Monday, January 20, 2014

World Inflation Waves, Interest Rate Risks, Squeeze of Economic Activity Induced by Zero Interest Rates, Cyclical Slow Growth not Secular Stagnation, Collapse of United States Dynamism of Income Growth and Employment Creation, United States Industrial Production, World Financial Turbulence, World Economic Slowdown and Global Recession Risk: Part VII

 

World Inflation Waves, Interest Rate Risks, Squeeze of Economic Activity Induced by Zero Interest Rates, Cyclical Slow Growth not Secular Stagnation, Collapse of United States Dynamism of Income Growth and Employment Creation, United States Industrial Production, World Financial Turbulence, World Economic Slowdown and Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014

Executive Summary

I World Inflation Waves

IA Appendix: Transmission of Unconventional Monetary Policy

IB1 Theory

IB2 Policy

IB3 Evidence

IB4 Unwinding Strategy

IB United States Inflation

IC Long-term US Inflation

ID Current US Inflation

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

IB Collapse of United States Dynamism of Income Growth and Employment Creation

II United States Industrial Production

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

IX Conclusion. Lucas (2011May) estimates US economic growth in the long-term at 3 percent per year and about 2 percent per year in per capita terms. There are displacements from this trend caused by events such as wars and recessions but the economy then returns to trend. Historical US GDP data exhibit remarkable growth: Lucas (2011May) estimates an increase of US real income per person by a factor of 12 in the period from 1870 to 2010. The explanation by Lucas (2011May) of this remarkable growth experience is that government provided stability and education while elements of “free-market capitalism” were an important driver of long-term growth and prosperity. Lucas sharpens this analysis by comparison with the long-term growth experience of G7 countries (US, UK, France, Germany, Canada, Italy and Japan) and Spain from 1870 to 2010. Countries benefitted from “common civilization” and “technology” to “catch up” with the early growth leaders of the US and UK, eventually growing at a faster rate. Significant part of this catch up occurred after World War II. Lucas (2011May) finds that the catch up stalled in the 1970s. The analysis of Lucas (2011May) is that the 20-40 percent gap that developed originated in differences in relative taxation and regulation that discouraged savings and work incentives in comparison with the US. A larger welfare and regulatory state, according to Lucas (2011May), could be the cause of the 20-40 percent gap. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in USD fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. The key indicator of growth of real income per capita or what is earned per person after inflation, measures long-term economic growth and prosperity. A refined concept would include real disposable income per capita, which is what a person earns after inflation and taxes.

Table IX-1 provides the data required for broader comparison of long-term and cyclical performance of the United States economy. Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) provide important information on long-term growth and cyclical behavior. First, Long-term performance. Using annual data, US GDP grew at the average rate of 3.3 percent per year from 1929 to 2012 and at 3.2 percent per year from 1947 to 2012. Real disposable income grew at the average yearly rate of 3.2 percent from 1929 to 2012 and at 3.7 percent from 1947 to 1999. Real disposable income per capita grew at the average yearly rate of 2.0 percent from 1929 to 2012 and at 2.3 percent from 1947 to 1999. US economic growth was much faster during expansions, compensating contractions in maintaining trend growth for whole cycles. Using annual data, US real disposable income grew at the average yearly rate of 3.5 percent from 1980 to 1989 and real disposable income per capita at 2.6 percent. The US economy has lost its dynamism in the current cycle: real disposable income grew at the yearly average rate of 1.4 percent from 2006 to 2012 and real disposable income per capita at 0.6 percent. Table IX-1 illustrates the contradiction of long-term growth with the proposition of secular stagnation (Hansen 1938, 1938, 1941 with early critique by Simons (1942). Secular stagnation would occur over long periods. Table IX-1 also provides the corresponding rates of population growth that is only marginally lower at 0.8 to 0.9 percent recently from 1.1 percent over the long-term. GDP growth fell abruptly from 2.6 percent on average from 2000 to 2006 to 0.9 percent from 2006 to 2012 and real disposable income growth fell from 2.9 percent from 2000 to 2006 to 1.4 percent from 2006 to 2012. The decline of real per capita disposable income is even sharper from average 2.0 percent from 2000 to 2006 to 0.6 percent from 2006 to 2012 while population growth was 0.8 percent on average. Lazear and Spletzer (2012JHJul122) provide theory and measurements showing that cyclic factors explain currently depressed labor markets. This is also the case of the overall economy. Second, first four quarters of expansion. Growth in the first four quarters of expansion is critical in recovering loss of output and employment occurring during the contraction. In the first four quarters of expansion from IQ1983 to IVQ1983: GDP increased 7.8 percent, real disposable personal income 5.3 percent and real disposable income per capita 4.4 percent. In the first four quarters of expansion from IIIQ2009 to IIQ2010: GDP increased 2.7 percent, real disposable personal income 0.3 percent and real disposable income per capita decreased 0.5 percent. Third, first 17 quarters of expansion. In the expansion from IQ1983 to IQ1987: GDP grew 23.1 percent at the annual equivalent rate of 5.0 percent; real disposable income grew 19.5 percent at the annual equivalent rate of 4.3 percent; and real disposable income per capita grew 15.1 percent at the annual equivalent rate of 3.4 percent. In the expansion from IIIQ2009 to IIIQ2013: GDP grew 10.3 percent at the annual equivalent rate of 2.3 percent; real disposable income grew 6.3 percent at the annual equivalent rate of 1.4 percent; and real disposable personal income per capita grew 2.9 percent at the annual equivalent rate of 0.7 percent. Fourth, entire quarterly cycle. In the entire cycle combining contraction and expansion from IQ1980 to IQ1987: GDP grew 22.9 percent at the annual equivalent rate of 2.8 percent; real disposable personal income 26.4 percent at the annual equivalent rate of 3.2 percent; and real disposable personal income per capita 18.1 percent at the annual equivalent rate of 2.2 percent. In the entire cycle combining contraction and expansion from IVQ2007 to IIIQ2013: GDP grew 5.6 percent at the annual equivalent rate of 0.9 percent; real disposable personal income 7.9 percent at the annual equivalent rate of 1.3 percent; and real disposable personal income per capita 3.1 percent at the annual equivalent rate of 0.5 percent. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing. Bordo (2012 Sep27) and Bordo and Haubrich (2012DR) provide strong evidence that recoveries have been faster after deeper recessions and recessions with financial crises, casting serious doubts on the conventional explanation of weak growth during the current expansion allegedly because of the depth of the contraction of 4.3 percent from IVQ2007 to IIQ2009 and the financial crisis. The proposition of secular stagnation should explain a long-term process of decay and not the actual abrupt collapse of the economy and labor markets currently.

Table IX-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2013, %

Long-term Average ∆% per Year

GDP

Population

 

1929-2012

3.3

1.1

 

1947-2012

3.2

1.2

 

1947-1999

3.6

1.3

 

2000-2012

1.7

0.9

 

2000-2006

2.6

0.9

 

2006-2012

0.9

0.8

 

Long-term

Average ∆% per Year

Real Disposable Income

Real Disposable Income per Capita

Population

1929-2012

3.2

2.0

1.1

1947-1999

3.7

2.3

1.3

2000-2012

2.2

1.3

0.9

2000-2006

2.9

2.0

0.9

Whole Cycles

Average ∆% per Year

     

1980-1989

3.5

2.6

0.9

2006-2012

1.4

0.6

0.8

Comparison of Cycles

# Quarters

∆%

∆% Annual Equivalent

GDP

     

I83 to IV83

IQ83 to IQ87

4

17

   

I83 to IV83

I83 to IQ87

4

17

7.8

23.1

7.8

5.0

RDPI

     

I83 to IV83

I83 to I87

4

17

5.3

19.5

5.3

4.3

RDPI Per Capita

     

I83 to IV83

I83 to I87

4

17

4.4

15.1

4.4

3.4

Whole Cycle IQ1980 to IQ1987

     

GDP

30

22.9

2.8

RDPI

30

26.4

3.2

RDPI per Capita

30

18.1

2.2

Population

30

7.0

0.9

GDP

     

III09 to II10

III09 to III13

4

17

2.7

10.3

2.7

2.3

RDPI

     

III09 to II10

III09 to III13

4

17

0.3

6.3

0.3

1.4

RDPI per Capita

     

III09 to II10

II09 to IIIQ13

4

17

-0.5

2.9

-0.5

0.7

Population

     

II09 to II010

II09 to III13

4

17

0.9

3.2

0.8

0.8

IVQ2007 to IIIQ2013

23

   

GDP

24

5.6

0.9

RDPI

24

7.9

1.3

RDPI per Capita

24

3.1

0.5

Population

24

4.6

0.8

RDPI: Real Disposable Personal Income

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

There are seven basic facts illustrating the current economic disaster of the United States:

  • GDP maintained trend growth in the entire business cycle from IQ1980 to IQ1987, including contractions and expansions. GDP is well below trend in the entire business cycle from IVQ2007 to IIIQ2013, including contractions and expansions
  • Per capita real disposable income exceeded trend growth in the 1980s but is substantially below trend in IIIQ2013
  • Level of employed persons increased in the 1980s but declined into IIIQ2013
  • Level of full-time employed persons increased in the 1980s but declined into IIIQ2013
  • Level unemployed, unemployment rate and employed part-time for economic reasons fell in the recovery from the recessions in the 1980s but not substantially in the recovery since IIIQ2009
  • Wealth of households and nonprofit organizations soared in the 1980s but stagnated in real terms into IIIQ2013
  • Gross private domestic investment increased sharply from IQ1980 to IQ1987 but gross private domestic investment stagnated and private fixed investment fell from IVQ2007 into IIIQ2013

There is a critical issue of the United States economy will be able in the future to attain again the level of activity and prosperity of projected trend growth. Growth at trend during the entire business cycles built the largest economy in the world but there may be an adverse, permanent weakness in United States economic performance and prosperity. Table IX-2 provides data for analysis of these seven basic facts. The seven blocks of Table IX-2 are separated initially after individual discussion of each one followed by the full Table IX-2.

1. Trend Growth.

i. As shown in Table IX-2, actual GDP grew cumulatively 22.5 percent from IQ1980 to IQ1987, which is relatively close to what trend growth would have been at 24.8 percent. Real GDP grew 22.9 percent from IVQ1979 to IQ1987. Rapid growth at the average annual rate of 5.0 percent per quarter during the expansion from IQ1983 to IQ1987 erased the loss of GDP of 4.6 percent during the contraction and maintained trend growth at 2.8 percent for GDP and 3.2 percent for real disposable personal income over the entire cycle.

ii. In contrast, cumulative growth from IVQ2007 to IIIQ2013 was 5.6 percent while trend growth would have been 19.4 percent. GDP in IIIQ2013 at seasonally adjusted annual rate is $15,839.3 billion as estimated by the Bureau of Economic Analysis (BEA) (http://www.bea.gov/iTable/index_nipa.cfm) and would have been $17,905.3 billion, or $2066.0 billion higher, had the economy grown at trend over the entire business cycle as it happened during the 1980s and throughout most of US history. There is $2.1 trillion of foregone GDP that the economy would have created as it occurred during past cyclical expansions, which explains why employment net of population growth has not rebounded to even higher than before. There would not be recovery of full employment even with growth of 3 percent per year beginning immediately because the opportunity was lost to grow faster during the expansion from IIIQ2009 to IIIQ2013 after the recession from IVQ2007 to IIQ2009. The United States has acquired a heavy social burden of unemployment and underemployment of 29.3 million people or 18.0 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/01/twenty-nine-million-unemployed-or.html) that will not be significantly diminished even with return to growth of GDP of 3 percent per year because of growth of the labor force by new entrants. The US labor force grew from 142.583 million in 2000 to 153.124 million in 2007 or by 7.4 percent at the average yearly rate of 1.0 percent per year. The civilian noninstitutional population or those able to work, increased from 212.577 million in 2000 to 231.867 million in 2007 or 9.1 percent at the average yearly rate of 1.2 percent per year (data from http://www.bls.gov/data/). Data for the past five years cloud accuracy because of the number of people discouraged from seeking employment. The noninstitutional population of the United States increased from 231.867 million in 2007 to 243.284 million in 2012 or by 4.9 percent. In the same period, the labor force increased from 153.124 million in 2007 to 154.975 million in 2012 or by 1.2 percent and only by 0.9 percent to 153.617 million in 2011 while population increased 3.3 percent from 231.867 million in 2007 to 239.618 million in 2011 (data from http://www.bls.gov/data/). People ceased to seek jobs because they do not believe that there is a job available for them (http://cmpassocregulationblog.blogspot.com/2014/01/twenty-nine-million-unemployed-or.html). Structural change in demography occurs over relatively long periods and not suddenly as shown by Edward P. Lazear and James R. Spletzer (2012JHJul22). There is an abrupt cyclical event and no evidence for secular stagnation and similar propositions.

Period IQ1980 to IQ1987

 

GDP SAAR USD Billions

 

    IQ1980

6,517.9

    IQ1987

7,986.4

∆% IQ1980 to IQ1987 (22.9 percent from IVQ1979 $6496.8 billion)

22.5

∆% Trend Growth IQ1980 to IQ1987

24.8

Period IVQ2007 to IIIQ2013

 

GDP SAAR USD Billions

 

    IVQ2007

14,996.1

    IIIQ2013

15,839.3

∆% IVQ2007 to IIIQ2013 Actual

5.6

∆% IVQ2007 to IIIQ2013 Trend

19.4

2. Stagnating Per Capita Real Disposable Income

i. In the entire business cycle from IQ1980 to IQ1987, as shown in Table IX-2, trend growth of per capita real disposable income, or what is left per person after inflation and taxes, grew cumulatively 18.0 percent, which is close to what would have been trend growth of 16.0 percent.

ii. In contrast, in the entire business cycle from IVQ2007 to IIIQ2013, per capita real disposable income increased 3.1 percent while trend growth would have been 12.6 percent. Income available after inflation and taxes is about the same or lower as before the contraction after 17 consecutive quarters of GDP growth at mediocre rates relative to those prevailing during historical cyclical expansions. In IIQ2013, personal income grew at the SAAR of 4.7 percent after falling at 4.1 percent in IQ2013. In IIQ2013, real personal income excluding current transfer receipts grew at 5.6 percent after falling at 7.2 percent in IQ2013. In IIQ2013, real disposable personal income grew at 4.1 percent after falling at minus 7.9 percent in IQ2013 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1113.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

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

Nominal personal income grew at 4.0 percent in IIIQ2013 and real personal income excluding current transfer receipts at 2.0 percent while real disposable income grew at 3.0 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1113.pdf).

Period IQ1980 to IQ1987

 

Real Disposable Personal Income per Capita IQ1980 Chained 2009 USD

20,242

Real Disposable Personal Income per Capita IQ1987 Chained 2009 USD

23,891

∆% IQ1980 to IQ1987 (18.1 percent from IVQ1982 $20,230)

18.0

∆% Trend Growth

16.0

Period IVQ2007 to IIIQ2013

 

Real Disposable Personal Income per Capita IVQ2007 Chained 2009 USD

35,823

Real Disposable Personal Income per Capita IIIQ2013 Chained 2009 USD

36,943

∆% IVQ2007 to IIIQ2013

3.1

∆% Trend Growth

12.6

3. Number of Employed Persons

i. As shown in Table IX-2, the number of employed persons increased over the entire business cycle from 98.527 million not seasonally adjusted (NSA) in IQ1980 to 110.229 million NSA in IQ1987 or by 11.9 percent.

ii. In contrast, during the entire business cycle the number employed fell from 146.334 million in IVQ2007 to 144,651 million in IIIQ2013 or by 1.2 percent. There are 29.3 million persons unemployed or underemployed, which is 18.0 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/01/twenty-nine-million-unemployed-or.html).

Period IQ1980 to IQ1987

 

Employed Millions IQ1980 NSA End of Quarter

98.527

Employed Millions IQ1987 NSA End of Quarter

110.229

∆% Employed IQ1980 to IQ1987

11.9

Period IVQ2007 to IIIQ2013

 

Employed Millions IVQ2007 NSA End of Quarter

146.334

Employed Millions IIIQ2013 NSA End of Quarter

144.651

∆% Employed IVQ2007 to IIIQ2013

-1.2

4. Number of Full-Time Employed Persons

i. As shown in Table IX-2, during the entire business cycle in the 1980s, including contractions and expansion, the number of employed full-time rose from 81.280 million NSA in IQ1980 to 90.270 million NSA in IQ1987 or 11.1 percent.

ii. In contrast, during the entire current business cycle, including contraction and expansion, the number of persons employed full-time fell from 121.042 million in IVQ2007 to 117.308 million in IIIQ2013 or by minus 3.1 percent.

4. Number of Full-time Employed Persons

Period IQ1980 to IQ1987

 

Employed Full-time Millions IQ1980 NSA End of Quarter

81.280

Employed Full-time Millions IQ1987 NSA End of Quarter

90,270

∆% Full-time Employed IQ1980 to IQ1987

11.1

Period IVQ2007 to IIIQ2013

 

Employed Full-time Millions IVQ2007 NSA End of Quarter

121.042

Employed Full-time Millions IIIQ2013 NSA End of Quarter

117.308

∆% Full-time Employed IVQ2007 to IIIQ2013

-3.1

5. Unemployed, Unemployment Rate and Employed Part-time for Economic Reasons.

i. As shown in Table IX-2 and in the following block, in the cycle from IQ1980 to IQ1987: (a) The rate of unemployment was virtually the same at 6.9 percent in IQ1987 relative to 6.6 percent in IQ1980. (b) The number unemployed increased from 6.983 million in IQ1980 to 8.124 million in IQ1987 or 16.3 percent. (c) The number employed part-time for economic reasons increased 44.4 percent from 3.624 million in IQ1980 to 5.232 million in IQ1987.

ii. In contrast, in the economic cycle from IVQ2007 to IIIQ2013: (a) The rate of unemployment increased from 4.8 percent in IVQ2007 to 7.0 percent in IIIQ2013. (b) The number unemployed increased 47.7 percent from 7.371 million in IVQ2007 to 10.885 million in IIIQ2013. (c) The number employed part-time for economic reasons because they could not find any other job increased 58.4 percent from 4.750 million in IVQ2007 to 7.522 million in IIIQ2013. (d) U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA increased from 8.7 percent in IVQ2007 to 13.1 percent in IIIQ2013.

Period IQ1980 to IQ1987

 

Unemployment Rate IQ1980 NSA End of Quarter

6.6

Unemployment Rate  IQ1987 NSA End of Quarter

6.9

Unemployed IQ1980 Millions End of Quarter

6.983

Unemployed IQ1987 Millions End of Quarter

8.124

∆%

16.3

Employed Part-time Economic Reasons Millions IQ1980 End of Quarter

3.624

Employed Part-time Economic Reasons Millions IQ1987 End of Quarter

5.232

∆%

44.4

Period IVQ2007 to IIIQ2013

 

Unemployment Rate IVQ2007 NSA End of Quarter

4.8

Unemployment Rate IIIQ2013 NSA End of Quarter

7.0

Unemployed IVQ2007 Millions End of Quarter

7.371

Unemployed IIIQ2013 Millions End of Quarter

10.885

∆%

47.7

Employed Part-time Economic Reasons IVQ2007 Millions End of Quarter

4.750

Employed Part-time Economic Reasons Millions IIIQ2013 End of Quarter

7.522

∆%

58.4

U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA

 

IVQ2007

8.7

IIIQ2013

13.1

6. Wealth of Households and Nonprofit Organizations.

The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and from IVQ1979) to IQ1987 and from IVQ2007 to IIIQ2012 is provided in Table IX-2 and in the following block. i. The data reveal the following facts for the cycles in the 1980s:

  • IVQ1979 to IQ1987. Net worth increased 94.1 percent from IVQ1979 to IQ1987, the all items CPI index increased 46.2 percent from 76.7 in Dec 1979 to 112.1 in Mar 1987 and real net worth increased 32.8 percent.
  • IQ1980 to IVQ1985. Net worth increased 65.7 percent, the all items CPI index increased 36.5 percent from 80.1 in Mar 1980 to 109.3 in Dec 1985 and real net worth increased 21.4 percent.
  • IVQ1979 to IVQ1985. Net worth increased 69.4 percent, the all items CPI index increased 42.5 percent from 76.7 in Dec 1979 to 109.3 in Dec 1985 and real net worth increased 18.8 percent.
  • IQ1980 to IQ1987. Net worth increased 89.9 percent, the all items CPI index increased 39.9 percent from 80.1 in Mar 1980 to 112.1 in Mar 1987 and real net worth increased 35.7 percent.

ii. There is disastrous performance in the current economic cycle:

  • IVQ2007 to IIIQ2013. Net worth increased 13.6 percent, the all items CPI increased 11.5 percent from 210.036 in Dec 2007 to 234.149 in Sep 2013 and real or inflation adjusted net worth increased 1.9 percent.

The explanation is partly in the sharp decline of wealth of households and nonprofit organizations and partly in the mediocre growth rates of the cyclical expansion beginning in IIIQ2009. US economic growth has been at only 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the third estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html).The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.4 percent from IQ1983 to IVQ1986 and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html).As a result, there are 29.3 million unemployed or underemployed in the United States for an effective unemployment rate of 18.0 percent (http://cmpassocregulationblog.blogspot.com/2014/01/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html). 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.

Period IQ1980 to IVQ1985

 

Net Worth of Households and Nonprofit Organizations USD Millions

 

IVQ1979

IQ1980

9,021.2

9,220.3

IVQ1985

IIIQ1986

IVQ1986

IQ1987

15,278.5

16,292.9

16,845,1

17,509.1

∆ USD Billions IVQ1985

IQ1987

IQ1980-IVQ1985

IQ1980-IIIQ1986

IQ1980-IVQ1986

IQ1980-IQ1987

+6,257.3  ∆%69.4 R∆%18.8

+8,487.9  ∆%94.1 R∆%32.8

+6,058.2 ∆%65.7 R∆%21.4

+7,072.6 ∆%76.7 R∆%28.4

+7,624.8 ∆%82.7 R∆%32.4

+8,288.8 ∆%89.9 R∆%35.7

Period IVQ2007 to IQ2013

 

Net Worth of Households and Nonprofit Organizations USD Millions

 

IVQ2007

67,990.3

IIIQ2013

77,259.3

∆ USD Billions

9,269.0 ∆%13.6 R∆%1.9

Net Worth = Assets – Liabilities. R∆% real percentage change or adjusted for CPI percentage change.

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: third quarter 2013. Washington, DC, Federal Reserve System, Dec 9.

http://www.federalreserve.gov/releases/Z1/Current/

7. Gross Private Domestic Investment.

i. The comparison of gross private domestic investment in the entire economic cycles from IQ1980 to IQ1987 and from IVQ2007 to IIIQ2013 is in the following block and in Table IX-2. Gross private domestic investment increased from $951.6 billion in IQ1980 to $1,173.8 billion in IQ1987 or by 23.4 percent.

ii In the current cycle, gross private domestic investment increased from $2,605.2 billion in IVQ2007 to $2,627.2 billion in IIIQ2013, or 0.8 percent. Private fixed investment fell from $2,586.3 billion in IVQ2007 to $2,494.0 billion in IIIQ2013, or decline by 3.6 percent.

Period IQ1980 to IQ1987

 

Gross Private Domestic Investment USD 2009 Billions

 

IQ1980

951.6

IQ1987

1,173.8

∆%

23.4

Period IVQ2007 to IIIQ2013

 

Gross Private Domestic Investment USD Billions

 

IVQ2007

2,605.2

IIQ2013

2,627.2

∆%

0.8

Private Fixed Investment USD 2009 Billions

 

IVQ2007

2,586.3

IIIQ2013

2,494.0

∆%

-3.6

Table IX-2, US, GDP and Real Disposable Personal Income per Capita Actual and Trend Growth and Employment, 1980-1985 and 2007-2012, SAAR USD Billions, Millions of Persons and ∆%

   

Period IQ1980 to IQ1987

 

GDP SAAR USD Billions

 

    IQ1980

6,517.9

    IQ1987

7,986.4

∆% IQ1980 to IQ1987 (22.9 percent from IVQ1982 $6496.8 billion)

21.1

∆% Trend Growth IQ1980 to IQ1987

24.8

Real Disposable Personal Income per Capita IQ1980 Chained 2009 USD

20,242

Real Disposable Personal Income per Capita IQ1987 Chained 2009 USD

23,891

∆% IQ1980 to IQ1987 (18.1 percent from IVQ1982 $20,230 billion)

18.0

∆% Trend Growth

16.0

Employed Millions IQ1980 NSA End of Quarter

98.527

Employed Millions IQ1987 NSA End of Quarter

110.229

∆% Employed IQ1980 to IQ1987

11.9

Employed Full-time Millions IQ1980 NSA End of Quarter

81.280

Employed Full-time Millions IQ1987 NSA End of Quarter

90.270

∆% Full-time Employed IQ1980 to IQ1987

11.1

Unemployment Rate IQ1980 NSA End of Quarter

6.6

Unemployment Rate  IQ1987 NSA End of Quarter

6.9

Unemployed IQ1980 Millions NSA End of Quarter

6.983

Unemployed IQ1987 Millions NSA End of Quarter

8.124

∆%

16.3

Employed Part-time Economic Reasons IQ1980 Millions NSA End of Quarter

3.624

Employed Part-time Economic Reasons Millions IQ1987 NSA End of Quarter

5.232

∆%

44.4

Net Worth of Households and Nonprofit Organizations USD Billions

 

IVQ1979

9,021.4

IQ1987

17,509.1

∆ USD Billions

+8,487.9

∆% CPI Adjusted

32.8

Gross Private Domestic Investment USD 2009 Billions

 

IQ1980

951.6

IQ1987

1173.8

∆%

23.4

Period IVQ2007 to IIQ2013

 

GDP SAAR USD Billions

 

    IVQ2007

14,996.1

    IIIQ2013

15,839.3

∆% IVQ2007 to IIIQ2013

5.6

∆% IVQ2007 to IIIQ2013 Trend Growth

19.4

Real Disposable Personal Income per Capita IVQ2007 Chained 2009 USD

35,823

Real Disposable Personal Income per Capita IIIQ2013 Chained 2009 USD

36,943

∆% IVQ2007 to IIIQ2013

3.1

∆% Trend Growth

12.6

Employed Millions IVQ2007 NSA End of Quarter

146.334

Employed Millions IIIQ2013 NSA End of Quarter

144.651

∆% Employed IVQ2007 to IIIQ2013

-1.2

Employed Full-time Millions IVQ2007 NSA End of Quarter

121.042

Employed Full-time Millions IIIQ2013 NSA End of Quarter

117.308

∆% Full-time Employed IVQ2007 to IIIQ2013

-3.1

Unemployment Rate IVQ2007 NSA End of Quarter

4.8

Unemployment Rate IIIQ2013 NSA End of Quarter

7.0

Unemployed IVQ2007 Millions NSA End of Quarter

7.371

Unemployed IIIQ2013 Millions NSA End of Quarter

10.885

∆%

47.7

Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter

4.750

Employed Part-time Economic Reasons Millions IIIQ2013 NSA End of Quarter

7.522

∆%

58.4

U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA

 

IVQ2007

8.7

IIIQ2013

13.1

Net Worth of Households and Nonprofit Organizations USD Billions

 

IVQ2007

67,990.3

IIIQ2013

77.259.3

∆ USD Billions

9,269 ∆%13.6 R∆%1.9

Gross Private Domestic Investment USD Billions

 

IVQ2007

2,605.2

IIIQ2013

2,627.2

∆%

0.8

Private Fixed Investment USD 2005 Billions

 

IVQ2007

2,586.3

IIIQ2013

2,494.0

∆%

-3.6

Note: GDP trend growth used is 3.0 percent per year and GDP per capita is 2.0 percent per year as estimated by Lucas (2011May) on data from 1870 to 2010.

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm US Bureau of Labor Statistics http://www.bls.gov/data/. Board of Governors of the Federal Reserve System. 2013Jun6. Flow of funds, balance sheets and integrated macroeconomic accounts. Washington, DC, Federal Reserve System, Jun 6.

The Congressional Budget Office (CBO 2013BEOFeb5) estimates potential GDP, potential labor force and potential labor productivity provided in Table IX-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2012 at 3.3 percent per year. The projected path is significantly lower at 2.2 percent per year from 2012 to 2023. The legacy of the economic cycle expansion from IIIQ2009 to IIIQ2013 at 2.3 percent on average is in contrast with 5.0 percent on average in the expansion from IQ1983 to IQ1987 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 29.3 million or 18.0 percent of the effective labor force in Dec 2013 (http://cmpassocregulationblog.blogspot.com/2014/01/twenty-nine-million-unemployed-or.html) with much lower hiring than in the period before the current cycle (http://cmpassocregulationblog.blogspot.com/2013/12/theory-and-reality-of-secular.html).

Table IX-3, US, Congressional Budget Office History and Projections of Potential GDP of US Overall Economy, ∆%

 

Potential GDP

Potential Labor Force

Potential Labor Productivity*

Average Annual ∆%

     

1950-1973

3.9

1.6

2.3

1974-1981

3.3

2.5

0.8

1982-1990

3.1

1.6

1.5

1991-2001

3.1

1.3

1.8

2002-2012

2.2

0.8

1.4

Total 1950-2012

3.3

1.5

1.7

Projected Average Annual ∆%

     

2013-2018

2.2

0.6

1.6

2019-2023

2.3

0.5

1.8

2012-2023

2.2

0.5

1.7

*Ratio of potential GDP to potential labor force

Source: CBO (2013BEOFeb5).

Chart IB-1 of the Congressional Budget Office (CBO 2013BEOFeb5) provides actual and potential GDP of the United States from 2000 to 2011 and projected to 2024. Lucas (2011May) estimates trend of United States real GDP of 3.0 percent from 1870 to 2010 and 2.2 percent for per capita GDP. The United States successfully returned to trend growth of GDP by higher rates of growth during cyclical expansion as analyzed by Bordo (2012Sep27, 2012Oct21) and Bordo and Haubrich (2012DR). Growth in expansions following deeper contractions and financial crises was much higher in agreement with the plucking model of Friedman (1964, 1988). The unusual weakness of growth at 2.3 percent on average from IIIQ2009 to IIIQ2013 during the current economic expansion in contrast with 5.0 percent on average in the cyclical expansion from IQ1983 to IQ1987 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html) cannot be explained by the contraction of 4.3 percent of GDP from IVQ2007 to IIQ2009 and the financial crisis. Weakness of growth in the expansion is perpetuating unemployment and underemployment of 29.3 million or 18.0 percent of the labor force as estimated for Dec 2013 (http://cmpassocregulationblog.blogspot.com/2014/01/twenty-nine-million-unemployed-or.html). There is no exit from unemployment/underemployment and stagnating real wages because of the collapse of hiring (http://cmpassocregulationblog.blogspot.com/2013/12/theory-and-reality-of-secular.html). The US economy and labor markets collapsed without recovery. Abrupt collapse of economic conditions can be explained only with cyclic factors (Lazear and Spletzer 2012Jul22) and not by secular stagnation (Hansen 1938, 1939, 1941 with early dissent by Simons 1942).

clip_image002

Chart IB-1, US, Congressional Budget Office, Actual and Projections of Potential GDP, 2000-2024, Trillions of Dollars

Source: Congressional Budget Office, CBO (2013BEOFeb5).

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