Increase of Interest Rates by Monetary Policy Dependent on Forecasting Accuracy of Future Economic Conditions and Behavior of Financial Markets, World Inflation Waves, Theory and Reality of Monetary Policy Based on Fear of Deflation, United Sates Industrial Production, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, Rules, Discretionary Authorities and Slow Productivity Growth, 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

Increase of Interest Rates by Monetary Policy Dependent on Forecasting Accuracy of Future Economic Conditions and Behavior of Financial Markets, World Inflation Waves, Theory and Reality of Monetary Policy Based on Fear of Deflation, United Sates Industrial Production, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, Rules, Discretionary Authorities and Slow Productivity Growth, 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

II United States Industrial Production

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

II Rules, Discretionary Authorities and Slow Productivity Growth

II 1B 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

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 0.1 percentage points in IIQ2013, deducting 1.3 percentage points in IIIQ2013 and 2.2 percentage points in IVQ2013. Net trade deducted 0.9 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 1.5 percentage points to GDP growth in IVQ2014. Net trade contributed 0.0 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 0.1 percentage points from GDP growth in IVQ2015 and added 1.3 percentage points in IQ2016. Net trade contributed 0.2 percentage points to GDP growth in IIQ2016. Net trade added 1.7 percentage points to GDP growth in IIIQ2016 and contributed 1.3 percentage points in IVQ2016.  Net trade contributed 0.3 percentage points to GDP growth in IQ2017 and deducted 1.2 percentage points in IIQ2017. Net trade contributed 2.4 percentage points to GDP growth in IIIQ2017 and deducted 0.4 percentage-point in IVQ2017. Net trade contributed 0.2 percentage points to GDP growth in IQ2018 and deducted 0.4 percentage points in IIQ2018. Net trade deducted 0.3 percentage points from GDP growth in IIIQ2018. Private consumption assumed the role of driver of Japan’s economic growth but should moderate as in most mature economies.

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 97.9 in Nov 2018 for gain of 16.4 percent relative to Jan 2012 and increase of 4.3 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.

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 102.1 in Nov 2018 or minus 8.4 percent relative to Apr 2012 and fell 3.6 percent to 102.1 in Nov 2018 relative to Jun 2009.

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 104.4 in Nov 2018 or increase of 4.8 percent relative to Apr 2012 and increase of 26.7 percent relative to Jun 2009.

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 109.9 in Nov 2018 or minus 16.5 percent relative to Apr 2012 and increase of 15.7 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 3.6 percent from Jun 2009 to Nov 2018 while the import corporate goods price index increased 15.7 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.

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 Nov 2018. There are oscillations of the indexes that are shown vividly in the four charts above. For the entire period from Jan 2008 to Nov 2018, the export index on the contract currency basis decreased 4.8 percent and decreased 5.2 percent on the yen basis. For the entire period from Jan 2008 to Nov 2018, the import price index decreased 0.9 percent on the contract currency basis and decreased 0.4 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	102.3	97.5	107.9	101.7
2018/10	102.5	98	109.2	103.5
2018/11	102.1	97.9	109.9	104.4

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: 11/25/18 https://cmpassocregulationblog.blogspot.com/2018/11/weaker-world-economic-growth-with.html https://cmpassocregulationblog.blogspot.com/2018/10/contraction-of-valuations-of-risk.html 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).

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.

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 decreased 4.3 percent in Nov 2018 and increased 14.8 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 0.2 percent in Nov 2018 and increased 0.4 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 ∆%

Nov 2018	Weight	Month ∆%	12 Month ∆%
Total	1000.0	-0.3	2.3
Food, Beverages	141.6	0.0	1.3
Petroleum & Coal	59.5	-4.3	14.8
Production Machinery	41.1	0.2	0.4
Electronic Components	24.5	0.0	-0.5
Electric Power, Gas & Water	67.1	0.7	8.1
Iron & Steel	51.7	0.1	4.6
Chemicals	89.2	-0.8	2.7
Transport Equipment	140.7	0.0	-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 Nov 2018 are in Table IV-8, divided into domestic, export and import segments. In the domestic CGPI, decreasing 0.3 percent in Nov 2018, the energy shock is evident in the deduction of 0.31 percentage points by petroleum and coal products in renewed carry trades of exposures in commodity futures. The exports CGPI decreased 0.3 percent on the basis of the contract currency with deduction of 0.06 percentage points by electric and electronic products. The imports CGPI increased 0.6 percent on the contract currency basis. Petroleum, coal and natural gas contributed 0.65 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 Nov 2018	Contribution to Change Percentage Points
A. Domestic Corporate Goods Price Index	Monthly Change:  -0.3%
Petroleum & Coal Products	-0.31
Chemicals & Related Products	-0.07
Scrap & Waste	-0.04
Electrical Machinery & Equipment	-0.02
Electric Power, Gas & Water	0.05
Agriculture, Forestry & Fishery Products	0.03
Pulp, Paper & Related Products	0.02
General Purpose Machinery	0.01
B. Export Price Index	Monthly Change:    -0.4% contract currency
Chemicals & Related Products	-0.28
Metals & Related Products	-0.15
Electric & Electronic Products	-0.06
General Purpose, Production & Business Oriented Machinery	0.09
Other Primary Products & Manufactured Goods	003%
C. Import Price Index	Monthly Change: 0.6% contract currency basis
Petroleum, Coal & Natural Gas	0.65
Chemicals & Related Products	0.03
Electric & Electronic Products	-0.07
Metals & Related Products	-0.03
Lumber & Wood Products and Forest Products	-0.01

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 Dec 2018. The index of current prices paid or costs of inputs moved from 16.1 in Dec 2012 to 39.7 in Dec 2018 while the index of current prices received or sales prices moved from 1.1 in Dec 2012 to 12.8 in Dec 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 39.7 in Dec 2018 are expanding at faster pace than prices received or of sales of products at 12.8. 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 51.9 in Dec 2018 while the index of future prices received or expectation of sales prices in the next six months moved from 25.8 in Dec 2012 to 27.6 in Dec 2018. Prices paid or of inputs at 51.9 in Dec 2018 are expected to increase at a faster pace in the next six months than prices received or prices of sales products at 27.6 in Dec 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 IV-5, US, FRBNY Empire State Manufacturing Survey, Diffusion Indexes, Prices Paid and Prices Received, SA

	Current Prices Paid	Current Prices Received	Future Prices Paid	Future Prices Received
12/31/2010	28.4	3.4	58	38.6
1/31/2011	35.8	15.8	60	42.1
2/28/2011	45.8	16.9	55.4	27.7
3/31/2011	53.2	20.8	71.4	36.4
4/30/2011	57.7	26.9	56.4	38.5
5/31/2011	69.9	28	68.8	35.5
6/30/2011	56.1	11.2	55.1	19.4
7/31/2011	43.3	5.6	51.1	30
8/31/2011	28.3	2.2	42.4	15.2
9/30/2011	32.6	8.7	53.3	22.8
10/31/2011	22.5	4.5	40.4	18
11/30/2011	18.3	6.1	36.6	25.6
12/31/2011	24.4	3.5	57	36
1/31/2012	26.4	23.1	53.8	30.8
2/29/2012	25.9	15.3	62.4	34.1
3/31/2012	50.6	13.6	66.7	32.1
4/30/2012	45.8	19.3	50.6	22.9
5/31/2012	37.3	12	57.8	22.9
6/30/2012	19.6	1	34	17.5
7/31/2012	7.4	3.7	35.8	16
8/31/2012	16.5	2.4	31.8	14.1
9/30/2012	19.1	5.3	40.4	23.4
10/31/2012	17.2	4.3	44.1	24.7
11/30/2012	14.6	5.6	39.3	15.7
12/31/2012	16.1	1.1	51.6	25.8
1/31/2013	22.6	10.8	38.7	21.5
2/28/2013	26.3	8.1	44.4	13.1
3/31/2013	25.8	2.2	50.5	23.7
4/30/2013	28.4	5.7	44.3	14.8
5/31/2013	20.5	4.5	29.5	14.8
6/30/2013	21	11.3	45.2	17.7
7/31/2013	17.4	1.1	28.3	12
8/31/2013	20.5	3.6	41	19.3
9/30/2013	21.5	8.6	39.8	24.7
10/31/2013	21.7	2.4	45.8	25.3
11/30/2013	17.1	-3.9	42.1	17.1
12/31/2013	15.7	3.6	48.2	27.7
1/31/2014	36.6	13.4	45.1	23.2
2/28/2014	25	15	40	23.8
3/31/2014	21.2	2.4	43.5	25.9
4/30/2014	22.4	10.2	33.7	14.3
5/31/2014	19.8	6.6	31.9	14.3
6/30/2014	17.2	4.3	36.6	16.1
7/31/2014	25	6.8	37.5	18.2
8/31/2014	27.3	8	42	21.6
9/30/2014	23.9	17.4	43.5	32.6
10/31/2014	11.4	6.8	42	26.1
11/30/2014	10.6	0	41.5	25.5
12/31/2014	10.4	6.3	40.6	32.3
1/31/2015	12.6	12.6	33.7	15.8
2/28/2015	14.6	3.4	27	5.6
3/31/2015	12.4	8.2	32	12.4
4/30/2015	19.1	4.3	38.3	13.8
5/31/2015	9.4	1	26	7.3
6/30/2015	9.6	1	24	5.8
7/31/2015	7.4	5.3	27.7	6.4
8/31/2015	7.3	0.9	34.5	10.9
9/30/2015	4.1	-5.2	28.9	7.2
10/31/2015	0.9	-8.5	27.4	7.5
11/30/2015	4.5	-4.5	29.1	11.8
12/31/2015	4	-4	27.3	20.2
1/31/2016	16	4	31	12
2/29/2016	3	-5	14.9	4
3/31/2016	3	-5.9	19.8	7.9
4/30/2016	19.2	2.9	27.9	5.8
5/31/2016	16.7	-3.1	28.1	6.3
6/30/2016	18.4	-1	29.6	7.1
7/31/2016	18.7	1.1	26.4	7.7
8/31/2016	15.5	2.1	25.8	9.3
9/30/2016	17	1.8	41.1	20.5
10/31/2016	22.6	4.7	35.8	30.2
11/30/2016	15.5	2.7	39.1	20.9
12/31/2016	22.6	3.5	42.6	22.6
1/31/2017	36.1	17.6	50.4	27.7
2/28/2017	37.8	19.4	38.8	25.5
3/31/2017	31	8.8	41.6	19.5
4/30/2017	32.8	12.4	37.2	25.5
5/31/2017	20.9	4.5	38.1	22.4
6/30/2017	20	10.8	33.1	13.8
7/31/2017	21.3	11	30.7	15.7
8/31/2017	31	6.2	33.3	21.7
9/30/2017	35.8	13.8	42.3	18.7
10/31/2017	27.3	7	41.4	25
11/30/2017	24.6	9.2	48.5	23.8
12/31/2017	29.7	11.6	50	27.5
1/31/2018	36.2	21.7	52.9	31.2
2/28/2018	48.6	21.5	52.1	25.7
3/31/2018	50.3	22.4	55.9	28
4/30/2018	47.4	20.7	54.8	31.1
5/31/2018	54	23	54	29.5
6/30/2018	52.7	23.3	51.2	27.1
7/31/2018	42.7	22.2	48.7	28.2
8/31/2018	45.2	20	53.3	26.7
9/30/2018	46.3	16.3	56.1	30.9
10/31/2018	42	14.3	52.9	23.5
11/30/2018	44.5	13.1	59.1	31.4
12/31/2018	39.7	12.8	51.9	27.6

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/2018/11/weakening-gdp-growth-in-major-economies.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 38.0 in Dec 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 26.2 in Dec 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 38.0 in Dec 2018 indicates faster expansion than the index of current prices received or sales prices of production in Dec 2018, showing 26.2. Prices paid indicate faster expansion than prices received during most of the history of the index. The index of future prices paid increased to 60.2 in Dec 2018 from 41.9 in Dec 2012 while the index of future prices received increased from 21.7 in Dec 2012 to 45.0 in Dec 2018. Expectations are incorporating faster increases in prices of inputs or costs of production, 60.2 in Dec 2018, than of sales prices of produced goods, 45.0 in Dec 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

	Current Prices Pai	Current Prices Received	Future Prices Paid	Future Prices Received
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
Nov-18	39.3	21.9	59.5	58.6
Dec-18	38	26.2	60.2	45

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 38.0 in Dec 2018.

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 38.0 in Dec 2018 while prices received moved to 26.2. 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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

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).

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).

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).

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).

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.”

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.”

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/

The Business Outlook survey of the FRB of Philadelphia for Nov 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos1118): “The survey’s diffusion indexes for prices remained positive but lower than their readings for most of this year (see Chart 2). With respect to prices received for firms’ own manufactured goods, 24 percent of the firms reported higher prices compared with 2 percent that reported decreases. The prices received index decreased 2 points. On the cost side, 41 percent of the firms reported increases in the prices paid for inputs. The prices paid index edged up 1 point but remains 24 points lower than its peak in July.”

Chart IV-2Nov18, 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 Dec 2018 states (https://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2018/bos1218): “The survey’s diffusion indexes for prices remained positive, suggesting continued increases in firms’ input prices and the prices for their own manufactured goods. On the cost side, 42 percent of the firms reported increases in the prices paid for inputs. The prices paid index edged down 1 point and remains 25 points below its peak in July (see Chart 2). The prices received index increased 4 points to 26.2, its highest reading in four months, but 10 points below its peak in May.”

Chart IV-2Dec18, 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/

II Rules, Discretionary Authorities and Slow Productivity Growth. The Bureau of Labor Statistics (BLS) of the Department of Labor provides the quarterly report on productivity and costs. The operational definition of productivity used by the BLS is (https://www.bls.gov/news.release/pdf/prod2.pdf 1): “Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.” The BLS has revised the estimates for productivity and unit costs. Table II-1 provides the third estimate for IIIQ2018 and revision of the estimates for IIQ2018 and IQ2018 together with data for nonfarm business sector productivity and unit labor costs in seasonally adjusted annual equivalent (SAAE) rate and the percentage change from the same quarter a year earlier. Reflecting increase in output at 4.1 percent and increase at 1.8 percent in hours worked, nonfarm business sector labor productivity changed at the SAAE rate of 2.3 percent in IIIQ2018, as shown in column 2 “IIIQ2018 SAEE.” The increase of labor productivity from IIIQ2017 to IIIQ2018 was 1.3 percent, reflecting increases in output of 3.7 percent and of hours worked of 2.3 percent, as shown in column 3 “IIIQ2018 YoY.” Hours worked decreased from 2.3 percent in IQ2018 at SAAE to 2.0 percent in IIQ2018 and decreased to 1.8 percent in IIIQ2018 while output growth increased from 2.6 percent in IQ2018 at SAAE to 5.0 percent in IIQ2018, decreasing to 4.1 percent in IIQ2018. The BLS defines unit labor costs as (https://www.bls.gov/news.release/pdf/prod2.pdf 1): “BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. Increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.” Unit labor costs increased at the SAAE rate of 0.9 percent in IIIQ2018 and increased 0.9 percent in IIIQ2018 relative to IIIQ2017. Hourly compensation increased at the SAAE rate of 3.1 percent in IIIQ2018, which deflating by the estimated consumer price increase SAAE rate in IIIQ2018 results in increase of real hourly compensation at 1.1 percent. Real hourly compensation decreased 0.4 percent in IIIQ2018 relative to IIIQ2017.

Table II-1, US, Nonfarm Business Sector Productivity and Costs %

	IIIQ2018 SAAE	IIIQ2018 YOY	IIQ2018 SAAE	IIQ2018 YOY	IQ2018 SAAE	IQ2018 YOY
Productivity	2.3	1.3	3.0	1.3	0.3	1.0
Output	4.1	3.7	5.0	3.5	2.6	3.2
Hours	1.8	2.3	2.0	2.2	2.3	2.3
Hourly Comp.	3.1	2.2	0.0	2.7	3.8	3.0
Real Hourly Comp.	1.1	-0.4	-1.6	0.0	0.2	0.7
Unit Labor Costs	0.9	0.9	-2.8	1.4	3.4	2.0
Unit Nonlabor Payments	1.8	4.3	12.7	4.2	-0.3	1.7
Implicit Price Deflator	1.3	2.4	3.6	2.6	1.8	1.9

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation; YoY: Quarter on Same Quarter Year Earlier

http://www.bls.gov/lpc/

The analysis by Kydland (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2004/kydland-bio.html) and Prescott (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2004/prescott-bio.html) (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (1)

Where U_t is the rate of unemployment at current time t, Uⁿ_t is the natural rate of unemployment, π_t is the current rate of inflation and π^e is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:

W = W(π_t, U_t) (2)

The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (π_t, U_t - Uⁿ) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999). Professor John B. Taylor (2014Jul15, 2014Jun26) building on advanced research (Taylor 2007, 2008Nov, 2009, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, 2015, 2012 Oct 25; 2013Oct28, 2014 Jan01, 2014Jan3, 2014Jun26, 2014Jul15, 2015, 2016Dec7, 2016Dec20 http://www.johnbtaylor.com/) finds that a monetary policy rule would function best in promoting an environment of low inflation and strong economic growth with stability of financial markets. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). It is not uncommon for effects of regulation differing from those intended by policy. Professors Edward C. Prescott and Lee E. Ohanian (2014Feb), writing on “US productivity growth has taken a dive,” on Feb 3, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303942404579362462611843696?KEYWORDS=Prescott), argue that impressive productivity growth over the long-term constructed US prosperity and wellbeing. Prescott and Ohanian (2014Feb) measure US productivity growth at 2.5 percent per year since 1948. Average US productivity growth has been only 1.1 percent since 2011. Prescott and Ohanian (2014Feb) argue that living standards in the US increased at 28 percent in a decade but with current slow growth of productivity will only increase 12 percent by 2024. There may be collateral effects on productivity growth from policy design similar to those in Kydland and Prescott (1977). Professor Edward P. Lazear (2017Feb27), writing in the Wall Street Journal, on Feb 27, 2017 (https://www.wsj.com/articles/how-trump-can-hit-3-growthmaybe-1488239746), finds that productivity growth was 7 percent between 2009 and 2016 at annual equivalent 1 percent. Lazear measures productivity growth at 2.3 percent per year from 2001 to 2008. Herkenhoff, Ohanian and Prescott (2017) and Ohanian and Prescott (2017Dec) analyze how restriction of land use by states in the United States have been depressing economic activity. Professor Edmund S. Phelps (https://www.nobelprize.org/prizes/economic-sciences/2006/phelps/auto-biography/) argues that there is failed analysis that fiscal stimulus in the form of higher government expenditures and tax reductions caused the recovery of the economy to normal levels by 2017 (Phelps, Edmund S. 2018. The fantasy of fiscal stimulus. The Wall Street Journal Oct 29, 2018 https://www.wsj.com/articles/the-fantasy-of-fiscal-stimulus-1540852299?mod=searchresults&page=1&pos=2). The evidence analyzed by Phelps leads to the conclusion that countries with disorderly government finance grew less rapidly than those with sounder fiscal performance. Phelps concludes convincingly that “there is a strong relationship between the speed of recovery and a proxy of its dynamism—the long-term growth rate of total factor productivity from 1990 to 2007. Some countries have preexisting social institutions and cultural capital that enables them to bounce back from an economic downturn. Much credit of the U.S.’s relatively speedy recovery is owed to this country’s endemic culture of innovation and enterprise.” The Bureau of Labor Statistics important report on productivity and costs released Aug 15, 2018 (http://www.bls.gov/lpc/) and revised on Dec 6, 2018, supports the argument of decline of productivity growth in the US analyzed by Prescott and Ohanian (2014Feb), Lazear (2017Feb27) and Phelps (2018). Table II-2 provides the annual percentage changes of productivity, real hourly compensation and unit labor costs for the entire economic cycle from 2007 to 2017. The estimates incorporate the yearly revision of the US national accounts (https://www.bea.gov/scb/pdf/2017/08-August/0817-2017-annual-nipa-update.pdf) and the comprehensive revisions since 1929 (https://apps.bea.gov/national/pdf/2018-ComprehensiveUpdate-Results.pdf). The data confirm the argument of Prescott and Ohanian (2014Feb) and Lazear (2017Feb27): productivity increased cumulatively 4.8 percent from 2011 to 2017 at the average annual rate of 0.7 percent. The situation is direr by excluding growth of 1.3 percent in 2015, which leaves an average of 0.6 percent for 2011-2017. Average productivity growth for the entire economic cycle from 2007 to 2017 is only 1.3 percent. The argument by Prescott and Ohanian (2014Feb) is proper in choosing the tail of the business cycle because the increase in productivity in 2009 of 3.5 percent and 3.4 percent in 2010 consisted of reducing labor hours.

Table II-2, US, Revised Nonfarm Business Sector Productivity and Costs Annual Average, ∆% Annual Average 

	2017 ∆%
Productivity	1.1
Real Hourly Compensation	1.2
Unit Labor Costs	2.2
	2016 ∆%	2015 ∆%	2014 ∆%	2013 ∆%	2012   ∆%	2011    ∆%
Productivity	0.1	1.3	0.8	0.5	0.9	0.0
Real Hourly Compensation	-0.2	2.9	1.1	-0.2	0.5	-0.9
Unit Labor Costs	0.9	1.8	2.0	0.8	1.8	2.2

	2010 ∆%	2009 ∆%	2008 ∆%	2007∆%
Productivity	3.4	3.5	1.1	1.7
Real Hourly Compensation	0.2	1.3	-1.0	1.5
Unit Labor Costs	-1.5	-2.5	1.7	2.6

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/

Productivity jumped in the recovery after the recession from Mar IQ2001 to Nov IVQ2001 (http://www.nber.org/cycles.html) Table II-3 provides quarter on quarter and annual percentage changes in nonfarm business output per hour, or productivity, from 1999 to 2018. The annual average jumped from 2.7 percent in 2001 to 4.3 percent in 2002. Nonfarm business productivity increased at the SAAE rate of 9.1 percent in the first quarter after the recession in IQ2002. Productivity increases decline later in the expansion period. Productivity increases were mediocre during the recession from Dec IVQ2007 to Jun IIIQ2009 (http://www.nber.org/cycles.html) and increased during the first phase of expansion from IIQ2009 to IQ2010, trended lower and collapsed in 2011 and 2012 with sporadic jumps and declines. Productivity increased at 3.2 percent in IVQ2013 and contracted at 3.3 percent in IQ2014. Productivity increased at 3.2 percent in IIQ2014 and at 3.8 percent in IIIQ2014. Productivity contracted at 2.2 percent in IVQ2014 and increased at 3.1 percent in IQ2015. Productivity grew at 2.1 percent in IIQ2015 and increased at 0.5 percent in IIIQ2015. Productivity contracted at 2.9 percent in IVQ2015 and increased at 0.3 percent in IQ2016. Productivity increased at 0.9 percent in IIQ2016 and expanded at 1.3 percent in IIIQ2016. Productivity grew at 1.3 percent in IVQ2016 and increased at 0.4 percent in IQ2017. Productivity increased at 1.6 percent in IIQ2017 and increased at 2.3 percent in IIIQ2017. Productivity decreased at 0.3 percent in IVQ2017 and increased at 0.3 percent in IQ2018. Productivity increased at 3.0 percent in IIQ2018 and increased at 2.3 percent in IIIQ2018.

Table II-3, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2018

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	5.3	1.0	3.8	6.4	3.8
2000	-0.5	8.2	-0.3	4.4	3.3
2001	-1.7	7.4	1.6	5.3	2.7
2002	9.1	0.5	3.0	-0.2	4.3
2003	4.3	5.1	9.4	3.9	3.8
2004	-1.4	3.8	1.8	1.9	2.9
2005	4.7	-1.1	3.2	0.3	2.2
2006	3.1	-0.5	-1.3	3.4	1.1
2007	1.1	1.7	4.1	3.1	1.7
2008	-3.1	3.9	1.0	-2.5	1.1
2009	4.0	8.4	6.4	5.6	3.5
2010	1.8	1.3	2.3	1.1	3.4
2011	-2.9	1.1	-1.8	2.7	0.0
2012	1.4	2.0	-0.9	-1.3	0.9
2013	2.2	-1.2	1.9	3.2	0.5
2014	-3.3	3.2	3.8	-2.2	0.8
2015	3.1	2.1	0.5	-2.9	1.3
2016	0.3	0.9	1.3	1.3	0.1
2017	0.4	1.6	2.3	-0.3	1.1
2018	0.3	3.0	2.3

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

Chart II-1 of the Bureau of Labor Statistics (BLS) provides SAAE rates of nonfarm business productivity from 1999 to 2018. There is a clear pattern in both episodes of economic cycles in 2001 and 2007 of rapid expansion of productivity in the transition from contraction to expansion followed by more subdued productivity expansion. Part of the explanation is the reduction in labor utilization resulting from adjustment of business to the sudden shock of collapse of revenue. Productivity rose briefly in the expansion after 2009 but then collapsed and moved to negative change with some positive changes recently at lower rates. Contractions in the cycle from 2007 to 2018 have been more frequent and sharper.

Chart II-1, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2018

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Percentage changes from prior quarter at SAAE rates and annual average percentage changes of nonfarm business unit labor costs are provided in Table II-4. Unit labor costs fell during the contractions with continuing negative percentage changes in the early phases of the recovery. Weak labor markets partly explain the decline in unit labor costs. As the economy moves toward full employment, labor markets tighten with increase in unit labor costs. The expansion beginning in IIIQ2009 has been characterized by high unemployment and underemployment. Table II-4 shows continuing subdued increases in unit labor costs in 2011 but with increase at 8.1 percent in IQ2012 followed by increase at 0.3 percent in IIQ2012, increase at 1.2 percent in IIIQ2012 and increase at 12.6 percent in IVQ2012. Unit labor costs decreased at 7.8 percent in IQ2013 and increased at 4.4 percent in IIQ2013. Unit labor costs decreased at 2.9 percent in IIIQ2013 and decreased at 0.1 percent in IVQ2013. Unit labor costs increased at 13.1 percent in IQ2014 and at minus 6.2 percent in IIQ2014. Unit labor costs decreased at 1.5 percent in IIIQ2014 and increased at 6.5 percent in IVQ2014. Unit labor costs increased at 2.3 percent in IQ2015 and increased at 1.4 percent in IIQ2015. Unit labor costs increased at 1.4 percent in IIIQ2015 and increased at 2.3 percent in IVQ2015. Unit labor costs decreased at 0.2 percent in IQ2016 and decreased at 0.2 percent in IIQ2016. Unit labor costs increased at 0.9 percent in IIIQ2016 and increased at 3.4 percent in IVQ2016. Unit labor costs increased at 4.2 percent in IQ2017 and decreased at 0.3 percent in IIQ2017. United labor costs increased at 2.8 percent in IIIQ2017 and increased at 2.3 percent in IVQ2017. Unit labor costs increased at 3.4 percent in IQ2018 and decreased at 2.8 percent in IIQ2018. Unit labor costs increased at 0.9 percent in IIIQ2018.

Table II-4, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2018

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	1.8	0.6	-0.2	1.9	0.8
2000	15.6	-6.8	8.3	-2.1	3.6
2001	11.4	-5.5	-1.1	-1.4	1.6
2002	-6.5	3.0	-1.0	1.3	-1.9
2003	-1.7	1.9	-3.0	1.7	-0.1
2004	0.7	4.0	5.4	-0.2	1.6
2005	-1.6	3.3	1.8	2.2	1.4
2006	5.2	0.6	1.9	3.7	2.7
2007	8.9	-1.9	-2.3	1.3	2.6
2008	7.4	-3.4	2.6	7.0	1.7
2009	-13.4	1.7	-3.6	-3.1	-2.5
2010	-4.5	3.3	-0.5	0.8	-1.5
2011	10.5	-3.3	4.5	-7.6	2.2
2012	8.1	0.3	1.2	12.6	1.8
2013	-7.8	4.4	-2.9	-0.1	0.8
2014	13.1	-6.2	-1.5	6.5	2.0
2015	2.3	1.4	1.4	2.3	1.8
2016	-0.2	-0.2	0.9	3.4	0.9
2017	4.2	-0.3	2.8	2.3	2.2
2018	3.4	-2.8	0.9

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

Chart II-2 provides change of unit labor costs at SAAE from 1999 to 2018. There are multiple oscillations recently with negative changes alternating with positive changes.

Chart II-2, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2018

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

Table II-5 provides percentage change from prior quarter at annual rates for nonfarm business real hourly worker compensation. The expansion after the contraction of 2001 was followed by strong recovery of real hourly compensation. Real hourly compensation increased at the rate of 2.8 percent in IQ2011 but fell at annual rates of 6.6 percent in IIQ2011 and 6.8 percent in IVQ2011. Real hourly compensation increased at 7.1 percent in IQ2012, increasing at 1.4 percent in IIQ2012, declining at 1.6 percent in IIIQ2012 and increasing at 8.3 percent in IVQ2012. Real hourly compensation fell at 0.9 percent in 2011 and increased at 0.5 percent in 2012. Real hourly compensation fell at 7.4 percent in IQ2013 and increased at 3.6 percent in IIQ2013, falling at 3.2 percent in IIIQ2013. Real hourly compensation increased at 1.5 percent in IVQ2013 and at 6.6 percent in IQ2014. Real hourly compensation decreased at 5.2 percent in IIQ2014. Real hourly compensation increased at 1.1 percent in IIIQ2014. The annual rate of increase of real hourly compensation for 2013 is minus 0.2 percent. Real hourly compensation increased at 5.1 percent in IVQ2014. The annual rate of increase of real hourly compensation in 2014 is 1.1 percent. Real hourly compensation increased at 8.2 percent in IQ2015 and increased at 0.8 percent in IIQ2015. Real hourly compensation increased at 0.3 percent in IIIQ2015 and decreased at 0.8 percent in IVQ2015. Real hourly compensation increased at 2.9 percent in 2015. Real hourly compensation increased at 0.1 percent in IQ2016 and decreased at 2.0 percent in IIQ2016. Real hourly compensation increased at 0.3 percent in IIIQ2016 and increased at 1.9 percent in IVQ2016. Real hourly compensation decreased 0.2 percent in 2016. Real hourly compensation increased at 1.6 percent in IQ2017 and increased at 1.2 percent in IIQ2017. Real hourly compensation increased at 2.9 percent in IIIQ2017. Real hourly compensation decreased at 1.3 percent in IVQ2017. Real hourly compensation increased 1.2 percent in 2017. Real hourly compensation increased at 0.2 percent in IQ2018 and decreased at 1.6 percent in IIQ2018. Real hourly compensation increased at 1.1 percent in IIIQ2018.

Table II-5, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate, 1999, 2018

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	5.8	-1.4	0.5	5.1	2.5
2000	10.5	-2.2	4.1	-0.5	3.5
2001	5.4	-1.5	-0.6	4.2	1.5
2002	0.6	0.3	-0.2	-1.2	0.7
2003	-1.6	7.7	3.0	4.0	1.4
2004	-4.0	4.7	4.6	-2.6	1.8
2005	1.0	-0.6	-1.0	-1.2	0.3
2006	6.2	-3.5	-3.0	9.0	0.6
2007	5.9	-4.5	-0.9	-0.5	1.5
2008	-0.4	-4.7	-2.5	14.4	-1.0
2009	-7.4	7.9	-0.8	-0.8	1.3
2010	-3.4	4.8	0.6	-1.4	0.2
2011	2.8	-6.6	-0.1	-6.8	-0.9
2012	7.1	1.4	-1.6	8.3	0.5
2013	-7.4	3.6	-3.2	1.5	-0.2
2014	6.6	-5.2	1.1	5.1	1.1
2015	8.2	0.8	0.3	-0.8	2.9
2016	0.1	-2.0	0.3	1.9	-0.2
2017	1.6	1.2	2.9	-1.3	1.2
2018	0.2	-1.6	1.1

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

Chart II-3 provides percentage change from prior quarter at annual rate of nonfarm business real hourly compensation. There have been multiple negative percentage quarterly changes in the current cycle since IVQ2007. There is meager growth recently.

Chart II-3, US, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1999-2018

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Chart II-4 provides percentage change of nonfarm business output per hour in a quarter relative to the same quarter a year earlier. As in most series of real output, productivity increased sharply in 2010 but the momentum was lost after 2011 as with the rest of the real economy. There are more negative yearly changes during the current cycle than in cycle after 1999.

Chart II-4, US, Nonfarm Business Output per Hour, Percent Change from Same Quarter a Year Earlier 1999-2018

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

Chart II-5 provides percentage changes of nonfarm business unit labor costs relative to the same quarter a year earlier. Softening of labor markets caused relatively high yearly percentage changes in the recession of 2001 repeated in the recession in 2009. Recovery was strong in 2010 but then weakened.

Chart II-5, US, Nonfarm Business Unit Labor Costs, Percent Change from Same Quarter a Year Earlier 1999-2018

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

Chart II-6 provides percentage changes in a quarter relative to the same quarter a year earlier for nonfarm business real hourly compensation. Labor compensation eroded sharply during the recession with brief recovery in 2010 and another fall until recently with restrained improvement.

Chart II-6, US, Nonfarm Business Real Hourly Compensation, Percent Change from Same Quarter a Year Earlier 1999-2018

2005=100

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

In the analysis of Hansen (1939, 3) of secular stagnation, economic progress consists of growth of real income per person driven by growth of productivity. The “constituent elements” of economic progress are “(a) inventions, (b) the discovery and development of new territory and new resources, and (c) the growth of population” (Hansen 1939, 3). Secular stagnation originates in decline of population growth and discouragement of inventions. According to Hansen (1939, 2), US population grew by 16 million in the 1920s but grew by one half or about 8 million in the 1930s with forecasts at the time of Hansen’s writing in 1938 of growth of around 5.3 million in the 1940s. Hansen (1939, 2) characterized demography in the US as “a drastic decline in the rate of population growth.” Hansen’s plea was to adapt economic policy to stagnation of population in ensuring full employment. In the analysis of Hansen (1939, 8), population caused half of the growth of US GDP per year. Growth of output per person in the US and Europe was caused by “changes in techniques and to the exploitation of new natural resources.” In this analysis, population caused 60 percent of the growth of capital formation in the US. Declining population growth would reduce growth of capital formation. Residential construction provided an important share of growth of capital formation. Hansen (1939, 12) argues that market power of imperfect competition discourages innovation with prolonged use of obsolete capital equipment. Trade unions would oppose labor-savings innovations. The combination of stagnating and aging population with reduced innovation caused secular stagnation. Hansen (1939, 12) concludes that there is role for public investments to compensate for lack of dynamism of private investment but with tough tax/debt issues.

The current application of Hansen’s (1938, 1939, 1941) proposition argues that secular stagnation occurs because full employment equilibrium can be attained only with negative real interest rates between minus 2 and minus 3 percent. Professor Lawrence H. Summers (2013Nov8) finds that “a set of older ideas that went under the phrase secular stagnation are not profoundly important in understanding Japan’s experience in the 1990s and may not be without relevance to America’s experience today” (emphasis added). Summers (2013Nov8) argues there could be an explanation in “that the short-term real interest rate that was consistent with full employment had fallen to -2% or -3% sometime in the middle of the last decade. Then, even with artificial stimulus to demand coming from all this financial imprudence, you wouldn’t see any excess demand. And even with a relative resumption of normal credit conditions, you’d have a lot of difficulty getting back to full employment.” The US economy could be in a situation where negative real rates of interest with fed funds rates close to zero as determined by the Federal Open Market Committee (FOMC) do not move the economy to full employment or full utilization of productive resources. Summers (2013Oct8) finds need of new thinking on “how we manage an economy in which the zero nominal interest rates is a chronic and systemic inhibitor of economy activity holding our economies back to their potential.”

Former US Treasury Secretary Robert Rubin (2014Jan8) finds three major risks in prolonged unconventional monetary policy of zero interest rates and quantitative easing: (1) incentive of delaying action by political leaders; (2) “financial moral hazard” in inducing excessive exposures pursuing higher yields of risker credit classes; and (3) major risks in exiting unconventional policy. Rubin (2014Jan8) proposes reduction of deficits by structural reforms that could promote recovery by improving confidence of business attained with sound fiscal discipline.

Professor John B. Taylor (2014Jan01, 2014Jan3) provides clear thought on the lack of relevance of Hansen’s contention of secular stagnation to current economic conditions. The application of secular stagnation argues that the economy of the US has attained full-employment equilibrium since around 2000 only with negative real rates of interest of minus 2 to minus 3 percent. At low levels of inflation, the so-called full-employment equilibrium of negative interest rates of minus 2 to minus 3 percent cannot be attained and the economy stagnates. Taylor (2014Jan01) analyzes multiple contradictions with current reality in this application of the theory of secular stagnation:

• Secular stagnation would predict idle capacity, in particular in residential investment when fed fund rates were fixed at 1 percent from Jun 2003 to Jun 2004. Taylor (2014Jan01) finds unemployment at 4.4 percent with house prices jumping 7 percent from 2002 to 2003 and 14 percent from 2004 to 2005 before dropping from 2006 to 2007. GDP prices doubled from 1.7 percent to 3.4 percent when interest rates were low from 2003 to 2005.
• Taylor (2014Jan01, 2014Jan3) finds another contradiction in the application of secular stagnation based on low interest rates because of savings glut and lack of investment opportunities. Taylor (2009) shows that there was no savings glut. The savings rate of the US in the past decade is significantly lower than in the 1980s.
• Taylor (2014Jan01, 2014Jan3) finds another contradiction in the low ratio of investment to GDP currently and reduced investment and hiring by US business firms.
• Taylor (2014Jan01, 2014Jan3) argues that the financial crisis and global recession were caused by weak implementation of existing regulation and departure from rules-based policies.
• Taylor (2014Jan01, 2014Jan3) argues that the recovery from the global recession was constrained by a change in the regime of regulation and fiscal/monetary policies.

The analysis by Kydland (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2004/kydland-bio.html) and Prescott (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2004/prescott-bio.html) (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (1)

Where U_t is the rate of unemployment at current time t, Uⁿ_t is the natural rate of unemployment, π_t is the current rate of inflation and π^e is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:

W = W(π_t, U_t) (2)

The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (π_t, U_t - Uⁿ) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999). Professor John B. Taylor (2014Jul15, 2014Jun26) building on advanced research (Taylor 2007, 2008Nov, 2009, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, 2015, 2012 Oct 25; 2013Oct28, 2014 Jan01, 2014Jan3, 2014Jun26, 2014Jul15, 2015, 2016Dec7, 2016Dec20 http://www.johnbtaylor.com/) finds that a monetary policy rule would function best in promoting an environment of low inflation and strong economic growth with stability of financial markets. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). It is not uncommon for effects of regulation differing from those intended by policy. Professors Edward C. Prescott and Lee E. Ohanian (2014Feb), writing on “US productivity growth has taken a dive,” on Feb 3, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303942404579362462611843696?KEYWORDS=Prescott), argue that impressive productivity growth over the long-term constructed US prosperity and wellbeing. Prescott and Ohanian (2014Feb) measure US productivity growth at 2.5 percent per year since 1948. Average US productivity growth has been only 1.1 percent since 2011. Prescott and Ohanian (2014Feb) argue that living standards in the US increased at 28 percent in a decade but with current slow growth of productivity will only increase 12 percent by 2024. There may be collateral effects on productivity growth from policy design similar to those in Kydland and Prescott (1977). Professor Edward P. Lazear (2017Feb27), writing in the Wall Street Journal, on Feb 27, 2017 (https://www.wsj.com/articles/how-trump-can-hit-3-growthmaybe-1488239746), finds that productivity growth was 7 percent between 2009 and 2016 at annual equivalent 1 percent. Lazear measures productivity growth at 2.3 percent per year from 2001 to 2008. Herkenhoff, Ohanian and Prescott (2017) and Ohanian and Prescott (2017Dec) analyze how restriction of land use by states in the United States have been depressing economic activity. Professor Edmund S. Phelps (https://www.nobelprize.org/prizes/economic-sciences/2006/phelps/auto-biography/) argues that there is failed analysis that fiscal stimulus in the form of higher government expenditures and tax reductions caused the recovery of the economy to normal levels by 2017 (Phelps, Edmund S. 2018. The fantasy of fiscal stimulus. The Wall Street Journal Oct 29, 2018 https://www.wsj.com/articles/the-fantasy-of-fiscal-stimulus-1540852299?mod=searchresults&page=1&pos=2). The evidence analyzed by Phelps leads to the conclusion that countries with disorderly government finance grew less rapidly than those with sounder fiscal performance. Phelps concludes convincingly that “there is a strong relationship between the speed of recovery and a proxy of its dynamism—the long-term growth rate of total factor productivity from 1990 to 2007. Some countries have preexisting social institutions and cultural capital that enables them to bounce back from an economic downturn. Much credit of the U.S.’s relatively speedy recovery is owed to this country’s endemic culture of innovation and enterprise.” The Bureau of Labor Statistics important report on productivity and costs released Dec 6, 2018 (http://www.bls.gov/lpc/) supports the argument of decline of productivity growth in the US analyzed by Prescott and Ohanian (2014Feb), Lazear (2017Feb27) and Phelps (2018). Table II-2 provides the annual percentage changes of productivity, real hourly compensation and unit labor costs for the entire economic cycle from 2007 to 2017. The estimates incorporate the yearly revision of the US national accounts (https://www.bea.gov/scb/pdf/2017/08-August/0817-2017-annual-nipa-update.pdf) and the comprehensive revisions since 1929 (https://apps.bea.gov/national/pdf/2018-ComprehensiveUpdate-Results.pdf). The data confirm the argument of Prescott and Ohanian (2014Feb) and Lazear (2017Feb27): productivity increased cumulatively 4.8 percent from 2011 to 2017 at the average annual rate of 0.7 percent. The situation is direr by excluding growth of 1.3 percent in 2015, which leaves an average of 0.6 percent for 2011-2017. Average productivity growth for the entire economic cycle from 2007 to 2017 is only 1.3 percent. The argument by Prescott and Ohanian (2014Feb) is proper in choosing the tail of the business cycle because the increase in productivity in 2009 of 3.5 percent and 3.4 percent in 2010 consisted of reducing labor hours.

In revealing research, Edward P. Lazear and James R. Spletzer (2012JHJul22) use the wealth of data in the valuable database and resources of the Bureau of Labor Statistics (http://www.bls.gov/data/) in providing clear thought on the nature of the current labor market of the United States. The critical issue of analysis and policy currently is whether unemployment is structural or cyclical. Structural unemployment could occur because of (1) industrial and demographic shifts and (2) mismatches of skills and job vacancies in industries and locations. Consider the aggregate unemployment rate, Y, expressed in terms of share s_i of a demographic group in an industry i and unemployment rate y_i of that demographic group (Lazear and Spletzer 2012JHJul22, 5-6):

Y = ∑_is_iy_i (1)

This equation can be decomposed for analysis as (Lazear and Spletzer 2012JHJul22, 6):

∆Y = ∑_i∆s_iy*_i + ∑_i∆y_is*_i (2)

The first term in (2) captures changes in the demographic and industrial composition of the economy ∆s_i multiplied by the average rate of unemployment y*_i , or structural factors. The second term in (2) captures changes in the unemployment rate specific to a group, or ∆y_i, multiplied by the average share of the group s*_i, or cyclical factors. There are also mismatches in skills and locations relative to available job vacancies. A simple observation by Lazear and Spletzer (2012JHJul22) casts intuitive doubt on structural factors: the rate of unemployment jumped from 4.4 percent in the spring of 2007 to 10 percent in October 2009. By nature, structural factors should be permanent or occur over relative long periods. The revealing result of the exhaustive research of Lazear and Spletzer (2012JHJul22) is:

“The analysis in this paper and in others that we review do not provide any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates. The evidence points to primarily cyclic factors.”

The theory of secular stagnation cannot explain sudden collapse of the US economy and labor markets. The theory of secular stagnation departs from an aggregate production function in which output grows with the use of labor, capital and technology (see Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 11-6). Simon Kuznets (1971) analyzes modern economic growth in his Lecture in Memory of Alfred Nobel:

“The major breakthroughs in the advance of human knowledge, those that constituted dominant sources of sustained growth over long periods and spread to a substantial part of the world, may be termed epochal innovations. And the changing course of economic history can perhaps be subdivided into economic epochs, each identified by the epochal innovation with the distinctive characteristics of growth that it generated. Without considering the feasibility of identifying and dating such economic epochs, we may proceed on the working assumption that modern economic growth represents such a distinct epoch - growth dating back to the late eighteenth century and limited (except in significant partial effects) to economically developed countries. These countries, so classified because they have managed to take adequate advantage of the potential of modern technology, include most of Europe, the overseas offshoots of Western Europe, and Japan—barely one quarter of world population.”

Chart II-7 provides nonfarm-business labor productivity, measured by output per hour, from 1947 to 2018. The rate of productivity increase continued in the early part of the 2000s but then softened and fell during the global recession. The interruption of productivity increases occurred exclusively in the current business cycle. Lazear and Spletzer (2012JHJul22) find “primarily cyclic” factors in explaining the frustration of currently depressed labor markets in the United States. Stagnation of productivity is another cyclic event and not secular trend. The theory and application of secular stagnation to current US economic conditions is void of reality.

Table II-6 expands Table II-2 providing more complete measurements of the Productivity and Cost research of the Bureau of Labor Statistics. The proper emphasis of Prescott and Ohanian (2014Feb) is on the low productivity increases from 2011 to 2017. Labor productivity increased 3.4 percent in 2010 and 3.5 percent in 2009. There is much stronger yet not sustained performance in 2010 with productivity growing 3.4 percent because of growth of output of 3.3 percent with decline of hours worked of 0.1 percent. Productivity growth of 3.5 percent in 2009 consists of decline of output by 3.9 percent while hours worked collapsed 7.2 percent, which is not a desirable route to progress. The expansion phase of the economic cycle concentrated in one year, 2010, with underperformance in the remainder of the expansion from 2011 to 2017 of productivity growth at average 0.7 percent per year.

Table II-6, US, Productivity and Costs, Annual Percentage Changes 2007-2017

	2017
Productivity	1.1
Output	2.7
Hours Worked	1.6
Employment	1.6
Average Weekly Hours Worked	0.0
Unit Labor Costs	2.2
Hourly Compensation	3.4
Consumer Price Inflation	2.1
Real Hourly Compensation	1.2
Non-labor Payments	3.6
Output per Job	1.1
	2016	2015	2014	2013	2012
Productivity	0.1	1.3	0.8	0.5	0.9
Output	1.6	3.5	3.1	2.2	3.1
Hours Worked	1.5	2.1	2.3	1.7	2.3
Employment	1.8	2.2	2.0	1.8	2.0
Average Weekly Hours Worked	-0.3	-0.1	0.2	-0.1	0.2
Unit Labor Costs	0.9	1.8	2.0	0.8	1.8
Hourly Compensation	1.1	3.1	2.8	1.3	2.7
Consumer Price Inflation	1.3	0.1	1.6	1.5	2.1
Real Hourly Compensation	-0.2	2.9	1.1	-0.2	0.5
Non-labor Payments	2.9	3.1	4.8	4.6	5.1
Output per Job	-0.2	1.2	1.0	0.4	1.1

	2011	2010	2009	2008	2007
Productivity	0.0	3.4	3.5	1.1	1.7
Output	2.0	3.3	-3.9	-1.0	2.4
Hours Worked	2.0	-0.1	-7.2	-2.1	0.7
Employment	1.6	-1.2	-5.7	-1.4	0.9
Average Weekly Hours Worked	0.5	1.1	-1.6	-0.6	-0.2
Unit Labor Costs	2.2	-1.5	-2.5	1.7	2.6
Hourly Compensation	2.2	1.9	0.9	2.8	4.3
Consumer Price Inflation	3.2	1.6	-0.4	3.8	2.8
Real Hourly Compensation	-0.9	0.2	1.3	-1.0	1.5
Non-labor Payments	3.6	7.8	1.0	0.3	3.6
Output per Job	0.4	4.5	1.9	0.4	1.5

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Productivity growth can bring about prosperity while productivity regression can jeopardize progress. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in USD fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Table II-7 provides average growth rates of indicators in the research of productivity and growth of the US Bureau of Labor Statistics. There is dramatic decline of productivity growth from 2.1 percent per year on average from 1947 to 2017 to 1.3 percent per year on average in the whole cycle from 2007 to 2017. Productivity increased at the average rate of 2.3 percent from 1947 to 2007. There is profound drop in the average rate of output growth from 3.4 percent on average from 1947 to 2017 to 1.6 percent from 2007 to 2017. Output grew at 3.7 percent per year on average from 1947 to 2007. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.3 percent on average in the cyclical expansion in the 37 quarters from IIIQ2009 to IIIQ2018. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the second estimate of GDP for IIIQ2018 (https://www.bea.gov/system/files/2018-11/gdp3q18_2nd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.8 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/2018/12/monetary-policy-rates-near-normal.html and earlier https://cmpassocregulationblog.blogspot.com/2018/10/contraction-of-valuations-of-risk.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, 3.7 percent from IQ1983 to IQ1992 and at 7.9 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2018/12/monetary-policy-rates-near-normal.html and earlier https://cmpassocregulationblog.blogspot.com/2018/10/contraction-of-valuations-of-risk.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 IIIQ2018 would have accumulated to 37.4 percent. GDP in IIIQ2018 would be $21,657.0 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $2985.3 billion than actual $18,671.7 billion. There are about two trillion dollars of GDP less than at trend, explaining the 20.5 million unemployed or underemployed equivalent to actual unemployment/underemployment of 12.0 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2018/12/fluctuation-of-valuations-of-risk.html and earlier https://cmpassocregulationblog.blogspot.com/2018/11/fluctuations-of-valuations-of-risk.html). US GDP in IIIQ2018 is 13.8 percent lower than at trend. US GDP grew from $15,762.0 billion in IVQ2007 in constant dollars to $18,671.7 billion in IIIQ2018 or 18.5 percent at the average annual equivalent rate of 1.6 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 3.0 percent per year from Nov 1919 to Nov 2018. Growth at 3.0 percent per year would raise the NSA index of manufacturing output from 108.3221 in Dec 2007 to 149.5742 in Nov 2018. The actual index NSA in Nov 2018 is 104.7616, which is 30.0 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Nov 2018. Using trend growth of 2.0 percent per year, the index would increase to 134.4628 in Nov 2018. The output of manufacturing at 104.7616 in Nov 2018 is 22.1 percent below trend under this alternative calculation.

Table II-7, US, Productivity and Costs, Average Annual Percentage Changes 2007-2017, 1947-2007 and 1947-2017

	Average Annual Percentage Rate 2007-2017	Average Annual Percentage Rate 1947-2007	Average Annual Percentage Rate 1947-2017
Productivity	1.3	2.3	2.1
Output	1.6	3.7	3.4
Hours	0.4	1.4	1.2
Employment	0.4	1.6	1.5
Average Weekly Hours	-0.8*	-14.4*	-15.1*
Hourly Compensation	2.2	5.4	4.9
Consumer Price Inflation	1.7	3.8	3.5
Real Hourly Compensation	0.5	1.7	1.5
Unit Labor Costs	0.9	3.0	2.7
Unit Non-Labor Payments	2.0	3.5	3.3
Output per Job	1.2	2.0	1.9

* Percentage Change

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Unit labor costs increased sharply during the Great Inflation from the late 1960s to 1981 as shown by sharper slope in Chart II-8. Unit labor costs continued to increase but at a lower rate because of cyclic factors and not because of imaginary secular stagnation.

Chart II-8, US, Nonfarm Business, Unit Labor Costs, 1947-2018, Index 2009=100

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

Real hourly compensation increased at relatively high rates after 1947 to the early 1970s but reached a plateau that lasted until the early 1990s, as shown in Chart II-9. There were rapid increases until the global recession. Cyclic factors and not alleged secular stagnation explain the interruption of increases in real hourly compensation.

Chart II-9, US, Nonfarm Business, Real Hourly Compensation, 1947-2018, Index 2009=100

Source: US Bureau of Labor Statistics: http://www.bls.gov/lpc/

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