation between contraction depth and recovery strength. For many configurations, the evidence for a robust bounce-back is stronger for cycles with financial crises than those without.”
The average rate of growth of real GDP in expansions after recessions with financial crises was 8 percent but only 6.9 percent on average for recessions without financial crises (Bordo 2012Sep27). Real GDP declined 12 percent in the Panic of 1907 and increased 13 percent in the recovery, consistent with the plucking model of Friedman (Bordo 2012Sep27). Bordo (2012Sep27) finds two probable explanations for the weak recovery during the current economic cycle: (1) collapse of United States housing; and (2) uncertainty originating in fiscal policy, regulation and structural changes. There are serious doubts if monetary policy is adequate to recover the economy under these conditions.
Lucas (2011May) estimates US economic growth in the long-term at 3 percent per year and about 2 percent per year in per capita terms. There are displacements from this trend caused by events such as wars and recessions but the economy grows much faster during the expansion, compensating for the contraction and maintaining trend growth over the entire cycle. Historical US GDP data exhibit remarkable growth: Lucas (2011May) estimates an increase of US real income per person by a factor of 12 in the period from 1870 to 2010. The explanation by Lucas (2011May) of this remarkable growth experience is that government provided stability and education while elements of “free-market capitalism” were an important driver of long-term growth and prosperity. Lucas sharpens this analysis by comparison with the long-term growth experience of G7 countries (US, UK, France, Germany, Canada, Italy and Japan) and Spain from 1870 to 2010. Countries benefitted from “common civilization” and “technology” to “catch up” with the early growth leaders of the US and UK, eventually growing at a faster rate. Significant part of this catch up occurred after World War II. Lucas (2011May) finds that the catch up stalled in the 1970s. The analysis of Lucas (2011May) is that the 20-40 percent gap that developed originated in differences in relative taxation and regulation that discouraged savings and work incentives in comparison with the US. A larger welfare and regulatory state, according to Lucas (2011May), could be the cause of the 20-40 percent gap. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in USD fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. The key indicator of growth of real income per capita, which is what a person earns after inflation, measures long-term economic growth and prosperity. A refined concept would include real disposable income per capita, which is what a person earns after inflation and taxes.
Table IB-1 provides the data required for broader comparison of long-term and cyclical performance of the United States economy. Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) provide valuable information on long-term growth and cyclical behavior. First, Long-term performance. Using annual data, US GDP grew at the average rate of 3.2 percent per year from 1929 to 2016 and at 3.2 percent per year from 1947 to 2016. Real disposable income grew at the average yearly rate of 3.2 percent from 1929 to 2016 and at 3.7 percent from 1947 to 1999. Real disposable income per capita grew at the average yearly rate of 2.0 percent from 1929 to 2016 and at 2.3 percent from 1947 to 1999. US economic growth was much faster during expansions, compensating contractions in maintaining trend growth for whole cycles. Using annual data, US real disposable income grew at the average yearly rate of 3.5 percent from 1980 to 1989 and real disposable income per capita at 2.6 percent. The US economy has lost its dynamism in the current cycle: real disposable income grew at the yearly average rate of 1.8 percent from 2006 to 2016 and real disposable income per capita at 1.0 percent. Real disposable income grew at the average rate of 1.7 percent from 2007 to 2016 and real disposable income per capita at 0.9 percent. Table IB-1 illustrates the contradiction of long-term growth with the proposition of secular stagnation (Hansen 1938, 1938, 1941 with early critique by Simons (1942). Secular stagnation would occur over long periods. Table IB-1 also provides the corresponding rates of population growth that is only marginally lower at 0.8 to 0.9 percent recently from 1.1 percent over the long-term. GDP growth fell abruptly from 2.6 percent on average from 2000 to 2006 to 1.4 percent from 2006 to 2016 and 1.3 percent from 2007 to 2017 and real disposable income growth fell from 2.9 percent on average from 2000 to 2006 to 1.8 percent from 2006 to 2016. The decline of growth of real per capita disposable income is even sharper from average 2.0 percent from 2000 to 2006 to 1.0 percent from 2006 to 2016 and 0.9 percent from 2007 to 2016 while population growth was 0.8 percent on average. Lazear and Spletzer (2012JHJul122) provide theory and measurements showing that cyclic factors explain currently depressed labor markets. This is also the case of the overall economy. Second, first four quarters of expansion. Growth in the first four quarters of expansion is critical in recovering loss of output and employment occurring during the contraction. In the first four quarters of expansion from IQ1983 to IVQ1983: GDP increased 7.8 percent, real disposable personal income 5.3 percent and real disposable income per capita 4.4 percent. In the first four quarters of expansion from IIIQ2009 to IIQ2010: GDP increased 2.7 percent, real disposable personal income 0.2 percent and real disposable income per capita decreased 0.7 percent. Third, first 33 quarters of expansion. In the expansion from IQ1983 to IQ1991: GDP grew 36.5 percent at the annual equivalent rate of 3.8 percent; real disposable income grew 31.8 percent at the annual equivalent rate of 3.4 percent; and real disposable income per capita grew 21.8 percent at the annual equivalent rate of 2.4 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).
In the expansion from IIIQ2009 to IIIQ2017: GDP grew 19.6 percent at the annual equivalent rate of 2.2 percent; real disposable income grew 15.9 percent at the annual equivalent rate of 1.8 percent; and real disposable personal income per capita grew 9.2 percent at the annual equivalent rate of 1.1 percent. Fourth, entire quarterly cycle. In the entire cycle combining contraction and expansion from IQ1980 to IQ1991: GDP grew 36.3 percent at the annual equivalent rate of 2.7 percent; real disposable personal income grew 39.5 percent at the annual equivalent rate of 2.9 percent; and real disposable personal income per capita 25.0 percent at the annual equivalent rate of 2.0 percent. The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://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). In the entire cycle combining contraction and expansion from IVQ2007 to IIIQ2017: GDP grew 14.5 percent at the annual equivalent rate of 1.4 percent; real disposable personal income increased 17.8 percent at the annual equivalent rate of 1.7 percent; and real disposable personal income per capita grew 9.5 percent at the annual equivalent rate of 1.0 percent. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing. Bordo (2012 Sep27) and Bordo and Haubrich (2012DR) provide convincing evidence that recoveries have been faster after deeper recessions and recessions with financial crises, casting serious doubts on the conventional explanation of weak growth during the current expansion allegedly because of the depth of the contraction of 4.2 percent from IVQ2007 to IIQ2009 and the financial crisis. The proposition of secular stagnation should explain a long-term process of decay and not the actual abrupt collapse of the economy and labor markets currently.
Table IB-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population Long-term and in 1983-89 and 2007-2016, %
| Long-term Average ∆% per Year | GDP | Population | |
| 1929-2016 | 3.2 | 1.1 | |
| 1947-2016 | 3.2 | 1.2 | |
| 1947-1999 | 3.6 | 1.3 | |
| 1980-1989 | 3.5 | 0.9 | |
| 2000-2016 | 1.8 | 0.9 | |
| 2000-2006 | 2.6 | 0.9 | |
| 2006-2016 | 1.4 | 0.8 | |
| 2007-2016 | 1.3 | 0.8 | |
| Long-term Average ∆% per Year | Real Disposable Income | Real Disposable Income per Capita | Population |
| 1929-2016 | 3.2 | 2.0 | 1.1 |
| 1947-1999 | 3.7 | 2.3 | 1.3 |
| 2000-2016 | 2.2 | 1.3 | 0.9 |
| 2000-2006 | 2.9 | 2.0 | 0.9 |
| 2006-2016 | 1.8 | 1.0 | 0.8 |
| 2007-2016 | 1.7 | 0.9 | 0.8 |
| Whole Cycles Average ∆% per Year | |||
| 1980-1989 | 3.5 | 2.6 | 0.9 |
| 2006-2016 | 1.8 | 1.0 | 0.8 |
| 2007-2016 | 1.7 | 0.9 | 0.8 |
| Comparison of Cycles | # Quarters | ∆% | ∆% Annual Equivalent |
| GDP | |||
| I83 to IV83 I83 to IQ87 I83 to II87 I83 to III87 I83 to IV87 I83 to I88 I83 to II88 I83 to III88 I83 to IV88 I83 to I89 I83 to II89 I83 to III89 I83 to IV89 I83 to I90 I83 to II90 I83 to III90 I83 to IV90 I83 to I91 | 4 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 | 7.8 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 | 7.8 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 |
| RDPI | |||
| I83 to IV83 I83 to I87 I83 to III87 I83 to IV87 I83 to I88 I83 to II88 I83 to III88 I83 to IV88 I83 to I89 I83 to II89 I83 to III89 I83 to IV89 I83 to I90 I83 to II90 I83 to III90 I83 to IV90 I83 to I91 | 4 17 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 | 5.3 19.5 20.5 22.1 23.8 25.1 26.3 27.5 29.1 28.7 29.6 30.7 31.8 32.5 32.6 31.5 31.8 | 5.3 4.3 4.0 4.1 4.2 4.2 4.1 4.1 4.2 4.0 3.9 3.9 3.9 3.8 3.7 3.5 3.4 |
| RDPI Per Capita | |||
| I83 to IV83 I83 to I87 I83 to III87 I83 to IV87 I83 to I88 I83 to II88 I83 to III88 I83 to IV88 I83 to I89 I83 to II89 I83 to III89 I83 to IV89 I83 to I90 I83 to II90 I83 to III90 I83 to IV90 I83 to I91 | 4 17 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 | 4.4 15.1 15.5 16.7 18.2 19.2 20.0 20.9 22.1 21.5 22.0 22.6 23.4 23.7 23.3 21.9 21.8 | 4.4 3.4 3.1 3.1 3.2 3.2 3.2 3.2 3.2 3.0 3.0 3.0 2.9 2.9 2.7 2.5 2.4 |
| Whole Cycle IQ1980 to IQ1991 | |||
| GDP | 46 | 36.3 | 2.7 |
| RDPI | 46 | 39.5 | 2.9 |
| RDPI per Capita | 46 | 25.0 | 2.0 |
| Population | 46 | 11.6 | 1.0 |
| GDP | |||
| III09 to II10 III09 to III17 | 4 33 | 2.7 19.6 | 2.7 2.2 |
| RDPI | |||
| III09 to II10 III09 to I1I7 | 4 33 | 0.2 15.9 | 0.2 1.8 |
| RDPI per Capita | |||
| III09 to II10 III09 to III17 | 4 33 | -0.7 9.2 | -0.7 1.1 |
| Population | |||
| III09 to II10 III09 to III17 | 4 33 | 0.8 6.2 | 0.8 0.7 |
| IVQ2007 to IIIQ2017 | 39 | ||
| GDP | 39 | 14.5 | 1.4 |
| RDPI | 39 | 17.8 | 1.7 |
| RDPI per Capita | 39 | 9.5 | 0.9 |
| Population | 39 | 7.6 | 0.8 |
RDPI: Real Disposable Personal Income
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
There are seven basic facts illustrating the current economic disaster of the United States:
- GDP maintained trend growth in the entire business cycle from IQ1980 to IQ1991, including contractions and expansions. 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 is well below trend in the entire business cycle from IVQ2007 to IIIQ2017, including contractions and expansions
- Per capita real disposable income exceeded trend growth in the 1980s but is substantially below trend in IIIQ2017
- Level of employed persons increased in the 1980s but declined/stagnated cyclically into IIIQ2017
- Level of full-time employed persons increased in the 1980s but declined/stagnated cyclically into IIIQ2017
- Level unemployed, unemployment rate and employed part-time for economic reasons fell in the recovery from the recessions in the 1980s but not substantially in relative cyclical terms in the recovery since IIQ2009
- Wealth of households and nonprofit organizations soared in the 1980s but stagnated in historically-relative real terms into IIQ2017
- Gross private domestic investment increased sharply from IQ1980 to IQ1991 but gross private domestic investment stagnated and private fixed investment stagnated in relative cyclical terms from IVQ2007 into IIIQ2017
There are references to adverse periods as “lost decades.” There is a more prolonged and adverse period in Table V-3A: the lost economic cycle of the Global Recession with economic growth underperforming below trend worldwide. Economic contractions were relatively high but not comparable to the decline of GDP during the Great Depression. In fact, during the Great Depression in the four years of 1930 to 1933, US 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. The contraction of GDP in the current cycle of the Global Recession was much lower, 4.2 percent (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.html). Contractions were deeper in Japan, 8.7 percent, the euro area (19 members), 5.8 percent, Germany, 6.9 percent and the UK 6.1 percent. The contraction in France was 4.0 percent. There is adversity in low rates of growth during the expansion that did not compensate for the contraction such that for the whole cycle performance is disappointingly low. As a result, GDP is substantially below what it would have been in trend growth in all countries and regions in the world. 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 third estimate of GDP for IIIQ2017 (https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp3q17_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by 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 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.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 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.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 $2835.2 billion than actual $17,163.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 22.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 13.3 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-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 $17,163.9 billion in IIIQ2017 or 14.5 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 Dec 1919 to Dec 2017. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.2393 in Dec 2007 to 146.8830 in Dec 2017. The actual index NSA in Dec 2017 is 103.381, which is 29.6 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Dec 2017. Using trend growth of 2.0 percent per year, the index would increase to 131.9431 in Dec 2017. The output of manufacturing at 103.381 in Dec 2017 is 21.6 percent below trend under this alternative calculation.
Table V-3A, Cycle 2007-2017, Percentage Contraction, Average Growth Rate in Expansion, Average Growth Rate in Whole Cycle and GDP Percent Below Trend
| Contraction ∆% | Expansion AV ∆% | Whole Cycle AV ∆% | Below Trend Percent | |
| USA | 4.2 | 2.2 | 1.4 | 14.3 |
| Japan | 8.7 | 1.7 | 0.5 | NA |
| Euro Area (19) | 5.8 | 1.3 | 0.5 | 15.5 |
| France | 4.0 | 1.3 | 0.7 | 10.1 |
| Germany | 6.9 | 2.1 | 1.1 | NA |
| UK | 6.1 | 2.0 | 1.0 | 14.5 |
Note: AV: Average. Expansion and Whole Cycle AV ∆% calculated with quarterly growth, seasonally adjusted and quarterly adjusted when applicable, rates and converted into annual equivalent.
Data reported periodically in this blog.
Source: Country Statistical Agencies http://www.census.gov/aboutus/stat_int.html
There is a critical issue of the United States economy will be able in the future to attain again the level of activity and prosperity of projected trend growth. Growth at trend during the entire business cycles built the largest economy in the world but there may be an adverse, permanent weakness in United States economic performance and prosperity. Table IB-2 provides data for analysis of these seven basic facts. The seven blocks of Table IB-2 are separated initially after individual discussion of each one followed by the full Table IB-2.
1. Trend Growth.
i. As shown in Table IB-2, actual GDP grew cumulatively 35.9 percent from IQ1980 to IQ1991, which is relatively close to what trend growth would have been at 40.5 percent. Real GDP grew 36.3 percent from IVQ1979 to IQ1991. Rapid growth at the average annual rate of 3.8 percent per quarter during the expansion from IQ1983 to IQ1991 erased the loss of GDP of 4.7 percent during the contractions and maintained relatively close trend growth at 2.7 percent for GDP and 2.9 percent for real disposable personal income over the entire cycle. 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 (https://www.bea.gov/iTable/index_nipa.cfm).
ii. In contrast, cumulative growth from IVQ2007 to IIIQ2017 was 14.5 percent while trend growth would have been 33.4 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 third estimate of GDP for IIIQ2017 (https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp3q17_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by 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 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.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 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.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 $2835.2 billion than actual $17,163.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 22.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 13.3 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-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 $17,163.9 billion in IIIQ2017 or 14.5 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 Dec 1919 to Dec 2017. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.2393 in Dec 2007 to 146.8830 in Dec 2017. The actual index NSA in Dec 2017 is 103.381, which is 29.6 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Dec 2017. Using trend growth of 2.0 percent per year, the index would increase to 131.9431 in Dec 2017. The output of manufacturing at 103.381 in Dec 2017 is 21.6 percent below trend under this alternative calculation.
| Period IQ1980 to IQ1991 | |
| GDP SAAR USD Billions | |
| IQ1980 | 6,524.9 |
| IQ1991 | 8,865.6 |
| ∆% IQ1980 to IQ1991 (36.3 percent from IVQ1979 $6503.9 billion) | 35.9 |
| ∆% Trend Growth IQ1980 to IQ1991 | 40.5 |
| Period IVQ2007 to IIIQ2017 | |
| GDP SAAR USD Billions | |
| IVQ2007 | 14,991.8 |
| IIIQ2017 | 17,163.9 |
| ∆% IVQ2007 to IIIQ2017 | 14.5 |
| ∆% IVQ2007 to IIIQ2017 Trend Growth | 33.4 |
2. Real Disposable Income
i. In the entire business cycle from IQ1980 to IQ1991, as shown in Table IB-2, per capita real disposable income, or what is left per person after inflation and taxes, grew cumulatively 24.9 percent, which is close to what would have been trend growth of 25.6 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).
ii. In contrast, in the entire business cycle from IVQ2007 to IIIQ2017, per capita real disposable income increased 9.5 percent while trend growth would have been 21.3 percent. Income available after inflation and taxes is about the same as before the contraction after 32 consecutive quarters of GDP growth at mediocre rates relative to those prevailing during historical cyclical expansions. Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2014, personal income grew at 6.1 percent in nominal terms while nominal disposable income grew at 5.7 percent in nominal terms and at 5.9 percent in real terms (Table 14 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi0617.pdf). In IQ2015, nominal personal income grew at 4.1 percent while nominal disposable income grew at 2.6 percent and at 4.3 percent in real terms (Table 14 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi0617.pdf). In IIQ2015, nominal personal income grew at 5.7 percent while nominal disposable income grew at 5.6 percent and real disposable income grew at 3.8 percent (Table 14 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi0617.pdf). In IIIQ2015, nominal personal income grew at 2.9 percent while nominal disposable income grew at 3.2 percent and real disposable income grew at 1.8 percent (Table 14 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi0617.pdf). In IVQ2015, nominal personal income grew at 3.7 percent while nominal disposable income grew at 3.1 percent and real disposable income at 2.9 percent (Table 14 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi0617.pdf). In IQ2016, personal income fell at 0.5 percent and fell at 2.1 percent excluding transfer receipts while nominal disposable income grew at 0.9 percent and real disposable income grew at 0.2 percent (Table 6 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi0817.pdf). In IIQ2016, personal income grew at 4.1 percent and at 2.2 percent excluding transfer receipts while nominal disposable income grew at 4.0 percent and real disposable income grew at 1.9 percent (Table 6 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi1117.pdf). In IIIQ2016, personal income grew at 3.0 percent and at 1.3 percent excluding transfer receipts while nominal disposable income grew at 2.5 percent and real disposable income grew at 0.7 percent (Table 6 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi1117.pdf). In IVQ2016, nominal personal income fell at 0.1 percent, decreasing at 2.6 percent excluding current transfers while disposable income grew at 0.1 percent and real disposable income decreased at 1.8 percent (Table 6 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi1117.pdf). In IQ2017, nominal personal income grew at 5.6 percent and 3.4 percent excluding transfer receipts while nominal disposable income grew at 5.2 percent and real disposable income at 2.9 percent (Table 6 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi1117.pdf). In IIQ2017, nominal personal income grew at 2.3 percent and 2.4 percent excluding transfer receipts while nominal disposable income grew at 3.0 percent and real disposable income at 2.7 percent (Table 6 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi1117.pdf). In IIIQ2017, nominal personal income grew at 2.8 percent and at 1.2 percent excluding transfer receipts while nominal disposable income grew at 2.1 percent and real disposable personal income grew at 0.5 percent (Table 6 at https://www.bea.gov/newsreleases/national/pi/2017/pdf/pi1117.pdf).
| Period IQ1980 to IQ1991 | |
| Real Disposable Personal Income per Capita IQ1980 Chained 2009 USD | 20,241 |
| Real Disposable Personal Income per Capita IQ1991 Chained 2009 USD | 25,290 |
| ∆% IQ1980 to IQ1991 (25.0 percent from IVQ1979 $20,230 billion) | 24.9 |
| ∆% Trend Growth | 25.6 |
| Period IVQ2007 to IIIQ2017 | |
| Real Disposable Personal Income per Capita IVQ2007 Chained 2009 USD | 35,819 |
| Real Disposable Personal Income per Capita IIIQ2017 Chained 2009 USD | 39,225 |
| ∆% IVQ2007 to IIIQ2017 | 9.5 |
| ∆% Trend Growth | 21.3 |
3. Number of Employed Persons
i. As shown in Table IB-2, the number of employed persons increased over the entire business cycle from 98.527 million not seasonally adjusted (NSA) in IQ1980 to 116.440 million NSA in IQ1991 or by 18.2 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).
ii. In contrast, during the entire business cycle the number employed nearly stagnated from 146.334 million in IVQ2007 to 154.494 million in IIIQ2017 or by 5.6 percent higher. There are 22.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 13.3 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html). The number employed in Dec 2017 was 153.602 million (NSA) or 6.287 million more people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population of ages 16 years and over increased from 231.958 million in Jul 2007 to 256.109 million in Dec 2017 or by 24.151 million. The number employed increased 4.3 percent from Jul 2007 to Dec 2017 while the noninstitutional civilian population of ages of 16 years and over, or those available for work, increased 10.4 percent. The ratio of employment to population in Jul 2007 was 63.5 percent (147.315 million employed as percent of population of 231.958 million). The same ratio in Dec 2017 would result in 162.629 million jobs (0.635 multiplied by noninstitutional civilian population of 256.109 million). There are effectively 9.027 million fewer jobs in Dec 2017 than in Jul 2007, or 162.629 million minus 153.602 million. There is actually not sufficient job creation in merely absorbing new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs.
| Period IQ1980 to IQ1991 | |
| Employed Millions IQ1980 NSA End of Quarter | 98.527 |
| Employed Millions IQ1991 NSA End of Quarter | 116.440 |
| ∆% Employed IQ1980 to IQ1991 | 18.2 |
| Period IVQ2007 to IIIQ2017 | |
| Employed Millions IVQ2007 NSA End of Quarter | 146.334 |
| Employed Millions IIIQ2017 NSA End of Quarter | 154.494 |
| ∆% Employed IVQ2007 to IIIQ2017 | 5.6 |
4. Number of Full-Time Employed Persons
i. As shown in Table IB-2, during the entire business cycle in the 1980s, including contractions and expansion, the number of employed full-time rose from 81.280 million NSA in IQ1980 to 95.443 million NSA in IQ1991 or 17.4 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).
ii. In contrast, during the entire current business cycle, including contraction and expansion, the number of persons employed full-time increased from 121.042 million in IVQ2007 to 127.235 million in IIIQ2017 or 5.1 percent. The magnitude of the stress in US labor markets is magnified by the increase in the civilian noninstitutional population of the United States from 231.958 million in Jul 2007 to 256.109 million in Dec 2017 or by 24.151 million (http://www.bls.gov/data/). The number with full-time jobs in Dec 2017 is 125.985 million, which is higher by 2.766 million relative to the peak of 123.219 million in Jul 2007. The ratio of full-time jobs of 123.219 million in Jul 2007 to civilian noninstitutional population of 231.958 million was 53.1 percent. If that ratio had remained the same, there would be 135.994 million full-time jobs with population of 256.109 million in Dec 2017 (0.531 x 256.109) or 10.009 million fewer full-time jobs relative to actual 125.985 million. There appear to be around 10 million fewer full-time jobs in the US than before the global recession while population increased around 20 million. Mediocre GDP growth is the main culprit of the fractured US labor market.
| Period IQ1980 to IQ1991 | |
| Employed Full-time Millions IQ1980 NSA End of Quarter | 81.280 |
| Employed Full-time Millions IVQ1990 NSA End of Quarter | 95.443 |
| ∆% Full-time Employed IQ1980 to IQ1991 | 17.4 |
| Period IVQ2007 to IIIQ2017 | |
| Employed Full-time Millions IVQ2007 NSA End of Quarter | 121.042 |
| Employed Full-time Millions IIIQ2017 NSA End of Quarter | 127.235 |
| ∆% Full-time Employed IVQ2007 to IIIQ2017 | 5.1 |
5. Unemployed, Unemployment Rate and Employed Part-time for Economic Reasons.
i. As shown in Table IB-2 and in the following block, in the cycle from IQ1980 to IQ1991: (a) The rate of unemployment was higher at 7.2 percent in IQ1991 relative to 6.6 percent in IQ1980. (b) The number unemployed increased from 6.983 million in IQ1980 to 9.121 million in IQ1991 or 30.6 percent. (c) The number employed part-time for economic reasons increased 68.7 percent from 3.624 million in IQ1980 to 6.114 million in IQ1991. 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).
ii. In contrast, in the economic cycle from IVQ2007 to IIIQ2017: (a) The rate of unemployment decreased from 4.8 percent in IVQ2007 to 4.1 percent in IIIQ2017. (b) The number unemployed decreased 11.1 percent from 7.371 million in IVQ2007 to 6.656 million in IIIQ2017. (c) The number employed part-time for economic reasons because they could not find any other job increased 1.4 percent from 4.750 million in IVQ2007 to 4.818 million in IIIQ2017. (d) U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA increased from 8.7 percent in IVQ2007 to 8.0 percent in IIIQ2017.
| Period IQ1980 to IVQ1990 | |
| Unemployment Rate IQ1980 NSA End of Quarter | 6.6 |
| Unemployment Rate IQ1991 NSA End of Quarter | 7.2 |
| Unemployed IQ1980 Millions NSA End of Quarter | 6.983 |
| Unemployed IQ1991 Millions NSA End of Quarter | 9.121 |
| ∆% | 30.6 |
| Employed Part-time Economic Reasons IQ1980 Millions NSA End of Quarter | 3.624 |
| Employed Part-time Economic Reasons Millions IQ1991 NSA End of Quarter | 6.114 |
| ∆% | 68.7 |
| Period IVQ2007 to IIIQ2017 | |
| Unemployment Rate IVQ2007 NSA End of Quarter | 4.8 |
| Unemployment Rate IIIQ2017 NSA End of Quarter | 4.1 |
| Unemployed IVQ2007 Millions NSA End of Quarter | 7.371 |
| Unemployed IIIQ2017 Millions NSA End of Quarter | 6.556 |
| ∆% | -11.1 |
| Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter | 4.750 |
| Employed Part-time Economic Reasons Millions IIIQ2017 NSA End of Quarter | 4.818 |
| ∆% | 1.4 |
| U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA | |
| IVQ2007 | 8.7 |
| IIIQ2017 | 8.0 |
6. Wealth of Households and Nonprofit Organizations.
The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and from IVQ1979) to IQ1991 and from IVQ2007 to IIIQ2017 is in Table IIA-5. The data reveal the following facts for the cycles in the 1980s:
- IVQ1979 to IQ1991. Net worth increased 151.1 percent from IVQ1979 to IQ1991, the all items CPI index increased 76.0 percent from 76.7 in Dec 1979 to 135.0 in Mar 1991 and real net worth increased 42.7 percent.
- IQ1980 to IVQ1985. Net worth increased 65.7 percent, the all items CPI index increased 36.5 percent from 80.1 in Mar 1980 to 109.3 in Dec 1985 and real net worth increased 21.5 percent.
- IVQ1979 to IVQ1985. Net worth increased 69.2 percent, the all items CPI index increased 42.5 percent from 76.7 in Dec 1979 to 109.3 in Dec 1985 and real net worth increased 18.7 percent.
- IQ1980 to IQ1989. Net worth increased 118.8 percent, the all items CPI index increased 52.7 percent from 80.1 in Mar 1980 to 122.3 in Mar 1989 and real net worth increased 43.3 percent.
- IQ1980 to IIQ1989. Net worth increased 123.2 percent, the all items CPI index increased 54.9 percent from 80.1 in Mar 1980 to 124.1 in Jun 1989 and real net worth increased 44.1 percent.
- IQ1980 to IIIQ1989. Net worth increased 129.2 percent, the all items CPI index increased 56.1 percent from 80.1 in Mar 1980 to 125.0 in Sep 1989 and real net worth increased 46.9 percent.
- IQ1980 to IVQ1989. Net worth increased 133.2 percent, the all items CPI index increased 57.4 from 80.1 in Mar 1980 to 126.1 in Dec 1989 and real net worth increased 48.1 percent.
- IQ1980 to IQ1990. Net worth increased 134.4 percent, the all items CPI index increased 60.7 percent from 80.1 in Mar 1980 to 128.7 in Mar 1990 and real net worth increased 45.9 percent.
- IQ1980 to IIQ1990. Net worth increased 136.9 percent, the all items CPI index increased 62.2 percent from 80.1 in Mar 1980 to 129.9 in Jun 1990 and real net worth increased 46.1 percent
- IQ1980 to IIIQ1990. Net worth increased 134.3 percent, the all items CPI index increased 65.7 percent from 80.1 in Mar 1980 to 132.7 in Jun 1990 and real net worth increased 41.4 percent.
- IQ1980 to IVQ1990. Net worth increased 139.2 percent, the all items CPI index increased 67.0 percent from 80.1 in Mar 1980 to 133.8 in Dec 1990 and real net worth increased 43.2 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). This new cyclical contraction explains the contraction of net worth in IIIQ1990
- IQ1980 to IQ1991. Net worth increased 146.0 percent, the all items CPI index increased 68.5 percent from 80.1 in Mar 1980 to 135.0 in Mar 1991 and real net worth increased 46.0 percent.
There is disastrous performance in the current economic cycle:
- IVQ2007 to IIIQ2017. Net worth increased 45.9 percent, the all items CPI increased 17.5 percent from 210.036 in Dec 2007 to 246.819 in Sep 2017 and real or inflation adjusted net worth increased 24.1 percent. Real estate assets adjusted for inflation increased 0.4 percent. Growth of real net worth at the long-term average of 3.1 percent per year from IVQ1945 to IIIQ2017 would have accumulated to 34.7 percent in the entire cycle from IVQ2007 to IIIQ2017, much higher than actual 24.1 percent.
The explanation is partly in the sharp decline of wealth of households and nonprofit organizations and partly in the mediocre growth rates of the cyclical expansion beginning in IIIQ2009. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 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 third estimate of GDP for IIIQ2017 (https://www.bea.gov/newsreleases/national/gdp/2017/pdf/gdp3q17_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by 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 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.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 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.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 $2835.2 billion than actual $17,163.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 22.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 13.3 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-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 $17,163.9 billion in IIIQ2017 or 14.5 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 Dec 1919 to Dec 2017. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.2393 in Dec 2007 to 146.8830 in Dec 2017. The actual index NSA in Dec 2017 is 103.381, which is 29.6 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Dec 2017. Using trend growth of 2.0 percent per year, the index would increase to 131.9431 in Dec 2017. The output of manufacturing at 103.381 in Dec 2017 is 21.6 percent below trend under this alternative calculation.
Table IIA-5, Net Worth of Households and Nonprofit Organizations in Billions of Dollars, IVQ1979 to IQ1991 and IVQ2007 to IIIQ2017
| Period IQ1980 to IQ1991 | |
| Net Worth of Households and Nonprofit Organizations USD Millions | |
| IVQ1979 IQ1980 | 8,994.9 9,181.1 |
| IVQ1985 IIIQ1986 IVQ1986 IQ1987 IIQ1987 IIIQ1987 IVQ1987 IQ1988 IIQ1988 IIIQ1988 IVQ1988 IQ1989 IIQ1989 IIIQ1989 IVQ1989 IQ1990 IIQ1990 | 15,216.1 16,227.8 16,779.1 17,439.4 17,727.0 18,143.0 17,991.8 18,466.7 18,868.5 19,160.2 19,644.4 20,084.8 20,491.3 21,042.4 21,407.4 21,521.8 21,753.0 |
| III1990 | 21,514.0 |
| IV1990 | 21,963.6 |
| I1991 | 22,589.6 |
| ∆ USD Billions IVQ1985 IVQ1979 to IQ1991 IQ1980-IVQ1985 IQ1980-IIIQ1986 IQ1980-IVQ1986 IQ1980-IQ1987 IQ1980-IIQ1987 IQ1980-IIIQ1987 IQ1980-IVQ1987 IQ1980-IQ1988 IQ1980-IIQ1988 IQ1980-IIIQ1988 IQ1980-IVQ1988 IQ1980-IQ1989 IQ1980-IIQ1989 IQ1980-IIIQ1989 IQ1980-IVQ1989 IQ1980-IQ1990 IQ1980-IIQ1990 | +6,221.2 ∆%69.2 R∆18.7 +13,594.7 ∆%151.1 R∆%42.7 +6,035.0∆%65.7 R∆%21.5 +7,046.7 ∆%76.8 R∆%28.5 +7,598.0 ∆%82.8 R∆%32.5 +8,258.3 ∆%89.9 R∆%35.7 +8,545.9 ∆%93.1 R∆%36.3 +8,961.9 ∆%97.6 R∆%37.6 +8810.7 ∆%96.0 R∆%36.0 +9285.6 ∆%101.1 R∆%38.3 +9687.4 ∆%105.5 R∆%39.5 +9979.1 ∆%108.7 R∆%39.5 +10463.3 ∆%114.0 R∆%42.2 +10903.7 ∆%118.8 R∆%43.3 +11,310.2 ∆%123.2 R∆% 44.1 +11,861.3 ∆%129.2 R∆% 46.9 +12,226.3 ∆%133.2 R∆%48.1 +12,340.7 ∆%134.4 R∆%45.9 +12,571.9 ∆%136.9 R∆%46.1 |
| IQ1980-IIIQ1990 | +12,332.9 ∆%134.3 R∆%41.4 |
| IQ1980-IVQ1990 | +12,782.5 ∆%139.2 R∆%43.2 |
| IQ1980-IQ1991 | +13,408.5 ∆%146.0 R∆%46.0 |
| Period IVQ2007 to IIIQ2017 | |
| Net Worth of Households and Nonprofit Organizations USD Millions | |
| IVQ2007 | 66,450.0 |
| IIIQ2017 | 96,939.2 |
| ∆ USD Billions | +30,489.2 ∆%45.9 R∆%24.1 |
Net Worth = Assets – Liabilities. R∆% real percentage change or adjusted for CPI percentage change.
Source: Board of Governors of the Federal Reserve System. 2017. Flow of funds, balance sheets and integrated macroeconomic accounts: third quarter 2017. Washington, DC, Federal Reserve System, Dec 7. https://www.federalreserve.gov/releases/z1/current/default.htm
7. Gross Private Domestic Investment.
i. The comparison of gross private domestic investment in the entire economic cycles from IQ1980 to IQ1991 and from IVQ2007 to IIIQ2017 is in the following block and in Table IB-2. Gross private domestic investment increased from $951.6 billion in IQ1980 to $1,137.1 billion in IQ1991 or by 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).
ii In the current cycle, gross private domestic investment increased from $2,605.2 billion in IVQ2007 to $2,976.5 billion in IIIQ2017, or 14.3 percent. Private fixed investment edged from $2,586.3 billion in IVQ2007 to $2,915.8 billion in IIIQ2017, or increase by 12.7 percent.
| Period IQ1980-IQ1991 | |
| Gross Private Domestic Investment USD 2009 Billions | |
| IQ1980 | 951.6 |
| IQ1991 | 1137.1 |
| ∆% | 19.5 |
| Period IVQ2007 to IIIQ2017 | |
| Gross Private Domestic Investment USD Billions | |
| IVQ2007 | 2,605.2 |
| IIIQ2017 | 2,976.5 |
| ∆% | 14.3 |
| Private Fixed Investment USD 2009 Billions | |
| IVQ2007 | 2,586.3 |
| IIIQ2017 | 2,915.8 |
| ∆% | 12.7 |
Table IB-2, US, GDP and Real Disposable Personal Income Per capita Actual and Trend Growth and Employment, 1980-1990 and 2007-2017, SAAR USD Billions, Millions of Persons and ∆%
| Period IQ1980 to IQ1991 | |
| GDP SAAR USD Billions | |
| IQ1980 | 6,524.9 |
| IQ1991 | 8,865.6 |
| ∆% IQ1980 to IQ1991 (36.3 percent from IVQ1979 $6503.9 billion) | 35.9 |
| ∆% Trend Growth IQ1980 to IQ1991 | 40.5 |
| Real Disposable Personal Income per Capita IQ1980 Chained 2009 USD | 20,241 |
| Real Disposable Personal Income per Capita IQ1991 Chained 2009 USD | 25,290 |
| ∆% IQ1980 to IQ1991 (25.0 percent from IVQ1979 $20,230 billion) | 24.9 |
| ∆% Trend Growth | 25.6 |
| Employed Millions IQ1980 NSA End of Quarter | 98.527 |
| Employed Millions IQ1991 NSA End of Quarter | 116.440 |
| ∆% Employed IQ1980 to IQ1991 | 18.2 |
| Employed Full-time Millions IQ1980 NSA End of Quarter | 81.280 |
| Employed Full-time Millions IQ1991 NSA End of Quarter | 95.443 |
| ∆% Full-time Employed IQ1980 to IQ1991 | 17.4 |
| Unemployment Rate IQ1980 NSA End of Quarter | 6.6 |
| Unemployment Rate IQ1991 NSA End of Quarter | 7.2 |
| Unemployed IQ1980 Millions NSA End of Quarter | 6.983 |
| Unemployed IQ1991 Millions NSA End of Quarter | 9.121 |
| ∆% | 30.6 |
| Employed Part-time Economic Reasons IQ1980 Millions NSA End of Quarter | 3.624 |
| Employed Part-time Economic Reasons Millions IQ1991 NSA End of Quarter | 6.114 |
| ∆% | 68.7 |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ1979 | 8,994.9 |
| IQ1991 | 22,589.6 |
| ∆ USD Billions | +13,594.7 |
| ∆% CPI Adjusted | 42.7 |
| Gross Private Domestic Investment USD 2009 Billions | |
| IQ1980 | 951.6 |
| IQ1991 | 1137.1 |
| ∆% | 19.5 |
| Period IVQ2007 to IIIQ2017 | |
| GDP SAAR USD Billions | |
| IVQ2007 | 14,991.8 |
| IIIQ2017 | 17,163.9 |
| ∆% IVQ2007 to IIIQ2017 | 14.5 |
| ∆% IVQ2007 to IIQ2017 Trend Growth | 33.4 |
| Real Disposable Personal Income per Capita IVQ2007 Chained 2009 USD | 35,819 |
| Real Disposable Personal Income per Capita IIIQ2017 Chained 2009 USD | 39,225 |
| ∆% IVQ2007 to IIIQ2017 | 9.5 |
| ∆% Trend Growth | 21.3 |
| Employed Millions IVQ2007 NSA End of Quarter | 146.334 |
| Employed Millions IIIQ2017 NSA End of Quarter | 154.494 |
| ∆% Employed IVQ2007 to IIIQ2017 | 5.6 |
| Employed Full-time Millions IVQ2007 NSA End of Quarter | 121.042 |
| Employed Full-time Millions IIIQ2017 NSA End of Quarter | 127.235 |
| ∆% Full-time Employed IVQ2007 to IIIQ2017 | 5.1 |
| Unemployment Rate IVQ2007 NSA End of Quarter | 4.8 |
| Unemployment Rate IIIQ2017 NSA End of Quarter | 4.1 |
| Unemployed IVQ2007 Millions NSA End of Quarter | 7.371 |
| Unemployed IIIQ2017 Millions NSA End of Quarter | 6.556 |
| ∆% | -11.1 |
| Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter | 4.750 |
| Employed Part-time Economic Reasons Millions IIIQ2017 NSA End of Quarter | 4.818 |
| ∆% | 1.4 |
| U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA | |
| IVQ2007 | 8.7 |
| IIIQ2017 | 8.0 |
| Net Worth of Households and Nonprofit Organizations USD Billions | |
| IVQ2007 | 66,450.0 |
| IIIQ2017 | 96,939.2 |
| ∆ USD Billions | +30,489.2 ∆%45.9 R∆%24.1 |
| Gross Private Domestic Investment USD Billions | |
| IVQ2007 | 2,605.2 |
| IIIQ2017 | 2,976.5 |
| ∆% | 14.3 |
| Private Fixed Investment USD 2009 Billions | |
| IVQ2007 | 2,586.3 |
| IIIQ2017 | 2,915.8 |
| ∆% | 12.7 |
Note: GDP trend growth used is 3.0 percent per year and GDP per capita is 2.0 percent per year as estimated by Lucas (2011May) on data from 1870 to 2010.
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm Source: Board of Governors of the Federal Reserve System. 2017. Flow of funds, balance sheets and integrated macroeconomic accounts: third quarter 2017. Washington, DC, Federal Reserve System, Dec 7. https://www.federalreserve.gov/releases/z1/current/default.htm
The Congressional Budget Office (CBO 2017Jan24) estimates potential GDP, potential labor force and potential labor productivity provided in Table IB-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2016 at 3.2 percent per year. The projected path is significantly lower at 1.8 percent per year from 2017 to 2027. The legacy of the economic cycle expansion from IIIQ2009 to IIIQ2017 at 2.2 percent on average is in contrast with 3.8 percent on average in the expansion from IQ1983 to IQ1991 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 22.6 million or 13.3 percent of the effective labor force in Dec 2017 (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html) with much lower hiring than in the period before the current cycle (https://cmpassocregulationblog.blogspot.com/2018/01/dollar-devaluation-and-rising.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/fomc-increases-interest-rates-with.html).
Table IB-3, US, Congressional Budget Office History and Projections of Potential GDP of US Overall Economy, ∆%
| Potential GDP | Potential Labor Force | Potential Labor Productivity* | |
| Average Annual ∆% | |||
| 1950-1973 | 4.0 | 1.6 | 2.4 |
| 1974-1981 | 3.2 | 2.5 | 0.6 |
| 1982-1990 | 3.4 | 1.7 | 1.7 |
| 1991-2001 | 3.3 | 1.2 | 2.0 |
| 2002-2007 | 2.4 | 1.0 | 1.4 |
| 2008-2016 | 1.4 | 0.5 | 0.9 |
| Total 1950-2016 | 3.2 | 1.4 | 1.7 |
| Projected Average Annual ∆% | |||
| 2017-2020 | 1.7 | 0.5 | 1.2 |
| 2021-2027 | 1.9 | 0.5 | 1.4 |
| 2017-2027 | 1.8 | 0.5 | 1.3 |
*Ratio of potential GDP to potential labor force
Source: CBO, The budget and economic outlook: 2017-2027. Washington, DC, Jan 24, 2017 https://www.cbo.gov/publication/52370 CBO (2014BEOFeb4), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015. Aug 2016
Chart IB1-A1 of the Congressional Budget Office provides historical and projected annual growth of United States potential GDP. There is sharp decline of growth of United States potential GDP.
Chart IB-1A1, Congressional Budget Office, Projections of Annual Growth of United States Potential GDP
Source: CBO, The budget and economic outlook: 2017-2027. Washington, DC, Jan 24, 2017 https://www.cbo.gov/publication/52370
https://www.cbo.gov/about/products/budget-economic-data#6
Chart IB-1A of the Congressional Budget Office provides historical and projected potential and actual US GDP. The gap between actual and potential output closes by 2017. Potential output expands at a lower rate than historically. Growth is even weaker relative to trend.
Chart IB-1A, Congressional Budget Office, Estimate of Potential GDP and Gap
Source: Congressional Budget Office
https://www.cbo.gov/publication/49890
Chart IB-1 of the Congressional Budget Office (CBO 2013BEOFeb5) provides actual and potential GDP of the United States from 2000 to 2011 and projected to 2024. Lucas (2011May) estimates trend of United States real GDP of 3.0 percent from 1870 to 2010 and 2.2 percent for per capita GDP. The United States successfully returned to trend growth of GDP by higher rates of growth during cyclical expansion as analyzed by Bordo (2012Sep27, 2012Oct21) and Bordo and Haubrich (2012DR). Growth in expansions following deeper contractions and financial crises was much higher in agreement with the plucking model of Friedman (1964, 1988). The unusual weakness of growth at 2.2 percent on average from IIIQ2009 to IIIQ2017 during the current economic expansion in contrast with 3.8 percent on average in the cyclical expansion from IQ1983 to IQ1991 (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states.html) cannot be explained by the contraction of 4.2 percent of GDP from IVQ2007 to IIQ2009 and the financial crisis. Weakness of growth in the expansion is perpetuating unemployment and underemployment of 22.6 million or 13.3 percent of the labor force as estimated for Dec 2017 (https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html). There is no exit from unemployment/underemployment and stagnating real wages because of the collapse of hiring (https://cmpassocregulationblog.blogspot.com/2018/01/dollar-devaluation-and-rising.html and earlier https://cmpassocregulationblog.blogspot.com/2017/12/fomc-increases-interest-rates-with.html). The US economy and labor markets collapsed without recovery. Abrupt collapse of economic conditions can be explained only with cyclic factors (Lazear and Spletzer 2012Jul22) and not by secular stagnation (Hansen 1938, 1939, 1941 with early dissent by Simons 1942).
Chart IB-1, US, Congressional Budget Office, Actual and Projections of Potential GDP, 2000-2024, Trillions of Dollars
Source: Congressional Budget Office, CBO (2013BEOFeb5). The last year in common in both projections is 2017. The revision lowers potential output in 2017 by 7.3 percent relative to the projection in 2007.
Chart IB-2 provides differences in the projections of potential output by the CBO in 2007 and more recently on Feb 4, 2014, which the CBO explains in CBO (2014Feb28).
Chart IB-2, Congressional Budget Office, Revisions of Potential GDP
Source: Congressional Budget Office, 2014Feb 28. Revisions to CBO’s Projection of Potential Output since 2007. Washington, DC, CBO, Feb 28, 2014.
Chart IB-3 provides actual and projected potential GDP from 2000 to 2024. The gap between actual and potential GDP disappears at the end of 2017 (CBO2014Feb4). GDP increases in the projection at 2.5 percent per year.
Chart IB-3, Congressional Budget Office, GDP and Potential GDP
Source: CBO (2013BEOFeb5), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014.
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