Friday, November 3, 2023

The Federal Open Market Committee (FOMC) of the Federal Reserve System did not Change the Fed Funds Target of 5¼ to 5½ Percent Recently at the Highest Pace Since 1994 and the Highest 5½ Percent in Jan 2001 with Unknown Additional Increases, The FOMC states “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.” Manufacturing increased 0.4 percent in Sep 2023 and decreased 0.1 percent in Aug 2023 after increasing 0.4 percent in Jul 2022, seasonally adjusted, decreasing 0.9 percent not seasonally adjusted in the 12 months ending in Sep 2023, Manufacturing increased cumulatively 0.8 percent in the six months ending in Sep 2023 or at the annual equivalent rate of 1.6 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), US Manufacturing Underperforming Below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Stagflation, Global Recession Risk, Worldwide Fiscal, Monetary and External Imbalances, World Cyclical Slow Growth, and Government Intervention in Globalization, Stagflation, Global Recession Risk, Worldwide Fiscal, Monetary and External Imbalances, World Cyclical Slow Growth, and Government Intervention in Globalization

The Federal Open Market Committee (FOMC) of the Federal Reserve System did not Change the Fed Funds Target of 5¼ to 5½ Percent Recently at the Highest Pace Since 1994 and the Highest 5½ Percent in Jan 2001 with Unknown Additional Increases, The FOMC states “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.” Manufacturing increased 0.4 percent in Sep 2023 and decreased 0.1 percent in Aug 2023 after increasing 0.4 percent in Jul 2022, seasonally adjusted, decreasing 0.9 percent not seasonally adjusted in the 12 months ending in Sep 2023, Manufacturing increased cumulatively 0.8 percent in the six months ending in Sep 2023 or at the annual equivalent rate of 1.6 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), US Manufacturing Underperforming Below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Stagflation, Global Recession Risk, Worldwide Fiscal, Monetary and External Imbalances, World Cyclical Slow Growth, and Government Intervention in Globalization, Stagflation, Global Recession Risk, 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, 2023.

IA The Federal Open Market Committee (FOMC) of the Federal Reserve System did not Change the Fed Funds Target of 5¼ to 5½ Percent Recently at the Highest Pace Since 1994 and the Highest 5½ Percent in Jan 2001 with Unknown Additional Increases, The FOMC states “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

I Industrial Production

IV Global Inflation

IA United States Industrial Production

IV Global Inflation

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 $33.6 trillion and debt held by the public $26.6 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 $18.0 trillion at the end of IIQ2023 (https://www.bea.gov/sites/default/files/2023-09/intinv223.pdf). The United States current account deficit is 3.2 percent of nominal GDP in IIQ2023, “up less than 0.1 percent from” IQ2023 (https://www.bea.gov/sites/default/files/2023-09/trans223.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 $7.9 trillion on Nov 1, 2023 and securities held outright reached $7.3 trillion (https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). US GDP nominal NSA reached $27.6 trillion in IIIQ2023 (https://apps.bea.gov/iTable/index_nipa.cfm). US GDP contracted at the real seasonally adjusted annual rate (SAAR) of 2.0 percent in IQ2022 and contracted at the SAAR of 0.6 percent in IIQ2022, growing at 2.7 percent in IIIQ2022, growing at 2.6 percent in IVQ2022, growing at 2.2 percent in IQ2023, growing at 2.1 percent in IIQ2023 and growing at 4.9 percent in IIIQ2023 (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 in Chart CPI-H increased 3.7 percent in Sep 2023 Relative to a Year Earlier, The Tenth Highest Since 8.9 percent in Dec 1981 was 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, 8.3 percent in both Apr and Aug 2022, 8.2 percent in Sep 2022, 7.7 percent in Oct 2022, 7.1 percent in Nov 2022, 6.5 percent in Dec 2022, 6.4 percent in Jan 2023, 6.0 percent in Feb 2023, 5.0 percent in Mar 2023, 4.9 percent in Apr 2023, 4.0 percent in May 2023, 3.0 percent in Jun 2023, 3.2 percent in Jul 2023, 3.7 percent in Aug 2023 and 3.7 percent in Sep 2023.

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Chart CPI-H, US, Consumer Price Index, 12-Month Percentage Change, NSA, 1981-2023

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

Table CPI-H, US, Consumer Price Index, 12-Month Percentage Change, NSA, 1981-1983, 2019-2023

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

1981

11.8

11.4

10.5

10.0

9.8

9.6

10.8

10.8

11.0

10.1

9.6

8.9

1982

8.4

7.6

6.8

6.5

6.7

7.1

6.4

5.9

5.0

5.1

4.6

3.8

1983

3.7

3.5

3.6

3.9

3.5

2.6

2.5

2.6

2.9

2.9

3.3

3.8

2019

1.6

1.5

1.9

2.0

1.8

1.6

1.8

1.7

1.7

1.8

2.1

2.3

2020

2.5

2.3

1.5

0.3

0.1

0.6

1.0

1.3

1.4

1.2

1.2

1.4

2021

1.4

1.7

2.6

4.2

5.0

5.4

5.4

5.3

5.4

6.2

6.8

7.0

2022

7.5

7.9

8.5

8.3

8.6

9.1

8.5

8.3

8.2

7.7

7.1

6.5

2023

6.4

6.0

5.0

4.9

4.0

3.0

3.2

3.7

3.7

      

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

Chart VII-3 of the Energy Information Administration provides the US retail price of regular gasoline. The price moved to $3.473 per gallon on Oct 30, 2023 from $3.742 a year earlier or minus 7.2 percent.

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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 $3.473 on Oct 30,2023 or 191.6 percent. The price of retail regular gasoline increased from $2.249/gallon on Jan 4,2021 to $3.473/gallon on Oct 30, 2023, or 54.4 percent. The price of retail regular gasoline decreased from $3.530/gallon on Feb 21, 2022, two days before the invasion of Ukraine, to $3.473/gallon on Oct 30,2023 or minus 1.6 percent and had increased 57.0 percent from $2.249/gallon on Jan 4,2021 to $3.530/gallon on Feb 21, 2022.

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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 $5.326 per million Btu on Dec 20, 2022 or 106.4 percent and closing at $3.575 on Oct 31, 2023 or change of 38.5 percent.

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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 13.000 thousand barrels per day in Nov 2019 to the final point of 13.053 thousand barrels per day in Aug 2023.

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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 245,473 thousand barrels per day in Jan 2021 to 260,412 thousand barrels in Jan 2022, moving to 278.016 thousand barrels in Aug 2023.

clip_image010

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 1950-2022. There was sharp increase in production in the final segment that reached consumption by 2020. There is reversal in 2021 with consumption exceeding production.

clip_image012

Chart VI-7, US Petroleum Consumption, Production, Imports, Exports and Net Imports 1950-2022, 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 15.93 cents per kilowatthour in Aug 2023 or 24.6 per cent.

clip_image014

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.

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Chart VII-9, US Fed Funds Rate and Three-Month, Two-Year and Ten-Year Treasury Constant Maturity Yields, Jan 2, 1994 to 2022-2023

Source: Federal Reserve Board of the Federal Reserve System

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

Note: program does not download the entire right-side of the chart.

clip_image016

Chart VII-9A, US Fed Funds Rate and Three-Month, Two-Year and Ten-Year Treasury Constant Maturity Yields, Jan 2, 2022 to May 30, 2023

Source: Federal Reserve Board of the Federal Reserve System

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

Note: Chart is shortened of current dates in download.

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.

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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.

clip_image019

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.

clip_image020

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

Chart USFX provides the exchange rate of US Dollars per EURO from 2007 to 2023. Barry Eichengreen and Jeffrey Sachs, Exchange Rates and Economic Recovery in the 1930s, The Journal of Economic History, Vol. 45, No. 4 (Dec 1985), argue that foreign exchange “depreciation was clearly beneficial for initiating countries” during the Great Depression of the 1930s and that it was no equivalent to “beggar my neighbor” policies such as tariffs.

clip_image021\

Chart USFX, Exchange Rate USD/EURO 2007-2023

Source: https://www.federalreserve.gov/releases/h10/current/

clip_image022

Chart USFX, Exchange Rate USD/EURO 2000-2023

Source: https://www.federalreserve.gov/releases/h10/current/

Federal Reserve Bank of St. Louis https://fred.stlouisfed.org/

clip_image023

Chart USFX, Exchange Rate USD/EURO 2018-2023

Source: https://www.federalreserve.gov/releases/h10/current/

Federal Reserve Bank of St. Louis https://fred.stlouisfed.org/

Table USFX provides the rate of USD/EURO in selected months. The dollar appreciated sharply from USD 1.2254 on Jan 4, 2021 to 1.0787 on Aug 25, 2023 and 1.0592 on Oct 27, 2023.

Table USFX, USD/EURO Selected Months

Date

USD/EUR

1/4/2021

1.2254

1/5/2021

1.2295

1/6/2021

1.229

1/7/2021

1.2265

1/8/2021

1.2252

1/11/2021

1.2169

1/12/2021

1.2168

1/13/2021

1.2159

1/14/2021

1.2156

1/15/2021

1.2099

1/31/2023

1.0858

2/1/2023

1.0917

2/2/2023

1.0918

2/3/2023

1.0825

2/6/2023

1.0722

2/7/2023

1.0705

2/8/2023

1.0734

2/9/2023

1.0761

2/10/2023

1.0670

2/13/2023

1.0718

2/14/2023

1.0722

2/15/2023

1.0683

2/16/2023

1.0684

2/17/2023

1.0678

2/24/2023

1.0545

3/03/2023

1.0616

3/10/2023

1.0659

3/17/2023

1.0647

3/24/2023

1.0762

3/31/2023

1.0872

4/7/2023

1.0913

4/14/2023

1.0980

4/21/2023

1.0973

4/28/2023

1.1040

5/5/2023

1.1026

5/26/2023

1.0713

6/2/2023

1.0724

6/9/2023

1.0749

6/16/2023

1.0925

6/23/2023

1.0887

6/30/2023

1.0920

7/7/2023

1.0964

7/14/2023

1.1237

7/21/2023

1.1120

7/28/2023

1.1039

8/4/2023

1.1036

8/11/2023

1.0957

8/18/2023

1.0875

8/25/2023

1.0787

9/1/223

1.0787

9/8/2023

1.0709

9/15/2023

1.0673

9/22/2023

1.0660

9/29/2023

1.0584

10/6/2023

1.0596

10/13/2023

1.0502

10/20/2023

1.0592

10/27/2023

1.0592

Source: https://www.federalreserve.gov/releases/h10/current/

Table B provides the exchange rate of Brazil and the trade balance from 1927 to 1939. “Currency depreciation in the 1930s…benefitted the initiating countries…There can be no presumption that depreciation was beggar-thy-neighbor…competitive devaluation taken by a group of countries had they been even more widely adopted and coordinated internationally would have hasted recovery from the Great Depression,” Barry Eichengreen and Jeffrey Sachs, “Exchange Rates and Economic Recovery in the1930s,” Journal of Economic History, Vol. 45, No. 4 (Dec., 1985), pp.925-946.

Table B, Brazil, Exchange Rate and Trade Balance, 1927-1939

Year

  

Exchange Rate

Mil-Réis per £

  

Trade Balance 1000 Contos

1927

  

40.6

  

370.9

1928

  

40.3

  

275.3

1929

  

40.6

  

332.7

1930

  

49.4

  

563.6

1931

  

62.4

  

1517.2

1932

  

48.1

  

1018.1

1933

  

52.6

  

655

1934

  

59.7

  

956.2

1935

  

57.9

  

248.1

1936

  

58.4

  

626.8

1937

  

56.9

  

-222.5

1938

  

57.6

  

-98.7

1939

  

71.1

  

631.9

Source: Carlos Manuel Peláez, Análise Econômica do Programa Brasileiro de Sustentação do Café 1906-1945: Teoria, Política e Medição, Revista Brasileira de Economia, Vol. 25, N 4, Out/Dez 1971, 5-213.

Christina D. Romer argues that growth of the money stock was critical in the recovery of the United States from the Great Depression (Christina D. Romer, What ended the Great Depression? The Journal of Economic History, Volume 52, Number 4, Dec 1992, pp 757-784).

Table C, Brazil, Yearly Percentage Changes of the Money Stock, M1 and M2, Exchange Rate, Terms of Trade, Industrial Production, Real Gross National Product and Real Gross Income Per Capita, 1930-1939

Period

M1

M2

Exchange Rate

Terms of Trade

Industrial Production

Real GNP

Real Gross Income Per Capita

1929/30

-9

-4

22

-34

-5

-1

-10

1930/31

4

1

26

-5

8

-3

-6

1931/32

15

7

-23

8

0

6

2

1932/33

10

4

10

-15

16

10

7

1933/34

5

6

13

5

13

7

5

1934/35

7

8

-3

-28

14

1

-4

1935/36

10

11

1

2

14

12

9

1936/37

10

9

-3

2

7

3

0

1937/38

19

13

1

-11

6

4

-1

1938/39

0

8

23

-12

14

4

2

Source: Carlos Manuel Peláez and Wilson Suzigan, História Monetária do Brasil. Segunda Edição Revisada e Ampliada. Coleção Temas Brasileiros, Universidade de Brasília, 1981.

“In the period of the free coffee market 1857-1906, international coffee prices fluctuated in cycles of increasing amplitude. British export prices decreased at a low average rate, and physical exports of coffee by Brazil increased at the average rate of 2.9 percent per year. The income terms of trade of the coffee economy of Brazil improved at the average compound rate of 4.0 percent per year. But the actual rate must have been much higher because of drastic improvements in the quality of manufactures while the quality of coffee remained relatively constant,” Carlos Manuel Peláez, “The Theory and Reality of Imperialism in the Coffee Economy of Nineteenth-Century Brazil,” The Economic History Review, Second Series, Volume XXIX, No. 2, May 1976. 276-290. See Carlos Manuel Peláez, “A Comparison of Long-Term Monetary Behavior and Institutions in Brazil, Europe and the United States,” The Journal of European Economic History, Volume 5, Number 2, Fall 1976, 439-450, Presented at the Sixth International Congress of Economic History, Section on Monetary Inflation in Historical Perspective, Copenhagen, 22 Aug 1974.

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

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

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

W = Y/r (1)

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

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.

clip_image025

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.

IA The Federal Open Market Committee (FOMC) of the Federal Reserve System did not Change the Fed Funds Target of 5¼ to 5½ Percent Recently at the Highest Pace Since 1994 and the Highest 5½ Percent in Jan 2001 with Unknown Additional Increases, The FOMC states “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

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 Nov 1, 2023 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20231101a.htm):

Press Release

November 01, 2023

Federal Reserve issues FOMC statement

For release at 2:00 p.m. EDT

Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains 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 maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. 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 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; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller.

For media inquiries, please email media@frb.gov or call 202-452-2955.

Implementation Note issued November 1, 2023

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. “In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5¼ to 5½ percent.”
  2. New Advance Guidance. “The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains 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 maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.” (emphasis added).
  3. “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 labor market conditions, inflation pressures and inflation expectations, and financial and international developments.” (emphasis added).
  4. 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 its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.” (https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm).”
  5. 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 5¼ to 5½ 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 5¼ to 5½ percent (https://www.federalreserve.gov/newsevents/pressreleases/monetary20231101a.htm): “The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains 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 maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.” (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 re the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+re). Thus, g = [(r/re) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dre>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Friedman 1957). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

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

I Industrial Production

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

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

The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on May 28, 2021 (https://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm):

“The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization. The most prominent features of the revision are an update of the base year to 2017 for the indexes, a conversion of the industry-group indexes to the 2017 North American Industry Classification System (NAICS), the incorporation of comprehensive annual production data for 2017 through 2019, and the incorporation of new survey utilization rate data for 2019 and 2020.[1]

On net, the revisions to total IP for recent years are negative. Notably, the updated rates of change are 1 to 1-1/2 percentage points lower per year from 2017 through 2019.[2] The cumulative effect of these revisions leaves the level of total IP in April 2021 about 3-1/2 percent below its late-2007 peak before the Great Recession; previously, total IP in April 2021 was slightly above its peak before the Great Recession. The incorporation of detailed data for manufacturing from the U.S. Census Bureau's 2017 Economic Census (EC) and the 2018 and 2019 Annual Surveys of Manufactures (ASMs) accounts for the majority of the differences between the current and the previously published estimates. The revisions to the rates of change for 2020 are small, and the magnitude of the sharp drop (17 percent) in total IP at the onset of the pandemic in early 2020 is very similar to the magnitude reported earlier.

Annual capacity growth is revised down about 1 percentage point, on average, from 2017 to 2019 and is little changed in 2020. After these revisions, capacity for total industry is estimated to have grown about 3 percent less between 2016 and the end of 2020 than previously estimated.

In the fourth quarter of 2020, capacity utilization for total industry stood at 73.4 percent, about 1/2 percentage point below its previous estimate and about 6-1/4 percentage points below its long-run (1972–2020) average. The utilization rate for 2019 is also about 1/2 percentage point lower than the previous estimate, but revisions to utilization rates for 2017 and 2018 are very small.”

The Board of Governors of the Federal Reserve System conducted its annual revision of industrial production and capacity utilization on Jun 28, 2022 (https://www.federalreserve.gov/releases/g17/Revisions/20220628/DefaultRev.htm):

“Manufacturing output is now estimated to have fallen about 2-1/2 percent in both 2019 and 2020 before moving up about 4-1/4 percent in 2021; these rates of change are identical to the estimates published previously. Manufacturing output is now estimated to have dropped about 18-1/2 percent between February 2020 and April 2020 because of the pandemic, only slightly less than was originally reported. Factory output has moved up robustly since then, and the index for May 2022 is currently reported to be 3-1/2 percent above its pre-pandemic level, about 1 percentage point less of a gain than the pre-revision estimate.

The revised contour for mining output shows a modest increase in 2019, a sharp drop in 2020, and a substantial rebound thereafter. The rates of change are broadly similar to those published previously, although the gains in 2019 and 2021 are now each about 1 percentage point stronger, and the decline in 2020 is about 1-1/2 percentage points steeper. The index for mining currently stands about 4 percent below its pre-pandemic level; before the revision, the index was 2 percent below its pre-pandemic level. The rates of change for utilities output are moderately higher in 2020 and little different in other recent years.”

The Board of Governors of the Federal Reserve System conducted its annual revision of industrial production and capacity utilization on Mar 28, 2023 (https://www.federalreserve.gov/releases/g17/Revisions/20230328/DefaultRev.htm): “Manufacturing output is now estimated to have been about 3 percent lower in the fourth quarter of 2020 than it was a year earlier; it moved up about 3-1/2 percent in 2021 and another 3/4 percent in 2022. The rates of change for 2020 and 2021 are respectively about 1/2 percentage point and 3/4 percentage point weaker than the estimates published previously, whereas the rate of change for 2022 is about 1/4 percentage point stronger. Manufacturing output is now estimated to have dropped more than 19 percent between February 2020 and April 2020 because of the pandemic, about the same as was previously reported. Factory output has recovered since then, and the index for February 2023 is currently reported to be about 3/4 percent above its pre-pandemic level, about 1/2 percentage point less of a gain than the pre-revision estimate.

The revised contour for mining output shows a sharp drop in the first half of 2020 and a substantial rebound later in 2020 and in 2021, followed by continued but more moderate growth in 2022. The rates of change are broadly similar to those published previously, although the gains in 2021 and 2022 are now each about 3/4 percentage point weaker, and the drop between the fourth quarters of 2019 and 2020 is about 1/3 percentage point smaller. The index for mining currently stands about 3-1/4 percent below its pre-pandemic level; before the revision, the index was 2-1/3 percent below its pre-pandemic level. The rates of change for utilities output are little changed from their previously reported values.”

Industrial production increased 0.3 percent in Sep 2023 after changing 0.0 percent in Aug 2023 and increasing 1.0 percent in Jul 2023, as shown in Table I-1. The report of the Board of Governors of the Federal Reserve System states (https://www.federalreserve.gov/releases/g17/current/default.htm):

“Industrial production increased 0.3 percent in September and advanced at an annual rate of 2.5 percent in the third quarter. Manufacturing output rose 0.4 percent in September, the index for mining moved up 0.4 percent, and the index for utilities decreased 0.3 percent. At 103.6 percent of its 2017 average, total industrial production in September was 0.1 percent above its year-earlier level. Capacity utilization moved up 0.2 percentage point to 79.7 percent in September, a rate that is equal to its long-run (1972–2022) average.”

In the six months ending in Sep 2023, United States national industrial production accumulated change of 1.0 percent at the annual equivalent rate of 2.0 percent, which is higher than growth of 0.1 percent in the 12 months ending in Sep 2023. Industrial production increased at annual equivalent 5.3 percent in the most recent quarter from Jul 2023 to Sep 2023 and decreased at 1.2 percent annual equivalent in the prior quarter from Apr 2023 to Jun 2023. Business equipment accumulated change of 1.1 percent in the six months from Apr 2023 to Sep 2023, at the annual equivalent rate of 2.2 percent, which is higher than growth of minus 1.7 percent in the 12 months ending in Sep 2023. The Fed analyzes capacity utilization of total industry in its report (https://www.federalreserve.gov/releases/g17/current/default.htm): “Capacity utilization moved up 0.2 percentage point to 79.7 percent in September, a rate that is equal to its long-run (1972–2022) average.” United States industry apparently decelerated to a lower growth rate followed by possible acceleration, oscillating growth in past months and deep contraction in the global recession, with output in the US reaching 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). There is renewed decline with marginal increase and current increase.

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

 

Sep 23

Aug 23

Jul 23

Jun 23

May 23

Apr 23

Sep 23/

Sep 22

Total

0.3

0.0

1.0

-0.5

-0.3

0.5

0.1

Market
Groups

              

Final Products

0.1

0.0

1.2

-1.1

-0.5

1.2

-0.1

Consumer Goods

0.3

-0.1

1.3

-1.5

-0.7

1.2

0.1

Business Equipment

-0.7

0.1

0.9

-0.1

-0.4

1.3

-1.7

Non
Industrial Supplies

0.4

0.1

0.3

-0.2

-0.2

-0.4

-1.7

Construction

1.0

-0.5

0.0

-0.5

-0.1

0.8

-2.0

Materials

0.4

0.0

1.0

-0.2

-0.1

0.2

0.9

Industry Groups

              

Manufacturing

0.4

-0.1

0.4

-0.6

-0.2

0.9

-0.8

Mining

0.4

0.2

1.1

0.6

-0.3

0.6

3.4

Utilities

-0.3

0.7

4.7

-1.7

-0.6

-2.3

2.0

Capacity

79.7

79.5

79.6

78.9

79.5

79.8

1.5

Sources: Board of Governors of the Federal Reserve System

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

Manufacturing increased 0.4 percent in Sep 2023 and decreased 0.1 percent in Aug 2023 after increasing 0.4 percent in Jul 2022, seasonally adjusted, decreasing 0.9 percent not seasonally adjusted in the 12 months ending in Sep 2023, as shown in Table I-2. Manufacturing increased cumulatively 0.8 percent in the six months ending in Sep 2023 or at the annual equivalent rate of 1.6 percent. Table I-2 provides a longer perspective of manufacturing in the US. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 with recovery followed by renewed deterioration/improvement in more recent months as shown by 12 months’ rates of growth. Growth rates appeared to be increasing again closer to 5 percent in Apr-Jun 2012 but deteriorated. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.7 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appeared to be returning to the levels at 3 percent or higher in the annual rates before the recession, but the pace of manufacturing fell steadily with some strength at the margin. There is renewed deterioration, improvement and current deterioration. The Board of Governors of the Federal Reserve System conducted the annual revision of industrial production released on May 28, 2021 (https://www.federalreserve.gov/releases/g17/revisions/Current/DefaultRev.htm):

“The Federal Reserve has revised its index of industrial production (IP) and the related measures of capacity and capacity utilization. The most prominent features of the revision are an update of the base year to 2017 for the indexes, a conversion of the industry-group indexes to the 2017 North American Industry Classification System (NAICS), the incorporation of comprehensive annual production data for 2017 through 2019, and the incorporation of new survey utilization rate data for 2019 and 2020.[1]

On net, the revisions to total IP for recent years are negative. Notably, the updated rates of change are 1 to 1-1/2 percentage points lower per year from 2017 through 2019.[2] The cumulative effect of these revisions leaves the level of total IP in April 2021 about 3-1/2 percent below its late-2007 peak before the Great Recession; previously, total IP in April 2021 was slightly above its peak before the Great Recession. The incorporation of detailed data for manufacturing from the U.S. Census Bureau's 2017 Economic Census (EC) and the 2018 and 2019 Annual Surveys of Manufactures (ASMs) accounts for the majority of the differences between the current and the previously published estimates. The revisions to the rates of change for 2020 are small, and the magnitude of the sharp drop (17 percent) in total IP at the onset of the pandemic in early 2020 is very similar to the magnitude reported earlier.

Annual capacity growth is revised down about 1 percentage point, on average, from 2017 to 2019 and is little changed in 2020. After these revisions, capacity for total industry is estimated to have grown about 3 percent less between 2016 and the end of 2020 than previously estimated.

In the fourth quarter of 2020, capacity utilization for total industry stood at 73.4 percent, about 1/2 percentage point below its previous estimate and about 6-1/4 percentage points below its long-run (1972–2020) average. The utilization rate for 2019 is also about 1/2 percentage point lower than the previous estimate, but revisions to utilization rates for 2017 and 2018 are very small.”

The Board of Governors of the Federal Reserve System conducted its annual revision of industrial production and capacity utilization on Jun 28, 2022 (https://www.federalreserve.gov/releases/g17/Revisions/20220628/DefaultRev.htm):

“Manufacturing output is now estimated to have fallen about 2-1/2 percent in both 2019 and 2020 before moving up about 4-1/4 percent in 2021; these rates of change are identical to the estimates published previously. Manufacturing output is now estimated to have dropped about 18-1/2 percent between February 2020 and April 2020 because of the pandemic, only slightly less than was originally reported. Factory output has moved up robustly since then, and the index for May 2022 is currently reported to be 3-1/2 percent above its pre-pandemic level, about 1 percentage point less of a gain than the pre-revision estimate.

The revised contour for mining output shows a modest increase in 2019, a sharp drop in 2020, and a substantial rebound thereafter. The rates of change are broadly similar to those published previously, although the gains in 2019 and 2021 are now each about 1 percentage point stronger, and the decline in 2020 is about 1-1/2 percentage points steeper. The index for mining currently stands about 4 percent below its pre-pandemic level; before the revision, the index was 2 percent below its pre-pandemic level. The rates of change for utilities output are moderately higher in 2020 and little different in other recent years.”

The Board of Governors of the Federal Reserve System conducted its annual revision of industrial production and capacity utilization on Mar 28, 2023 (https://www.federalreserve.gov/releases/g17/Revisions/20230328/DefaultRev.htm): “Manufacturing output is now estimated to have been about 3 percent lower in the fourth quarter of 2020 than it was a year earlier; it moved up about 3-1/2 percent in 2021 and another 3/4 percent in 2022. The rates of change for 2020 and 2021 are respectively about 1/2 percentage point and 3/4 percentage point weaker than the estimates published previously, whereas the rate of change for 2022 is about 1/4 percentage point stronger. Manufacturing output is now estimated to have dropped more than 19 percent between February 2020 and April 2020 because of the pandemic, about the same as was previously reported. Factory output has recovered since then, and the index for February 2023 is currently reported to be about 3/4 percent above its pre-pandemic level, about 1/2 percentage point less of a gain than the pre-revision estimate.

The revised contour for mining output shows a sharp drop in the first half of 2020 and a substantial rebound later in 2020 and in 2021, followed by continued but more moderate growth in 2022. The rates of change are broadly similar to those published previously, although the gains in 2021 and 2022 are now each about 3/4 percentage point weaker, and the drop between the fourth quarters of 2019 and 2020 is about 1/3 percentage point smaller. The index for mining currently stands about 3-1/4 percent below its pre-pandemic level; before the revision, the index was 2-1/3 percent below its pre-pandemic level. The rates of change for utilities output are little changed from their previously reported values.”

Manufacturing decreased 22.3 percent from the peak in Jun 2007 to the trough in Apr 2009. Manufacturing increased 16.3 percent from the trough in Apr 2009 to Sep 2023. Manufacturing decreased 9.7 percent from the peak in Jun 2007 to Sep 2023. US economic growth has been at only 2.3 percent on average in the cyclical expansion in the 56 quarters from IIIQ2009 to IIQ2023 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, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (https://apps.bea.gov/iTable/index_nipa.cfm) and the third estimate of GDP for IIQ2023 (https://www.bea.gov/sites/default/files/2023-09/gdp2q23_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.9 percent obtained by dividing GDP of $16,743.2 billion in IIQ2010 by GDP of $16,269.1 billion in IIQ2009 {[($16,743.2/$16,269.2) -1]100 = 2.9%] or accumulating the quarter-on-quarter growth rates (https://cmpassocregulationblog.blogspot.com/2023/10/us-gdp-grew-at-21-percent-saar-in.html and earlier https://cmpassocregulationblog.blogspot.com/2023/09/us-gdp-grew-at-21-percent-saar-in.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, 3.7 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, 3.6 percent from IQ1982 to IQ1996, 3.6 percent from IQ1982 to IIQ1996, 3.6 percent from IQ1982 to IIIQ1996, 3.6 percent from IQ1982 to IVQ1996 and at 7.9 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2023/10/us-gdp-grew-at-21-percent-saar-in.html and earlier https://cmpassocregulationblog.blogspot.com/2023/09/us-gdp-grew-at-21-percent-saar-in.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 $10,090.6 billion of chained 2017 dollars in IIIQ1990 to the trough of $9951.9 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 IIQ2023 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 58.1 percent. GDP in IIQ2023 would be $26,745.7 billion (in constant dollars of 2017) if the US had grown at trend, which is higher by $4520.3 billion than actual $22,225.4 billion. There are more than four trillion dollars of GDP less than at trend, explaining the 20.6 million unemployed or underemployed equivalent to actual unemployment/underemployment of 11.6 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/2023/10/increase-in-sep-2023-of-nonfarm-payroll.html and earlier https://cmpassocregulationblog.blogspot.com/2023/09/the-federal-open-market-committee-fomc.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://cmpassocregulationblog.blogspot.com/2023/07/us-gdp-grew-at-20-percent-saar-in.html and earlier https://cmpassocregulationblog.blogspot.com/2023/06/us-gdp-grew-at-13-percent-saar-in.html). US GDP in IIQ2023 is 16.9 percent lower than at trend. US GDP grew from $16,915.2 billion in IVQ2007 in constant dollars to $22,225.4 billion in IIQ2023 or 31.4 percent at the average annual equivalent rate of 1.8 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 Sep 1919 to Sep 2023. Growth at 2.9 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 106.7154 in Dec 2007 to 167.4053 in Sep 2023. The actual index NSA in Sep 2023 is 99.9794 which is 40.3 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 1.5 percent between Dec 1999 and Dec 2006. Using trend growth of 1.5 percent per year, the index would increase to 134.9172 in Sep 2023. The output of manufacturing at 99.9794 in Sep 2023 is 25.9 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 108.3508 in Jun 2007 to the low of 84.6376 in Jun 2009 or 21.9 percent. The NAICS manufacturing index increased from 84.6376 in Apr 2009 to 100.3412 in Sep 2023 or 18.6 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 104.6156 in Dec 2007 to 179.8486 in Sep 2023. The NAICS index at 100.3412 in Sep 2023 is 44.2 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 104.6156 in Dec 2007 to 136.4274 in Sep 2023. The NAICS index at 100.3412 in Sep 2023 is 26.5 percent below trend under this alternative calculation.

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

 

Month SA ∆%

12-Month NSA ∆%

2023-09

0.4

-0.9

2023-08

-0.1

-0.9

2023-07

0.4

-1.0

2023-06

-0.6

-0.9

2023-05

-0.2

-0.9

2023-04

0.9

0.0

2023-03

-0.8

-1.5

2023-02

0.3

0.1

2023-01

1.7

0.8

2022-12

-2.1

-1.2

2022-11

-0.7

0.8

2022-10

0.1

2.4

2022-09

0.2

3.9

2022-08

0.2

2.3

2022-07

0.2

2.0

2022-06

-0.4

2.8

2022-05

-0.4

3.2

2022-04

0.1

3.6

2022-03

0.8

4.7

2022-02

1.2

6.8

2022-01

-0.6

1.6

2021-12

-0.1

3.0

2021-11

0.9

3.7

2021-10

1.3

3.2

2021-09

-0.9

2.9

2021-08

-0.3

3.6

2021-07

1.0

6.2

2021-06

-0.1

8.3

2021-05

1.1

16.8

2021-04

0.1

21.7

2021-03

3.0

2.0

2021-02

-3.9

-5.7

2021-01

1.0

-1.4

2020-12

0.6

-3.0

2020-11

0.6

-3.3

2020-10

0.8

-2.8

2020-09

0.0

-5.4

2020-08

1.5

-5.3

2020-07

3.6

-6.3

2020-06

7.7

-10.0

2020-05

4.4

-15.8

2020-04

-15.5

-19.9

2020-03

-4.6

-5.1

2020-02

0.2

-0.5

2020-01

-0.2

-1.5

2019-12

0.1

-2.2

2019-11

0.9

-2.0

2019-10

-0.9

-3.1

2019-09

-0.6

-2.9

2019-08

0.7

-2.2

2019-07

-0.7

-2.8

2019-06

0.4

-1.9

2019-05

0.0

-1.8

2019-04

-0.6

-2.8

2019-03

-0.3

-1.1

2019-02

-0.5

-1.1

2019-01

-0.9

0.5

2018-12

0.3

0.5

2018-11

-0.3

0.0

2018-10

-0.5

0.3

2018-09

0.0

2.2

2018-08

0.3

2.1

2018-07

0.0

1.6

2018-06

0.6

1.1

2018-05

-0.9

0.7

2018-04

0.7

2.7

2018-03

-0.1

1.9

2018-02

1.0

1.8

2018-01

-0.4

0.6

2017-12

-0.2

1.6

2017-11

0.1

1.4

2017-10

1.1

1.1

2017-09

0.0

0.1

2017-08

-0.2

0.5

2017-07

-0.4

0.7

2017-06

0.0

0.6

2017-05

-0.1

0.8

2017-04

1.1

-0.4

2017-03

-0.4

0.4

2017-02

-0.1

0.1

2017-01

0.2

-0.2

2016-12

0.0

0.0

2016-11

-0.1

-0.4

2016-10

0.1

-0.4

2016-09

0.2

-0.3

2016-08

-0.3

-1.6

2016-07

0.0

-1.3

2016-06

0.2

-0.6

2016-05

-0.1

-1.3

2016-04

-0.2

-0.6

2016-03

-0.1

-1.7

2016-02

-0.4

-0.5

2016-01

0.4

-0.8

2015-12

-0.3

-1.8

2015-11

-0.3

-1.6

2015-10

-0.1

-0.7

2015-09

-0.3

-1.7

2015-08

-0.3

-0.6

2015-07

0.7

-0.4

2015-06

-0.4

-1.2

2015-05

0.0

-0.3

2015-04

0.0

-0.2

2015-03

0.4

-0.1

2015-02

-0.8

0.5

2015-01

-0.6

1.9

2014-12

-0.2

1.6

2014-11

0.7

1.7

2014-10

-0.1

0.9

2014-09

0.0

1.1

2014-08

-0.6

1.2

2014-07

0.4

2.0

2014-06

0.3

1.4

2014-05

0.3

1.4

2014-04

0.0

1.0

2014-03

0.9

1.6

2014-02

0.9

0.3

2014-01

-1.1

-0.5

2013-12

-0.2

0.2

2013-11

0.0

1.2

2013-10

0.1

2.0

2013-09

0.1

1.3

2013-08

0.9

1.4

2013-07

-0.8

0.3

2013-06

0.2

0.8

2013-05

0.3

0.8

2013-04

-0.3

0.9

2013-03

-0.1

0.5

2013-02

0.4

0.6

2013-01

-0.2

0.7

2012-12

0.7

1.7

2012-11

0.6

1.6

2012-10

-0.2

0.7

2012-09

-0.2

1.7

2012-08

-0.1

2.2

2012-07

-0.2

2.5

2012-06

0.3

3.4

2012-05

-0.4

3.4

2012-04

0.5

3.7

2012-03

-0.5

2.8

2012-02

0.4

4.1

2012-01

0.9

3.5

2011-12

0.7

3.0

2011-11

-0.2

2.5

2011-10

0.5

2.7

2011-09

0.3

2.6

2011-08

0.4

2.0

2011-07

0.6

2.2

2011-06

0.1

1.7

2011-05

0.0

1.5

2011-04

-0.6

2.8

2011-03

0.6

4.5

2011-02

0.1

4.9

2011-01

0.1

4.9

2010-12

0.5

5.4

2010-11

0.1

4.6

2010-10

0.1

5.8

2010-09

0.1

6.1

2010-08

0.1

6.8

2010-07

0.5

7.5

2010-06

0.0

9.4

2010-05

1.3

9.1

2010-04

0.8

7.5

2010-03

1.3

5.3

2010-02

-0.1

2.0

2010-01

1.0

1.9

2009-12

-0.2

-2.7

2009-11

1.0

-5.6

2009-10

0.1

-8.7

2009-09

1.0

-10.2

2009-08

1.1

-13.3

2009-07

1.6

-15.3

2009-06

-0.2

-17.9

2009-05

-1.0

-18.0

2009-04

-0.7

-18.7

2009-03

-1.8

-17.8

2009-02

-0.1

-16.8

2009-01

-3.2

-17.2

2008-12

-3.4

-14.5

2008-11

-2.5

-11.7

2008-10

-0.6

-9.1

2008-09

-3.4

-8.7

2008-08

-1.3

-5.1

2008-07

-1.1

-3.6

2008-06

-0.7

-3.3

2008-05

-0.6

-2.4

2008-04

-1.0

-1.2

2008-03

-0.4

-0.6

2008-02

-0.7

1.0

2008-01

-0.2

2.4

2007-12

0.2

2.0

2007-11

0.5

3.3

2007-10

-0.2

2.7

2007-09

0.3

2.8

2007-08

-0.3

2.6

2007-07

-0.1

3.6

2007-06

0.3

3.1

2007-05

-0.1

3.4

2007-04

0.6

3.9

2007-03

0.8

2.8

2007-02

0.3

1.8

2007-01

-0.3

1.4

2006-12

1.5

2.9

2005-12

0.1

3.5

2004-12

0.8

4.1

2003-12

-0.1

2.2

2002-12

-0.6

2.4

2001-12

0.2

-5.3

2000-12

-0.6

0.8

1999-12

0.7

5.2

∆% Peak 110.7440 in 06/2007 to 85.9986 in 04/2009

  

-22.3

∆% Trough 85.9986 in 04/2009 to 99.9794 in 09/2023

  

16.3

∆% Peak 110.7440 in 06/2007 to 99.9794 in 09/2023

  

-9.7

Sources: Board of Governors of the Federal Reserve System

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

Chart I-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (Cobet and Wilson (2002); see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered sufficiently above levels before the global recession, remaining like GDP below historical trend. There is sharp contraction of output followed by continuing recovery 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). 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 Sep 1919 to Sep 2023. Growth at 2.9 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 106.7154 in Dec 2007 to 167.4053 in Sep 2023. The actual index NSA in Sep 2023 is 99.9794 which is 40.3 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 1.5 percent between Dec 1999 and Dec 2006. Using trend growth of 1.5 percent per year, the index would increase to 134.9172 in Sep 2023. The output of manufacturing at 99.9794 in Sep 2023 is 25.9 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 108.3508 in Jun 2007 to the low of 84.6376 in Jun 2009 or 21.9 percent. The NAICS manufacturing index increased from 84.6376 in Apr 2009 to 100.3412 in Sep 2023 or 18.6 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 104.6156 in Dec 2007 to 179.8486 in Sep 2023. The NAICS index at 100.3412 in Sep 2023 is 44.2 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 104.6156 in Dec 2007 to 136.4274 in Sep 2023. The NAICS index at 100.3412 in Sep 2023 is 26.5 percent below trend under this alternative calculation.

clip_image026

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

Source: Board of Governors of the Federal Reserve System

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

Additional detail on industrial production and capacity utilization is in Chart I-2 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is oscillating above the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession, stalling in the final segment followed by recovery. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction, declining in the final segment. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but recovered sharply above the level before the contraction with alternating recent decline/improvement. There are deep contractions in Mar-Apr 2020 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).

clip_image027

Chart I-2, US, Industrial Production, Capacity and Utilization

Source: Board of Governors of the Federal Reserve System

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

The modern industrial revolution of Jensen (1993) is captured in Chart I-3 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Output of energy materials was stagnant before the contraction but recovered sharply above the level before the contraction with alternating recent decline/improvement followed by stability and renewed contraction. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart I-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression (https://cmpassocregulationblog.blogspot.com/2022/10/annual-update-of-us-product-and-income.html and earlier https://cmpassocregulationblog.blogspot.com/2022/09/us-gdp-contracting-at-saar-of-06.html). The lower part of Chart I-3 shows recent strong growth of energy compared with non-energy. There are deep contractions in Mar-Apr 2020 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).

clip_image028

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

Source: Board of Governors of the Federal Reserve System

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

United States manufacturing output from 1919 to 2023 monthly is in Chart I-4 of the Board of Governors of the Federal Reserve System. The second industrial revolution of Jensen (1993) is quite evident in the acceleration of the rate of growth of output given by the sharper slope in the 1980s and 1990s. Growth was robust after the shallow recession of 2001 but dropped sharply during the global recession after IVQ2007. Manufacturing output recovered sharply but has not reached earlier levels and is losing momentum at the margin. There is 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 Sep 1919 to Sep 2023. Growth at 2.9 percent per year would raise the NSA index of manufacturing output (SIC, Standard Industrial Classification) from 106.7154 in Dec 2007 to 167.4053 in Sep 2023. The actual index NSA in Sep 2023 is 99.9794 which is 40.3 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 1.5 percent between Dec 1999 and Dec 2006. Using trend growth of 1.5 percent per year, the index would increase to 134.9172 in Sep 2023. The output of manufacturing at 99.9794 in Sep 2023 is 25.9 percent below trend under this alternative calculation. Using the NAICS (North American Industry Classification System), manufacturing output fell from the high of 108.3508 in Jun 2007 to the low of 84.6376 in Jun 2009 or 21.9 percent. The NAICS manufacturing index increased from 84.6376 in Apr 2009 to 100.3412 in Sep 2023 or 18.6 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 104.6156 in Dec 2007 to 179.8486 in Sep 2023. The NAICS index at 100.3412 in Sep 2023 is 44.2 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 104.6156 in Dec 2007 to 136.4274 in Sep 2023. The NAICS index at 100.3412 in Sep 2023 is 26.5 percent below trend under this alternative calculation.

clip_image029

Chart I-4, US, Manufacturing Output, 1919-2023

Source: Board of Governors of the Federal Reserve System

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

Chart I-7 of the Board of Governors of the Federal Reserve System shows that output of durable manufacturing accelerated in the 1980s and 1990s with slower growth in the 2000s perhaps because processes matured. Growth was robust after the major drop during the global recession but appears to vacillate in the final segment. There is sharp contraction in Mar-Apr 2020 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). There is initial recovery in May 2020-Oct 2022 with deterioration/weakness and renewed oscillating growth in Nov 2022-Se[ 2023.

clip_image030

Chart I-7, US, Output of Durable Manufacturing, 1972-2023

Source: Board of Governors of the Federal Reserve System

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

Chart V-3D provides the index of US manufacturing (NAICS) from Jan 1972 to Sep 2023. The index continued increasing during the decline of manufacturing jobs after the early 1980s. There are likely effects of changes in the composition of manufacturing with also changes in productivity and trade. There is sharp decline 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).

clip_image031

Chart V-3D, United States Manufacturing (NAICS) NSA, Jan 1972 to Jun 2023

Source: Board of Governors of the Federal Reserve System

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

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022, 2023.

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