Saturday, October 20, 2018

Oscillation of Valuations of Risk Financial Assets, World Inflation Waves, Recovery without Hiring, Ten Million Fewer Full-Time Jobs, United States Industrial Production, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, Collapse of United States Dynamism of Income Growth and Employment Creation in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, World Financial Turbulence, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk: Part III

Oscillation of Valuations of Risk Financial Assets, World Inflation Waves, Recovery without Hiring, Ten Million Fewer Full-Time Jobs, United States Industrial Production, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, Collapse of United States Dynamism of Income Growth and Employment Creation in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, World Financial Turbulence, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018

I World Inflation Waves

IA Appendix: Transmission of Unconventional Monetary Policy

IB1 Theory

IB2 Policy

IB3 Evidence

IB4 Unwinding Strategy

IC United States Inflation

IC Long-term US Inflation

ID Current US Inflation

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

I Recovery without Hiring

IA1 Hiring Collapse

IA2 Labor Underutilization

ICA3 Ten Million Fewer Full-time Jobs

IA4 Theory and Reality of Cyclical Slow Growth Not Secular Stagnation: Youth and Middle-Age Unemployment

II United States Industrial Production

IIB Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates

II IB Collapse of United States Dynamism of Income Growth and Employment Creation in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide

III World Financial Turbulence

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

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

and earlier http://cmpassocregulationblog.blogspot.com/2015/07/fluctuating-risk-financial-assets.html and earlier http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html and earlier http://cmpassocregulationblog.blogspot.com/2015/05/fluctuating-valuations-of-financial.html and earlier http://cmpassocregulationblog.blogspot.com/2015/04/global-portfolio-reallocations-squeeze.html and earlier http://cmpassocregulationblog.blogspot.com/2015/03/impatience-with-monetary-policy-of.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/02/world-financial-turbulence-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2015/01/exchange-rate-conflicts-squeeze-of.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html and earlier http://cmpassocregulationblog.blogspot.com/2014/11/squeeze-of-economic-activity-by-carry.html and earlier http://cmpassocregulationblog.blogspot.com/2014/10/imf-view-squeeze-of-economic-activity.html and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html)

Industrial production increased 0.3 percent in Sep 2018 and increased 0.4 percent in Aug 2018 after increasing 0.3 percent in Jul 2018, with all data seasonally adjusted, as shown in Table I-1. The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on Mar 23, 2018 (https://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm):

“The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization.[1] On net, the revisions to total IP for recent years were negative: For the 2015–17 period, the current estimates show rates of change that are 0.4 to 0.7 percentage point lower in each year.[2] Total IP is still reported to have moved up about 22 1/2 percent from the end of the recession in mid-2009 through late 2014. Subsequently, the index declined in 2015, edged down in 2016, and increased in 2017. The incorporation of detailed data for manufacturing from the U.S. Census Bureau's 2016 Annual Survey of Manufactures (ASM) accounts for the majority of the differences between the current and the previously published estimates.

Revisions to capacity for total industry were mixed. Capacity growth was revised up about 1/2 percentage point for 2016, but revisions to other recent years were negative. Capacity for total industry is estimated to have expanded less than 1 percent in 2015, 2016, and 2017, but it is expected to increase about 2 percent in 2018.

In the fourth quarter of 2017, capacity utilization for total industry stood at 77.0 percent, about 1/2 percentage point below its previous estimate and about 3 percentage points below its long-run (1972–2017) average. The utilization rate for 2016 is also lower than the previous estimate.”

The report of the Board of Governors of the Federal Reserve System states (https://www.federalreserve.gov/releases/g17/Current/default.htm):

“Industrial production increased 0.3 percent in September, about the same rate of change as in the previous two months. Output growth in September was held down slightly by Hurricane Florence, with an estimated effect of less than 0.1 percentage point. For the third quarter as a whole, total industrial production advanced at an annual rate of 3.3 percent. In September, manufacturing output moved up 0.2 percent for its fourth consecutive monthly increase, while the output of utilities was unchanged. The index for mining increased 0.5 percent and has moved up in each of the past eight months. At 108.5 percent of its 2012 average, total industrial production was 5.1 percent higher in September than it was a year earlier. Capacity utilization for the industrial sector was unchanged at 78.1 percent, a rate that is 1.7 percentage points below its long-run (1972–2017) average.” In the six months ending in Sep 2018, United States national industrial production accumulated change of 1.9 percent at the annual equivalent rate of 3.8 percent, which is lower than growth of 5.1 percent in the 12 months ending in Sep 2018. Excluding growth of 1.1 percent in Apr 2018, growth in the remaining five months from Apr to Sep 2018 accumulated to 0.8 percent or 1.9 percent annual equivalent. Industrial production increased 1.1 percent in one of the past six months, increased 0.6 percent in one month, 0.4 percent in one month and increased 0.3 percent in two months, decreasing 0.8 percent in one month. Industrial production increased at annual equivalent 4.1 percent in the most recent quarter from Jul 2018 to Sep 2018 and increased at 3.6 percent in the prior quarter Apr 2018 to Jun 2018. Business equipment accumulated change of 3.1 percent in the six months from Apr 2018 to Sep 2018, at the annual equivalent rate of 6.3 percent, which is higher than growth of 3.6 percent in the 12 months ending in Sep 2018. The Fed analyzes capacity utilization of total industry in its report (https://www.federalreserve.gov/releases/g17/Current/default.htm): “Capacity utilization for the industrial sector was unchanged at 78.1 percent, a rate that is 1.7 percentage points below its long-run (1972–2017) average.” United States industry apparently decelerated to a lower growth rate followed by possible acceleration and weakening growth in past months. There could be renewed growth.

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

Sep 18

Aug 18

Jul 18

Jun 18

May 18

Apr 18

Sep 18/

Sep 17

Total

0.3

0.4

0.3

0.6

-0.8

1.1

5.1

Market
Groups

Final Products

0.4

0.5

0.1

1.0

-2.3

1.5

3.0

Consumer Goods

0.2

0.4

0.2

0.6

-2.6

1.6

2.5

Business Equipment

0.8

1.0

0.3

2.2

-2.1

0.9

3.6

Non
Industrial Supplies

0.0

-0.1

-0.3

0.0

-0.3

0.7

2.0

Construction

-0.6

0.3

-0.1

-0.5

0.4

0.6

2.4

Materials

0.2

0.3

0.7

0.5

0.3

1.0

8.0

Industry Groups

Manufacturing

0.2

0.3

0.3

0.7

-0.9

0.6

3.5

Mining

0.5

0.4

0.8

1.8

1.0

0.9

13.4

Utilities

0.0

1.1

0.0

-1.5

-2.6

5.8

5.4

Capacity

78.1

78.1

77.9

77.8

77.5

78.2

1.8

Sources: Board of Governors of the Federal Reserve System

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

Manufacturing increased 0.2 percent in Sep 2018 and increased 0.3 percent in Aug 2018 after increasing 0.3 percent in Jul 2018, seasonally adjusted, increasing 3.6 percent not seasonally adjusted in the 12 months ending in Sep 2018, as shown in Table I-2. Manufacturing increased cumulatively 1.2 percent in the six months ending in Sep 2018 or at the annual equivalent rate of 2.4 percent. Excluding the increase of 0.7 percent in Jun 2018, manufacturing changed 0.5 percent from Apr 2018 to Sep 2018 or at the annual equivalent rate of 1.2 percent. Table I-2 provides a longer perspective of manufacturing in the US. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 with recovery followed by renewed deterioration/improvement in more recent months as shown by 12 months’ rates of growth. Growth rates appeared to be increasing again closer to 5 percent in Apr-Jun 2012 but deteriorated. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.6 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appeared to be returning to the levels at 3 percent or higher in the annual rates before the recession, but the pace of manufacturing fell steadily with some strength at the margin. There is renewed deterioration and improvement. The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on Mar 23, 2018 (https://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm):

“The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization.[1] On net, the revisions to total IP for recent years were negative: For the 2015–17 period, the current estimates show rates of change that are 0.4 to 0.7 percentage point lower in each year.[2] Total IP is still reported to have moved up about 22 1/2 percent from the end of the recession in mid-2009 through late 2014. Subsequently, the index declined in 2015, edged down in 2016, and increased in 2017. The incorporation of detailed data for manufacturing from the U.S. Census Bureau's 2016 Annual Survey of Manufactures (ASM) accounts for the majority of the differences between the current and the previously published estimates.

Revisions to capacity for total industry were mixed. Capacity growth was revised up about 1/2 percentage point for 2016, but revisions to other recent years were negative. Capacity for total industry is estimated to have expanded less than 1 percent in 2015, 2016, and 2017, but it is expected to increase about 2 percent in 2018.

In the fourth quarter of 2017, capacity utilization for total industry stood at 77.0 percent, about 1/2 percentage point below its previous estimate and about 3 percentage points below its long-run (1972–2017) average. The utilization rate for 2016 is also lower than the previous estimate.”

The bottom part of Table I-2 shows manufacturing decreasing 22.3 from the peak in Jun 2007 to the trough in Apr 2009 and increasing 16.1 percent from the trough in Apr 2009 to Dec 2017. Manufacturing grew 21.7 percent from the trough in Apr 2009 to Sep 2018. Manufacturing in Sep 2018 is lower by 5.5 percent relative to the peak in Jun 2007. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.3 percent on average in the cyclical expansion in the 36 quarters from IIIQ2009 to IIQ2018. 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 IIQ2018 (https://www.bea.gov/system/files/2018-09/gdp2q18_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 2.8 percent obtained by dividing GDP of $15,557.3 billion in IIQ2010 by GDP of $15,134.1 billion in IIQ2009 {[($15,557.3/$15,134.1) -1]100 = 2.8%], or accumulating the quarter on quarter growth rates (https://cmpassocregulationblog.blogspot.com/2018/09/fomc-increases-policy-interest-rate.html and earlier https://cmpassocregulationblog.blogspot.com/2018/09/revision-of-united-states-national.html). The expansion from IQ1983 to IQ1986 was at the average annual growth rate of 5.7 percent, 5.3 percent from IQ1983 to IIIQ1986, 5.1 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, 4.6 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, 3.8 percent from IQ1983 to IIQ1991, 3.8 percent from IQ1983 to IIIQ1991, 3.7 percent from IQ1983 to IVQ1991 and at 7.9 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2018/09/fomc-increases-policy-interest-rate.html and earlier https://cmpassocregulationblog.blogspot.com/2018/09/revision-of-united-states-national.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 IIQ2018 would have accumulated to 36.4 percent. GDP in IIQ2018 would be $21,499.4 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $2987.8 billion than actual $18,511.6 billion. There are about two trillion dollars of GDP less than at trend, explaining the 20.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 12.1 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2018/10/twenty-one-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2018/09/twenty-one-million-unemployed-or.html). US GDP in IIQ2018 is 13.9 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $18,511.6 billion in IIQ2018 or 17.4 percent at the average annual equivalent rate of 1.5 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.1 percent per year from Sep 1919 to Sep 2018. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.3221 in Dec 2007 to 150.3999 in Sep 2018. The actual index NSA in Sep 2018 is 106.1908, which is 29.4 percent below trend. Manufacturing output grew at average 2.1 percent between Dec 1986 and Sep 2018. Using trend growth of 2.1 percent per year, the index would increase to 135.4390 in Sep 2018. The output of manufacturing at 106.1908 in Sep 2018 is 21.6 percent below trend under this alternative calculation.

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

Month SA ∆%

12-Month NSA ∆%

Sep 2018

0.2

3.6

Aug

0.3

3.1

Jul

0.3

2.6

Jun

0.7

2.0

May

-0.9

1.4

Apr

0.6

3.3

Mar

-0.1

2.4

Feb

1.5

2.1

Jan

-0.5

0.9

Dec 2017

0.0

1.8

Nov

0.2

2.1

Oct

1.3

1.8

Sep

-0.1

0.7

Aug

-0.2

1.2

Jul

-0.3

1.4

Jun

0.1

1.5

May

-0.4

1.8

Apr

1.1

0.4

Mar

-0.5

1.1

Feb

0.1

0.7

Jan

0.3

0.1

Dec 2016

0.3

0.4

Nov

0.0

-0.2

Oct

0.2

-0.3

Sep

0.3

-0.2

Aug

-0.3

-1.5

Jul

0.2

-1.4

Jun

0.3

-0.8

May

-0.1

-1.5

Apr

-0.3

-0.8

Mar

-0.2

-1.8

Feb

-0.4

-0.6

Jan

0.5

-0.7

Dec 2015

-0.2

-1.9

Nov

-0.2

-1.7

Oct

0.0

-0.8

Sep

-0.4

-1.7

Aug

-0.3

-0.7

Jul

0.6

-0.4

Jun

-0.4

-1.1

May

-0.1

-0.3

Apr

-0.1

-0.1

Mar

0.3

-0.1

Feb

-0.6

0.5

Jan

-0.5

1.9

Dec 2014

-0.3

1.5

Nov

0.8

1.7

Oct

-0.1

0.9

Sep

0.0

1.1

Aug

-0.4

1.3

Jul

0.3

2.0

Jun

0.3

1.4

May

0.2

1.3

Apr

-0.1

0.9

Mar

0.8

1.6

Feb

1.1

0.3

Jan

-1.2

-0.5

Dec 2013

0.0

0.1

Nov

0.0

1.2

Oct

0.1

1.9

Sep

0.1

1.2

Aug

1.0

1.3

Jul

-1.0

0.3

Jun

0.2

0.8

May

0.3

0.9

Apr

-0.4

1.0

Mar

-0.1

0.6

Feb

0.5

0.7

Jan

-0.3

0.8

Dec 2012

0.8

1.7

Nov

0.7

1.7

Oct

-0.4

0.7

Sep

-0.1

1.6

Aug

-0.2

2.1

Jul

-0.1

2.5

Jun

0.2

3.4

May

-0.4

3.4

Apr

0.6

3.8

Mar

-0.5

2.8

Feb

0.4

4.1

Jan

0.8

3.5

Dec 2011

0.7

3.1

Nov

-0.3

2.7

Oct

0.6

2.8

Sep

0.3

2.6

Aug

0.4

2.1

Jul

0.6

2.3

Jun

0.1

1.7

May

0.1

1.5

Apr

-0.6

2.7

Mar

0.6

4.2

Feb

0.1

4.8

Jan

0.2

4.8

Dec 2010

0.5

5.4

Nov

0.0

4.5

Oct

0.1

5.8

Sep

0.0

6.1

Aug

0.1

6.8

Jul

0.6

7.4

Jun

-0.1

9.2

May

1.4

8.9

Apr

0.8

7.3

Mar

1.2

5.2

Feb

-0.1

1.7

Jan

1.1

1.7

Dec 2009

-0.2

-2.9

Nov

1.0

-5.8

Oct

0.2

-8.9

Sep

0.9

-10.4

Aug

1.1

-13.5

Jul

1.5

-15.3

Jun

-0.3

-17.9

May

-1.0

-17.9

Apr

-0.7

-18.6

Mar

-1.8

-17.8

Feb

-0.2

-16.7

Jan

-3.1

-17.0

Dec 2008

-3.5

-14.5

Nov

-2.4

-11.7

Oct

-0.6

-9.2

Sep

-3.4

-8.8

Aug

-1.2

-5.2

Jul

-1.2

-3.7

Jun

-0.7

-3.2

May

-0.6

-2.4

Apr

-1.1

-1.0

Mar

-0.3

-0.5

Feb

-0.6

1.1

Jan

-0.4

2.5

Dec 2007

0.2

2.1

Nov

0.5

3.5

Oct

-0.3

2.9

Sep

0.5

3.0

Aug

-0.3

2.7

Jul

0.1

3.6

Jun

0.3

3.1

May

-0.1

3.2

Apr

0.7

3.6

Mar

0.8

2.6

Feb

0.4

1.6

Jan

-0.5

1.2

Dec 2006

2.7

Dec 2005

3.6

Dec 2004

4.1

Dec 2003

2.2

Dec 2002

2.4

Dec 2001

-5.3

Dec 2000

0.8

Dec 1999

5.2

Average ∆% Dec 1986-Dec 2017

2.0

Average ∆% Dec 1986-Dec 2016

2.0

Average ∆% Dec 1986-Dec 2015

2.0

Average ∆% Dec 1986-Dec 2014

2.2

Average ∆% Dec 1986-Dec 2013

2.2

Average ∆% Dec 1986-Dec 1999

4.3

Average ∆% Dec 1999-Dec 2006

1.5

Average ∆% Dec 1999-Dec 2017

0.3

∆% Peak 112.3300 in 06/2007 to 101.3446 in 12/2017

-9.8

∆% Peak 112.3300 in 06/2007 to Trough 87.2739 in 4/2009

-22.3

∆% Trough 87.2739 in 04/2009 to 101.3446 in 12/2017

16.1

∆% Trough 87.2739 in 04/2009 to 106.1908 in 09/2018

21.7

∆% Peak 112.3300 in 06/2007 to 106.1908 in 09/2018

-5.5

Source: Board of Governors of the Federal Reserve System

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

Chart I-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (Cobet and Wilson (2002); see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered sufficiently above levels before the global recession, remaining like GDP below historical trend. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.1 percent per year from Sep 1919 to Sep 2018. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.3221 in Dec 2007 to 150.3999 in Sep 2018. The actual index NSA in Sep 2018 is 106.1908, which is 29.4 percent below trend. Manufacturing output grew at average 2.1 percent between Dec 1986 and Sep 2018. Using trend growth of 2.1 percent per year, the index would increase to 135.4390 in Sep 2018. The output of manufacturing at 106.1908 in Sep 2018 is 21.6 percent below trend under this alternative calculation.

clip_image001

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

Source: Board of Governors of the Federal Reserve System

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

The modern industrial revolution of Jensen (1993) is captured in Chart I-2 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart I-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression (https://cmpassocregulationblog.blogspot.com/2018/09/fomc-increases-policy-interest-rate.html and earlier https://cmpassocregulationblog.blogspot.com/2018/09/revision-of-united-states-national.html). The bottom left-hand part of Chart II-2 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of semiconductors has already surpassed the level before the global recession.

clip_image003

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

Source: Board of Governors of the Federal Reserve System

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

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

clip_image004

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

Source: Board of Governors of the Federal Reserve System

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

United States manufacturing output from 1919 to 2018 monthly is in Chart I-4 of the Board of Governors of the Federal Reserve System. The second industrial revolution of Jensen (1993) is quite evident in the acceleration of the rate of growth of output given by the sharper slope in the 1980s and 1990s. Growth was robust after the shallow recession of 2001 but dropped sharply during the global recession after IVQ2007. Manufacturing output recovered sharply but has not reached earlier levels and is losing momentum at the margin. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.1 percent per year from Sep 1919 to Sep 2018. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.3221 in Dec 2007 to 150.3999 in Sep 2018. The actual index NSA in Sep 2018 is 106.1908, which is 29.4 percent below trend. Manufacturing output grew at average 2.1 percent between Dec 1986 and Sep 2018. Using trend growth of 2.1 percent per year, the index would increase to 135.4390 in Sep 2018. The output of manufacturing at 106.1908 in Sep 2018 is 21.6 percent below trend under this alternative calculation.

clip_image005

Chart I-4, US, Manufacturing Output, 1919-2018

Source: Board of Governors of the Federal Reserve System

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

Manufacturing jobs not seasonally adjusted increased 278,000 from Sep 2017 to
Sep 2018 or at the average monthly rate of 23,167. Industrial production increased 0.3 percent in Sep 2018 and increased 0.4 percent in Aug 2018 after increasing 0.3 percent in Jul 2018, with all data seasonally adjusted. The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on Mar 23, 2018 (https://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm):

“The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization.[1] On net, the revisions to total IP for recent years were negative: For the 2015–17 period, the current estimates show rates of change that are 0.4 to 0.7 percentage point lower in each year.[2] Total IP is still reported to have moved up about 22 1/2 percent from the end of the recession in mid-2009 through late 2014. Subsequently, the index declined in 2015, edged down in 2016, and increased in 2017. The incorporation of detailed data for manufacturing from the U.S. Census Bureau's 2016 Annual Survey of Manufactures (ASM) accounts for the majority of the differences between the current and the previously published estimates.

Revisions to capacity for total industry were mixed. Capacity growth was revised up about 1/2 percentage point for 2016, but revisions to other recent years were negative. Capacity for total industry is estimated to have expanded less than 1 percent in 2015, 2016, and 2017, but it is expected to increase about 2 percent in 2018.

In the fourth quarter of 2017, capacity utilization for total industry stood at 77.0 percent, about 1/2 percentage point below its previous estimate and about 3 percentage points below its long-run (1972–2017) average. The utilization rate for 2016 is also lower than the previous estimate.”

Manufacturing decreased 22.3 from the peak in Jun 2007 to the trough in Apr 2009 and increased 16.1 percent from the trough in Apr 2009 to Dec 2017. Manufacturing grew 21.7 percent from the trough in Apr 2009 to Sep 2018. Manufacturing in Sep 2018 is lower by 5.5 percent relative to the peak in Jun 2007. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IIQ2018 would have accumulated to 36.4 percent. GDP in IIQ2018 would be $21,499.4 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $2987.8 billion than actual $18,511.6 billion. There are about two trillion dollars of GDP less than at trend, explaining the 20.7 million unemployed or underemployed equivalent to actual unemployment/underemployment of 12.1 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2018/10/twenty-one-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2018/09/twenty-one-million-unemployed-or.html). US GDP in IIQ2018 is 13.9 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $18,511.6 billion in IIQ2018 or 17.4 percent at the average annual equivalent rate of 1.5 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.1 percent per year from Sep 1919 to Sep 2018. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.3221 in Dec 2007 to 150.3999 in Sep 2018. The actual index NSA in Sep 2018 is 106.1908, which is 29.4 percent below trend. Manufacturing output grew at average 2.1 percent between Dec 1986 and Sep 2018. Using trend growth of 2.1 percent per year, the index would increase to 135.4390 in Sep 2018. The output of manufacturing at 106.1908 in Sep 2018 is 21.6 percent below trend under this alternative calculation.

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

SSAR IQ2018

% Total

SSAR IIQ2018

% Total

National Income WCCA

16,806.5

100.0

17,009.6

100.0

Domestic Industries

16,537.7

98.4

16,742.6

98.4

Private Industries

14,610.6

86.9

14,808.6

87.1

Agriculture

129.6

0.8

134.9

0.8

Mining

174.2

1.0

188.4

1.1

Utilities

162.1

1.0

164.3

1.0

Construction

890.8

5.3

909.0

5.3

Manufacturing

1578.2

9.4

1615.5

9.5

Durable Goods

947.5

5.6

966.4

5.7

Nondurable Goods

630.7

3.8

649.1

3.8

Wholesale Trade

923.3

5.5

925.2

5.4

Retail Trade

1142.1

6.8

1137.4

6.7

Transportation & WH

539.4

3.2

549.3

3.2

Information

649.3

3.9

661.9

3.9

Finance, Insurance, RE

2957.2

17.6

2969.1

17.5

Professional & Business Services

2473.0

14.7

2533.4

14.9

Education, Health Care

1745.2

10.4

1764.5

10.4

Arts, Entertainment

746.8

4.4

749.4

4.4

Other Services

499.3

3.0

506.4

3.0

Government

1927.1

11.5

1934.0

11.4

Rest of the World

268.7

1.6

267.0

1.6

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

Source: US Bureau of Economic Analysis

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

Motor vehicle sales and production in the US have been in long-term structural change. Table VA-1A provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. In IIQ2018, light vehicle sales accumulated to 4,500,220, which is higher by 1.8 percent relative to 4,419,349 a year earlier in IIQ2017 (http://www.motorintelligence.com/m_frameset.html). The seasonally adjusted annual rate of light vehicle sales in the US reached 17.9 million in Sep 2018, lower than 17.1 million in Aug 2018 and lower than 18.5 million in Sep 2017 (https://www.bea.gov/national/xls/gap_hist.xlsx).

Table VA-1A, US, New Motor Vehicle Sales and Car Production, Thousand Units 7

New Motor Vehicle Sales

New Car Sales and Leases

New Truck Sales and Leases

Domestic Car Production

1990

14,137

9,300

4,837

6,231

1991

12,725

8,589

4,136

5,454

1992

13,093

8,215

4,878

5,979

1993

14,172

8,518

5,654

5,979

1994

15,397

8,990

6,407

6,614

1995

15,106

8,536

6,470

6,340

1996

15,449

8,527

6,922

6,081

1997

15,490

8,273

7,218

5,934

1998

15,958

8,142

7,816

5,554

1999

17,401

8,697

8,704

5,638

2000

17,806

8,852

8,954

5,542

2001

17,468

8,422

9,046

4,878

2002

17,144

8,109

9,036

5,019

2003

16,968

7,611

9,357

4,510

2004

17,298

7,545

9,753

4,230

2005

17,445

7,720

9,725

4,321

2006

17,049

7,821

9,228

4,367

2007

16,460

7,618

8,683

3,924

2008

13,494

6,814

6.680

3,777

2009

10,601

5,456

5,154

2,247

2010

11,772

5,729

6,044

2,840

Source: US Census Bureau

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

Chart I-5 of the Board of Governors of the Federal Reserve provides output of motor vehicles and parts in the United States from 1972 to 2018. Output virtually stagnated since the late 1990s with recent increase.

clip_image006

Chart 1-5, US, Motor Vehicles and Parts Output, 1972-2018

Source: Board of Governors of the Federal Reserve System

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

Chart I-6 of the Board of Governors of the Federal Reserve System provides output of computers and electronic products in the United States from 1972 to 2018. Output accelerated sharply in the 1990s and 2000s and surpassed the level before the global recession beginning in IVQ2007.

clip_image007

Chart I-6, US, Output of Computers and Electronic Products, 1972-2018

Source: Board of Governors of the Federal Reserve System

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

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

clip_image008

Chart I-7, US, Output of Durable Manufacturing, 1972-2018

Source: Board of Governors of the Federal Reserve System

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

Chart I-8 of the Board of Governors of the Federal Reserve System provides output of aerospace and miscellaneous transportation equipment from 1972 to 2018. There is long-term upward trend with oscillations around the trend and cycles of large amplitude.

clip_image009

Chart I-8, US, Output of Aerospace and Miscellaneous Transportation Equipment, 1972-2018

Source: Board of Governors of the Federal Reserve System

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

The Empire State Manufacturing Survey Index in Table VA-1 provides continuing deterioration that started in Jun 2012 well before Hurricane Sandy in Oct 2012. The current general index has been in negative contraction territory from minus 2.3 in Aug 2012 to minus 7.5 in Jan 2013 and minus 0.4 in May 2013. The current general index changed to 21.1 in Oct 2018. The index of current orders has also been in negative contraction territory from minus 2.9 in Aug 2012 to minus 10.9 in Jan 2013 and minus 7.8 in Jun 2013. The index of current new orders changed to 22.5 in Oct 2018. There is weakening in the general index for the next six months at 29.9 in Oct 2018 and new orders at 35.1.

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

Current General Index

Current New Orders

Future General Index

Future New Orders

9/30/2011

-3.9

-4.2

22.4

23.4

10/31/2011

-5.3

1.9

14.4

19.5

11/30/2011

5.1

1.7

35.5

30.9

12/31/2011

11.6

10.2

46

43.8

1/31/2012

11.4

8.6

51

44.4

2/29/2012

16.5

7

46.5

38

3/31/2012

15.1

4.4

44

38

4/30/2012

7.3

3.7

40

37.7

5/31/2012

14.8

7

32.2

31.5

6/30/2012

1.5

3

27.7

27.7

7/31/2012

3.5

-3.4

24.2

21.6

8/31/2012

-2.3

-2.9

18.7

14.5

9/30/2012

-6.4

-9.9

26.9

27.8

10/31/2012

-4

-6.2

20

22.4

11/30/2012

-0.5

6.3

18.2

16.3

12/31/2012

-5.7

0.4

19.8

19.8

1/31/2013

-7.5

-10.9

21.7

23.4

2/28/2013

7.5

12

32.4

27.5

3/31/2013

4.5

4.7

35.2

33.3

4/30/2013

3.7

1.9

29.7

34.8

5/31/2013

-0.4

-3

26

29.7

6/30/2013

4.4

-7.8

27.7

21.5

7/31/2013

5.7

2.3

33.8

33.1

8/31/2013

10.3

3.1

35.8

30.8

9/30/2013

8.2

3.4

40.1

38

10/31/2013

4.4

10

41.3

37

11/30/2013

2.9

-2.1

38.4

40.7

12/31/2013

3.3

1.3

37.3

28.6

1/31/2014

12.4

8

36

37.2

2/28/2014

4.3

1.2

40.6

44.3

3/31/2014

2.4

0.8

35.4

36.8

4/30/2014

2.9

-1.7

37.6

33.6

5/31/2014

19

8.7

42.9

37.8

6/30/2014

15.6

13.1

41.1

43.3

7/31/2014

21.5

16.5

30.5

27.5

8/31/2014

16.9

15.8

45.7

50.3

9/30/2014

29.9

18

46.5

45.6

10/31/2014

7.2

2.5

42.1

42.3

11/30/2014

13

11

48.1

48.8

12/31/2014

-2.4

0.7

36.5

36.9

1/31/2015

11.9

6.3

46.8

40.4

2/28/2015

7.7

2.2

28.3

30.1

3/31/2015

3.3

-6.3

31.2

26.9

4/30/2015

-1.5

-6.8

35.8

32.9

5/31/2015

5.5

3.9

30.2

34

6/30/2015

-5

-6.8

26

25.4

7/31/2015

2.5

-5

29.2

33.6

8/31/2015

-12.6

-14

32.9

30.7

9/30/2015

-12.6

-11.3

23.3

23.8

10/31/2015

-12.1

-14.2

22.2

22.7

11/30/2015

-8.5

-10.2

23.1

22.3

12/31/2015

-6

-5.5

35.1

26.1

1/31/2016

-16.6

-22.1

10

13.4

2/29/2016

-16.9

-11.1

15.8

21.7

3/31/2016

-3.1

2.9

26

37.6

4/30/2016

7.5

8.3

28.5

35.9

5/31/2016

-5.8

-2.3

28.2

22.9

6/30/2016

2.5

6.5

33.2

35.9

7/31/2016

2.2

-1.7

31.1

31.7

8/31/2016

-4.1

1.4

25.2

28.7

9/30/2016

-1.6

-5.8

34.3

32.1

10/31/2016

-7.6

-1.2

35.2

37.8

11/30/2016

3.5

5

30.7

29.8

12/31/2016

9.3

10.7

49.4

47.7

1/31/2017

6.7

3.6

49

39.2

2/28/2017

17.1

12.3

41.3

41.6

3/31/2017

14.6

17.4

38.3

35.1

4/30/2017

4.1

7.3

39.4

32.5

5/31/2017

3

-1.9

39.8

34.3

6/30/2017

18.1

16.1

41.4

40

7/31/2017

12.7

13.4

36.6

35.7

8/31/2017

24.2

20.9

44

41.3

9/30/2017

23.8

24.4

40.8

43.6

10/31/2017

28.1

21

44.9

44.6

11/30/2017

20.9

21.3

49.8

52.5

12/31/2017

19.6

19

46.3

42.7

1/31/2018

17.7

11.9

48.6

47.6

2/28/2018

13.1

13.5

50.5

47.2

3/31/2018

22.5

16.8

44.1

43

4/30/2018

15.8

9

18.3

18.5

5/31/2018

20.1

16

31.1

33.7

6/30/2018

25

21.3

38.9

33.4

7/31/2018

22.6

18.2

31.1

37.2

8/31/2018

25.6

17.1

34.8

36

9/30/2018

19

16.5

30.3

33.3

10/31/2018

21.1

22.5

29

35.1

Source:

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

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

clip_image011

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

Source: Federal Reserve Bank of New York

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

Table VA-2 shows improvement after prior deterioration followed by current soft improvement of the Business Outlook survey of the Federal Reserve Bank of Philadelphia. The general index moved out of contraction of 6.2 in Feb 2013 to expansion at 22.2 in Oct 2018. New orders moved from minus 1.1 in Feb 2013 to 19.3 in Oct 2018. There is expansion in the future general index at 33.8 in Oct 2018 and in future new orders at 43.4 in Oct 2018.

Table VA-2, US, Federal Reserve Bank of Philadelphia Business Outlook Survey, SA

Current General Index

Current New Orders

Future General Index

Future New orders

Jan-11

16.5

20.8

43.4

36.1

Feb-11

28.7

20.8

41.9

38.8

Mar-11

36.4

34.5

57

55.5

Apr-11

12.9

14.2

35.7

30.8

May-11

6.1

8.1

26.2

25.2

Jun-11

-0.4

-4.9

8.5

8.4

Jul-11

7.1

3.6

28.7

32.1

Aug-11

-19.6

-17.9

12.7

26.7

Sep-11

-10.6

-6.5

18.3

19.6

Oct-11

6.2

5.5

26.3

28.7

Nov-11

4.1

1

36.5

36.2

Dec-11

2.5

4.8

33.8

38.6

Jan-12

7.5

11

42.9

43.8

Feb-12

10

11.7

30.3

32.2

Mar-12

8.8

0.8

30.5

37.1

Apr-12

5.6

1.2

39.9

42.3

May-12

-0.8

2.1

24.9

35.4

Jun-12

-12.5

-17.4

25.4

33.9

Jul-12

-12.6

-3.7

21.6

25.5

Aug-12

-2.5

0.6

20.2

25.6

Sep-12

0.3

0.1

31.8

42.8

Oct-12

-1.1

-4.1

17.3

20.8

Nov-12

-10.4

-7.8

16.9

23.1

Dec-12

2.5

2.9

22.7

29

Jan-13

-1.4

-2.3

27.4

31.9

Feb-13

-6.2

-1.1

32.1

39.1

Mar-13

2

2

35.7

38.1

Apr-13

0.5

1.1

30.8

34.2

May-13

0.3

-3.7

39.4

42.1

Jun-13

12.8

11.8

37.1

39.5

Jul-13

16

8

41.7

52.1

Aug-13

8.2

7.9

38.7

38.9

Sep-13

20.8

19.1

49.1

51.6

Oct-13

13.5

23.6

55.7

61.1

Nov-13

4.9

8.8

42.4

47.3

Dec-13

3.9

11.9

41.6

44.8

Jan-14

15.4

7.2

35.6

40.3

Feb-14

0.5

1.9

44.1

39.6

Mar-14

12.6

9.4

42.9

39

Apr-14

17.1

17.4

39.5

38.2

May-14

18.5

14.9

43.5

42.3

Jun-14

14.3

10.3

52.8

54.3

Jul-14

21.7

30.2

53.8

48.2

Aug-14

23

14.6

62.2

51.4

Sep-14

22.1

14.1

46.7

44.7

Oct-14

18.2

17.4

51.2

49.3

Nov-14

36

29.5

50.8

46.6

Dec-14

21.6

13.5

48.1

44.7

Jan-15

13.1

9

51.2

46

Feb-15

7.9

4.9

35.3

46.4

Mar-15

7.6

5.6

38.6

38.4

Apr-15

10

4.1

39.9

32.8

May-15

6.5

5.3

37.3

34.4

Jun-15

8

10.4

42.1

45.8

Jul-15

4.9

5.1

40.5

43.8

Aug-15

6.4

5.2

35.2

39.5

Sep-15

-2.9

11.3

38

41.5

Oct-15

-4.3

-6.1

35.1

37.4

Nov-15

-3.3

-7.9

38.3

47.9

Dec-15

-9.5

-10.6

20.2

31.7

Jan-16

-4.5

-4

14.6

19.8

Feb-16

-10.3

-9.4

16.5

20.3

Mar-16

9.3

11.6

28.2

36

Apr-16

-1.2

-1.8

39.7

42

May-16

-4.2

-2.3

38.1

38.6

Jun-16

3.7

-2.3

34.3

35.3

Jul-16

2.3

14.1

36.8

33.2

Aug-16

6.2

-3.6

42.7

43.4

Sep-16

13.6

4.6

38.3

37.8

Oct-16

11.7

20.4

36.7

42.2

Nov-16

10

18.1

30.7

40.3

Dec-16

21.6

13.8

47.9

48

Jan-17

24.1

24.6

51

50.2

Feb-17

35.3

31.2

51.1

49.3

Mar-17

31.6

37.4

57.6

58.8

Apr-17

22.8

25.9

45.2

52.9

May-17

35.5

24.7

37.9

47

Jun-17

26.9

24.8

35.3

36.9

Jul-17

23.2

10.6

39.9

42.4

Aug-17

22.1

20.7

44

51.1

Sep-17

25.8

28.9

55

57.7

Oct-17

28.8

23.3

47.2

46.9

Nov-17

24.3

24.2

48.7

55.5

Dec-17

27.9

28.2

52.7

59

Jan-18

22.2

10.1

42.2

46.2

Feb-18

25.8

24.5

41.2

49.1

Mar-18

22.3

35.7

47.9

48.8

Apr-18

23.2

18.4

40.7

37.2

May-18

34.4

40.6

38.7

40.3

Jun-18

19.9

17.9

34.8

38.2

Jul-18

25.7

31.4

29

28.3

Aug-18

11.9

9.9

38.8

38.1

Sep-18

22.9

21.4

36.3

34.7

Oct-18

22.2

19.3

33.8

43.4

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart VA-2 of the Federal Reserve Bank of Philadelphia Manufacturing Business Outlook Survey provides the current and future general activity indexes from Jan 2007 to Aug 2018. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now by what appeared as renewed strength from late 2011 into Jan 2012. There is decline to negative territory of the current activity index in Nov 2012 and return to positive territory in Dec 2012 with decline of current conditions into contraction in Jan-Feb 2013 and rebound to mild expansion in Mar-Apr 2013. The index of current activity moved into expansion in Jun-Oct 2013 with weakness in Nov-Dec 2013, improving in Jan 2014. There is renewed deterioration in Feb 2014 with rebound in Apr-Sep 2014 and mild deterioration in Oct 2014 followed by improvement in Nov 2014. The index deteriorated in Jan-Feb 2015, stabilizing in Mar-May 2015 and improving in Jun 2015. The index deteriorated in Jul 2015, improved in Aug 2015 and deteriorated in Sep-Oct 2015. The index shows contraction in Nov 2015 to Feb 2016 with recovery in Mar 2016. There is deterioration in Apr-May 2016 with improvement in Jun 2016 and deterioration in Jul 2016. There is improvement in Aug-Sep 2016 with moderate weakening in Oct-Nov 2016. The indexes improved sharply in Dec 2016 and Jan-Feb 2017, softening in Mar-Apr 2017. The current index weakened in Jun 2017 with stability in the six-month forecast. The current index deteriorated in Jul 2017 with improvement in the six-month forecast. The current index deteriorated in Aug 2017 with improvement in the six-month forecast. The current index improved in Sep 2017 with improvement in the six-month forecast. The current index improved and the future index deteriorated in Oct 2017. There is deterioration in Nov 2017 of the current index and improvement of the future index. Both the current and future indexes improved in Dec 2017, deteriorating in Jan 2018. There is improvement of the current index in Feb 2018 with mild deterioration in the future index. The current index improves in Apr 2018 while the future index weakens. There is improvement in the current index in May 2018 with weakening of the future index. There is weakening in the current index in Jun 2018 while the future index weakens. The current index improves in Jul 2018 while the future index weakens. There is weakening of the current index in Aug 2018 while the future index improves. The current index improves in Sep 2018 while the future index weakens. The current index weakens in Oct 2018 while the future index weakens.

clip_image013

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

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The index of current new orders of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia in Chart VA-2 illustrates the weakness of the cyclical expansion. The index weakened in 2006 and 2007 and then fell sharply into contraction during the global recession. There have been twelve readings into contraction from Jan 2012 to May 2013 and generally weak readings with some exceptions. The index of new orders moved into expansion in Jun-Oct 2013 with moderation in Nov-Dec 2013 and into Jan 2014. The index fell into contraction in Feb 2014, recovering in Mar-Apr 2014 but weaker reading in May 2014. There is marked improvement in Jun-Jul 2014 with slowing in Aug-Oct 2014 followed by acceleration in Nov 2014. New orders deteriorated in Jan-Apr 2015, improving in May-Jun 2015. New orders deteriorated in Jul-Aug 2015 and improved in Sep 2015. New orders deteriorated in Oct-2015 to Dec 2015, contracting at slower pace in Jan 2016. There is sharper contraction in Feb 2016 and an upward jump in Mar 2016 followed by deterioration in Apr-Jun 2016. New orders improved in Jul 2016, deteriorating in Aug 2016 and improving in Sep 2016. Improvement continued in Oct-Nov 2016 with mild deterioration in Dec 2016 followed by improvement in Jan-Feb 2017, softening in Mar-Jul 2017, recovering in Aug-Sep 2017. There is deterioration in Oct 2017 followed by improvement in Nov-Dec 2017. There is deterioration in Jan 2018 followed by improvement in Feb 2018 and improvement in Mar 2018. The index deteriorates in Apr 2018, improving in May 2018. The index deteriorates in Jun 2018, improving in Jul 2018 and deteriorating in Aug 2018. The index improves in Sep 2018, deteriorating in Oct 2018.

clip_image014

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

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

IID Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates. Long-term economic growth in Japan significantly improved by increasing competitiveness in world markets. Net trade of exports and imports is an important component of the GDP accounts of Japan. Table VB-3 provides quarterly data for net trade, exports and imports of Japan. Net trade had strong positive contributions to GDP growth in Japan in all quarters from IQ2007 to IIQ2009 with exception of IVQ2008, IIIQ2008 and IQ2009. The US recession is dated by the National Bureau of Economic Research (NBER) as beginning in IVQ2007 (Dec) and ending in IIQ2009 (Jun) (http://www.nber.org/cycles/cyclesmain.html). Net trade contributions helped to cushion the economy of Japan from the global recession. Net trade deducted from GDP growth in six of the nine quarters from IVQ2010 to IQ2012. The only strong contribution of net trade was 3.6 percent in IIIQ2011. Net trade added 1.4 percentage points to GDP growth in IQ2013 but deducted 0.2 percentage points in IIQ2013, deducting 1.3 percentage points in IIIQ2013 and 2.2 percentage points in IVQ2013. Net trade deducted 0.8 percentage points from GDP growth in IQ2014. Net trade added 3.9 percentage points to GDP growth in IIQ2014 and deducted 0.0 percentage points in IIIQ2014. Net trade added 1.4 percentage points to GDP growth in IVQ2014. Net trade contributed 0.1 percentage points to GDP growth in IQ2015 and deducted 0.7-percentage points in IIQ2015. Net trade deducted 0.2 percentage points from GDP growth in IIIQ2015. Net trade subtracted 0.2 percentage points to GDP growth in IVQ2015 and added 1.4 percentage points in IQ2016. Net trade contributed 0.3 percentage points to GDP growth in IIQ2016. Net trade added 1.7 percentage points to GDP growth in IIIQ2016 and contributed 1.2 percentage points in IVQ2016.  Net trade contributed 0.4 percentage points to GDP growth in IQ2017 and deducted 1.1 percentage points in IIQ2017. Net trade contributed 2.3 percentage points to GDP growth in IIIQ2017 and deducted 0.6 percentage-point in IVQ2017. Net trade contributed 0.3 percentage points to GDP growth in IQ2018 and deducted 0.5 percentage points in IIQ2018. Private consumption assumed the role of driver of Japan’s economic growth but should moderate as in most mature economies.

Table VB-3, Japan, Contributions to Changes in Real GDP, Seasonally Adjusted Annual Rates (SAAR), %

Net Trade

Exports

Imports

2018

I

0.3

0.5

-0.1

II

-0.5

0.2

-0.6

2017

I

0.4

1.2

-0.8

II

-1.1

0.1

-1.2

III

2.3

1.4

0.9

IV

-0.6

1.4

-2.0

2016

I

1.4

0.3

1.1

II

0.3

-0.3

0.6

III

1.7

1.6

0.1

IV

1.2

1.9

-0.7

2015

I

0.1

0.7

-0.6

II

-0.7

-2.4

1.7

III

-0.2

1.8

-2.0

IV

-0.2

-0.6

0.5

2014

I

-0.8

3.7

-4.5

II

3.9

0.9

3.0

III

0.0

1.1

-1.1

IV

1.4

2.2

-0.7

2013

I

1.4

1.6

-0.2

II

-0.2

2.0

-2.2

III

-1.3

0.0

-1.2

IV

-2.2

-0.2

-2.0

2012

I

0.7

1.7

-1.0

II

-2.0

-0.5

-1.4

III

-1.9

-2.2

0.3

IV

-0.4

-1.9

1.6

2011

I

-1.3

-0.6

-0.7

II

-4.3

-4.6

0.3

III

3.6

5.4

-1.8

IV

-2.7

-1.7

-1.1

2010

I

1.9

3.3

-1.3

II

0.3

2.8

-2.5

III

0.6

1.7

-1.0

IV

-0.1

0.2

-0.3

2009

I

-4.7

-16.2

11.5

II

7.6

4.7

2.9

III

2.1

5.3

-3.1

IV

2.8

4.2

-1.4

2008

I

0.8

1.8

-1.0

II

0.5

-1.4

1.9

III

-0.1

0.1

-0.2

IV

-10.4

-9.3

-1.1

2007

I

1.1

1.6

-0.5

II

0.8

1.6

-0.8

III

2.2

1.7

0.5

IV

1.2

1.9

-0.7

Source: Japan Economic and Social Research Institute, Cabinet Office

http://www.esri.cao.go.jp/index-e.html

http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html

There was milder increase in Japan’s export corporate goods price index during the global recession in 2008 but similar sharp decline during the bank balance sheets effect in late 2008, as shown in Chart IV-5 of the Bank of Japan. Japan exports industrial goods whose prices have been less dynamic than those of commodities and raw materials. As a result, the export CGPI on the yen basis in Chart IV-5 trends down with oscillations after a brief rise in the final part of the recession in 2009. The export corporate goods price index on the yen basis fell from 93.9 in Jun 2009 to 84.1 in Jan 2012 or minus 10.4 percent and increased to 97.6 in Sep 2018 for gain of 16.1 percent relative to Jan 2012 and increase of 3.9 percent relative to Jun 2009. The choice of Jun 2009 is designed to capture the reversal of risk aversion beginning in Sep 2008 with the announcement of toxic assets in banks that would be withdrawn with the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009). Reversal of risk aversion in the form of flight to the USD and obligations of the US government opened the way to renewed carry trades from zero interest rates to exposures in risk financial assets such as commodities. Japan exports industrial products and imports commodities and raw materials. The recovery from the global recession began in the third quarter of 2009.

clip_image015

Chart IV-5, Japan, Export Corporate Goods Price Index, Monthly, Yen Basis, 2008-2018

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Chart IV-5A provides the export corporate goods price index on the basis of the contract currency. The export corporate goods price index on the basis of the contract currency increased from 105.9 in Jun 2009 to 111.5 in Apr 2012 or 5.3 percent but dropped to 102.5 in Sep 2018 or minus 8.1 percent relative to Apr 2012 and fell 3.2 percent to 102.5 in Sep 2018 relative to Jun 2009.

clip_image016

Chart IV-5A, Japan, Export Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2018

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Japan imports primary commodities and raw materials. As a result, the import corporate goods price index on the yen basis in Chart IV-6 shows an upward trend after declining from the increase during the global recession in 2008 driven by carry trades from fed funds rates. The index increases with carry trades from zero interest rates into commodity futures and declines during risk aversion from late 2008 into beginning of 2008 originating in doubts about soundness of US bank balance sheets. Measurement that is more careful should show that the terms of trade of Japan, export prices relative to import prices, declined during the commodity shocks originating in unconventional monetary policy. The decline of the terms of trade restricted potential growth of income in Japan (for the relation of terms of trade and growth see Pelaez 1979, 1976a). The import corporate goods price index on the yen basis increased from 82.4 in Jun 2009 to 99.6 in Apr 2012 or 20.9 percent and to 101.8 in Sep 2018 or increase of 2.2 percent relative to Apr 2012 and increase of 23.5 percent relative to Jun 2009.

clip_image017

Chart IV-6, Japan, Import Corporate Goods Price Index, Monthly, Yen Basis, 2008-2018

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Chart IV-6A provides the import corporate goods price index on the contract currency basis. The import corporate goods price index on the basis of the contract currency increased from 95.0 in Jun 2009 to 131.6 in Apr 2012 or 38.5 percent and to 108.0 in Sep 2018 or minus 17.9 percent relative to Apr 2012 and increase of 13.7 percent relative to Jun 2009. There is evident deterioration of the terms of trade of Japan: the export corporate goods price index on the basis of the contract currency decreased 3.2 percent from Jun 2009 to Sep 2018 while the import corporate goods price index increased 13.7 percent. Prices of Japan’s exports of corporate goods, mostly industrial products, increased only 5.3 percent from Jun 2009 to Apr 2012, while imports of corporate goods, mostly commodities and raw materials increased 38.5 percent. Unconventional monetary policy induces carry trades from zero interest rates to exposures in commodities that squeeze economic activity of industrial countries by increases in prices of imported commodities and raw materials during periods without risk aversion. Reversals of carry trades during periods of risk aversion decrease prices of exported commodities and raw materials that squeeze economic activity in economies exporting commodities and raw materials. Devaluation of the dollar by unconventional monetary policy could increase US competitiveness in world markets but economic activity is squeezed by increases in prices of imported commodities and raw materials. Unconventional monetary policy causes instability worldwide instead of the mission of central banks of promoting financial and economic stability.

clip_image018

Chart IV-6A, Japan, Import Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2018

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

Table IV-6B provides the Bank of Japan’s Corporate Goods Price indexes of exports and imports on the yen and contract bases from Jan 2008 to Sep 2018. There are oscillations of the indexes that are shown vividly in the four charts above. For the entire period from Jan 2008 to Sep 2018, the export index on the contract currency basis decreased 4.5 percent and decreased 5.5 percent on the yen basis. For the entire period from Jan 2008 to Sep 2018, the import price index decreased 2.6 percent on the contract currency basis and decreased 2.9 percent on the yen basis. During significant part of the expansion period, prices of Japan’s exports of corporate goods on the contract currency, mostly industrial products, increased only 5.3 percent from Jun 2009 to Apr 2012, while prices of imports of corporate goods on the contract currency, mostly commodities and raw materials, increased 38.5 percent. The charts show sharp deteriorations in relative prices of exports to prices of imports during multiple periods. Price margins of Japan’s producers are subject to periodic squeezes resulting from carry trades from zero interest rates of monetary policy to exposures in commodities.

Table IV-6B, Japan, Exports and Imports Corporate Goods Price Index, Contract Currency Basis and Yen Basis

X-CC

X-Y

M-CC

M-Y

2008/01

107.3

103.3

110.9

104.8

2008/02

107.9

103.9

112.8

106.2

2008/03

108.7

100.7

115.1

103.4

2008/04

109.9

103.2

121.3

110.3

2008/05

110.7

105

124.9

114.9

2008/06

111.9

108

131.6

123.6

2008/07

113.2

109.2

135

126.8

2008/08

112.1

109.2

135.6

129.5

2008/09

111

105.8

129

120.8

2008/10

108.3

98.1

120.2

107

2008/11

106.6

93.5

107.7

93.2

2008/12

105.9

90

98.4

81.9

2009/01

106

89

94.3

77.9

2009/02

105.4

89.6

94.4

79

2009/03

105.2

93.2

93.8

81.9

2009/04

105.5

94.5

93

81.9

2009/05

105.4

92.9

92.5

80

2009/06

105.9

93.9

95

82.4

2009/07

105.4

92.2

98.3

83.7

2009/08

106.3

93.4

98.7

84.4

2009/09

106.3

91.4

100.2

83.4

2009/10

106

90.5

100.2

82.8

2009/11

106.4

90.2

102.2

83.5

2009/12

106.3

90.1

105.1

85.9

2010/01

107.5

91.4

106.8

88.1

2010/02

107.8

90.9

107.5

87.9

2010/03

107.8

91.1

106.8

87.4

2010/04

108.7

93.6

110

92.1

2010/05

108.9

92.1

112

92.4

2010/06

108.2

90.9

110.2

90.1

2010/07

107.5

88.6

110

87.9

2010/08

107.2

87.1

109.6

85.9

2010/09

107.5

86.8

110.2

85.6

2010/10

108.2

86.3

110.7

84.4

2010/11

108.9

87.1

113

86.5

2010/12

109.4

88

115

88.6

2011/01

110.4

88.2

118.1

90.4

2011/02

111.3

89

120.1

91.9

2011/03

111.9

89.1

123.2

93.6

2011/04

112.6

91

127.7

98.6

2011/05

112.3

89.4

130.9

99

2011/06

112.2

88.8

129.4

97.3

2011/07

112

88

130.3

97.1

2011/08

112

86.4

130.6

95.2

2011/09

112.1

86

128.9

93.6

2011/10

111.4

85.2

128.4

93

2011/11

110.2

84.8

127.1

92.8

2011/12

109.7

84.6

127.9

93.6

2012/01

110.1

84.1

126.7

91.8

2012/02

110.7

85.7

127.6

93.7

2012/03

111.3

88.8

130.3

99.5

2012/04

111.5

88.3

131.6

99.6

2012/05

110.6

86.2

130.1

96.7

2012/06

109.6

85

126.9

94

2012/07

108.8

84.1

123.4

91.2

2012/08

109.1

84.2

123.8

91.3

2012/09

109.2

84.2

126.3

92.7

2012/10

109.3

84.7

125.4

92.7

2012/11

109.1

85.8

124.7

93.8

2012/12

108.9

87.7

124.9

96.5

2013/01

109.2

91.6

125.4

101.7

2013/02

109.7

94.8

126.5

105.9

2013/03

109.5

95.4

126.8

107.5

2013/04

108.3

96.2

125.7

109.1

2013/05

107.7

97.6

124

110.4

2013/06

107.3

94.9

123.4

106.8

2013/07

107.2

96.2

122.9

108.2

2013/08

107

94.9

123.2

106.9

2013/09

107

95.9

124.5

109.2

2013/10

107.3

95.5

124.6

108.3

2013/11

107.2

96.6

124.6

110

2013/12

107.2

98.8

125.4

113.6

2014/01

107.3

99

126

114.6

2014/02

106.9

97.7

125.4

112.5

2014/03

106.6

97.6

124.9

112.2

2014/04

106.3

97.5

124.1

111.8

2014/05

106.2

96.8

123.8

110.9

2014/06

105.9

96.7

123.9

111.2

2014/07

106

96.5

123.9

110.9

2014/08

106.1

97.3

123.7

111.6

2014/09

105.9

99.3

122.8

114

2014/10

105.2

99.1

120.7

112.7

2014/11

104.8

103.4

117.8

115.9

2014/12

103.8

104.1

113.8

114

2015/01

102.2

101.2

108.2

106.6

2015/02

101.2

100.1

102.1

100.7

2015/03

101.3

100.9

103.1

102.6

2015/04

101.1

100.2

102

101

2015/05

101.4

101.4

101.6

101.5

2015/06

101.3

102.9

102.5

104.3

2015/07

100.6

101.7

101.5

102.9

2015/08

99.8

100.9

99

100.4

2015/09

98.6

98.2

96.6

96.2

2015/10

97.9

97.3

95.5

95

2015/11

97.5

98

94.9

95.7

2015/12

97.1

97.3

92.9

93.2

2016/01

96.4

94.7

89.9

88.3

2016/02

95.9

92.7

87.5

84.4

2016/03

96.1

92

87.3

83.2

2016/04

96.4

91

88.2

82.4

2016/05

96.5

90.6

88.6

82.4

2016/06

96.5

88.8

89.9

81.6

2016/07

96.9

88.2

90.8

81.5

2016/08

96.9

87.1

90.7

79.9

2016/09

97

87.5

91.1

80.7

2016/10

97.4

88.6

91.1

81.6

2016/11

98.1

91.2

93.8

86.3

2016/12

98.7

95.5

93.7

90.5

2017/01

99.4

95.6

96.1

92.1

2017/02

99.8

95.3

97.6

92.5

2017/03

100.3

95.7

98.4

93.3

2017/04

99.8

93.7

98.3

91.4

2017/05

99.4

94.6

98.1

92.6

2017/06

99.2

93.9

97.1

91

2017/07

99.3

94.9

96.3

91.2

2017/08

99.9

94.4

96.5

90.1

2017/09

100.5

95.5

97.8

91.8

2017/10

101.2

97.2

99.2

94.3

2017/11

101.5

97.4

100.3

95.3

2017/12

101.7

97.7

102.1

97.1

2018/01

101.9

97.1

103

96.7

2018/02

102.4

96.1

104.9

96.6

2018/03

102.7

95.2

104.4

94.9

2018/04

102.2

95.5

104.7

96.1

2018/05

102.7

96.9

106.3

98.9

2018/06

102.7

97

108.3

100.8

2018/07

102.5

97.4

108.3

101.7

2018/08

102.3

97

107.9

101.1

2018/09

102.5

97.6

108

101.8

Note: X-CC: Exports Contract Currency; X-Y: Exports Yen; M-CC: Imports Contract; M-Y: Imports Yen

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

Japan also experienced sharp increase in inflation during the 1970s as in the episode of the Great Inflation in the US. Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html  and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). A remarkable similarity with US experience is the sharp rise of the CGPI of Japan in 2008 driven by carry trades from policy interest rates rapidly falling to zero to exposures in commodity futures during a global recession. Japan had the same sharp waves of consumer price inflation during the 1970s as in the US (see Chart IV-5A and associated table at : 9/23/18 https://cmpassocregulationblog.blogspot.com/2018/09/world-inflation-waves-united-states.html https://cmpassocregulationblog.blogspot.com/2018/08/revision-of-united-states-national.html https://cmpassocregulationblog.blogspot.com/2018/07/continuing-gradual-increases-in-fed.html https://cmpassocregulationblog.blogspot.com/2018/06/world-inflation-waves-united-states.html https://cmpassocregulationblog.blogspot.com/2018/05/dollar-strengthening-world-inflation.html https://cmpassocregulationblog.blogspot.com/2018/04/dollar-appreciation-mediocre-cyclical.html https://cmpassocregulationblog.blogspot.com/2018/03/mediocre-cyclical-united-states_31.html https://cmpassocregulationblog.blogspot.com/2018/03/mediocre-cyclical-united-states.html https://cmpassocregulationblog.blogspot.com/2018/02/twenty-four-million-unemployed-or.html https://cmpassocregulationblog.blogspot.com/2017/12/dollar-devaluation-cyclically.html https://cmpassocregulationblog.blogspot.com/2017/12/twenty-one-million-unemployed-or.html https://cmpassocregulationblog.blogspot.com/2017/10/dollar-revaluation-and-increase-of.html https://cmpassocregulationblog.blogspot.com/2017/10/destruction-of-household-nonfinancial.html https://cmpassocregulationblog.blogspot.com/2017/08/dollar-devaluation-and-interest-rate.html https://cmpassocregulationblog.blogspot.com/2017/07/data-dependent-monetary-policy-with_30.html https://cmpassocregulationblog.blogspot.com/2017/07/dollar-devaluation-and-rising-yields.html https://cmpassocregulationblog.blogspot.com/2017/05/mediocre-cyclical-united-states.html https://cmpassocregulationblog.blogspot.com/2017/04/dollar-devaluation-mediocre-cyclical.html https://cmpassocregulationblog.blogspot.com/2017/04/mediocre-cyclical-economic-growth-with.html https://cmpassocregulationblog.blogspot.com/2017/03/rising-valuations-of-risk-financial.html http://cmpassocregulationblog.blogspot.com/2017/01/rising-valuations-of-risk-financial.html http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2016/11/dollar-revaluation-rising-yields-and.html http://cmpassocregulationblog.blogspot.com/2016/10/mediocre-cyclical-united-states_30.html http://cmpassocregulationblog.blogspot.com/2016/10/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2016/08/and-as-ever-economic-outlook-is.html http://cmpassocregulationblog.blogspot.com/2016/07/business-fixed-investment-has-been-soft.html http://cmpassocregulationblog.blogspot.com/2016/07/financial-asset-values-rebound-from.html http://cmpassocregulationblog.blogspot.com/2016/05/appropriate-for-fed-to-increase.html http://cmpassocregulationblog.blogspot.com/2016/03/contraction-of-united-states-corporate.html http://cmpassocregulationblog.blogspot.com/2016/02/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2016/01/closely-monitoring-global-economic-and.html http://cmpassocregulationblog.blogspot.com/2015/12/dollar-revaluation-and-decreasing.html http://cmpassocregulationblog.blogspot.com/2015/11/dollar-revaluation-constraining.html http://cmpassocregulationblog.blogspot.com/2015/11/interest-rate-increase-considered.html http://cmpassocregulationblog.blogspot.com/2015/11/interest-rate-increase-considered.htmlhttp://cmpassocregulationblog.blogspot.com/2015/09/monetary-policy-designed-on-measurable.html

http://cmpassocregulationblog.blogspot.com/2015/08/fluctuations-of-global-financial.html http://cmpassocregulationblog.blogspot.com/2015/08/turbulence-of-valuations-of-financial_77.html http://cmpassocregulationblog.blogspot.com/2015/06/international-valuations-of-financial_29.html http://cmpassocregulationblog.blogspot.com/2015/06/dollar-revaluation-squeezing-corporate_97.html http://cmpassocregulationblog.blogspot.com/2015/05/dollar-devaluation-and-carry-trade.html http://cmpassocregulationblog.blogspot.com/2015/03/dollar-revaluation-and-financial-risk.html http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html http://cmpassocregulationblog.blogspot.com/2015/02/financial-and-international.html http://cmpassocregulationblog.blogspot.com/2014/12/valuations-of-risk-financial-assets.html http://cmpassocregulationblog.blogspot.com/2014/09/financial-volatility-mediocre-cyclical.html http://cmpassocregulationblog.blogspot.com/2014/09/geopolitical-and-financial-risks_71.html http://cmpassocregulationblog.blogspot.com/2014/03/financial-uncertainty-mediocre-cyclical_8145.html http://cmpassocregulationblog.blogspot.com/2014/03/financial-risks-slow-cyclical-united.html http://cmpassocregulationblog.blogspot.com/2014/02/mediocre-cyclical-united-states.html http://cmpassocregulationblog.blogspot.com/2013/12/collapse-of-united-states-dynamism-of.html http://cmpassocregulationblog.blogspot.com/2013/12/exit-risks-of-zero-interest-rates-world_1.html and earlier http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or_561.html and at http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk_1.html http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html).

clip_image019

Chart IV-7, Japan, Domestic Corporate Goods Price Index, Monthly, 1960-2018

Source: Bank of Japan

http://www.stat-search.boj.or.jp/index_en.html

The producer price index of the US from 1970 to 2018 in Chart IV-8 shows various periods of more rapid or less rapid inflation but no bumps. The major event is the decline in 2008 when risk aversion because of the global recession caused the collapse of oil prices from $148/barrel to less than $80/barrel with most other commodity prices also collapsing. The event had nothing in common with explanations of deflation but rather with the concentration of risk exposures in commodities after the decline of stock market indexes. Eventually, there was a flight to government securities because of the fears of insolvency of banks caused by statements supporting proposals for withdrawal of toxic assets from bank balance sheets in the Troubled Asset Relief Program (TARP), as explained by Cochrane and Zingales (2009). The bump in 2008 with decline in 2009 is consistent with the view that zero interest rates with subdued risk aversion induce carry trades into commodity futures.

clip_image020

Chart IV-8, US, Producer Price Index Finished Goods, Monthly, 1960-2018

Source: US Bureau of Labor Statistics

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

Further insight into inflation of the corporate goods price index (CGPI) of Japan is in Table IV-7. The increase in the tax on value added of consumption caused sharp increases in prices across all segments. Petroleum and coal with weight of 6.0 percent increased 2.3 percent in Sep 2018 and increased 26.4 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, prices of production machinery, with weight of 4.1 percent, increased 0.4 percent in Sep 2018 and increased 1.1 percent in 12 months. In general, most manufactured products had been experiencing negative or low increases in prices while inflation rates have been high in 12 months for products originating in raw materials and commodities. The reversal of carry trades in commodity futures caused decrease in prices of commodities and raw materials while prices of manufactures stabilized. Ironically, unconventional monetary policy of zero interest rates and quantitative easing that intended to increase aggregate demand and GDP growth deteriorated the terms of trade of advanced economies with adverse effects on real income (for analysis of terms of trade and growth see Pelaez (1979, 1976a). There are now inflation effects of the intentional policy of devaluing the yen and recent collapse of commodity prices followed by increases.

Table IV-7, Japan, Corporate Goods Prices and Selected Components, % Weights, Month and 12 Months ∆%

Sep 2018

Weight

Month ∆%

12 Month ∆%

Total

1000.0

0.3

3.0

Food, Beverages

141.6

0.0

0.8

Petroleum & Coal

59.5

2.3

26.4

Production Machinery

41.1

0.4

1.1

Electronic Components

24.5

-0.1

-0.4

Electric Power, Gas & Water

67.1

0.7

4.9

Iron & Steel

51.7

0.2

3.9

Chemicals

89.2

0.3

5.0

Transport
Equipment

140.7

0.1

-0.3

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

Percentage point contributions to change of the corporate goods price index (CGPI) in Aug 2018 are in Table IV-8, divided into domestic, export and import segments. In the domestic CGPI, increasing 0.3 percent in Sep 2018, the energy shock is evident in the contribution of 0.16 percentage points by petroleum and coal products in renewed carry trades of exposures in commodity futures. The exports CGPI increased 0.2 percent on the basis of the contract currency with deduction of 0.08 percentage points by electric and electronic products. The imports CGPI increased 0.1 percent on the contract currency basis. Petroleum, coal and natural gas contributed 0.25 percentage points. Shocks of risk aversion cause unwinding carry trades that result in declining commodity prices with resulting downward pressure on price indexes. The volatility of inflation adversely affects financial and economic decisions worldwide.

Table IV-8, Japan, Percentage Point Contributions to Change of Corporate Goods Price Index

Groups Sep 2018

Contribution to Change Percentage Points

A. Domestic Corporate Goods Price Index

Monthly Change: 
0.3%

Petroleum & Coal Products

0.16

Electric Power, Gas & Water

0.04

Chemicals & Related Products

0.02

Production Machinery

0.02

Scrap & Waste

0.01

Metal Products

0.01

Agriculture, Forestry & Fishery Products

-0.02

Nonferrous Metals

-0.01

B. Export Price Index

Monthly Change:   
0.2% contract currency

Chemicals & Related Products

0.30

Other Primary Products & Manufactured Products

0.04

Transportation Equipment

0.02

General Purpose, Production & Business Oriented Machinery

-0.09

Electric & Electronic Products

-0.08

Metals & Related Products

-0.06

C. Import Price Index

Monthly Change: 0.1% contract currency basis

Petroleum, Coal & Natural Gas

0.25

Chemicals & Related Products

0.05

Beverages & Foods and Agricultural Products for Food

-0.11

Metals & Related Products

-0.10

Textiles

-0.03

Other Primary Products & Manufactured Goods

-0.02

Source: Bank of Japan

http://www.boj.or.jp/en/statistics/index.htm/

There are two categories of responses in the Empire State Manufacturing Survey of the Federal Reserve Bank of New York (https://www.newyorkfed.org/survey/empire/empiresurvey_overview.html): current conditions and expectations for the next six months. There are responses in the survey for two types of prices: prices received or inputs of production and prices paid or sales prices of products. Table IV-5 provides indexes for the two categories and within them for the two types of prices from Dec 2010 to Oct 2018. The index of current prices paid or costs of inputs moved from 16.1 in Dec 2012 to 42.0 in Oct 2018 while the index of current prices received or sales prices moved from 1.1 in Dec 2012 to 14.3 in Oct 2018. The farther the index is from the area of no change at zero, the faster the rate of change. Prices paid or costs of inputs at 42.0 in Oct 2018 are expanding at faster pace than prices received or of sales of products at 14.3. The index of future prices paid or expectations of costs of inputs in the next six months moved from 51.6 in Dec 2012 to 52.9 in Oct 2018 while the index of future prices received or expectation of sales prices in the next six months decreased from 25.8 in Dec 2012 to 23.5 in Oct 2018. Prices paid or of inputs at 52.9 in Oct 2018 are expected to increase at a faster pace in the next six months than prices received or prices of sales products at 23.5 in Oct 2018. Prices of sales of finished products are less dynamic than prices of costs of inputs during waves of increases. Prices of costs of costs of inputs fall less rapidly than prices of sales of finished products during waves of price decreases. As a result, margins of prices of sales less costs of inputs oscillate with typical deterioration against producers, forcing companies to manage tightly costs and labor inputs. Instability of sales/costs margins discourages investment and hiring.

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

Current General Index

Current New Orders

Future General Index

Future New Orders

9/30/2011

-3.9

-4.2

22.4

23.4

10/31/2011

-5.3

1.9

14.4

19.5

11/30/2011

5.1

1.7

35.5

30.9

12/31/2011

11.6

10.2

46

43.8

1/31/2012

11.4

8.6

51

44.4

2/29/2012

16.5

7

46.5

38

3/31/2012

15.1

4.4

44

38

4/30/2012

7.3

3.7

40

37.7

5/31/2012

14.8

7

32.2

31.5

6/30/2012

1.5

3

27.7

27.7

7/31/2012

3.5

-3.4

24.2

21.6

8/31/2012

-2.3

-2.9

18.7

14.5

9/30/2012

-6.4

-9.9

26.9

27.8

10/31/2012

-4

-6.2

20

22.4

11/30/2012

-0.5

6.3

18.2

16.3

12/31/2012

-5.7

0.4

19.8

19.8

1/31/2013

-7.5

-10.9

21.7

23.4

2/28/2013

7.5

12

32.4

27.5

3/31/2013

4.5

4.7

35.2

33.3

4/30/2013

3.7

1.9

29.7

34.8

5/31/2013

-0.4

-3

26

29.7

6/30/2013

4.4

-7.8

27.7

21.5

7/31/2013

5.7

2.3

33.8

33.1

8/31/2013

10.3

3.1

35.8

30.8

9/30/2013

8.2

3.4

40.1

38

10/31/2013

4.4

10

41.3

37

11/30/2013

2.9

-2.1

38.4

40.7

12/31/2013

3.3

1.3

37.3

28.6

1/31/2014

12.4

8

36

37.2

2/28/2014

4.3

1.2

40.6

44.3

3/31/2014

2.4

0.8

35.4

36.8

4/30/2014

2.9

-1.7

37.6

33.6

5/31/2014

19

8.7

42.9

37.8

6/30/2014

15.6

13.1

41.1

43.3

7/31/2014

21.5

16.5

30.5

27.5

8/31/2014

16.9

15.8

45.7

50.3

9/30/2014

29.9

18

46.5

45.6

10/31/2014

7.2

2.5

42.1

42.3

11/30/2014

13

11

48.1

48.8

12/31/2014

-2.4

0.7

36.5

36.9

1/31/2015

11.9

6.3

46.8

40.4

2/28/2015

7.7

2.2

28.3

30.1

3/31/2015

3.3

-6.3

31.2

26.9

4/30/2015

-1.5

-6.8

35.8

32.9

5/31/2015

5.5

3.9

30.2

34

6/30/2015

-5

-6.8

26

25.4

7/31/2015

2.5

-5

29.2

33.6

8/31/2015

-12.6

-14

32.9

30.7

9/30/2015

-12.6

-11.3

23.3

23.8

10/31/2015

-12.1

-14.2

22.2

22.7

11/30/2015

-8.5

-10.2

23.1

22.3

12/31/2015

-6

-5.5

35.1

26.1

1/31/2016

-16.6

-22.1

10

13.4

2/29/2016

-16.9

-11.1

15.8

21.7

3/31/2016

-3.1

2.9

26

37.6

4/30/2016

7.5

8.3

28.5

35.9

5/31/2016

-5.8

-2.3

28.2

22.9

6/30/2016

2.5

6.5

33.2

35.9

7/31/2016

2.2

-1.7

31.1

31.7

8/31/2016

-4.1

1.4

25.2

28.7

9/30/2016

-1.6

-5.8

34.3

32.1

10/31/2016

-7.6

-1.2

35.2

37.8

11/30/2016

3.5

5

30.7

29.8

12/31/2016

9.3

10.7

49.4

47.7

1/31/2017

6.7

3.6

49

39.2

2/28/2017

17.1

12.3

41.3

41.6

3/31/2017

14.6

17.4

38.3

35.1

4/30/2017

4.1

7.3

39.4

32.5

5/31/2017

3

-1.9

39.8

34.3

6/30/2017

18.1

16.1

41.4

40

7/31/2017

12.7

13.4

36.6

35.7

8/31/2017

24.2

20.9

44

41.3

9/30/2017

23.8

24.4

40.8

43.6

10/31/2017

28.1

21

44.9

44.6

11/30/2017

20.9

21.3

49.8

52.5

12/31/2017

19.6

19

46.3

42.7

1/31/2018

17.7

11.9

48.6

47.6

2/28/2018

13.1

13.5

50.5

47.2

3/31/2018

22.5

16.8

44.1

43

4/30/2018

15.8

9

18.3

18.5

5/31/2018

20.1

16

31.1

33.7

6/30/2018

25

21.3

38.9

33.4

7/31/2018

22.6

18.2

31.1

37.2

8/31/2018

25.6

17.1

34.8

36

9/30/2018

19

16.5

30.3

33.3

10/31/2018

21.1

22.5

29

35.1

Source:

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

Price indexes of the Federal Reserve Bank of Philadelphia Outlook Survey are in Table IV-5A. As in inflation waves throughout the world (Section I and earlier https://cmpassocregulationblog.blogspot.com/2018/09/world-inflation-waves-united-states.html) indexes of both current and expectations of future prices paid and received were quite high until May 2011. Prices paid, or inputs, were more dynamic, reflecting carry trades from zero interest rates to commodity futures. All indexes softened after May 2011 with even decline of prices received in Aug 2011 during the first round of risk aversion. Current and future price indexes have increased again but not back to the intensity in the beginning of 2011 because of risk aversion frustrating carry trades even induced by zero interest rates. The index of prices paid or prices of inputs moved from 21.0 in Dec 2012 to 38.2 in Oct 2018. The index of current prices received was minus 2.4 in Apr 2013, indicating decrease of prices received. The index of current prices received decreased from 9.0 in Dec 2012 to minus 6.0 in Sep 2015, decreasing to minus 3.9 in Feb 2016. The index of current prices received was 24.1 in Oct 2018. The farther the index is from the area of no change at zero, the faster the rate of change. The index of current prices paid or costs of inputs at 38.2 in Oct 2018 indicates faster expansion than the index of current prices received or sales prices of production in Oct 2018, showing 24.1. Prices paid indicate faster expansion than prices received during most of the history of the index. The index of future prices paid increased to 54.1 in Oct 2018 from 41.9 in Dec 2012 while the index of future prices received increased from 21.7 in Dec 2012 to 51.1 in Oct 2018. Expectations are incorporating faster increases in prices of inputs or costs of production, 54.1 in Oct 2018, than of sales prices of produced goods, 51.1 in Oct 2018, forcing companies to manage tightly costs and labor inputs. Volatility of margins of sales/costs discourages investment and hiring.

Table IV-5A, US, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Prices Paid and Prices Received, SA

Dec-10

42.7

5.2

56.3

24.2

Jan-11

48.2

12.6

58.9

34.6

Feb-11

61.4

13.6

68.7

31.6

Mar-11

59.2

17.8

61.5

33.5

Apr-11

52.8

22.9

56.4

36.4

May-11

51.3

20.6

54.8

28.5

Jun-11

36

6.3

40.7

6.8

Jul-11

34.1

5.6

48.1

17.2

Aug-11

23.6

-2.9

42.7

22.8

Sep-11

30.1

6.4

38.2

20.5

Oct-11

22.7

1.6

41.4

27.7

Nov-11

21.8

5.1

34.3

26.2

Dec-11

25

5.5

42.7

21.1

Jan-12

26.1

9.2

47.9

21.8

Feb-12

33.4

10.4

51.6

26.5

Mar-12

17.4

6.8

38.7

24.9

Apr-12

21.8

9.6

37

25.2

May-12

10.2

1.1

40.4

9.1

Jun-12

1.2

-6.1

32.9

16.9

Jul-12

8.3

3.3

27.1

20.3

Aug-12

16.3

7.3

35

23.9

Sep-12

12.9

2.7

38.3

24.6

Oct-12

17.2

4.7

44.2

15

Nov-12

22.1

4.7

45.6

10.5

Dec-12

21

9

41.9

21.7

Jan-13

12.9

0.7

35.2

21.7

Feb-13

12.9

0.1

35.6

23.2

Mar-13

13.3

1

35.2

20.5

Apr-13

11.6

-2.4

31.3

17.1

May-13

12.7

0.6

35.4

19.2

Jun-13

17

11.5

29.7

24.1

Jul-13

19.3

5.5

40

24.7

Aug-13

17.8

13.3

34.1

23

Sep-13

22.1

11.6

37.3

27.1

Oct-13

17.4

9

41.5

34.2

Nov-13

23.3

6.5

40.8

36

Dec-13

17.4

9

40.1

28

Jan-14

19.9

8.3

37.6

13.7

Feb-14

16.3

9.9

29.3

20

Mar-14

21.2

6.8

33.6

20.7

Apr-14

21.1

10.3

38.4

22

May-14

27.1

17.7

39.2

29

Jun-14

26.4

9.7

42.4

30

Jul-14

30.9

14.3

36.5

21.7

Aug-14

21.6

6.8

44.9

27.6

Sep-14

21.6

7.4

39.1

25.9

Oct-14

23.5

16.9

30.7

21.2

Nov-14

13.9

8.2

32.6

17.9

Dec-14

15.9

11.4

25.2

19.5

Jan-15

11.6

2.4

30.6

20.9

Feb-15

6.1

2.8

35

23

Mar-15

1

-5.8

30

10

Apr-15

1.3

-2.8

20.2

14.9

May-15

-13.2

-6.4

24.1

19.2

Jun-15

10.5

0.3

39.3

12.5

Jul-15

18.5

1.2

33.7

16

Aug-15

3.1

-2.5

34.9

7.9

Sep-15

-3.1

-6

25.5

5.3

Oct-15

-2

-1.4

16.9

7.9

Nov-15

-7.8

-2.8

23.3

9.5

Dec-15

-7.6

-6

24.2

13.1

Jan-16

-2

-3.2

18.9

11.3

Feb-16

-2.8

-3.9

13.4

5.2

Mar-16

-2

1.1

23.7

14.9

Apr-16

13

5

35.8

22.9

May-16

15

12.3

26.2

12.8

Jun-16

22.1

2.5

36.3

18.4

Jul-16

14.6

2.9

28.2

22.6

Aug-16

19.2

7.9

31.8

12.8

Sep-16

20.2

8.8

41.1

32.9

Oct-16

8.4

-2.2

39.9

26.7

Nov-16

25.9

17.3

38

29

Dec-16

30.4

9.1

44.7

28.3

Jan-17

31.8

25.5

47.6

27.5

Feb-17

30

11.9

47.9

25.3

Mar-17

38.6

18.5

53.8

39.3

Apr-17

32.7

15.4

35.9

29.8

May-17

26.3

15.8

44.9

24.1

Jun-17

25.1

19.1

43

30.1

Jul-17

22.3

10.9

47.7

30.1

Aug-17

21.9

14.7

37.4

37

Sep-17

33.5

21.9

47.8

33.9

Oct-17

37.6

14.1

57.8

39.4

Nov-17

36.9

9.6

53.9

42.9

Dec-17

27.8

12.6

56

39.4

Jan-18

32.9

25.1

54.2

44.1

Feb-18

45

23.9

65.2

49.5

Mar-18

42.6

20.7

62.8

51.3

Apr-18

56.4

29.8

66.8

47.9

May-18

52.6

36.4

63.4

33.6

Jun-18

51.8

33.2

62.6

56.6

Jul-18

62.9

36.3

59.7

50.6

Aug-18

55

33.2

60.2

58.9

Sep-18

39.6

19.6

49.6

44.2

Oct-18

38.2

24.1

54.1

51.1

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-1 of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices paid or prices of inputs from 2006 to 2018. Recession dates are in shaded areas. In the middle of deep global contraction after IVQ2007, input prices continued to increase in speculative carry trades from central bank policy rates falling toward zero into commodities futures. The index peaked above 70 in the second half of 2008. Inflation of inputs moderated significantly during the shock of risk aversion in late 2008, even falling briefly into contraction territory below zero during several months in 2009 in the flight away from risk financial assets into US government securities (Cochrane and Zingales 2009) that unwound carry trades. Return of risk appetite induced carry trade with significant increase until return of risk aversion in the first round of the European sovereign debt crisis in Apr 2010. Carry trades returned during risk appetite in expectation that the European sovereign debt crisis was resolved. The various inflation waves originating in carry trades induced by zero interest rates with alternating episodes of risk aversion are mirrored in the prices of inputs after 2011, in particular after Aug 2012 with the announcement of the Outright Monetary Transactions Program of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). Subsequent risk aversion and flows of capital away from commodities into stocks and high-yield bonds caused sharp decline in the index of prices paid followed by another recent rebound with marginal decline and new increase. The index falls, rebounds and falls again in the final segment but there are no episodes of contraction after 2009 with exception of minus 13.2 in May 2015, minus 3.1 in Sep 2015, minus 2.0 in Oct 2015, minus 7.8 in Nov 2015 and minus 7.6 in Dec 2015. The reading for the index in Jan 2016 is minus 2.0 and minus 2.8 for Feb 2016. The index is minus 2.0 in Mar 2016 and 13.0 in Apr 2016, increasing at 15.0 in May 2016 and 22.1 in Jun 2016. The index reached 14.6 in Jul 2016, 19.2 in Aug 2016 and 20.2 in Sep 2016. The index was 8.4 in Oct 2016 and 38.2 in Oct 2018.

clip_image021

Chart IV-1, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2 of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices received from 2006 to 2018. The significant difference between the index of current prices paid in Chart IV-1 and the index of current prices received in Chart IV-2 is that increases in prices paid are significantly sharper than increases in prices received. There were several periods of negative readings of prices received from 2010 to 2016. Prices paid increased at 1.0 in Mar 2015 while prices received contracted at 5.8. There were several contractions of prices paid: 6.4 in May 2015 for prices received with faster contraction of 13.2 of prices paid; minus 3.1 for prices paid in Sep 2015 with minus 6.0 for prices received; and minus 2.0 for prices paid in Oct 2015 with minus 1.4 for prices received. The index of prices received fell to minus 2.8 in Nov 2015 with minus 7.8 for prices paid and to minus 6.0 in Dec 2015 with minus 7.6 for prices paid. The index of prices received fell to minus 3.9 in Feb 2016 with minus 2.8 for prices paid. The index of prices paid decreased at 2.0 in Mar 2016 with increase at 1.1 for prices received. Prices paid moved to 38.2 in Oct 2018 while prices received moved to 24.1. Prices received relative to prices paid deteriorate most of the time largely because of the carry trades from zero interest rates to commodity futures. Profit margins of business are compressed intermittently by fluctuations of commodity prices induced by unconventional monetary policy of zero interest rates, frustrating production, investment and hiring decisions of business, which is precisely the opposite outcome pursued by unconventional monetary policy.

clip_image022

Chart IV-2, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2A of the Federal Reserve Bank of Philadelphia shows current prices paid and current prices received from Jan 2007 to Mar 2017. Current prices paid jumped ahead of current prices received during the contraction from IVQ2007 to IIQ2009 through the carry trade from zero interest rates to exposures in commodity derivatives. There is the same behavior during most of the cyclical expansion after IIIQ2009. Rebalancing of financial investment portfolios away from commodities into equities explains the recent weakness of prices paid. There is a new ongoing carry trade into commodity futures.

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Chart IV-2A, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Current Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2B of the Federal Reserve Bank of Philadelphia shows Current and Future Prices Received of the Business Outlook Survey from 2007 to Jun 2017. There is correlation in the direction of the indexes. The six-month forecast is typically above current prices received. There is upward trend in both indexes in the final segment with wide fluctuations.

clip_image024

Chart IV-2B, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Received and Future Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2C of the Federal Reserve Bank of Philadelphia shows Current and Future Prices Received of the Business Outlook Survey from 2007 to Jul 2017. There is correlation in the direction of the indexes. The six-month forecast is typically above current prices received. There is upward trend in both indexes in the final segment with wide fluctuations.

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Chart IV-2c, Federal Reserve Bank of Philadelphia Business Outlook Survey Current and Future Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2D of the Federal Reserve Bank of Philadelphia shows Current Prices Paid and Current Prices Received of the Business Outlook Survey from 2007 to Sep 2017. Current prices paid are typically above prices received.

clip_image027

Chart IV-2d, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Current Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DE of the Federal Reserve Bank of Philadelphia shows Current Prices Paid and Current Prices Received of the Business Outlook Survey from 2007 to Oct 2017. Current prices paid are typically above prices received.

clip_image029

Chart IV-2de, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEf of the Federal Reserve Bank of Philadelphia shows current prices paid and received of the Business Outlook Survey from 2007 to Dec 2017.Current prices paid are mostly above current prices received. There is upward trend in both indexes in the final segment with wide fluctuations.

clip_image031

Chart IV-2DEf, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices and Future Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2Def1 of the Federal Reserve Bank of Philadelphia shows current prices paid and received of the Business Outlook Survey from 2007 to Jan 2018. There is correlation in the direction of the indexes. The six-month forecast is typically above current prices received. There is upward trend in both indexes in the final segment with wide fluctuations.

clip_image032

Chart IV-2dEf1, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices and Future Prices Paid Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2Def2 of the Federal Reserve Bank of Philadelphia shows current prices paid and received of the Business Outlook Survey from 2007 to Feb 2018. There is correlation in the direction of the indexes. Prices paid are typically above prices received.

clip_image034

Chart IV-2df2, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Piad and Future Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF3 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to Mar 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “Price increases for purchased inputs were reported by 44 percent of the manufacturers this month. The prices paid diffusion index fell 2 points to 42.6 but remains near last month’s reading, which was the highest since 2011 (see Chart 2). The current prices received index, reflecting the manufacturers own prices, declined 3 points to a reading of 20.7” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0318).

clip_image036

Chart IV-2dEf3, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF4 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to Apr 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “Price increases for purchased inputs were reported by 59 percent of the manufacturers this month, up notably from 44 percent in March. The prices paid diffusion index increased 14 points to the highest reading since Mar 2011 (see Chart 2). The current prices received index, reflecting the manufacturers own prices, increased 9 points to a reading of 29.8, its highest reading since May 2008” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0418).

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Chart IV-2dEf4, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF5 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to May 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “Price increases for purchased inputs were reported by 55 percent of the manufacturers this month, down slightly from 59 percent in April. The prices paid diffusion index fell 4 points but remains at an elevated level (see Chart 2). The current prices received index, reflecting the manufacturers’ own prices, increased 7 points to a reading of 36.4, its second consecutive month of increase and highest reading since February 1989.” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0518).

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Chart IV-2dEf5, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF5 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to Jun 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “The firms continued to report higher prices for both purchased inputs and their own manufactured goods, although the survey’s price indicators fell modestly from their May readings. Price increases for purchased inputs were reported by 54 percent of the manufacturers this month, but the prices paid diffusion index edged 1 point lower (see Chart 2). The current prices received index, reflecting the manufacturers’ own prices, decreased 3 points but remains at a high reading of 33.2. Nearly 34 percent of the firms reported higher prices for their manufactured goods.” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0618).

clip_image042

Chart IV-2dEf5, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

Chart IV-2DEF5 of the Federal Reserve Bank of Philadelphia Business Outlook survey provides current prices paid and received from 2007 to Jul 2018 with prices paid typically above prices received. The Business Outlook survey of the FRB of Philadelphia states: “The manufacturers continued to report higher prices for both purchased inputs and their own manufactured goods. Price increases for purchased inputs were reported by 63 percent of the manufacturers this month, up from 54 percent last month. The index has now risen 30 points since January (see Chart 2). The current prices received index, reflecting the manufacturers’ own prices, increased 3 points. Over 36 percent of the firms reported higher prices for their manufactured goods this month.” (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0718).

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Chart IV-2dEf6, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Aug 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0818): “The survey’s current price measures moderated slightly but remain elevated, indicating that price increases for both purchased inputs and the firms’ own manufactured goods remain widespread. The prices paid index fell 8 points. Price increases for purchased inputs were reported by 63 percent of the manufacturers this month. Nearly 35 percent of the firms reported higher prices for their own manufactured goods this month, although the prices received index fell 3 points. In this month’s special questions, the firms were asked to forecast the changes in the prices of their own products and for U.S. consumers over the next four quarters. Regarding their own prices, the firms’ median forecast was for an increase of 3.0 percent, the same as when the same question was last asked in May. The firms expect their employee compensation costs (wages plus benefits on a per employee basis) to rise 3.0 percent over the next four quarters, the same as the previous forecast. When asked about the rate of inflation for U.S. consumers over the next year, the firms’ median forecast was 3.0 percent, slightly higher than the 2.5 percent projected in the previous survey. The firms’ forecast for the long-run (10-year average) inflation rate was also 3.0 percent.”

The Business Outlook survey of the FRB of Philadelphia for Sep 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos0918): “The survey’s diffusion indexes for prices remained positive but decreased from their readings in August (see Chart 2). On the cost side, 44 percent of the firms reported increases in the prices paid for inputs, down from 63 percent in August, and the prices paid index decreased 15 points to 39.6. With respect to prices received for firms’ own manufactured goods, 25 percent of the firms reported higher prices compared with 35 percent last month. The prices received index decreased 14 points.”

clip_image046

Chart IV-2dEf6, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

The Business Outlook survey of the FRB of Philadelphia for Oct 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos1018): “The survey’s diffusion indexes for prices remained positive but lower than their readings for most of this year (see Chart 2). On the cost side, 42 percent of the firms reported increases in the prices paid for inputs, and the prices paid index, which had fallen 15 points last month, decreased 1 point to 38.2. With respect to prices received for firms’ own manufactured goods, 27 percent of the firms reported higher prices compared with 3 percent that reported decreases. The prices received index increased 5 points.”

clip_image048

Chart IV-2Oct18, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid and Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

https://www.philadelphiafed.org/

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018.

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