Federal Open Market Committee (FOMC) of the Federal Reserve System Increases the Fed Funds Rate Target Range to 3 to 3 ¼ Percent or Increase of 0.75 Percentage Points at the Highest Pace Since 1994 with Probable Additional Increases, Real Disposable Income or Personal Income After Tax and Inflation Increasing 0.3 Percent in Jul 2022 and Decreasing 3.7 Percent in 12 Months, Prices of Personal Consumption Expenditures Increasing 6.3 Percent in 12 Months Ending in Jul 2022, Prices of Personal Consumption Expenditures Excluding Food and Energy Increasing 4.6 Percent in 12 Months Ending in Jul 2022, Cyclically Stagnating Real Disposable Income and Consumption Expenditures, Financial Repression, Stagflation, Worldwide Fiscal, Monetary and External Imbalances, World Cyclical Slow Growth, and Government Intervention in Globalization

 

Federal Open Market Committee (FOMC) of the Federal Reserve System Increases the Fed Funds Rate Target Range to 3 to 3 ¼ Percent or Increase of 0.75 Percentage Points at the Highest Pace Since 1994 with Probable Additional Increases, Real Disposable Income or Personal Income After Tax and Inflation Increasing 0.3 Percent in Jul 2022 and Decreasing 3.7 Percent in 12 Months, Prices of Personal Consumption Expenditures Increasing 6.3 Percent in 12 Months Ending in Jul 2022, Prices of Personal Consumption Expenditures Excluding Food and Energy Increasing 4.6 Percent in 12 Months Ending in Jul 2022, Cyclically Stagnating Real Disposable Income and Consumption Expenditures, Financial Repression, Stagflation, Worldwide Fiscal, Monetary and External Imbalances, World Cyclical Slow Growth, and Government Intervention in Globalization

Note: This Blog will post only one indicator of the US economy while we concentrate efforts in completing a book-length manuscript in the critically important subject of INFLATION.

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022.

I Stagnating Real Disposable Income and Consumption Expenditures

II Prices of Personal Consumption Expenditures

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

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

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

Preamble. United States total public debt outstanding is $30.9 trillion and debt held by the public $24.3 trillion (https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny). The Net International Investment Position of the United States, or foreign debt, is $17.8 trillion at the end of IQ2022 (https://www.bea.gov/sites/default/files/2022-06/intinv122.pdf). The United States current account deficit is 4.0 percent of GDP in IIQ2022, decreasing from 4.6 percent in IQ2022 (https://www.bea.gov/sites/default/files/2022-09/trans222_0.pdf). The Treasury deficit of the United States reached $2.8 trillion in fiscal year 2021 (https://fiscal.treasury.gov/reports-statements/mts/). Total assets of Federal Reserve Banks reached $8.8 trillion on Sep 21, 2022 and securities held outright reached $8.4 trillion (https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). US GDP nominal NSA reached $24.9 trillion in IIQ2022 (https://apps.bea.gov/iTable/index_nipa.cfm). US GDP contracted at the real seasonally adjusted annual rate (SAAR) of 1.6 percent in IQ2022 and contract at the SAAR of 0.9 percent in IIQ2022 (https://apps.bea.gov/iTable/index_nipa.cfm). Total Treasury interest-bearing, marketable debt held by private investors increased from $3635 billion in 2007 to $16,439 billion in Sep 2021 (Fiscal Year 2021) or increase by 352.2 percent (https://fiscal.treasury.gov/reports-statements/treasury-bulletin/). John Hilsenrath, writing on “Economists Seek Recession Cues in the Yield Curve,” published in the Wall Street Journal on Apr 2, 2022, analyzes the inversion of the Treasury yield curve with the two-year yield at 2.430 on Apr 1, 2022, above the ten-year yield at 2.374. Hilsenrath argues that inversion appears to signal recession in market analysis but not in alternative Fed approach.

The Consumer Price index of the United States Increased 8.3 percent in Aug 2022 Relative to a Year Earlier, which is the Fourth Highest Since 8.9 percent in Dec 1981, Followed by the Highest of 9.1 percent in Jun 2022, the Second Highest of 8.6 percent in May 2022, 8.5 percent in both Jul 2022 and Mar 2022 and equal to 8.3 percent in Apr 2022.

Chart CPI-H, US, Consumer Price Index, 12-Month Percentage Change, NSA, 1981-2022

Source: US Bureau of Labor Statistics https://www.bls.gov/cpi/data.htm

Chart VII-3 of the Energy Information Administration provides the US retail price of regular gasoline. The price increased to $3.654 per gallon on Sep 19, 2022 from $3.184 a year earlier or 14.8 percent.

Chart VII-3, US Retail Price of Regular Gasoline, Dollars Per Gallon

Source: US Energy Information Administration

https://www.eia.gov/petroleum/weekly/

Chart VII-3A provides the US retail price of regular gasoline, dollars per gallon, from $1.191 on Aug 20,1990 to Sep 19, 2022 to $3.654 on Sep 12,2022 or 206.8 percent. The price of retail regular gasoline increased from $2.249/gallon on Jan 4,2021 to $3.654/gallon on Sep 19, 2022, or 62.5 percent. The price of retail regular gasoline increased from $3.530/gallon on Feb 21, 2022, two days before the invasion of Ukraine, to $3.654/gallon on Sep 19,2022 or 3.5 percent and had increased 57.0 percent from $2.249/gallon on Jan 4,2021 to $3.530/gallon on Feb 21, 2022.

Chart VII-3A, US Retail Price of Regular Gasoline, Dollars Per Gallon

Source: US Energy Information Administration

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EMM_EPMR_PTE_NUS_DPG&f=W

Chart VII-4 of the Energy Information Administration provides the price of the Natural Gas Futures Contract increasing from $2.581 per million Btu on Jan 4, 2021 to $7.717 per million Btu on Sep 20, 2022 or 199.0 percent.

Chart VII-4, US, Natural Gas Futures Contract 1

Source: US Energy Information Administration

https://www.eia.gov/dnav/ng/hist/rngc1d.htm

Chart VII-5 of the US Energy Administration provides US field production of oil decreasing from a peak of 12,966 thousand barrels per day in Nov 2019 to the final point of 11.816 thousand barrels per day in Jun 2022.

Chart VII-5, US, US, Field Production of Crude Oil, Thousand Barrels Per Day

Source: US Energy Information Administration

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=M

Chart VII-6 of the US Energy Information Administration provides imports of crude oil. Imports increased from 245,369 thousand barrels per day in Jan 2021 to 252,916 thousand barrels in Jan 2022, moving to 258,396 thousand barrels in Jun 2022.

Chart VII-6, US, US, Imports of Crude Oil and Petroleum Products, Thousand Barrels

Source: US Energy Information Administration

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTTIMUS1&f=M

Chart VI-7 of the EIA provides US Petroleum Consumption, Production, Imports, Exports and Net Imports 1950-2020. There was sharp increase in production in the final segment that reached consumption in 2020.

Chart VI-7, US Petroleum Consumption, Production, Imports, Exports and Net Imports 1950-2020, Million Barrels Per Day

https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php

Chart VI-8 provides the US average retail price of electricity at 12.78 cents per kilowatthour in Dec 2020 increasing to 15.42 cents per kilowatthour in Jun 2022 or 20.7 per cent.

Chart VI-8, US Average Retail Price of Electricity, Monthly, Cents per Kilowatthour,

https://www.eia.gov/electricity/data/browser/#/topic/7?agg=0,1&geo=g&endsec=vg&linechart=ELEC.PRICE.US-RES.M~~~&columnchart=ELEC.PRICE.US-ALL.M~ELEC.PRICE.US-RES.M~ELEC.PRICE.US-COM.M~ELEC.PRICE.US-IND.M&map=ELEC.PRICE.US-ALL.M&freq=M&start=200101&end=202205&ctype=linechart&ltype=pin&rtype=s&pin=&rse=0&maptype=0

Chart VII-9 provides the fed funds rate and Three Months, Two-Year and Ten-Year Treasury Constant Maturity Yields. Unconventional monetary policy of near zero interest rates is typically followed by financial and economic stress with sharp increases in interest rates.

Chart VII-9, US Fed Funds Rate and Three-Month, Two-Year and Ten-Year Treasury Constant Maturity Yields, Jan 2, 1994 to Jan 2, 2014

Source: Federal Reserve Board of the Federal Reserve System

https://www.federalreserve.gov/releases/h15/

Chart VI-14 provides the overnight fed funds rate, the yield of the 10-year Treasury constant maturity bond, the yield of the 30-year constant maturity bond and the conventional mortgage rate from Jan 1991 to Dec 1996. In Jan 1991, the fed funds rate was 6.91 percent, the 10-year Treasury yield 8.09 percent, the 30-year Treasury yield 8.27 percent and the conventional mortgage rate 9.64 percent. Before monetary policy tightening in Oct 1993, the rates and yields were 2.99 percent for the fed funds, 5.33 percent for the 10-year Treasury, 5.94 for the 30-year Treasury and 6.83 percent for the conventional mortgage rate. After tightening in Nov 1994, the rates and yields were 5.29 percent for the fed funds rate, 7.96 percent for the 10-year Treasury, 8.08 percent for the 30-year Treasury and 9.17 percent for the conventional mortgage rate.

Chart VI-14, US, Overnight Fed Funds Rate, 10-Year Treasury Constant Maturity, 30-Year Treasury Constant Maturity and Conventional Mortgage Rate, Monthly, Jan 1991 to Dec 1996

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/update/

Chart VI-15 of the Bureau of Labor Statistics provides the all items consumer price index from Jan 1991 to Dec 1996. There does not appear acceleration of consumer prices requiring aggressive tightening.

Chart VI-15, US, Consumer Price Index All Items, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

https://www.bls.gov/cpi/data.htm

Chart IV-16 of the Bureau of Labor Statistics provides 12-month percentage changes of the all items consumer price index from Jan 1991 to Dec 1996. Inflation collapsed during the recession from Jul 1990 (III) and Mar 1991 (I) and the end of the Kuwait War on Feb 25, 1991 that stabilized world oil markets. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). Policy tightening had adverse collateral effects in the form of emerging market crises in Mexico and Argentina and fixed income markets worldwide.

Chart VI-16, US, Consumer Price Index All Items, Twelve-Month Percentage Change, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

https://www.bls.gov/cpi/data.htm

In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and r^e the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+r^e). Thus, g = [(r/r^e) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dr^e>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Friedman 1957). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.

Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart VI-1B for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart VI-1B cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s. The loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy.  This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises frm the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”

The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:

“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”

Yellen (2014Aug22) states that “Historically, slack has accounted for only a small portion of the fluctuations in inflation. Indeed, unusual aspects of the current recovery may have shifted the lead-lag relationship between a tightening labor market and rising inflation pressures in either direction.”

Chart VI-1B provides the tortuous Phillips Circuit of Brazil from 1963 to 1987. There were no reliable consumer price index and unemployment data in Brazil for that period. Chart VI-1B used the more reliable indicator of inflation, the wholesale price index, and idle capacity of manufacturing as a proxy of unemployment in large urban centers.

Chart VI1-B, Brazil, Phillips Circuit, 1963-1987

Source: ©Carlos Manuel Pelaez, O Cruzado e o Austral: Análise das Reformas Monetárias do Brasil e da Argentina. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.

The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm). The FOMC updated in the statement at its meeting on Dec 16, 2015 with maintenance of the current level of the balance sheet and liftoff of interest rates (http://www.federalreserve.gov/newsevents/press/monetary/20151216a.htm) followed by the statement of Sep 21, 2022 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20220921a.htm):

September 21, 2022

Federal Reserve issues FOMC statement

For release at 2:00 p.m. EDT

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

Implementation Note issued September 21, 2022

There are several important issues in this statement.

1. Mandate. The FOMC pursues a policy of attaining its “dual mandate:” (https://www.federalreserve.gov/aboutthefed.htm): “The Federal Reserve System is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest. The Federal Reserve:

• conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
• promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
• promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
• fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
• promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.”

1. “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.”
2. New Advance Guidance. “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.” (emphasis added).
3. New Quantitative Easing and Other Measures: “In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective (https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm).”
4. Forecast Dependent Policy. In the Opening Remarks to the Press Conference on Jan 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that the cumulative effects of those developments over the last several months warrant a patient, wait-and-see approach regarding future policy changes. In particular, our statement today says, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This change was not driven by a major shift in the baseline outlook for the economy. Like many forecasters, we still see “sustained expansion of economic activity, strong labor market conditions, and inflation near … 2 percent” as the likeliest case. But the cross-currents I mentioned suggest the risk of a less-favorable outlook. In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to Page 3 of 5 push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.” In the opening remarks to the Mar 20, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf): “In discussing the Committee’s projections, it is useful to note what those projections are, as well as what they are not. The SEP includes participants’ individual projections of the most likely economic scenario along with their views of the appropriate path of the federal funds rate in that scenario. Views about the most likely scenario form one input into our policy discussions. We also discuss other plausible scenarios, including the risk of more worrisome outcomes. These and other scenarios and many other considerations go into policy, but are not reflected in projections of the most likely case. Thus, we always emphasize that the interest rate projections in the SEP are not a Committee decision. They are not a Committee plan. As Chair Yellen noted some years ago, the FOMC statement, rather than the dot plot, is the device that the Committee uses to express its opinions about the likely path of rates.”

Focus is shifting from tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds now currently at 3 to 3 ¼ percent and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Markets overreacted to the so-called “paring” of outright purchases to $25 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 3 to 3 ¼ percent (https://www.federalreserve.gov/newsevents/pressreleases/monetary20220921a.htm): “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments” (emphasis added). The Chairman of the Federal Reserve Board, Jerome H Powell, stated after the FOMC meeting on Dec 15, 2021 (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20211215.pdf): “All FOMC participants forecast that this remaining test will be met next year. The median projection for the appropriate level of the federal funds rate is 0.9 percent at the end of 2022, about a half a percentage point higher than projected in September. Participants expect a gradual pace of policy firming, with the level of the federal funds rate generally near estimates of its longer-run level by the end of 2024. Of course, these projections do not represent a Committee decision or plan, and no one knows with any certainty where the economy will be a year or more from now.” There are multiple new policy measures, including purchases of Treasury securities and mortgage-backed securities for the balance sheet of the Fed (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm): “To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.” In the Opening Remarks to the Press Conference on Oct 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20191030.pdf): “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective. We believe monetary policy is in a good place to achieve these outcomes. Looking ahead, we will be monitoring the effects of our policy actions, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the fed funds rate. Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.” In the Opening Remarks to the Press Conference on Jan 30, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf): “Today, the FOMC decided that the cumulative effects of those developments over the last several months warrant a patient, wait-and-see approach regarding future policy changes. In particular, our statement today says, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This change was not driven by a major shift in the baseline outlook for the economy. Like many forecasters, we still see “sustained expansion of economic activity, strong labor market conditions, and inflation near … 2 percent” as the likeliest case. But the cross-currents I mentioned suggest the risk of a less-favorable outlook. In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to Page 3 of 5 push headline inflation lower still in coming months. Further, as we noted in our post-meeting statement, while survey-based measures of inflation expectations have been stable, financial market measures of inflation compensation have moved lower. Similarly, the risk of financial imbalances appears to have receded, as a number of indicators that showed elevated levels of financial risk appetite last fall have moved closer to historical norms. In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy.” The FOMC is initiating the “normalization” or reduction of the balance sheet of securities held outright for monetary policy (https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm) with significant changes (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf). In the opening remarks to the Mar 20, 2019, the Chairman of the Federal Reserve Board, Jerome H. Powell, stated (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190320.pdf): “In discussing the Committee’s projections, it is useful to note what those projections are, as well as what they are not. The SEP includes participants’ individual projections of the most likely economic scenario along with their views of the appropriate path of the federal funds rate in that scenario. Views about the most likely scenario form one input into our policy discussions. We also discuss other plausible scenarios, including the risk of more worrisome outcomes. These and other scenarios and many other considerations go into policy, but are not reflected in projections of the most likely case. Thus, we always emphasize that the interest rate projections in the SEP are not a Committee decision. They are not a Committee plan. As Chair Yellen noted some years ago, the FOMC statement, rather than the dot plot, is the device that the Committee uses to express its opinions about the likely path of rates.”

In the Introductory Statement on Jul 25, 2019, in Frankfurt am Main, the President of the European Central Bank, Mario Draghi, stated (https://www.ecb.europa.eu/press/pressconf/2019/html/ecb.is190725~547f29c369.en.html): “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to our aim over the medium term.

We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.” At its meeting on September 12, 2019, the Governing Council of the ECB (European Central Bank), decided to (https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html): (1) decrease the deposit facility by 10 basis points to minus 0.50 percent while maintaining at 0.00 the main refinancing operations rate and at 0.25 percent the marginal lending facility rate; (2) restart net purchases of securities at the monthly rate of €20 billion beginning on Nov 1, 2019; (3) reinvest principal payments from maturing securities; (4) adapt long-term refinancing operations to maintain “favorable bank lending conditions;” and (5) exempt part of the “negative deposit facility rate” on bank excess liquidity.

The Federal Open Market Committee (FOMC) decided to lower the target range of the federal funds rate by 0.50 percent to 1.0 to 1¼ percent on Mar 3, 2020 in a decision outside the calendar meetings (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm):

March 03, 2020

Federal Reserve issues FOMC statement

For release at 10:00 a.m. EST

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

For media inquiries, call 202-452-2955.

Implementation Note issued March 3, 2020

In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and r^e the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+r^e). Thus, g = [(r/r^e) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dr^e>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Friedman 1957). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.

I IB Stagnating Real Disposable Income and Consumption Expenditures. The Bureau of Economic Analysis (BEA) provides important revisions and enhancements of data on personal income and outlays since 1929 (http://www.bea.gov/iTable/index_nipa.cfm). There are waves of changes in personal income and expenditures in Table IB-1 that correspond somewhat to inflation waves observed worldwide (https://cmpassocregulationblog.blogspot.com/2022/04/inflation-accelerating-worldwide.html and earlier https://cmpassocregulationblog.blogspot.com/2022/03/accelerating-inflation-throughout-world.html) because of the influence through price indexes. There are wide fluctuations in Nov and Dec 2012 by the rush to realize income of all forms in anticipation of tax increases beginning in Jan 2013. There is major distortion in Jan 2013 because of higher contributions in payrolls to government social insurance that caused sharp reduction in personal income and disposable personal income. The Bureau of Economic Analysis (BEA) explains as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

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

The BEA provides the annual update of the national income and product account (https://cmpassocregulationblog.blogspot.com/2017/07/data-dependent-monetary-policy-with_30.html): “Annual Update of the National Income and Product Accounts

The estimates released today reflect the results of the annual update of the national income and

product accounts (NIPAs) in conjunction with preliminary estimates for June 2017. The update covers the most recent 3 years and the first 5 months of 2017. For more information, see information on the “2017 Annual Update” on BEA’s website. Additionally, the August Survey of Current Business will contain an article that describes the results in detail.”

The BEA provides “Comprehensive Update of the National Income and Product Accounts” on Jul 31, 2018 with revisions since 1929 (https://cmpassocregulationblog.blogspot.com/2018/07/revision-of-united-states-national.html): “The estimates released today also reflect the results of the 15th comprehensive update of the National Income and Product Accounts (NIPAs). The updated estimates reflect previously announced improvements (https://www.bea.gov/scb/2018/04-april/0418-preview-2018-comprehensive-nipa-update.htm), and include the introduction of new not seasonally adjusted estimates for GDP, GDI and their major components. For more information, see the Technical Note. Revised NIPA table stubs, initial results, and background materials are available on the BEA website (https://www.bea.gov/index.htm).” The BEA provides the “Annual Update of the National Income and Product Accounts” on Jul 26, 2019 (https://www.bea.gov/system/files/2019-07/NIPA-AU19-Briefing.pdf).

The BEA provides the annual update of the National Income and Product Accounts on Jul 31, 2020 (https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf): “The estimates released today also reflect the results of the Annual Update of the National Income and

Product Accounts (NIPAs). The timespan of the update is the first quarter of 2015 through the fourth quarter of 2019 for estimates of real GDP and its major components, and the first quarter of 1999 through the fourth quarter of 2019 for estimates of income and saving. The reference year remains 2012. More information on the 2020 Annual Update is included in the May Survey of Current Business article, “GDP and the Economy.”

The BEA provides the annual update of the National Income and Product Accounts on Jul 30, 2021 (https://www.bea.gov/sites/default/files/2021-07/pi0621.pdf): “Today’s release also reflects the Annual Update of the National Income and Product Accounts. The timespan of the update is the first quarter of 1999 through the first quarter of 2021 and resulted in revisions to GDP, GDI, and their major components. The reference year remains 2012. With today's release, most NIPA tables are available through BEA’s Interactive Data application on the BEA website (www.bea.gov). See Information on Updates to the National Economic Accounts for the complete table release schedule and a summary of results through 2020, which includes a discussion of methodology changes. A table showing the major current dollar revisions and their sources for each component of GDP, national income, and personal income is also provided. The August 2021 Survey of Current Business will contain an article describing the update in more detail. Previously published estimates, which are superseded by today's release, are found in BEA’s archives.”

The emphasis is now shifting to the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). In the first wave, nominal personal income increased at 2.4 percent in Jan 2019 while nominal disposable personal income decreased at 1.2 percent. Nominal personal consumption expenditures increased at 4.9 percent. Real disposable income changed at 0.0 percent and real personal consumption expenditures increased at 4.9 percent. In the second wave, nominal personal income increased at 4.3 percent in Feb-Mar 2019 while nominal disposable personal income increased at 3.0 percent. Nominal personal consumption expenditures increased at 6.2 percent. Real disposable income increased at 0.6 percent and real personal consumption expenditures increased at 3.7 percent. In the third wave, nominal personal income increased at 1.6 percent in Apr-Jun 2019 while nominal disposable income increased at 0.8 percent. Nominal personal consumption expenditures increased at 5.3 percent. Real disposable income decreased at 1.2 percent and real personal consumption expenditures increased at 2.8 percent. In the fourth wave, nominal personal income increased at 1.2 percent annual equivalent in Jul 2019 while nominal disposable income increased at 3.7 percent. Nominal personal consumption increased at 4.9 percent. Real disposable income increased at 1.2 percent and real personal consumption expenditures increased at 3.7 percent. In the fifth wave, nominal personal income increased at 4.3 percent annual equivalent in Aug-Sep 2019 while nominal disposable income increased at 5.5 percent. Nominal personal consumption increased at 3.0 percent. Real disposable income increased at 4.3 percent and real personal consumption expenditures increased at 2.4 percent. In the sixth wave, nominal personal income increased at 3.7 percent annual equivalent in Oct-Dec 2019 while nominal disposable income increased at 2.8 percent. Nominal personal consumption increased at 3.2 percent. Real disposable income increased at 0.8 percent and real personal consumption expenditures increased at 1.2 percent. In the seventh wave, nominal personal income increased at 11.3 percent annual equivalent in Jan-Feb 2020 while nominal disposable income increased at 11.3 percent. Nominal personal consumption increased at 4.3 percent. Real disposable income increased at 9.4 percent and real personal consumption expenditures increased at 2.4 percent. In the eighth wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income increased at 80.7 percent annual equivalent in Mar-Apr 2020 while nominal disposable income increased at 109.8 percent. Nominal personal consumption decreased at 71.0 percent. Real disposable income increased at 119.1 percent and real personal consumption expenditures decreased at 69.8 percent. The BEA explains (https://www.bea.gov/sites/default/files/2020-05/pi0420_0.pdf): “The increase in personal income in April primarily reflected an increase in government social benefits to persons as payments were made to individuals from federal economic recovery programs in response to the COVID-19 pandemic (table 3). For more information, see “How are the economic impact payments for individuals authorized by the CARES Act of 2020 recorded in the NIPAs?” “Other government social benefits to persons” are $3,122.1 billion in Apr 2020 compared with $528.3 billion in Mar 2020 (https://www.bea.gov/sites/default/files/2020-05/pi0420_0.pdf). In the ninth wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income decreased at 25.9 percent annual equivalent in May-Jun 2020 while nominal disposable income decreased at 30.3 percent. Nominal personal consumption increased at 138.0 percent. Real disposable income decreased at 33.3 percent and real personal consumption expenditures increased at 130.1 percent. The BEA explains as follows (https://www.bea.gov/sites/default/files/2020-06/pi0520_0.pdf): “The May estimate for personal income and outlays was impacted by the response to the spread

of COVID-19. Federal economic recovery payments continued but were at a lower level than in

April, and government “stay-at-home” orders were partially lifted in May. The full economic

effects of the COVID-19 pandemic cannot be quantified in the personal income and outlays

estimate for May because the impacts are generally embedded in source data and cannot be

separately identified. For more information, see the “highlights” file and the Effects of Selected

Federal Pandemic Response Programs on Personal Income table.” The BEA explains as follows (https://www.bea.gov/sites/default/files/2020-07/pi0620.pdf): “The decrease in personal income in June was more than accounted for by a decrease in government social benefits to persons as payments made to individuals from federal economic recovery programs in response to the COVID-19 pandemic continued, but at a lower level than in May (table 3). For more

information, see “How are the economic impact payments for individuals authorized by the CARES Act of 2020 recorded in the NIPAs? Partially offsetting the decrease in other government social benefits were increases in compensation of employees and proprietors’ income as portions of the economy continued to reopen in June.

Unemployment insurance benefits, based primarily on unemployment claims data from the Department of Labor’s Employment and Training Administration, also increased in June. For more information, see “How will the expansion of unemployment benefits in response to the COVID-19 pandemic be recorded

in the NIPAs?”.” In the ninth wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income increased at 11.4 percent annual equivalent in Jul 2020 while nominal disposable income increased at 11.4 percent. Nominal personal consumption increased at 22.4 percent. Real disposable income increased at 7.4 percent and real personal consumption expenditures increased at 18.2 percent. The BEA explains as follows (https://www.bea.gov/sites/default/files/2020-08/pi0720.pdf): “The July estimate for personal income and outlays was impacted by the response to the spread of COVID-19. Federal economic recovery payments continued but were at a lower level than in June,

and government “stay-at-home” orders lifted in some areas of the country. The full economic

effects of the COVID-19 pandemic cannot be quantified in the personal income and outlays

estimate because the impacts are generally embedded in source data and cannot be separately

identified. For more information, see Effects of Selected Federal Pandemic Response Programs on Personal Income. The increase in personal income in July was more than accounted for by compensation of employees as portions of the economy continued to reopen (table 3). Proprietors’ income and rental income of persons also contributed to the increase. Partially offsetting these increases were decreases in government social benefits and income on assets.

Unemployment insurance benefits, based primarily on unemployment claims data from the Department of Labor’s Employment and Training Administration, decreased in July. For more information, see “How will federal government responses to the COVID-19 pandemic affect unemployment insurance benefits?”.” In the tenth wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income decreased at 29.8 percent annual equivalent in Aug 2020 while nominal disposable income decreased at 34.0 percent. Nominal personal consumption increased at 12.7 percent. Real disposable income decreased at 36.4 percent and real personal consumption expenditures increased at 8.7 percent. The BEA explains as follows (https://www.bea.gov/sites/default/files/2020-10/pi0820.pdf): “The decrease in personal income in August was more than accounted for by a decrease in

unemployment insurance benefits, based primarily on unemployment claims data from the Department of Labor’s Employment and Training Administration (table 3). In particular, the Federal Pandemic Unemployment Compensation program which provided a temporary weekly supplemental payment of $600 for those receiving unemployment benefits expired on July 31. For more information, see “How

will federal government responses to the COVID-19 pandemic affect unemployment insurance

benefits?”. Partially offsetting the decrease in unemployment insurance benefits was an increase in compensation in August. Government wage and salary disbursements increased $17.5 billion in August, following an increase of $14.5 billion in July. Temporary and intermittent Census decennial workers boosted government wages and salaries by $10.8 billion in August.” In the eleventh wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income increased at 8.7 percent annual equivalent in Sep 2020 while nominal disposable income increased at 8.7 percent. Nominal personal consumption increased at 19.6 percent. Real disposable income increased at 7.4 percent and real personal consumption expenditures increased at 16.8 percent. The BEA explains the process (https://www.bea.gov/sites/default/files/2020-10/pi0920.pdf). In the eleventh wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income decreased at 7.0 percent annual equivalent in Oct-Nov 2020 while nominal disposable income decreased at 9.7 percent. Nominal personal consumption decreased at 0.6 percent. Real disposable income decreased at 10.3 percent and real personal consumption expenditures decreased at 1.2 percent. The BEA explains the process (https://www.bea.gov/sites/default/files/2020-11/pi1020.pdf and https://www.bea.gov/sites/default/files/2020-12/pi1120.pdf). In the twelfth wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income increased at 83.7 percent annual equivalent in Dec 2020-Jan 2021 while nominal disposable income increased at 90.8 percent. Nominal personal consumption increased at 17.9 percent. Real disposable income increased at 83.2 percent and real personal consumption expenditures increased at 12.4 percent. The BEA explains the process (https://www.bea.gov/sites/default/files/2021-02/pi0121.pdf). In the thirteenth wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/cycles.html), in the lockdown of economic activity in the COVID-19 event, nominal personal income decreased at 59.2 percent annual equivalent in Feb 2021 while nominal disposable income decreased at 64.2 percent. Nominal personal consumption decreased at 12.4 percent. Real disposable income decreased at 65.6 percent and real personal consumption expenditures decreased at 14.5 percent. The BEA explains the process (https://www.bea.gov/sites/default/files/2021-03/pi0221.pdf). In the fourteenth wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income increased at 885.0 percent annual equivalent in Mar 2021 while nominal disposable income increased at 1183.6 percent. Nominal personal consumption increased at 83.7 percent. Real disposable income increased at 1099.1 percent and real personal consumption expenditures increased at 71.5 percent. The BEA explains the process (https://www.bea.gov/sites/default/files/2021-04/pi0321.pdf): “The increase in personal income in March largely reflected an increase in government social benefits (table 3). Within government social benefits, “other” social benefits increased. The American Rescue Plan Act established an additional round of direct economic impact payments to households.” In the fifteenth wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income decreased at 62.4 percent annual equivalent in Apr-May 2021 while nominal disposable income decreased at 67.6 percent. Nominal personal consumption increased at 6.2 percent. Real disposable income decreased at 69.7 percent and real personal consumption expenditures changed at 0.0 percent. The BEA explains the process (https://www.bea.gov/sites/default/files/2021-05/pi0421.pdf): “The decrease in personal income in April primarily reflected a decrease in government social benefits (table 3). Within government social benefits, "other" social benefits decreased as economic impact payments made to individuals from the American Rescue Plan Act of 2021 continued, but at a lower level than in March. Unemployment insurance also decreased, led by decreases in payments from the Pandemic Unemployment Compensation program.” The BEA explains further (https://www.bea.gov/sites/default/files/2021-06/pi0521.pdf): “The decrease in personal income in May primarily reflected a decrease in government social benefits (table 3). Within government social benefits, "other" social benefits decreased as economic impact payments made to individuals from the American Rescue Plan Act of 2021 continued, but at a lower level than in April. Unemployment insurance also decreased, led by decreases in payments from the Pandemic Unemployment Compensation program.” In the sixteenth wave, in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), nominal personal income increased at 3.7 percent annual equivalent in Jun 2021 while nominal disposable income increased at 1.2 percent. Nominal personal consumption increased at 14.0 percent. Real disposable income decreased at 4.7 percent and real personal consumption expenditures increased at 7.4 percent. The BEA explains the process (https://www.bea.gov/sites/default/files/2021-07/pi0621.pdf): “The estimate for June of personal income and outlays reflected the continued economic recovery, reopening of establishments, and continued government response related to the COVID-19 pandemic. Government social benefits associated with pandemic-related assistance programs declined in June. The full economic effects of the COVID-19 pandemic cannot be quantified in the personal income and outlays estimate because the impacts are generally embedded in source data and cannot be separately identified. For more information, see Effects of Selected Federal Pandemic Response Programs on Personal Income. The increase in personal income in June primarily reflected an increase in compensation of employees. Government social benefits decreased in June (table 3). Within compensation, the increase was primarily in private wages and salaries, reflecting Bureau of Labor Statistics Current Employment Statistics. Within government social benefits, "other" social benefits decreased as economic impact payments declined. Unemployment insurance also decreased, led by decreases in payments from the Pandemic Unemployment Compensation program.

The $155.4 billion increase in current dollar PCE in June reflected an increase of $29.3 billion in spending for goods and a $126.1 billion increase in spending for services (table 3). Within goods, an increase in nondurable goods was partly offset by a decrease in durable goods. Within nondurable goods, the increase was primarily accounted for by increases in “other” nondurable goods (mainly pharmaceuticals) as well as gasoline and other energy goods. Within durable goods, the decrease was primarily in motor vehicles and parts. Within services, increases were widespread across all spending categories, led by food services and accommodations. Detailed information on monthly PCE spending can be found on Table 2.3.5U.” In the seventeenth wave, nominal personal income increased at annual equivalent 16.8 percent in Jul 2021 while nominal disposable income increased at 15.4 percent. Nominal personal consumption expenditures increased at 1.2 percent. Real disposable income increased at 10.0 percent while real personal consumption expenditures decreased at 3.5 percent. The BEA explains as follows (https://www.bea.gov/sites/default/files/2021-08/pi0721.pdf): “The increase in personal income in July primarily reflected increases in government social benefits and compensation of employees (table 3). Within government social benefits, an increase in "other" social benefits (more than accounted for by advance Child Tax Credit payments as authorized by the American Rescue Plan) was partly offset by a decrease in unemployment insurance, reflecting a decrease in payments from the Pandemic Unemployment Compensation program. Within compensation, the increase was primarily in private wages and salaries, reflecting Bureau of Labor Statistics Current Employment Statistics.” In the eighteenth wave, nominal personal income increased at annual equivalent 4.9 percent in Aug 2021 while nominal disposable income increased at 3.7 percent. Nominal personal consumption expenditures increased at 14.0 percent. Real disposable income decreased at 1.2 percent while real personal consumption expenditures increased at 8.7 percent. The BEA explains as follows (https://www.bea.gov/sites/default/files/2021-10/pi0821.pdf): “The increase in personal income in August primarily reflected increases in compensation of employees and government social benefits (table 3). Within compensation, the increase primarily reflected an increase in private wages and salaries. Within government social benefits, an increase in "other" social benefits, reflecting advance Child Tax Credit payments authorized by the American Rescue Plan, was partly offset by a decrease in unemployment insurance, reflecting decreases in payments from the Pandemic Unemployment Compensation program.” In the nineteenth wave, nominal personal income decreased at annual equivalent 10.3 percent in Sep 2021 while nominal disposable income decreased at 14.5 percent. Nominal personal consumption expenditures increased at 7.4 percent. Real disposable income decreased at 17.6 percent while real personal consumption expenditures increased at 3.7 percent. The BEA explains as follows (https://www.bea.gov/sites/default/files/2021-10/pi0921.pdf): “The decrease in personal income in September primarily reflected a decrease in government social benefits, both in unemployment benefits and “other” benefits (table 3). Unemployment insurance decreased reflecting decreases in payments from the Pandemic Unemployment Compensation program, the Pandemic Emergency Unemployment Compensation program, and the Pandemic Unemployment Assistance program. “Other” social benefits decreased primarily reflecting decreases in the Provider Relief Fund, economic impact payments, and Paycheck Protection Program loans to nonprofit institutions.” In the twentieth wave, nominal personal income increased at annual equivalent 9.4 percent in Oct-Nov 2021 while nominal disposable income increased at 8.1 percent. Nominal personal consumption expenditures increased at 12.0 percent. Real disposable income changed at 0.0 percent while real personal consumption expenditures increased at 3.7 percent. The BEA explains as follows (https://www.bea.gov/sites/default/files/2021-11/pi1021.pdf): “The increase in personal income in October primarily reflected increases in compensation of employees and personal income receipts on assets that were partly offset by a decrease in government social benefits (table 3). Within compensation, the increase primarily reflected an increase in private wages and salaries. Within personal income receipts on assets, both dividend income and interest income increased. Within government social benefits, unemployment insurance decreased, reflecting decreases in payments from three pandemic-related unemployment programs: Pandemic Unemployment Compensation Payments, Pandemic Emergency Unemployment Compensation, and Pandemic Unemployment Assistance (table 3).” The BEA explains further (https://www.bea.gov/sites/default/files/2021-12/pi1121.pdf): “The estimate for November personal income and outlays reflected the continued economic recovery and government response to the COVID-19 pandemic. Government social benefits increased in November, reflecting an increase in the Provider Relief Fund (extended by the American Rescue Plan) that was partly offset by declines in many other pandemic-assistance programs. The full economic effects of the COVID-19 pandemic cannot be quantified in the personal income and outlays estimate because the impacts are generally embedded in source data and cannot be separately identified. For more information, see Effects of Selected Federal Pandemic Response Programs on Personal Income.” In the twenty-first wave, nominal personal income increased at annual equivalent 6.2 percent in Dec 2021 while nominal disposable income increased at 3.7 percent. Nominal personal consumption expenditures decreased at 10.3 percent. Real disposable income decreased at 2.4 percent while real personal consumption expenditures decreased at 15.6 percent. The BEA explains as follows (https://www.bea.gov/sites/default/files/2022-01/pi1221.pdf): “The increase in personal income in December primarily reflected an increase in compensation that was partly offset by a decrease in proprietors' income. Within compensation, the increase reflected increases in both private and government wages and salaries. Within proprietors' income, both nonfarm and farm income decreased (table 3). Government social benefits decreased slightly, reflecting the winding down of pandemic-related assistance programs. The estimate for December personal income and outlays reflected the continued economic recovery and government response to the COVID-19 pandemic. In December, COVID-19 cases resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country. Government social benefits decreased, primarily reflecting the winding down of pandemic-related assistance programs. The full economic effects of the COVID-19 pandemic cannot be quantified in the personal income and outlays estimate because the impacts are generally embedded in source data and cannot be separately identified. For more information, see Effects of Selected Federal Pandemic Response Programs on Personal Income.” In the twenty-second wave, nominal personal income changed at annual equivalent 0.0 percent in Jan 2022 while nominal disposable income decreased at 14.5 percent. Nominal personal consumption expenditures increased at 25.3 percent. Real disposable income decreased at 19.6 percent while real personal consumption expenditures increased at 16.8 percent. The BEA explains as follows (https://www.bea.gov/sites/default/files/2022-02/pi0122.pdf):” The increase in personal income in January primarily reflected an increase in compensation that was partly offset by a decrease in government social benefits (table 3). Within compensation, the increase reflected increases in both private and government wages and salaries. Within government social benefits, a decrease in "other" social benefits (reflecting the end of advance Child Tax Credit payments as authorized by the American Rescue Plan) was partly offset by an increase in Social Security benefits (reflecting a 5.9 percent cost-of-living adjustment). The $337.2 billion increase in current-dollar PCE in January reflected an increase of $285.4 billion in spending for goods and a $51.8 billion increase in spending for services (table 3). Within goods, increases were widespread, led by motor vehicles and parts, "other" nondurable goods, and recreational goods and vehicles. Within services, the largest contributor to the increase was spending for housing and utilities. Detailed information on monthly PCE spending can be found on Table 2.3.5U.” In the twenty-third wave, nominal personal income increased at annual equivalent 6.6 percent in Feb-Apr 2022 while nominal disposable income increased at 6.6 percent. Nominal personal consumption expenditures increased at 9.2 percent. Real disposable income decreased at 0.4 percent while real personal consumption expenditures increased at 2.0 percent. The BEA provides detailed explanations (https://www.bea.gov/sites/default/files/2022-03/pi0222.pdf https://www.bea.gov/sites/default/files/2022-04/pi0322.pdf https://www.bea.gov/sites/default/files/2022-05/pi0422.pdf). In the twenty-forth wave, nominal personal income increased at annual equivalent 8.1 percent in May-Jun 2022 while nominal disposable income increased at 8.1 percent. Nominal personal consumption expenditures increased at 9.4 percent. Real disposable income decreased at 1.2 percent while real personal consumption expenditures decreased at 0.6 percent. The BEA provides detailed explanations (https://www.bea.gov/sites/default/files/2022-06/pi0522.pdf https://www.bea.gov/sites/default/files/2022-07/pi0622.pdf). ). In the twenty-fifth wave, nominal personal income increased at annual equivalent 2.4 percent in Jul 2022 while nominal disposable income increased at 2.4 percent. Nominal personal consumption expenditures increased at 1.2 percent. Real disposable income increased at 3.7 percent while real personal consumption expenditures increased at 2.4 percent. The BEA provides detailed explanations (https://www.bea.gov/sites/default/files/2022-08/pi0722.pdf).

The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions. Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.0 percent on average in the cyclical expansion in the 52 quarters from IIIQ2009 to IIQ2022 and in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). 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, 201 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) (https://apps.bea.gov/iTable/index_nipa.cfm) and the second estimate of GDP for IIQ2022 (https://www.bea.gov/sites/default/files/2022-08/gdp2q22_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 2.9 percent obtained by dividing GDP of $15,605.6 billion in IIQ2010 by GDP of $15,161.8 billion in IIQ2009 {[($15,605.6/$15,161.8) -1]100 = 2.9%] or accumulating the quarter-on-quarter growth rates (https://cmpassocregulationblog.blogspot.com/2022/09/us-gdp-contracting-at-saar-of-06.html and earlier https://cmpassocregulationblog.blogspot.com/2022/08/the-consumer-price-index-of-united.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 IQ1988, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989, 4.7 percent from IQ1983 to IIQ1989, 4.6 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, 3.7 percent from IQ1983 to IIQ1992, 3.7 percent from IQ1983 to IIIQ1992, 3.8 percent from IQ1983 to IVQ1992, 3.7 percent from IQ1983 to IQ1993, 3.6 percent from IQ1983 to IIQ1993, 3.6 percent from IQ1983 to IIIQ1993, 3.7 percent from IQ1983 to IVQ1993, 3.7 percent from IQ1983 to IQ1994, 3.7 percent from IQ1983 to IIQ1994, 3.7 percent from IQ1983 to IIIQ1994, 3.7 percent from IQ1983 to IVQ1994, 3.6 percent from IQ1983 to IQ1995, 3.6 percent from IQ1983 to IIQ1995, 3.6 percent from IQ1983 to IIIQ1995, 3.6 percent from IQ1982 to IVQ1995 and at 7.9 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2022/09/us-gdp-contracting-at-saar-of-06.html and earlier https://cmpassocregulationblog.blogspot.com/2022/08/the-consumer-price-index-of-united.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (https://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.4 percent from the pre-recession peak of $9404.5 billion of chained 2012 dollars in IIIQ1990 to the trough of $9275.3 billion in IQ1991 (https://apps.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 IQ2022 and in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021) would have accumulated to 53.5 percent. GDP in IIQ2022 would be $24,204.2 billion (in constant dollars of 2012) if the US had grown at trend, which is higher by $4504.7 billion than actual $19,699.5 billion. There are more than four trillion dollars of GDP less than at trend, explaining the 21.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 12.4 percent of the effective labor force with the largest part originating in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event (https://cmpassocregulationblog.blogspot.com/2022/09/us-consumer-price-increased-83-percent.html and earlier https://cmpassocregulationblog.blogspot.com/2022/08/increase-in-jul-2022-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2022/07/increase-in-jun-2022-of-nonfarm-payroll.html). Unemployment is decreasing while employment is increasing in initial adjustment of the lockdown of economic activity in the global recession resulting from the COVID-19 event (https://www.bls.gov/covid19/effects-of-covid-19-pandemic-and-response-on-the-employment-situation-news-release.htm). US GDP in IIQ2022 is 18.6 percent lower than at trend. US GDP grew from $15,767.1 billion in IVQ2007 in constant dollars to $19,699.5 billion in IIQ2022 or 24.9 percent at the average annual equivalent rate of 1.5 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 2.9 percent per year from Jul 1919 to Aug 2022. Growth at 2.9 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 106.7546 in Dec 2007 to 162.3601 in Aug 2022. The actual index NSA in Aug 2022 is 103.0776 which is 36.5 percent below trend. The underperformance of manufacturing in Mar-Nov 2020 originates partly in the earlier global recession augmented by the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). Manufacturing output grew at average 1.4 percent between Dec 1999 and Dec 2006. Using trend growth of 1.4 percent per year, the index would increase to 130.9012 in Aug 2022. The output of manufacturing at 103.0776 in Aug 2022 is 21.3 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 108.4159 in Jul 2007 to the low of 84.7149 in Jun 2009 or 21.9 percent. The NAICS manufacturing index increased from 84.7149 in Apr 2009 to 103.3477 in Aug 2022 or 22.0 percent. The NAICS manufacturing index increased at the annual equivalent rate of 3.5 percent from Dec 1986 to Dec 2006. Growth at 3.5 percent would increase the NAICS manufacturing output index from 104.6406 in Dec 2007 to 173.3109 in Aug 2022. The NAICS index at 103.3477 in Aug 2022 is 40.4 percent below trend. The NAICS manufacturing output index grew at 1.7 percent annual equivalent from Dec 1999 to Dec 2006. Growth at 1.7 percent would raise the NAICS manufacturing output index from 104.6406 in Dec 2007 to 133.9906 in Aug 2022. The NAICS index at 103.3477 in Aug 2022 is 22.9 percent below trend under this alternative calculation.

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

	NPI	NDPI	RDPI	NPCE	RPCE
Jul 2022	0.2	0.2	0.3	0.1	0.2
AE ∆% Jul	2.4	2.4	3.7	1.2	2.4
Jun	0.7	0.7	-0.2	1.0	0.0
May	0.6	0.6	0.0	0.5	-0.1
AE ∆% May-Jun	8.1	8.1	-1.2	9.4	-0.6
Apr	0.4	0.4	0.2	0.4	0.2
Mar	0.6	0.6	-0.4	1.2	0.3
Feb	0.6	0.6	0.1	0.6	0.0
AE ∆% Feb-Apr	6.6	6.6	-0.4	9.2	2.0
Jan	0.0	-1.3	-1.8	1.9	1.3
AE ∆% Jan	0.0	-14.5	-19.6	25.3	16.8
Dec 2021	0.5	0.3	-0.2	-0.9	-1.4
AE ∆% Dec	6.2	3.7	-2.4	-10.3	-15.6
Nov	0.7	0.6	0.0	0.5	-0.1
Oct	0.8	0.7	0.0	1.4	0.7
AE ∆% Oct-Nov	9.4	8.1	0.0	12.0	3.7
Sep	-0.9	-1.3	-1.6	0.6	0.3
AE ∆% Sep	-10.3	-14.5	-17.6	7.4	3.7
Aug	0.4	0.3	-0.1	1.1	0.7
AE ∆% Aug	4.9	3.7	-1.2	14.0	8.7
Jul	1.3	1.2	0.8	0.1	-0.3
AE ∆% Jul	16.8	15.4	10.0	1.2	-3.5
Jun	0.3	0.1	-0.4	1.1	0.6
AE ∆% Jun	3.7	1.2	-4.7	14.0	7.4
May	-2.0	-2.4	-3.0	0.0	-0.5
Apr	-13.3	-15.1	-15.5	1.0	0.5
AE ∆% Apr-May	-62.4	-67.6	-69.7	6.2	0.0
Mar	21.0	23.7	23.0	5.2	4.6
AE ∆% Mar	885.0	1183.6	1099.1	83.7	71.5
Feb	-7.2	-8.2	-8.5	-1.1	-1.3
AE ∆% Feb	-59.2	-64.2	-65.6	-12.4	-14.5
Jan	9.9	10.7	10.4	3.3	2.9
Dec 2020	0.7	0.6	0.2	-0.5	-0.9
AE ∆% Dec-Jan	83.7	90.8	83.2	17.9	12.4
Nov	-1.0	-1.3	-1.3	-0.5	-0.6
Oct	-0.2	-0.4	-0.5	0.4	0.4
AE ∆% Oct-Nov	-7.0	-9.7	-10.3	-0.6	-1.2
Sep	0.7	0.7	0.6	1.5	1.3
AE ∆% Sep	8.7	8.7	7.4	19.6	16.8
Aug	-2.9	-3.4	-3.7	1.0	0.7
AE ∆% Aug	-29.8	-34.0	-36.4	12.7	8.7
Jul	0.9	0.9	0.6	1.7	1.4
AE ∆% Jul	11.4	11.4	7.4	22.4	18.2
Jun	-0.9	-1.2	-1.7	6.4	5.9
May	-4.0	-4.7	-4.9	8.6	8.5
AE ∆% May-Jun	-25.9	-30.3	-33.3	138.0	130.1
Apr	12.5	15.1	15.7	-12.6	-12.2
Mar	-1.9	-1.7	-1.5	-6.9	-6.7
AE ∆% Mar-Apr	80.7	109.8	119.1	-71.0	-69.8
Feb	0.7	0.7	0.6	0.1	0.0
Jan	1.1	1.1	0.9	0.6	0.4
AE ∆% Jan-Feb	11.3	11.3	9.4	4.3	2.4
Dec 2019	0.0	-0.1	-0.3	0.1	-0.1
Nov	0.5	0.5	0.4	0.4	0.3
Oct	0.4	0.3	0.1	0.3	0.1
AE ∆% Oct-Dec	3.7	2.8	0.8	3.2	1.2
Sep	0.2	0.3	0.2	0.2	0.1
Aug	0.5	0.6	0.5	0.3	0.3
AE ∆% Aug-Sep	4.3	5.5	4.3	3.0	2.4
Jul	0.1	0.3	0.1	0.4	0.3
AE ∆% Jul	1.2	3.7	1.2	4.9	3.7
Jun	0.2	0.2	0.1	0.4	0.3
May	0.1	0.0	0.0	0.3	0.2
Apr	0.1	0.0	-0.4	0.6	0.2
AE ∆% Apr-Jun	1.6	0.8	-1.2	5.3	2.8
Mar	0.3	0.2	-0.1	0.9	0.6
Feb	0.4	0.3	0.2	0.1	0.0
AE ∆% Feb-Mar	4.3	3.0	0.6	6.2	3.7
Jan	0.2	-0.1	0.0	0.4	0.4
AE ∆% Jan	2.4	-1.2	0.0	4.9	4.9

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

Percentage change month to month seasonally adjusted

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

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

Table IB-12 provides year on year growth of real disposable income and real personal consumption expenditures and segments. Real disposable income decreased 3.7 percent in the 12 months ending in Jul 2022 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). The BEA explains as follows (https://www.bea.gov/sites/default/files/2022-08/pi0722.pdf): “The increase in current-dollar personal income in July primarily reflected an increase in compensation that was partly offset by decreases in proprietors' income, personal current transfer receipts, and rental income of persons (table 3). The increase in compensation was led by private wages and salaries. The decrease in proprietors' income was mainly in nonfarm income. The decrease in personal current transfer receipts followed an increase in June that reflected a legal settlement from corporate business to persons. The $23.7 billion increase in current-dollar PCE in July reflected an increase of $33.3 billion in spending for services that was partly offset by a decrease of $9.6 billion in spending for goods (table 3). Within services, the largest contributors to the increase were spending for housing and utilities (mainly housing) and for "other" services (mainly international travel). Within goods, gasoline and other energy goods was the leading contributor to the decrease. Detailed information on monthly PCE spending can be found on Table 2.3.5U. Personal outlays increased $27.0 billion in July (table 3). Personal saving was $932.3 billion in July and the personal saving rate—personal saving as a percentage of disposable personal income—was 5.0 percent (table 1). From the preceding month, the PCE price index for July decreased 0.1 percent (table 9). Prices for goods decreased 0.4 percent and prices for services increased 0.1 percent. Food prices increased 1.3 percent and energy prices decreased 4.8 percent. Excluding food and energy, the PCE price index increased 0.1 percent. Detailed monthly PCE price indexes can be found on Table 2.3.4U. From the same month one year ago, the PCE price index for July increased 6.3 percent (table 11). Prices for goods increased 9.5 percent and prices for services increased 4.6 percent. Food prices increased 11.9 percent and energy prices increased 34.4 percent. Excluding food and energy, the PCE price index increased 4.6 percent from one year ago. The 0.2 percent increase in real PCE in July reflected an increase of 0.2 percent in spending on goods and an increase of 0.2 percent in spending on services. Within goods, an increase in durable goods (led by recreational goods and vehicles) was partly offset by a decrease in nondurable goods (led by gasoline and other energy goods as well as by food and beverages). Within services, increases in housing and utilities and in transportation services were the leading contributors. Detailed information on monthly real PCE spending can be found on Table 2.3.6U.” RPCE growth decelerated sharply to minus 2.2 percent in Feb 2021, increasing 2.2 percent in the 12 months ending in Jul 2022. Subdued growth of RPCE could affect revenues of business. Growth rates of personal consumption have weakened in oscillations. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-month rates of growth of real goods PCE (RPCEG) and real durable goods PCE (RPCEGD) than services real PCE (RPCES). Growth of consumption of goods and, in particular, of consumer durable goods drives the faster expansion of the economy while growth of consumption of services is much more moderate. In Jul 2022, RPCEG increased 0.4 percent in 12 months and RPCEGD increased 3.4 percent while RPCES increased 3.3 percent. Government transfers through the stimulus program to compensate for the lockdown of economic activity caused sharp increases in Mar 2021. There are limits to sustained growth based on financial repression in an environment of weak labor markets and real labor remuneration.

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

Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2022
Jul	-3.7	2.2	0.4	3.4	3.3
Jun	-3.2	1.7	-2.3	-2.3	3.9
May	-3.4	2.3	-1.9	-4.3	4.6
Apr	-6.2	1.8	-3.8	-7.9	5.0
Mar	-20.9	2.1	-4.5	-9.7	5.8
Feb	-2.4	6.5	5.2	3.8	7.2
Jan	-10.7	5.0	2.7	0.2	6.3
2021
Dec	0.3	6.7	6.3	4.3	7.0
Nov	0.7	7.2	8.4	8.3	6.7
Oct	-0.6	6.7	7.4	7.4	6.4
Sep	-1.1	6.4	6.1	5.4	6.5
Aug	1.1	7.5	8.1	6.5	7.2
Jul	-2.6	7.5	6.7	7.0	7.9
Jun	-2.8	9.3	11.2	14.4	8.4
May	-4.1	15.1	17.1	25.9	14.0
Apr	-6.0	25.4	37.3	70.5	19.7
Mar	28.8	9.6	21.1	53.2	4.1
Feb	3.2	-2.2	9.1	16.9	-7.2
Jan	13.4	-0.8	12.8	21.7	-6.8
2020
Dec	3.7	-3.3	5.5	10.2	-7.2
Nov	3.2	-2.4	7.9	13.4	-7.1
Oct	5.0	-1.6	9.6	16.8	-6.6
Sep	5.6	-1.9	9.5	14.7	-7.0
Aug	5.3	-3.1	7.3	14.4	-7.7
Jul	9.8	-3.5	8.0	14.5	-8.5
Jun	9.3	-4.6	6.7	12.6	-9.5
May	11.3	-9.6	1.3	4.0	-14.4
Apr	17.0	-16.4	-10.8	-17.7	-18.9
Mar	0.8	-4.7	2.0	-7.8	-7.6
Feb	2.2	2.8	4.2	7.7	2.1
Jan	1.8	2.8	4.1	8.2	2.2
2019
Dec	0.8	2.8	5.2	8.6	1.8
Nov	2.3	1.9	2.5	4.3	1.7
Oct	2.0	2.0	3.4	4.5	1.4
Sep	2.1	2.4	3.9	5.6	1.7
Aug	1.8	2.2	3.8	4.3	1.5
Jul	1.6	2.2	3.7	4.4	1.5
Jun	1.9	2.2	3.8	3.8	1.5
May	2.1	2.1	2.8	3.6	1.8
Apr	2.4	2.1	3.3	3.6	1.6
Mar	3.0	2.3	3.3	4.1	1.8
Feb	3.5	2.0	2.0	1.6	2.0
Jan	3.5	2.1	2.6	2.6	1.8

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

Numbers are percentage changes from the same month a year earlier

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

Chart IB-1 shows US real personal consumption expenditures (RPCE) from 2002 to 2022. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007 with recent recovery. The final data points in IIQ2020 shows sharp drop in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021) with sharp recovery in IIIQ2020 and milder recovery in IVQ2020. Recovery gained strength in IQ2021-IIQ2021, slowing in IIIQ2021 and IVQ2021. There is further slowing in IQ2022 and IIQ2022.

Chart IB-1, US, Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 2002-2022

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

Percent changes from the prior period in seasonally adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are in Chart IB-2 from 1995 to 2021. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart IB-2 that the average rate of growth of RPCE was higher before the recession than during the fifty quarters of expansion that began in IIIQ2009. The data point in IIQ2020 shows sharp contraction in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021) followed by sharp recovery in IIIQ2020, milder recovery in IVQ2020 and stronger recovery in IQ2021-IIQ2021, slowing in IIIQ2021, IVQ2021, IQ2022 and IIQ2022.

Chart IB-2, Percent Change from Prior Period in Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1995-2022

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

Personal income and its disposition are in Table IB-3. The latest estimates and revisions have changed movements. (1) Increase in Jul 2022 of personal income by 47.0 billion or 0.2 percent and increase of disposable income of $37.6 billion or 0.2 percent with increase of wages and salaries of 0.8 percent in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021). The BEA explains as follows (https://www.bea.gov/sites/default/files/2022-08/pi0722.pdf): “The increase in current-dollar personal income in July primarily reflected an increase in compensation that was partly offset by decreases in proprietors' income, personal current transfer receipts, and rental income of persons (table 3). The increase in compensation was led by private wages and salaries. The decrease in proprietors' income was mainly in nonfarm income. The decrease in personal current transfer receipts followed an increase in June that reflected a legal settlement from corporate business to persons. The $23.7 billion increase in current-dollar PCE in July reflected an increase of $33.3 billion in spending for services that was partly offset by a decrease of $9.6 billion in spending for goods (table 3). Within services, the largest contributors to the increase were spending for housing and utilities (mainly housing) and for "other" services (mainly international travel). Within goods, gasoline and other energy goods was the leading contributor to the decrease. Detailed information on monthly PCE spending can be found on Table 2.3.5U. Personal outlays increased $27.0 billion in July (table 3). Personal saving was $932.3 billion in July and the personal saving rate—personal saving as a percentage of disposable personal income—was 5.0 percent (table 1) From the preceding month, the PCE price index for July decreased 0.1 percent (table 9). Prices for goods decreased 0.4 percent and prices for services increased 0.1 percent. Food prices increased 1.3 percent and energy prices decreased 4.8 percent. Excluding food and energy, the PCE price index increased 0.1 percent. Detailed monthly PCE price indexes can be found on Table 2.3.4U. From the same month one year ago, the PCE price index for July increased 6.3 percent (table 11). Prices for goods increased 9.5 percent and prices for services increased 4.6 percent. Food prices increased 11.9 percent and energy prices increased 34.4 percent. Excluding food and energy, the PCE price index increased 4.6 percent from one year ago The 0.2 percent increase in real PCE in July reflected an increase of 0.2 percent in spending on goods and an increase of 0.2 percent in spending on services. Within goods, an increase in durable goods (led by recreational goods and vehicles) was partly offset by a decrease in nondurable goods (led by gasoline and other energy goods as well as by food and beverages). Within services, increases in housing and utilities and in transportation services were the leading contributors. Detailed information on monthly real PCE spending can be found on Table 2.3.6U.” (2) Increase of personal income of $1557.9 billion or 8.0 percent from Dec 2020 to Dec 2021 and increase of disposable income of $1057.3 billion or 6.1 percent with increase of wages and salaries of 10.7 percent. (3) Increase of personal income of $887.1 billion from Dec 2019 to Dec 2020 or 4.8 percent and increase of disposable income of $827.9 billion or 5.0 percent with increase of wages and salaries of 3.9 percent. (4) Increase of personal income of $538.0 billion from Dec 2018 to Dec 2019 or 3.0 percent and increase of disposable income of $402.1 billion or 2.5 percent with increase of wages and salaries of 4.7 percent.

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

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Jul 2022	21,796.4	11,459.9	3,152.0	18,644.5	5.0
Jun 2022	21,749.4	11,365.6	3,142.5	18,606.9	5.0
Change Jul 2022/      Jun 2022	47.0 ∆% 0.2	94.3 ∆% 0.8	9.5 ∆% 0.3	37.6 ∆% 0.2
Dec 2021	21,120.1	10,925.0	2,790.6	18,329.5	8.7
Change Dec 2021/      Dec 2020	1557.9 ∆% 8.0	1052.4 ∆% 10.7	500.6 ∆% 21.9	1057.3 ∆% 6.1
Dec 2020	19,562.2	9,872.6	2,290.0	17,272.2	14.0
Change Dec 2020/Dec 2019	887.1 ∆% 4.8	368.8 ∆% 3.9	59.2 ∆% 2.7	827.9 ∆% 5.0
Dec 2019	18,675.1	9,503.8	2,230.8	16,444.3	7.3
Change Dec 2019/Dec 2018	538.0 ∆% 3.0	426.8 ∆% 4.7	135.9 ∆% 6.5	402.1 ∆% 2.5
Dec 2018	18,137.1	9,077.0	2,094.9	16,042.2	9.0

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

Table IB-4 provides growth rates of real disposable income and real disposable income per capita in the long-term and selected periods. Real disposable income consists of after-tax income adjusted for inflation. Real disposable income per capita is income per person after taxes and inflation. There is remarkable long-term trend of growth of real disposable income of 3.2 percent per year on average from 1929 to 2019 and 2.0 percent in real disposable income per capita. Real disposable income increased at the average yearly rate of 3.7 percent from 1947 to 1999 and real disposable income per capita at 2.3 percent. These rates of increase broadly accompany rates of growth of GDP. Institutional arrangements in the United States provided the environment for growth of output and income after taxes, inflation and population growth. There is significant break of growth by much lower 2.5 percent for real disposable income on average from 1999 to 2019 and 1.6 percent in real disposable per capita income. Real disposable income grew at 3.5 percent from 1980 to 1989 and real disposable per capita income at 2.6 percent. In contrast, real disposable income grew at only 2.1 percent on average from 2006 to 2019 and real disposable income per capita at 1.3 percent. Real disposable income grew at 2.1 percent from 2007 to 2019 and real disposable income per capita at 1.3 percent. The United States has interrupted its long-term and cyclical dynamism of output, income and employment growth. Recovery of this dynamism could prove to be a major challenge. Cyclical uncommonly slow growth explains weakness in the global recession whole cycle instead of the allegation of secular stagnation. Real disposable income increased 6.2 percent from 2019 to 2020 and 2.2 percent from 2020 to 2021 while real disposable income per capita increased 5.8 percent from 2019 to 2020 and 2.1 percent from 2020 to 2021 in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021).

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

RDPI Average ∆%
1929-2019	3.2
1929-2021	3.2
1947-1999	3.7
1999-2019	2.5
1999-2021	2.6
1999-2006	3.1
1980-1989	3.5
2006-2019	2.1
2006-2021	2.4
2007-2019	2.1
2007-2021	2.4
2019-2020*	6.2
2020-2021	2.2
RDPIPC Average ∆%
1929-2019	2.0
1929-2021	2.1
1947-1999	2.3
1999-2019	1.6
1999-2021	1.8
1999-2006	2.1
1980-1989	2.6
2006-2019	1.3
2006-2021	1.7
2007-2019	1.3
2007-2021	1.7
2019-2020*	5.8
2020-2021*	2.1

Note: *Absolute percentage change

Source: Bureau of Economic Analysis https://apps.bea.gov/iTable/index_nipa.cfm

IA2 Financial Repression. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6; for historical analysis see the landmark exhaustive research by Summerhill (2015) and earlier research by Pelaez (1975)). Theory and evidence support the role of financial institutions in efficiency and growth (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 22-6, Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 37-44). Excessive official regulation frustrates financial development required for growth (Haber 2011). Emphasis on disclosure can reduce bank fragility and corruption, empowering investors to enforce sound governance (Barth, Caprio and Levine 2006). Banking was important in facilitating economic growth in historical periods (Cameron 1961, 1967, 1972; Cameron et al. 1992). Banking is also important currently because small- and medium-size business may have no other form of financing than banks in contrast with many options for larger and more mature companies that have access to capital markets. Calomiris and Haber (2014) find that broad voting rights and institutions restricting coalitions of bankers and populists ensure stable banking systems and access to credit. Summerhill (2015) contributes momentous solid facts and analysis with an ideal method combining economic theory, econometrics, international comparisons, data reconstruction and exhaustive archival research. Summerhill (2015) finds that Brazil committed to service of sovereign foreign and internal debt. Contrary to conventional wisdom, Brazil generated primary fiscal surpluses during most of the Empire until 1889 (Summerhill 2015, 37-8, Figure 2.1). Econometric tests by Summerhill (2015, 19-44) show that Brazil’s sovereign debt was sustainable. Sovereign credibility in the North-Weingast (1989) sense spread to financial development that provided the capital for modernization in England and parts of Europe (see Cameron 1961, 1967). Summerhill (2015, 3,194-6, Figure 7.1) finds that “Brazil’s annual cost of capital in London fell from a peak of 13.9 percent in 1829 to only 5.12 percent in 1889. Average rates on secured loans in the private sector in Rio, however, remained well above 12 percent through 1850.” Financial development would have financed diversification of economic activities, increasing productivity and wages and ensuring economic growth. Brazil restricted creation of limited liability enterprises (Summerhill 2015, 151-82) that prevented raising capital with issue of stocks and corporate bonds. Cameron (1961) analyzed how the industrial revolution in England spread to France and then to the rest of Europe. The Société Générale de Crédit Mobilier of Émile and Isaac Péreire provided the “mobilization of credit” for the new economic activities (Cameron 1961). Summerhill (2015, 151-9) provides facts and analysis demonstrating that regulation prevented the creation of a similar vehicle for financing modernization by Irineu Evangelista de Souza, the legendary Visconde de Mauá. Regulation also prevented the use of negotiable bearing notes of the Caisse Générale of Jacques Lafitte (Cameron 1961, 118-9). The government also restricted establishment and independent operation of banks (Summerhill 2015, 183-214). Summerhill (2015, 198-9) measures concentration in banking that provided economic rents or a social loss. The facts and analysis of Summerhill (2015) provide convincing evidence in support of the economic theory of regulation, which postulates that regulated entities capture the process of regulation to promote their self-interest. There appears to be a case that excessively centralized government can result in regulation favoring private instead of public interests with adverse effects on economic activity. The contribution of Summerhill (2015) explains why Brazil did not benefit from trade as an engine of growth—as did regions of recent settlement in the vision of nineteenth-century trade and development of Ragnar Nurkse (1959)—partly because of restrictions on financing and incorporation. Interest rate ceilings on deposits and loans have been commonly used. Professor Rondo E. Cameron, in his memorable A Concise Economic History of the World (Cameron 1989, 307-8), finds that “from a broad spectrum of possible forms of interaction between the financial sector and other sectors of the economy that requires its services, one can isolate three type-cases: (1) that in which the financial sector plays a positive, growth-inducing role; (2) that in which the financial sector is essentially neutral or merely permissive; and (3) that in which inadequate finance restricts or hinders industrial and commercial development.” Summerhill (1985) proves exhaustively that Brazil failed to modernize earlier because of the restrictions of an inadequate institutional financial arrangement plagued by regulatory capture for self-interest. The Banking Act of 1933 imposed prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.

Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with still low nominal interest rates, 2.25 to 2.50 percent, and consumer price inflation of 8.3 percent in the 12 months ending in Aug 2022 (https://www.bls.gov/cpi/) but rising during waves of carry trades from zero interest rates to commodity futures exposures (https://cmpassocregulationblog.blogspot.com/2022/04/inflation-accelerating-worldwide.html and earlier https://cmpassocregulationblog.blogspot.com/2022/03/accelerating-inflation-throughout-world.html). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:

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

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

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

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

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

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

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

Chart IB-14 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2022. There was a long-term downward sloping trend from 12 percent in the early 1980s to 2.2 percent in Jul 2005. The savings rate then rose during the contraction and in the expansion. In 2011 and into 2012 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The savings rate increased in the final segment of Chart IB-14 in 2012 because of the “fiscal cliff” episode followed by another decline because of the pain of the opportunity cost of zero remuneration for hard-earned savings. There are multiple recent oscillations during expectations of increase or “liftoff” of the fed funds rate in the United States followed by “shallow” or uncertain monetary policy with increase in policy interest rates and reduction of the balance sheet of the Fed. The savings rate increased in the final segment with the annual revisions of 2019 and 2020. The savings rate jumped followed by decline in the lockdown of economic activity of the COVID-19 event. The BEA explains as follows (https://www.bea.gov/sites/default/files/2022-08/pi0722.pdf): “The increase in current-dollar personal income in July primarily reflected an increase in compensation that was partly offset by decreases in proprietors' income, personal current transfer receipts, and rental income of persons (table 3). The increase in compensation was led by private wages and salaries. The decrease in proprietors' income was mainly in nonfarm income. The decrease in personal current transfer receipts followed an increase in June that reflected a legal settlement from corporate business to persons. The $23.7 billion increase in current-dollar PCE in July reflected an increase of $33.3 billion in spending for services that was partly offset by a decrease of $9.6 billion in spending for goods (table 3). Within services, the largest contributors to the increase were spending for housing and utilities (mainly housing) and for "other" services (mainly international travel). Within goods, gasoline and other energy goods was the leading contributor to the decrease. Detailed information on monthly PCE spending can be found on Table 2.3.5U. Personal outlays increased $27.0 billion in July (table 3). Personal saving was $932.3 billion in July and the personal saving rate—personal saving as a percentage of disposable personal income—was 5.0 percent (table 1).”

There is further explanation (https://www.bea.gov/sites/default/files/2020-12/pi1120.pdf https://www.bea.gov/sites/default/files/2021-01/pi1220.pdf https://www.bea.gov/sites/default/files/2021-02/pi0121.pdf https://www.bea.gov/sites/default/files/2021-03/pi0221.pdf https://www.bea.gov/sites/default/files/2021-04/pi0321.pdf https://www.bea.gov/sites/default/files/2021-04/pi0321.pdf https://www.bea.gov/sites/default/files/2021-05/pi0421.pdf https://www.bea.gov/sites/default/files/2021-06/pi0521.pdf https://www.bea.gov/sites/default/files/2021-07/pi0621.pdf https://www.bea.gov/sites/default/files/2021-08/pi0721.pdf https://www.bea.gov/sites/default/files/2021-10/pi0821.pdf https://www.bea.gov/sites/default/files/2021-10/pi0921.pdf https://www.bea.gov/sites/default/files/2021-11/pi1021.pdf https://www.bea.gov/sites/default/files/2021-12/pi1121.pdf https://www.bea.gov/sites/default/files/2022-01/pi1221.pdf https://www.bea.gov/sites/default/files/2022-02/pi0122.pdf

https://www.bea.gov/sites/default/files/2022-03/pi0222.pdf https://www.bea.gov/sites/default/files/2022-04/pi0322.pdf https://www.bea.gov/sites/default/files/2022-05/pi0422.pdf https://www.bea.gov/sites/default/files/2022-05/pi0422.pdf https://www.bea.gov/sites/default/files/2022-06/pi0522.pdf https://www.bea.gov/sites/default/files/2022-07/pi0622.pdf https://www.bea.gov/sites/default/files/2022-08/pi0722.pdf )

Chart IB-14, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2022

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

Chart IB-14A provides the US personal savings rate, or personal savings as percent of disposable personal income, on an annual basis from 1929 to 2021. The US savings rate shows decline from around 10 percent in the 1960s to around 8 percent currently. There is sharp increase in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), in the lockdown of economic activity in the COVID-19 event.

Chart IB-14A, US, Personal Savings as a Percentage of Disposable Personal Income, Annual, 1929-2021

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

Table IB-7 provides personal savings as percent of disposable income and annual change of real disposable personal income in selected years since 1930. Savings fell from 4.5 percent of disposable personal income in 1930 to minus 0.7 percent in 1933 while real disposable income contracted 6.3 percent in 1930 and 2.9 percent in 1933. Savings as percent of disposable personal income swelled during World War II to 27.9 percent in 1944 with increase of real disposable income of 3.1 percent. Savings as percent of personal disposable income fell steadily over decades from 12.0 percent in 1982 to 2.9 percent in 2005. Savings as percent of disposable personal income was 6.1 percent in 2013 while real disposable income fell 1.2 percent. The savings rate was 7.1 percent of GDP in 2014 with growth of real disposable income of 3.8 percent. The savings rate was 7.5 percent in 2015 with growth of real disposable income at 4.0 percent. The savings rate stood at 7.0 percent in 2016 with growth of real disposable income at 1.8 percent. The savings rate reached 7.3 percent in 2017 with growth of real disposable income at 2.8 percent. The savings rate stood at 7.6 percent in 2018 with growth of real disposable income at 3.4 percent. The savings rate stood at 7.6 percent in 2019 with growth of real disposable income at 2.3 percent. The savings rate jumped to 16.6 percent in 2020 with growth of real disposable income of 6.2 percent in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), in the lockdown of economic activity in the COVID-19 event. The savings rate decreased to 12.3 percent in 2021 with growth of real disposable income of 2.2 percent.

Table IB-7, US, Personal Savings as Percent of Disposable Personal Income, Annual, Selected Years 1929-2021

	Personal Savings as Percent of Disposable Personal Income	Annual Change of Real Disposable Personal Income
1930	4.5	-6.3
1933	-0.7	-2.9
1944	27.9	3.1
1947	6.3	-4.1
1954	10.3	1.4
1958	11.4	1.0
1960	10.1	2.6
1970	12.8	4.6
1975	13.4	2.5
1982	12.0	2.2
1989	8.4	2.9
1993	7.9	1.7
2002	5.7	3.0
2003	5.4	2.6
2004	5.0	3.3
2005	2.9	1.5
2006	3.6	3.8
2007	3.3	2.4
2008	4.6	1.2
2009	5.9	-0.1
2010	6.2	2.1
2011	6.8	2.1
2012	8.6	3.3
2013	6.1	-1.2
2014	7.1	3.8
2015	7.5	4.0
2016	7.0	1.8
2017	7.3	2.8
2018	7.6	3.4
2019	7.6	2.3
2020	16.6	6.2
2021	12.3	2.2
Average Savings Ratio
1980-1989	9.9
2007-2019	6.6
Average Yearly ∆% Real Disposable Income
1980-1989		3.1
2007-2019		2.1

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

Chart IB-15 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Jul 2022. The savings rate jumped to 13.1 percent in Mar 2020 and 33.8 percent in Apr 2020, decreasing to 24.8 percent in May 2020, 19.3 percent in Jun 2020, 18.7 percent in Jul 2020, 15.0 percent in Aug 2020, 14.3 percent in Sep 2020, 13.6 percent in Oct 2020, 13.0 percent in Nov 2020, 14.0 in Dec 2020, 19.9 in Jan 2021, 13.5 percent in Feb 2021, 26.6 percent in Mar 2021, 12.6 percent in Apr 2021, 10.4 percent in May 2021, 9.5 percent in Jun 2021, 10.5 percent in Jul 2021, 9.8 percent in Aug 2021, 8.1 in Sep 2021, 7.5 percent in Oct 2021, 7.6 percent in Nov 2021, 8.7 percent in Dec 2021, 5.8 percent in Jan 2022, 5.8 percent in Feb 2022, 5.3 percent in Mar 2022, 5.2 percent in Apr 2022, 5.2 percent in May 2022, 5.0 percent in Jun 2022 and 5.0 percent in Jul 2022 during government social transfers in the global recession, with output in the US reaching a high in Feb 2020 (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions), in the lockdown of economic activity in the COVID-19 event and the through in Apr 2020 (https://www.nber.org/news/business-cycle-dating-committee-announcement-july-19-2021), in the lockdown of economic activity in the COVID-19 event. The BEA explains as follows (“The increase in current-dollar personal income in July primarily reflected an increase in compensation that was partly offset by decreases in proprietors' income, personal current transfer receipts, and rental income of persons (table 3). The increase in compensation was led by private wages and salaries. The decrease in proprietors' income was mainly in nonfarm income. The decrease in personal current transfer receipts followed an increase in June that reflected a legal settlement from corporate business to persons.” There is further explanation (https://www.bea.gov/sites/default/files/2020-12/pi1120.pdf https://www.bea.gov/sites/default/files/2021-01/pi1220.pdf https://www.bea.gov/sites/default/files/2021-02/pi0121.pdf https://www.bea.gov/sites/default/files/2021-03/pi0221.pdf https://www.bea.gov/sites/default/files/2021-04/pi0321.pdf https://www.bea.gov/sites/default/files/2021-05/pi0421.pdf https://www.bea.gov/sites/default/files/2021-06/pi0521.pdf https://www.bea.gov/sites/default/files/2021-07/pi0621.pdf https://www.bea.gov/sites/default/files/2021-08/pi0721.pdf https://www.bea.gov/sites/default/files/2021-10/pi0821.pdf https://www.bea.gov/sites/default/files/2021-10/pi0921.pdf https://www.bea.gov/sites/default/files/2021-11/pi1021.pdf https://www.bea.gov/sites/default/files/2021-12/pi1121.pdf https://www.bea.gov/sites/default/files/2022-01/pi1221.pdf https://www.bea.gov/sites/default/files/2022-02/pi0122.pdf https://www.bea.gov/sites/default/files/2022-03/pi0222.pdf https://www.bea.gov/sites/default/files/2022-05/pi0422.pdf https://www.bea.gov/sites/default/files/2022-06/pi0522.pdf https://www.bea.gov/sites/default/files/2022-07/pi0622.pdf https://www.bea.gov/sites/default/files/2022-08/pi0722.pdf )

Chart IB-15, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2022

Source: US Bureau of Economic Analysis

https://apps.bea.gov/iTable/index_nipa.cfm

II Prices of Personal Consumption Expenditures. Percentage changes of prices of personal consumption expenditures (PCE) in a month relative to the same month a year earlier at in Table IV-6. Prices of PCE increased from 1.5 percent relative to a year earlier in Jan 2019 to 1.9 percent in Jan 2020, increasing to 6.3 percent in the 12 months ending in Jul 2022. The price indicator of monetary policy is the 12-month change of prices of personal consumption excluding food and energy (PCE). The goal of monetary policy was to maintain the 12-month change of PCEX at or below 2.0 percent. On Aug 27, 2020, the Federal Open Market Committee changed its Longer-Run Goals and Monetary Policy Strategy, including the following (https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm): “The Committee judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” The Federal Open Market Committee provided new guidance in its statement of Jul 27, 2022 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20220727a.htm): “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.” The new policy can affect relative exchange rates depending on relative inflation rates and country risk issues. The change of PCEX in 12 months increased from 1.9 percent in Feb 2020 to 4.6 percent in Jul 2022, higher than the policy target of 2.0 percent.

Table IV-6, US, Percentage Change in 12 Months of Prices of Personal Consumption

Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2022
Jul	6.3	9.5	5.6	4.6	4.6	11.9	34.4
Jun	6.8	10.4	6.1	4.9	4.8	11.2	43.4
May	6.3	9.6	6.6	4.6	4.7	11.0	35.5
Apr	6.3	9.5	8.4	4.6	4.9	10.0	30.3
Mar	6.6	10.6	10.1	4.6	5.2	9.2	34.0
Feb	6.3	9.5	11.0	4.6	5.3	8.0	25.8
Jan	6.0	8.8	11.5	4.5	5.1	6.6	26.0
2021
Dec	5.8	8.6	10.6	4.3	4.9	5.7	29.0
Nov	5.6	8.3	9.8	4.3	4.7	5.5	31.4
Oct	5.1	7.5	9.0	3.8	4.2	4.7	29.0
Sep	4.4	6.1	7.4	3.5	3.7	4.1	24.9
Aug	4.2	5.5	6.9	3.6	3.6	2.8	24.8
Jul	4.2	5.3	6.9	3.5	3.6	2.4	23.6
Jun	4.0	5.3	7.3	3.4	3.6	0.9	24.2
May	4.0	5.4	7.0	3.2	3.5	0.7	27.3
Apr	3.6	4.5	5.4	3.1	3.1	1.1	24.3
Mar	2.5	2.5	2.4	2.4	2.0	3.0	13.3
Feb	1.6	0.9	1.4	2.0	1.5	3.3	1.9
Jan	1.4	0.3	1.4	1.9	1.5	3.5	-4.5
2020
Dec	1.3	-0.2	1.4	2.0	1.5	3.9	-7.7
Nov	1.1	-0.6	0.6	1.9	1.4	3.7	-10.0
Oct	1.2	-0.6	0.4	2.0	1.4	3.9	-9.6
Sep	1.4	-0.2	0.4	2.1	1.6	3.9	-7.9
Aug	1.3	-0.1	0.4	2.0	1.5	4.3	-9.1
Jul	1.0	-0.8	-0.7	1.9	1.3	4.3	-11.1
Jun	0.9	-1.2	-1.9	1.9	1.1	5.1	-12.6
May	0.5	-2.3	-2.3	1.9	1.0	4.6	-18.3
Apr	0.4	-2.4	-2.8	1.7	0.9	4.0	-17.5
Mar	1.3	-1.0	-1.7	2.4	1.7	1.2	-6.1
Feb	1.9	0.3	-1.5	2.6	1.9	0.9	3.0
Jan	1.9	0.5	-2.0	2.5	1.8	0.9	6.8
2019
Dec	1.7	0.3	-2.0	2.3	1.6	0.8	3.7
Nov	1.4	-0.3	-1.5	2.2	1.6	1.0	-0.8
Oct	1.4	-0.7	-1.1	2.4	1.7	1.1	-4.3
Sep	1.4	-0.7	-1.0	2.3	1.7	0.8	-4.7
Aug	1.5	-0.5	-1.2	2.4	1.9	0.8	-4.4
Jul	1.5	-0.5	-1.3	2.4	1.7	0.9	-2.0
Jun	1.5	-0.6	-0.5	2.4	1.7	1.0	-3.4
May	1.5	-0.4	-1.2	2.4	1.6	1.2	-0.4
Apr	1.6	-0.3	-1.5	2.5	1.7	0.8	1.6
Mar	1.5	-0.3	-1.3	2.3	1.6	1.4	-0.4
Feb	1.4	-0.8	-1.0	2.4	1.7	1.4	-5.2
Jan	1.5	-0.8	-1.1	2.5	1.8	0.8	-5.1

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

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

Chart IV-1AP provides the monthly price indexes of PCE and PCE core, excluding food and energy, from 2019 to 2022. There is recent sharp upward trend.

Chart IV-1AP, Indexes of Prices of Personal Consumption, PCE, and PCE Core, Excluding Food and Energy, 2019-2022

Source: Bureau of Economic Analysis, BEA

https://apps.bea.gov/iTable/index_nipa.cfm

Chart IV-2AP1 provides the indexes of PCE and PCE core, excluding food and energy, monthly from 1959 to 2022. There is similar sharp upward trend in both indexes.

Chart IV-2AP1, Indexes of Prices of Personal Consumption, PCE, and PCE Core, Excluding Food and Energy, 1959-2022

Source: Bureau of Economic Analysis, BEA

https://apps.bea.gov/iTable/index_nipa.cfm

Chart IV-2AP2 provides the monthly price indexes from 1965 to 1982, a period commonly referred as The Great Inflation. Both the US and Japan experienced high rates of inflation during the US Great Inflation of the 1970s (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, http://www.johnbtaylor.com/ 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 difficult to justify unconventional monetary policy because of risks of deflation similar to that experienced in Japan. Fear of deflation as had occurred during the Great Depression and in Japan was used as an argument for the first round of unconventional monetary policy with 1 percent interest rates from Jun 2003 to Jun 2004. The 1 percent interest rate combined with quantitative easing in the form of withdrawal of supply of 30-year securities by suspension of the auction of 30-year Treasury bonds with the intention of reducing mortgage rates. For fear of deflation, see Pelaez and Pelaez, International Financial Architecture (2005), 18-28, and Pelaez and Pelaez, The Global Recession Risk (2007), 83-95. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.htm

Chart IV-2AP2, Indexes of Prices of Personal Consumption, PCE, and PCE Core, Excluding Food and Energy, 1965-1982

Source: Bureau of Economic Analysis, BEA

https://apps.bea.gov/iTable/index_nipa.cfm

Chart IV-2AP3 provides monthly percentage changes of PCE and PCE core, excluding food and energy from 1965 to 1982. Mickey D. Levy and Michael D. Bordo, both members of the Shadow Open Market Committee (https://www.shadowfed.org/), in an opinion article in the Wall Street Journal, “The Fed in the sand as inflation threatens,” on Apr 26, 2021, argue that monetary policy in the 1970s caused increases in financial asset prices initially with subsequent impact on the economy and inflation. There is also major fiscal incentive. Monetary policy may have been underestimating inflation risks, as Levy and Bordo argue.

Chart IV-2AP3, Monthly Percent Change of Indexes of Prices of Personal Consumption, PCE, and PCE Core, Excluding Food and Energy, 1965-1982

Source: Bureau of Economic Analysis, BEA

https://apps.bea.gov/iTable/index_nipa.cfm

Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart VI-1B for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart VI-1B cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s. The loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy.  This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises frm the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”

The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:

“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”

Yellen (2014Aug22) states that “Historically, slack has accounted for only a small portion of the fluctuations in inflation. Indeed, unusual aspects of the current recovery may have shifted the lead-lag relationship between a tightening labor market and rising inflation pressures in either direction.”

Chart VI-1B provides the tortuous Phillips Circuit of Brazil from 1963 to 1987. There were no reliable consumer price index and unemployment data in Brazil for that period. Chart VI-1B used the more reliable indicator of inflation, the wholesale price index, and idle capacity of manufacturing as a proxy of unemployment in large urban centers.

Chart VI1-B, Brazil, Phillips Circuit, 1963-1987

Source: ©Carlos Manuel Pelaez, Cruzado e o Austral: Análise das Reformas Monetárias do Brasil e da Argentina. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.

Chart IV-2AP4 provides the percentage change of PCE and PCE core price indexes from 2019 to 2022. There is significant fluctuation. The final segment reaches higher levels of monthly inflation.

Chart IV-2AP4, Percent Change from Preceding Period in Indexes of Prices of Personal Consumption, PCE, and PCE Core, Excluding Food and Energy, 2019-2022

Source: Bureau of Economic Analysis, BEA

https://apps.bea.gov/iTable/index_nipa.cfm

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022.