Expanding Bank Cash and Deposits with Stagnating Loans, Budget/Debt Quagmire, United States Housing Collapse, Global Financial Turbulence and World Economic and Trade Slowdown with Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I United States Monetary and Fiscal Policy
IA United States Commercial Banks Assets and Liabilities
IA1 Transmission of Monetary Policy
IA2 Functions of banks
IA3 United States Commercial Banks Assets and Liabilities
IB United States Budget/Debt Quagmire
II United States Housing Collapse
IIA United States New House Sales
IIB United States House Prices
IIC Factors of United States Housing Collapse
III World Financial Turbulence
IIIA Financial Risks
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
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
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
Appendix I The Great Inflation
IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.
Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 2.2 | 1.4 | 0.5 | 8.3 |
| Japan | 3.5 | -0.2 | -2.1 | 4.3 |
| China | 8.9 | 1.8 | -2.9 | |
| UK | -0.8 | 2.6* | 1.7* output | 8.0 |
| Euro Zone | -0.4 | 2.4 | 1.8 | 11.2 |
| Germany | 1.0 CA | 1.9 | 1.6 | 5.4 |
| France | 0.3 | 2.2 | 1.3 | 10.1 |
| Nether-lands | -0.5 | 2.6 | 1.8 | 5.1 |
| Finland | 0.6 | 3.1 | 1.4 | 7.5 |
| Belgium | -0.4 | 2.0 | 2.6 | 7.2 |
| Portugal | -3.3 | 2.8 | 2.7 | 15.4 |
| Ireland | NA | 2.0 | 2.4 | 14.8 |
| Italy | -2.5 | 3.6 | 2.2 | 10.8 |
| Greece | -6.2 | 0.9 | 3.1 | NA |
| Spain | -1.0 | 2.2 | 2.5 | 24.8 |
Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier
*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/july-2012/index.html **Core
PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/july-2012/index.html Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html
Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 2.2 percent in IIQ2012 relative to IIQ2011 (Table 8, p 27 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_adv.pdf) See I Mediocre and Decelerating United States Economic Growth http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states.html). Japan’s GDP fell 0.7 percent in IVQ2011 relative to IVQ2010 and contracted 1.8 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 7.4 percent in IIIQ2011, increasing at the SAAR of 0.3 percent in IVQ 2011, 5.5 percent in IQ2012 and 1.4 percent in IIQ2012 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html); the UK grew at minus 0.5 percent in IIQ2012 relative to IQ2012 and GDP fell 0.5 percent in IIQ2012 relative to IIQ2011 (see Section VH and earlier at http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html); and the Euro Zone grew at minus 0.2 percent in IIQ2012, 0.0 percent in IQ2012 relative to IVQ2011 and fell 0.4 percent in IIQ2012 relative to IIQ2011 (see Section VD at http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html). These are stagnating or “growth recession” rates, which are positive or about nil growth rates instead of contractions but insufficient to recover employment. The rates of unemployment are quite high: 8.3 percent in the US but 17.9 percent for unemployment/underemployment or job stress of 28.6 million (see Table I-4 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs.html http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight.html http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html), 4.3 percent for Japan (see Section VB http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or_3778.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html), 8.0 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH at http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial_22.html and 11.2 percent in the Euro Zone (section VD at http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or_3778.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.4 percent in the US, -0.2 percent for Japan, 1.8 percent for China, 2.4 percent for the Euro Zone and 2.6 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III and earlier http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism.html); (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (see IIB http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html), weak hiring with the loss of 10 million full-time jobs (see Section I at http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see Section I at http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see Section I in this comment and earlier IV Budget/Debt Quagmire in http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.
In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.
Jon Hilsenrath, writing on “Bernanke letter defends Fed actions,” on Aug 24, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444358404577609231770784446.html?mod=WSJ_hp_LEFTWhatsNewsCollection#project%3Dissaletter082412%26articleTabs%3Darticle), finds support for FOMC policies and possible further actions in a letter by Chairman Bernanke (2012Aug22) in reply to inquiry by Representative Darrell Issa (2012Aug1), which were obtained and published by the WSJ on Aug 22, 2012 (http://online.wsj.com/public/resources/documents/Bernankeletter0812.pdf http://s3.documentcloud.org/documents/413447/issaletter0812.pdf). Issa (2012Aug1) inquired from Chairman Bernanke about analysis of monetary policy of various types, including by distinguished Professor Allan Meltzer (http://www.amazon.com/Allan-H.-Meltzer/e/B001H6MWPC/ref=ntt_dp_epwbk_0), the author of three scholarly analytical volumes on the history of the Federal Reserve (Meltzer 2004, 2010a, 2010b), who has emphasized the short-term nature of economic policy that could be more effective if focused on the long term. Chairman Bernanke (2012Aug22), who is also an eminent scholar, provided detailed answers to the queries by Issa (2012Aug1). The first sentence of the reply ignited positive risk taking in financial markets operating with low holiday volumes: “There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery.”
The statement of the FOMC at the conclusion of its meeting on Aug 1, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20120801a.htm):
“Release Date: August 1, 2012
For immediate release
Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
There are several important issues in this statement.
1. Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):
“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”
2. Extending Average Maturity of Holdings of Securities. The statement of Apr 25, 2012, invokes the mandate that inflation is subdued but employment below maximum such that further accommodation is required. Accommodation consists of low interest rates. The new “Operation Twist” (http://cmpassocregulationblog.blogspot.com/2011_09_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html) or restructuring the portfolio of securities of the Fed by selling short-dated securities and buying long-term securities has the objective of reducing long-term interest rates. The FOMC is extending this program until the end of 2012.
3. Continuing Maturity Extension Program. This program is discussed in Section II Twist Again Extension (http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html). The statement affirms: “The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.
4. Target of Fed Funds Rate. The FOMC continues to maintain the target of fed funds rate at 0 to ¼ percent.
5. Advance Guidance. The FOMC increases transparency by advising on the expectation of the future path of fed funds rate. This guidance is the view that conditions such as “low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
6. Monitoring and Policy Focus. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Jun 20, 2012. The Fed releases the data with careful explanations (http://www.federalreserve.gov/newsevents/press/monetary/20120620b.htm). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IIQ2012 is analyzed in I Mediocre and Decelerating United States Economic Growth (http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html) and the PCE inflation data from the report on personal income and outlays (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_09.html). The Bureau of Economic Analysis (BEA) provides the first estimate of IIQ2012 GDP with the second estimate to be released on Aug 29 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in this blog as soon as available (for the latest report for Jun see http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm and http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html). The next report on “Personal Income and Outlays” for Jul will be released at 8:30 AM on Aug 30, 2012. PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog (the Jul report is analyzed at http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html). The report for Aug will be released on Sep 7, 2012 (http://www.bls.gov/cps/home.htm). “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf).
It is instructive to focus on 2012, as 2013, 2014 and longer term are too far away, and there is not much information on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Jun 20, 2012, and the second row “PR” the projection of the Apr 25, 2012 meeting. There are three major changes in the view.
1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun 2011 to 2.5 to 2.9 percent in Nov 2011 and 2.2 to 2.7 percent at the Jan 25 meeting but increased it to 2.4 to 2.9 percent at the Apr 25, 2012 meeting, reducing it to 1.9 to 2.4 percent at the Jun 20, 2012 meeting.
2. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun 2011 to 8.5 to 8.7 percent in Nov 2011 but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting and further down to 7.8 to 8.0 percent at the Apr 25, 2012 meeting but increased it to 8.0 to 8.2 percent at the Jun 20, 2012 meeting.
3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun 2011 to virtually the same of 1.4 to 2.0 percent in Nov 2011 but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting but increased it to 1.9 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.2 to 1.7 percent at the Jun 20, 2012 meeting.
4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun 2011 of 1.4 to 2.0 percent and the Nov 2011 projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting but increased to 1.8 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.7 to 2.0 percent at the Jun 20, 2012 meeting.
Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, June 2012 and April 2012
| ∆% GDP | UNEM % | ∆% PCE Inflation | ∆% Core PCE Inflation | |
| Central | ||||
| 2012 Apr PR | 1.9 to 2.4 2.4 to 2.9 | 8.0 to 8.2 7.8 to 8.0 | 1.2 to 1.7 1.9 to 2.0 | 1.7 to 2.0 1.8 to 2.0 |
| 2013 | 2.2 to 2.8 | 7.5 to 8.0 | 1.5 to 2.0 | 1.6 to 2.0 1.7 to 2.0 |
| 2014 | 3.0 to 3.5 | 7.0 to 7.7 | 1.5 to 2.0 | 1.6 to 2.0 |
| Longer Run Apr PR | 2.3 to 2.5 2.3 to 2.6 | 5.2 to 6.0 5.2 to 6.0 | 2.0 2.0 | |
| Range | ||||
| 2012 | 1.6 to 2.5 | 7.8 to 8.4 | 1.2 to 2.0 | 1.7 to 2.0 |
| 2013 | 2.2 to 3.5 | 7.0 to 8.1 | 1.5 to 2.1 | 1.4 to 2.1 |
| 2014 | 2.8 to 4.0 | 6.3 to 7.7 | 1.5 to 2.2 | 1.5 to 2.2 |
| Longer Run Apr PR | 2.2 to 3.0 2.2 to 3.0 | 4.9 to 6.3 4.9 to 6.0 | 2.0 2.0 |
Notes: UEM: unemployment; PR: Projection
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf
Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):
“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.
The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”
The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.
The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf). There are 16 participants expecting the rate to remain at 0 to ¼ percent in 2012 and only three to be higher. Not much change is expected in 2013 either with 13 participants anticipating the rate at the current target of 0 to ¼ percent and only six expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for six participants with five expecting the rate to be in the range of 0.5 to 1 percent and five participants expecting rates from 1 to 2.0 percent but only three with rates exceeding 2.0 percent. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014.
Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012
| 0 to 0.25 | 0.5 to 1.0 | 1.0 to 1.5 | 1.0 to 2.0 | 2.0 to 3.0 | 3.0 to 4.5 | |
| 2012 | 16 | 3 | ||||
| 2013 | 13 | 2 | 3 | 1 | ||
| 2014 | 6 | 5 | 5 | 3 | ||
| Longer Run | 19 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf
Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2012 to 2015. It is evident from Table IV-4 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.
Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012
| Appropriate Year of Increasing Target Fed Funds Rate | Number of Participants |
| 2012 | 3 |
| 2013 | 3 |
| 2014 | 7 |
| 2015 | 6 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf
V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) to show GDP in dollars in 2010 and the growth rate of real GDP of the world and selected regional countries from 2011 to 2014. The IMF revised some of the projections in its World Economic Outlook Update released on Jul 16, 2012 (http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm). Table V-1 incorporates these revisions with lines “Rev” where appropriate. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has lowered its forecast of the world economy to 3.5 percent in 2012 but accelerating to 3.9 percent in 2013 instead of 4.1 percent in the earlier projection, 4.4 percent in 2014 and 4.5 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,670 billion of world output of $69,660 billion, or 48.3 percent, but are projected to grow at much lower rates than world output, 2.0 percent on average from 2012 to 2015 in contrast with 4.1 percent for the world as a whole, incorporating the revisions. While the world would grow 17.3 percent in the four years from 2012 to 2015, the G7 as a whole would grow 8.4 percent. The difference in dollars of 2011 is rather high: growing by 17.3 percent would add $12.1 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,869 but growing by 8.4 percent would add $5.9 trillion of output to the world, or about the output of Japan in 2011. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2011 of $25,237 billion, or 36.2 percent of world output. The EMDEs would grow cumulatively 26.3 percent or at the average yearly rate of 6.0 percent, contributing $6.6 trillion from 2012 to 2015 or the equivalent of somewhat less than the GDP of $7,298 billion of China in 2011. The final four countries in Table 1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,317 billion, or 19.1 percent of world output, which is equivalent to 39.6 percent of the combined output of the major advanced economies of the G7.
Table V-1, IMF World Economic Outlook Database Projections of Real GDP Growth
| GDP USD 2011 | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | |
| World Rev | 69,660 | 3.5 | 4.1 3.9 | 4.4 | 4.5 |
| G7 Rev | 33,670 | 1.5 1.4 | 1.9 1.9 | 2.3 | 2.5 |
| Canada | 1,737 | 2.1 | 2.2 | 2.4 | 2.4 |
| France Rev | 2,776 | 0.5 0.3 | 1.1 0.8 | 1.9 | 1.9 |
| DE Rev | 3,577 | 0.6 1.0 | 1.5 1.4 | 1.3 | 1.3 |
| Italy | 2,199 | -1.9 | -0.3 | 0.5 | 1.0 |
| Japan Rev | 5,869 | 2.0 2.4 | 1.7 1.5 | 1.5 | 1.3 |
| UK | 2,418 | 0.8 | 2.0 | 2.5 | 2.6 |
| US Rev | 15,094 | 2.1 0.2 | 2.4 1.4 | 2.9 | 3.3 |
| Euro Area Rev | 13,115 | -0.3 | 0.9 0.7 | 1.4 | 1.6 |
| DE Rev | 3,577 | 0.6 1.0 | 1.5 1.4 | 1.3 | 1.3 |
| France Rev | 2,776 | 0.5 0.3 | 1.1 0.8 | 1.9 | 1.9 |
| Italy | 2,199 | -1.9 | -0.3 | 0.5 | 1.0 |
| POT | 239 | -3.3 | 0.3 | 2.1 | 1.9 |
| Ireland | 218 | 0.5 | 2.1 | 2.5 | 2.8 |
| Greece | 303 | -4.7 | 0.0 | 2.5 | 3.1 |
| Spain Rev | 1,494 | -1.8 -1.5 | 0.1 -0.6 | 1.6 | 1.6 |
| EMDE Rev | 25,237 | 5.7 5.6 | 6.0 5.9 | 6.2 | 6.3 |
| Brazil Rev | 2,493 | 3.0 2.5 | 4.2 4.6 | 4.0 | 4.1 |
| Russia | 1,850 | 4.0 | 3.9 | 3.9 | 3.9 |
| India Rev | 1,676 | 6.9 6.1 | 7.3 6.5 | 7.5 | 7.7 |
| China Rev | 7,298 | 8.2 8.0 | 8.8 8.5 | 8.7 | 8.7 |
Notes: Rev: Revision of July 19, 2012; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal
Source: IMF World Economic Outlook databank
http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx
http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm
Table V-2 is constructed with the WEO database to provide rates of unemployment from 2011 to 2015 for major countries and regions. In fact, unemployment rates for 2011 in Table ESV-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high for the countries with sovereign debt difficulties in Europe: 12.7 percent for Portugal (POT), 14.4 percent for Ireland, 17.3 percent for Greece, 21.6 percent for Spain and 8.4 percent for Italy, which is lower but still high. The G7 rate of unemployment is 7.7 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.
Table V-2, IMF World Economic Outlook Database Projections of Unemployment Rate as Percent of Labor Force
| % Labor Force 2011 | % Labor Force 2012 | % Labor Force 2013 | % Labor Force 2014 | % Labor Force 2015 | |
| World | NA | NA | NA | NA | NA |
| G7 | 7.7 | 7.4 | 7.3 | 7.0 | 6.7 |
| Canada | 7.5 | 7.4 | 7.3 | 7.1 | 6.9 |
| France | 9.7 | 9.9 | 10.1 | 9.8 | 9.4 |
| DE | 6.0 | 5.6 | 5.5 | 5.3 | 5.3 |
| Italy | 8.4 | 9.5 | 9.7 | 9.8 | 9.5 |
| Japan | 4.5 | 4.5 | 4.4 | 4.3 | 4.2 |
| UK | 8.0 | 8.3 | 8.2 | 7.8 | 7.4 |
| US | 8.9 | 8.2 | 7.9 | 7.5 | 6.9 |
| Euro Area | 10.1 | 10.9 | 10.8 | 10.5 | 10.1 |
| DE | 6.0 | 5.6 | 5.5 | 5.3 | 5.3 |
| France | 9.7 | 9.9 | 10.1 | 9.8 | 9.4 |
| Italy | 8.4 | 9.5 | 9.7 | 9.8 | 9.5 |
| POT | 12.7 | 14.3 | 13.9 | 13.2 | 12.4 |
| Ireland | 14.4 | 14.5 | 13.8 | 12.9 | 12.0 |
| Greece | 17.3 | 19.4 | 19.4 | 18.2 | 16.8 |
| Spain | 21.6 | 24.2 | 23.9 | 22.8 | 21.9 |
| EMDE | NA | NA | NA | NA | NA |
| Brazil | 6.0 | 6.0 | 6.5 | 7.0 | 7.0 |
| Russia | 7.5 | 6.5 | 6.0 | 6.0 | 6.0 |
| India | NA | NA | NA | NA | NA |
| China | 4.1 | 4.0 | 4.0 | 4.0 | 4.0 |
Notes: DE: Germany; EMDE: Emerging and Developing Economies (150 countries)
Source: IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weoselgr.aspx
Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog for IQ2012 and IIQ2012. Growth is weak throughout most of the world. Japan’s GDP increased 1.3 percent in IQ2012 and 2.9 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. Japan’s GDP grew 0.3 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of 1.4 percent, which is much lower than 5.5 percent in IQ2012. Growth of 3.5 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. China grew at 1.8 percent in IIQ2012, which annualizes to 7.4 percent. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). China’s GDP grew 7.6 percent in IIQ2012 relative to IIQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. China’s GDP grew 8.1 percent in IQ2012 relative to a year earlier but only 7.6 percent in IIQ2012 relative to a year earlier. GDP was flat in the euro area in IQ2012 and also in IQ2012 relative to a year earlier. Euro area GDP contracted 0.2 percent IIQ2012 and fell 0.4 percent relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. In IIQ2012, Germany’s GDP increased 0.3 percent and 0.5 percent relative to a year earlier but 1.0 percent relative to a year earlier when adjusted for calendar (CA) effects. Growth of US GDP in IQ2012 was 0.5 percent, at SAAR of 2.0 percent and higher by 2.4 percent relative to IQ2011. US GDP increased 0.4 percent in IIQ2012, 1.5 percent at SAAR and 2.2 percent relative to a year earlier (Section I Mediocre and Decelerating United States Economic Growth http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html) but with substantial underemployment and underemployment (Section I http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html) and weak hiring (Section I http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html). UK GDP fell 0.5 percent in IIQ2012, declining 0.5 percent relative to IIQ2011. In IQ2011, UK GDP fell 0.3 percent, declining 0.2 percent relative to a year earlier. Italy has experienced decline of GDP in four consecutive quarters from IIIQ2011 to IIQ2012. Italy’s GDP fell 0.7 percent in IIQ2012 and declined 2.5 percent relative to IIQ2011. France’s GDP stagnated in both IQ2012 and IIQ2012 and fell 0.3 percent relative to a year earlier.
Table V-3, Percentage Changes of GDP Quarter on Prior Quarter and on Same Quarter Year Earlier, ∆%
| IQ2012/IVQ2011 | IQ2012/IQ2011 | |
| United States | QOQ: 0.5 SAAR: 2.0 | 2.4 |
| Japan | QOQ: 1.3 SAAR: 5.5 | 2.9 |
| China | 1.8 | 8.1 |
| Euro Area | 0.0 | 0.0 |
| Germany | 0.5 | 1.7 |
| France | 0.0 | 0.3 |
| Italy | -0.8 | -1.4 |
| United Kingdom | -0.3 | -0.2 |
| IIQ2012/IQ2012 | IIQ2012/IIQ2011 | |
| United States | QOQ: 0.4 SAAR: 1.5 | 2.2 |
| Japan | QOQ: 0.3 | 3.5 |
| China | 1.8 | 7.6 |
| Euro Area | -0.2 | -0.4 |
| Germany | 0.3 | 0.5 1.0 CA |
| France | 0.0 | 0.3 |
| Italy | -0.7 | -2.5 |
| United Kingdom | -0.5 | -0.5 |
QOQ: Quarter relative to prior quarter; SAAR: seasonally adjusted annual rate
Source: Country Statistical Agencies
http://www.bea.gov/national/index.htm#gdp http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html http://www.stats.gov.cn/enGliSH/
There is evidence of deceleration of growth of world trade and even contraction in more recent data. Table V-4 provides two types of data: growth of exports and imports in the latest available months and in the past 12 months; and contributions of net trade (exports less imports) to growth of real GDP. Japan provides the most worrisome data (see also Section VB below). In Jul 2012, Japan’s exports fell 5.8 percent in the month and 8.1 percent in 12 months while imports increased 4.4 percent in the month and 2.1 percent in 12 months. The second part of Table V-4 shows that net trade deducted 0.3 percentage points from Japan’s growth of GDP in IIQ2012. In Jul 2012, China’s exports fell 1.8 percent in the month and increased 1.0 percent in 12 months. Germany’s exports fell 1.5 percent in the month of Jun and increased 7.4 percent in the 12 months ending in Jun while imports fell 3.0 percent in the month of Jun and decreased 1.5 percent in the 12 months ending in Jun. Net trade contributed 1.1 percentage points to growth of Germany’s GDP in IIQ2012. The Flash Germany Composite Output Index of the Markit Flash Germany PMI®, combining manufacturing and services, fell from 47.5 in Jul to 47.0 in Aug, which is the lowest since Jun 2009 and the fourth consecutive month of decline with declines of both services and manufacturing and sharp decline of new export orders for manufacturers (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9949). Tim Moore, Senior Economist at Markit, finds deterioration in business conditions in Germany relative to the first semester of 2012 with new export orders in manufacturing falling at the sharpest rate since Apr 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9949).
UK’s exports fell 4.6 percent in Jun and decreased 1.4 percent in Apr-Jun 2012 relative to Apr-Jun 2011 while imports fell 0.7 percent in Jun and increased 2.2 percent in Apr-Jun 2012 relative to Apr-Jun 2011. Net trade deducted 1.0 percentage points from UK GDP growth in IIQ2012. France’s exports fell 1.9 percent in Jun and net trade deducted 0.5 percentage points to GDP growth in IIQ2012. US exports increased 0.9 percent in Jun 2012 and 7.1 percent in Jan-Jun relative to a year earlier but net trade deducted 0.31 percentage points from GDP growth in IIQ2012. The Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™) seasonally adjusted increased marginally from 51.4 in Jul to 51.9 in Aug, indicating the third weakest reading since Oct 2009 in the beginning of the current recovery with the lowest in Dec 2010 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9958). New export orders registered 48.7 in Aug still in contraction territory with 48.6 in Jul. Rob Dodson, Economist at Markit, finds that IIIQ2012 is at the lowest in the current recovery (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9958). Trade values incorporate both price and quantity effects that are difficult to separate. Data do suggest that world trade slowdown is accompanying world economic slowdown.
Table V-4, Growth of Trade and Contributions of Net Trade to GDP Growth, ∆% and % Points
| Exports | Exports 12 M ∆% | Imports | Imports 12 M ∆% | |
| USA | 0.9 Jun | 7.1 Jan-Jun | -1.5 Jun | 6.0 Jan-Jun |
| Japan Jul | -5.8 | -8.1 | 4.4 | 2.1 |
| China | -1.8 Jul | 1.0 Jul 7.8 Jan-Jul | 2.2 Jul | 4.7 Jul 6.5 Jan-Jul |
| Euro Area | 2.2 Jun | 8.3 Jan-Jun | -2.9 Jun | 2.4 Jan-Jun |
| Germany | -1.5 Jun CSA | 7.4 Jun | -3.0 Jun CSA | -1.5 Jun |
| France Jun | -1.9 | 4.3 | -0.4 | 5.8 |
| Italy Jun | -1.4 | 5.5 | -5.3 | -7.1 |
| UK | -4.6 Jun | -1.4 Apr-Jun | -0.7 Jun | 2.2 Apr-Jun |
| Net Trade % Points GDP Growth | % Points | |||
| USA IIQ2012 | -0.31 | |||
| Japan IIQ2012 | -0.3 | |||
| Germany IIQ2012 | 1.1 | |||
| France IIQ2012 | -0.5 | |||
| UK IIQ2012 | -1.0 |
Sources: http://www.census.gov/foreign-trade/ http://www.bea.gov/iTable/index_nipa.cfm
http://www.customs.go.jp/toukei/latest/index_e.htm http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html
http://english.customs.gov.cn/publish/portal191/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home
https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 http://lekiosque.finances.gouv.fr/AppChiffre/Portail_default.asp
http://www.statistics.gov.uk/hub/index.html
The geographical breakdown of exports by imports of Japan with selected regions and countries is provided in Table V-5 for Jul 2012. The share of Asia in Japan’s trade is more than one half, 55.6 percent of exports and 45.1 percent of imports. Within Asia, exports to China are 19.0 percent of total exports and imports from China 21.6 percent of total imports. The second largest export market for Japan in Jul 2012 is the US with share of 17.6 percent of total exports and share of imports from the US of 8.8 percent in total imports. Western Europe has share of 9.6 percent in Japan’s exports and of 11.0 percent in imports. Rates of growth of exports of Japan in Jul are sharply negative for most countries and regions with the exception of 4.7 percent for exports to the US, 15.3 percent to Canada and 9.0 percent for exports to the Middle East. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity, which could be part of the explanation for the decline of Japan’s exports by 8.1 percent in Jul 2012 while imports increased by 2.1 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Jul are sharply higher with exception of declines in imports mostly of raw materials: minus 5.4 percent for Middle East, minus 6.6 percent for Australia and minus 27.7 percent for Brazil. Imports from Asia increased 2.8 percent in the 12 months ending in Jul while imports from China increased 3.3 percent.
Table V-5, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens
| Jun 2012 | Exports | 12 months ∆% | Imports Millions Yens | 12 months ∆% |
| Total | 5,313,281 | -8.1 | 5,830,663 | 2.1 |
| Asia | 2,956,186 | -9.0 | 2,629,261 | 2.8 |
| China | 1,009,095 | -11.9 | 1,259,160 | 3.3 |
| USA | 934,186 | 4.7 | 512,324 | 7.6 |
| Canada | 63,745 | 15.3 | 93,209 | 15.8 |
| Brazil | 38,537 | -8.7 | 72,324 | -27.7 |
| Mexico | 69,165 | -5.6 | 29,749 | 15.9 |
| Western Europe | 510,315 | -28.4 | 639,386 | 8.4 |
| Germany | 137,005 | -19.8 | 169,862 | 14.9 |
| France | 38,336 | -33.3 | 94,594 | 18.8 |
| UK | 70,222 | -32.0 | 47,673 | 25.2 |
| Middle East | 184,758 | 9.0 | 989,543 | -5.4 |
| Australia | 110,817 | -25.0 | 399,395 | -6.6 |
Source: http://www.customs.go.jp/toukei/latest/index_e.htm
The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, increased from 50.3 in Jun to 51.7 in Jul, indicating expansion at a moderate rate, which is one of the lowest in the current expansion (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9928). This index has remained above the contraction territory of 50.0 during 35 months. Both global manufacturing and services have slowed down considerably with services increasing marginally because of activity in the US while manufacturing deepened its decline. The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, fell to 48.4 in Jul from 49.1 in Jun, for the lowest reading in three years in two consecutive months below 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9899). David Hensley, Director of Global Economics Coordination at JPMorgan, finds that inventory adjustment is the driver of deeper contraction in the beginning of IIIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9899). The HSBC Brazil Composite Output Index, compiled by Markit, fell from moderate expansion at 51.5 in Jun to moderate contraction at 48.9 in Jul, in the weakest reading in ten months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9912). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the decline of the HSBC Brazil Services Business Activity Index from 53.0 in Jun to 48.9 in Jul withdraws important support present in the first half of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9912). The HSBC Brazil Purchasing Managers’ IndexTM (PMI™) increased slightly to 48.7 in Jul from 48.5 in Jun, indicating modest deterioration of business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9876). Andre Loes, Chief Economist, Brazil at HSBC, finds that moderate improvement in the index suggests that drivers of the drop of activity are moderating.
VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™) seasonally adjusted increased marginally from 51.4 in Jul to 51.9 in Aug, indicating the third weakest reading since Oct 2009 in the beginning of the current recovery with the lowest in Dec 2010 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9958). New export orders registered 48.7 in Aug still in contraction territory with 48.6 in Jul. Rob Dodson, Economist at Markit, finds that IIIQ2012 is at the lowest in the current recovery (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9958). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business® increased 0.1 percentage points from 49.7 in Jun to 49.8 in Jun, for a second monthly contraction, which are the first since Jul 2009 (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders increased 0.2 percentage points from 47.8 in Jun to 48.0 in Jul, for a second consectuvie contraction interrupting growth in 37 months since Apr 2009. The Non-Manufacturing ISM Report on Business® PMI increased 0.5 percentage points from 52.1 in Jun to 52.6 in Jul while the index of new orders increased 1.0 percentage points from 53.3 in Jun to 54.3 in Jul (http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943). Table USA provides the country economic indicators for the US.
Table USA, US Economic Indicators
| Consumer Price Index | Jul 12 months NSA ∆%: 1.4; ex food and energy ∆%: 2.1 Jul month ∆%: 0.0; ex food and energy ∆%: 0.1 |
| Producer Price Index | Jul 12-month NSA ∆%: 0.5; ex food and energy ∆% 2.5 |
| PCE Inflation | Jun 12-month NSA ∆%: headline 1.5; ex food and energy ∆% 1.8 |
| Employment Situation | Household Survey: Jul Unemployment Rate SA 8.3% |
| Nonfarm Hiring | Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million |
| GDP Growth | BEA Revised National Income Accounts IIQ2012/IIQ2011 2.2 J]IQ2011 SAAR 2.0 IIQ2012 SAAR 1.5 |
| Personal Income and Consumption | Jun month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.3 |
| Quarterly Services Report | IQ12/IQ11 SA ∆%: |
| Employment Cost Index | IIQ2012 SA ∆%: 0.5 |
| Industrial Production | Jul month SA ∆%: 0.6 Manufacturing Jul SA ∆% 0.5 Jul 12 months SA ∆% 5.0, NSA 4.6 |
| Productivity and Costs | Nonfarm Business Productivity IIQ2012∆% SAAE 1.6; IIQ2012/IIQ2011 ∆% 1.1; Unit Labor Costs SAAE IIQ2012 ∆% 1.7; IIQ2012/IIQ2011 ∆%: 0.8 Blog 8/12/2012 |
| New York Fed Manufacturing Index | General Business Conditions From Jul 7.39 to Aug -5.85 |
| Philadelphia Fed Business Outlook Index | General Index from Jul minus 12.9 to Aug minus 7.1 |
| Manufacturing Shipments and Orders | Jun New Orders SA ∆%: -0.5; ex transport ∆%: -1.8 |
| Durable Goods | Jul New Orders SA ∆%: 4.2; ex transport ∆%: -0.4 |
| Sales of New Motor Vehicles | Jul 2012 8,425,842; Jun 2011 7,392,167. Jul SAAR 14.09 million, Jun SAAR 14.38 million, Jun 2011 SAAR 12.40 million Blog 8/5/12 |
| Sales of Merchant Wholesalers | Jan-Jun 2012/Jan-Jun 2011 NSA ∆%: Total 7.0; Durable Goods: 9.2; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Jun 12/Jun 11 NSA ∆%: Sales Total Business 1.5; Manufacturers 1.4 |
| Sales for Retail and Food Services | Jan-Jul 2012/Jan-Jul 2011 ∆%: Retail and Food Services 5.9; Retail ∆% 5.6 |
| Value of Construction Put in Place | Jun SAAR month SA ∆%: 0.4 Jun 12-month NSA: 6.5 |
| Case-Shiller Home Prices | May 2012/Apr 2011 ∆% NSA: 10 Cities minus 2.3; 20 Cities: minus 0.7 |
| FHFA House Price Index Purchases Only | Jun SA ∆% 0.7; |
| New House Sales | Jul 2012 month SAAR ∆%: |
| Housing Starts and Permits | Jul Starts month SA ∆%: -1.1 ; Permits ∆%: 6.8 |
| Trade Balance | Balance Jun SA -$42294 million versus May -$48044 million |
| Export and Import Prices | Jul 12-month NSA ∆%: Imports -4.1; Exports -1.0 |
| Consumer Credit | Jun ∆% annual rate: 3.0 |
| Net Foreign Purchases of Long-term Treasury Securities | Jun Net Foreign Purchases of Long-term Treasury Securities: $9.3 billion |
| Treasury Budget | Fiscal Year Oct-Jul 2012/2011 ∆%: Receipts 6.1; Outlays -0.4; Individual Income Taxes 4.2 Deficit Fiscal Year 2012 Oct-Jul $973,172 million CBO Forecast 2012FY Deficit $1.171 trillion Blog 8/12/2012 |
| CBO Budget and Economic Outlook | 2012 Deficit $1128 B 7.3% GDP Debt 11,318 B 72.8% GDP 2013 Deficit $614 B, Debt 12,064 B 76.1% GDP Blog 8/26/12 |
| Commercial Banks Assets and Liabilities | Jul 2012 SAAR ∆%: Securities 17.7 Loans 3.1 Cash Assets 31.6 Deposits 15.4 Blog 8/26/12 |
| Flow of Funds | IQ2012 ∆ since 2007 Assets -$4113B Real estate -$4916B Financial $367.3MM Net Worth -$3300B Blog 6/17/12 |
| Current Account Balance of Payments | IQ2012 -$137B %GDP 3.6 Blog 06/17/12 |
Links to blog comments in Table USA: 8/19/12 http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html
8/12/12 http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html
8/5/12 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html
7/29/12 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html
6/17/12 http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars_17.html
Manufacturers’ shipments of durable goods increased 2.6 percent in Jul 2012 after no growth in Jun increasing 1.1 percent in May. New orders increased 4.2 percent in Jul after increasing 1.6 percent in Jun and 1.5 percent in May, as shown in Table VA-1. These data are very volatile. Volatility is illustrated by increase of orders for nondefense aircraft of 53.9 percent in Jul, 32.5 percent in Jun and 7.6 percent in May. New orders excluding transportation equipment decreased 0.4 percent in Jul after decreasing 2.2 percent in Jun following increase of 0.7 percent in May. Capital goods new orders, indicating investment, increased 3.9 percent in Jul after increases of 8.2 percent in Jun and 3.2 percent in May. New orders of nondefense capital goods increased 6.8 percent in Jul after increases of 2.5 percent in Jun and 2.3 percent in May. Excluding more volatile aircraft, capital goods orders decreased 3.4 percent in Jul after decrease of 2.7 percent in Jun and increase of 2.3 percent in May.
Table VA-1, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%
| Jul 2012 ∆% | Jun 2012 | May 2012 | |
| Total | |||
| S | 2.6 | 0.0 | 1.1 |
| NO | 4.2 | 1.6 | 1.5 |
| Excluding | |||
| S | 0.3 | 0.5 | 1.0 |
| NO | -0.4 | -2.2 | 0.7 |
| Excluding | |||
| S | 3.1 | -0.1 | 0.8 |
| NO | 5.7 | -0.7 | 0.9 |
| Machinery | |||
| S | -0.6 | 4.3 | 1.2 |
| NO | -3.6 | -2.5 | 5.0 |
| Computers & Electronic Products | |||
| S | 1.8 | 0.4 | 3.8 |
| NO | 1.0 | -5.1 | -0.4 |
| Computers | |||
| S | 8.4 | -3.4 | 2.5 |
| NO | 3.7 | -4.7 | 4.5 |
| Transport | |||
| S | 8.4 | -1.0 | 1.4 |
| NO | 14.1 | 10.8 | 3.6 |
| Motor Vehicles | |||
| S | 12.6 | -0.6 | 0.1 |
| NO | 12.8 | -0.7 | 0.2 |
| Nondefense | |||
| S | 6.5 | -4.9 | 2.2 |
| NO | 53.9 | 32.5 | 7.6 |
| Capital Goods | |||
| S | 0.5 | 1.0 | 1.8 |
| NO | 3.9 | 8.2 | 3.2 |
| Nondefense Capital Goods | |||
| S | 1.2 | 0.9 | 0.9 |
| NO | 6.8 | 2.5 | 2.3 |
| Capital Goods ex Aircraft | |||
| S | 0.0 | 1.5 | 1.0 |
| NO | -3.4 | -2.7 | 2.3 |
Note:Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation
Source: US Census Bureau http://www.census.gov/manufacturing/m3/
Chart VA-1 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.
Chart VA-1, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr021.html
Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-2. Values are cumulative millions of dollars in Jan-Jul 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Jul 2012 total $1553.2 billion and new orders total $1530.9 billion, growing respectively by 8.9 percent and 7.5 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 7.8 percent and new orders increased 5.5 percent. Excluding defense, shipments grew 9.8 percent and new orders grew 8.8 percent. Important information not in Table VA-2 is the large share of nondurable goods: with shipments of $3 trillion in 2011, growing by 14.0 percent, and new orders of $3 trillion, growing by 14.0 percent, in part driven by higher prices for food and energy. Durable goods were lower in value in 2011, with shipments of $2.4 trillion, growing by 7.9 percent, and new orders of $2.4 trillion, growing by 10.0 percent. Capital goods have relatively high value of $540.6 billion for shipments, growing 7.5 percent, and new orders $568.9 billion, growing 5.2 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $442.7 billion, growing by 7.8 percent, and new orders $449.9 billion, growing 3.6 percent. There is no suggestion in these data that the US economy is close to recession but performance at the margin appears somewhat weaker without enough data to discern trends.
Table VA-2, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars
| Jan-Jul 2012 | Shipments | ∆% 2012/ 2011 | New Orders | ∆% 2012/ |
| Total | 1,553,238 | 8.9 | 1,530,945 | 7.5 |
| Excluding Transport | 1,116,671 | 7.8 | 1,077,912 | 5.5 |
| Excluding Defense | 1,479,796 | 9.8 | 1,455,747 | 8.8 |
| Machinery | 225,045 | 11.5 | 225,907 | -0.4 |
| Computers & Electronic Products | 195,138 | 0.8 | 151,582 | 3.9 |
| Computers & Related Products | 19,118 | -3.0 | 19,036 | -3.0 |
| Transport Equipment | 436,567 | 11.6 | 453,033 | 12.7 |
| Motor Vehicles | 298,855 | 13.5 | 297,756 | 13.2 |
| Nondefense Aircraft | 63,164 | 25.0 | 82,861 | 40.3 |
| Capital Goods | 540,610 | 7.5 | 567,898 | 5.2 |
| Nondefense Capital Goods | 483,472 | 9.9 | 508,808 | 8.4 |
| Capital Goods ex Aircraft | 442,774 | 7.8 | 449,975 | 3.6 |
Note: Transport: transportation
Source: US Census Bureau http://www.census.gov/manufacturing/m3/
In IQ2012, manufacturing had share of $1518.3 billion or 10.4 percent of National Income without capital consumption adjustment or 10.0 percent of the total and durable goods had share of $861.0 billion or 6.0 percent of the total, as shown in Table VA-3.
Table VA-3, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total
| SAAR IQ2012 | % Total | |
| National Income WCCA | 13,777.4 | 100.0 |
| Domestic Industries | 13,562.4 | 98.7 |
| Private Industries | 11,911.8 | 86.7 |
| Agriculture | 134.0 | 1.0 |
| Mining | 210.7 | 1.3 |
| Utilities | 211.9 | 1.4 |
| Construction | 584.2 | 4.1 |
| Manufacturing | 1518.3 | 10.4 |
| Durable Goods | 861.0 | 6.0 |
| Nondurable Goods | 657.3 | 4.4 |
| Wholesale Trade | 831.9 | 5.8 |
| Retail Trade | 948.3 | 6.8 |
| Transportation & WH | 415.6 | 2.8 |
| Information | 486.0 | 3.5 |
| Finance, insurance, RE | 2299.7 | 18.7 |
| Professional, BS | 1953.0 | 14.0 |
| Education, Health Care | 1377.6 | 10.1 |
| Arts, Entertainment | 539.7 | 3.8 |
| Other Services | 401.0 | 3.9 |
| Government | 1650.7 | 12.1 |
| Rest of the World | 214.9 | 1.3 |
Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services
Sources: Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
VB Japan. Table VB-BOJF provides the forecasts of economic activity and inflation in Japan by the majority of members of the Policy Board of the Bank of Japan, which is part of their Outlook for Economic Activity and Prices (http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf
http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf). For fiscal 2012, the forecast is of growth of GDP between 2.1 and 2.4 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.4 to 0.7 percent and the all items CPI less fresh food of 0.1 to 0.4 percent.
Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year
| Fiscal Year | Real GDP | Domestic CGPI | CPI All Items Less Fresh Food |
| 2011 | |||
| Apr 2012 | -0.2 to –0.2 | +1.7 | 0.0 |
| Jan 2012 | -0.4 to –0.3 | +1.8 to +1.9 | -0.1 to 0.0 |
| 2012 | |||
| Apr 2012 | +2.1 to +2.4 | +0.4 to +0.7 | +0.1 to +0.4 |
| Jan 2012 | +1.8 to +2.1 | -0.1 to +0.2 | 0.0 to +0.2 |
| 2013 | |||
| Apr 2012 | +1.6 to +1.8 | +0.7 to +0.9 | +0.5 to +0.7 |
| Jan 2012 | +1.4 to +1.7 | +0.6 to 1.0 | +0.4 to +0.5 |
Figures in brackets are the median of forecasts of Policy Board members
Source: Policy Board, Bank of Japan
http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf
http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf
Private-sector activity in Japan contracted at a moderate rate with the Markit Composite Output PMI™ Index declining from 49.1 in Jun to 47.4 in Jul for the sharpest reduction in private-sector activity since Sep 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9919). Alex Hamilton, economist at Markit and author of the report, finds deceleration of the economy in the beginning of the second half of 2012 in both manufacturing and services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9919). The Markit Business Activity Index of Services decreased from 49.3 in Jun to 47.5 in Jul, also showing slower pace and the lowest reading in ten months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9919). The Markit/JMMA Purchasing Managers’ Index™, seasonally adjusted, fell from 49.9 in Jun to 47.9 in Jul, indicating moderate reduction of private-sector manufacturing activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9858). Alex Hamilton, economist at Markit and author of the report, finds deterioration in all segments of output, new orders and exports (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9858).Table JPY provides the country data table for Japan.
Table JPY, Japan, Economic Indicators
| Historical GDP and CPI | 1981-2010 Real GDP Growth and CPI Inflation 1981-2010 |
| Corporate Goods Prices | Jul ∆% -0.4 |
| Consumer Price Index | Jun NSA ∆% -0.5; Jun 12 months NSA ∆% -0.2 |
| Real GDP Growth | IIQ2012 ∆%: 0.3 on IVQ2011; IIQ2012 SAAR 1.4; |
| Employment Report | Jun Unemployed 2.88 million Change in unemployed since last year: minus 260 thousand |
| All Industry Indices | Jun month SA ∆% 0.2 Blog 8/26/12 |
| Industrial Production | Jun SA month ∆%: -0.1 |
| Machine Orders | Total Jun ∆% 7.4 Private ∆%: 9.3 |
| Tertiary Index | Jun month SA ∆% 0.1 |
| Wholesale and Retail Sales | Jun 12 months: |
| Family Income and Expenditure Survey | Jun 12-month ∆% total nominal consumption 1.5, real 1.6 Blog 8/5/12 |
| Trade Balance | Exports Jul 12 months ∆%: -8.1 Imports Jul 12 months ∆% 2.1 Blog 8/26/12 |
Links to blog comments in Table JPY:
8/19/12 http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html
8/12/12 http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html
8/5/12 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html
7/29/12 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html
8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP increased 0.3 percent in IIQ2012 (Table VB-1 http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html), industry decreased 2.0 percent, the tertiary sector was unchanged, government decreased 0.3 percent and construction decreased 1.9 percent. The report shows that the all industry index decreased 0.2 percent in IIQ2012. Industry deducted 0.37 percentage points to growth of the all industry index and the tertiary index contributed 0.00 percentage points. Japan had already experienced a very weak quarter in IVQ2010, with decline of the all industry index of 0.2 percent and revised unchanged GDP (http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html Table VB-1), when it was unexpectedly hit by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.5 percent in IIQ2011 relative to IQ2011 but recovery at 3.3 percent in IIIQ2011. Industrial production fell 4.2 percent from IQ2011 into IIQ2011 but grew 5.4 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.3 percent in IQ2011 caused by decline of industrial production by 1.5 percent and services by 1.0 percent with GDP falling revised 2.0 percent (http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html Table VB-1).
Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%
| CON | IND | TERT | GOVT | ALL IND | REAL | |
| Weight | 5.7 | 18.3 | 63.2 | 11.4 | 100.0 | |
| 2012 | ||||||
| IIQ | -1.9 | -2.0 | 0.0 | -0.3 | -0.2 | 0.3 |
| Cont to IIQ % Change | -0.09 | -0.37 | 0.00 | -0.04 | ||
| IQ | 5.7 | 1.3 | 0.0 | 0.1 | -0.1 | 1.3 |
| 2011 | ||||||
| IVQ | -1.5 | 0.4 | 0.5 | 0.2 | 0.5 | 0.1 |
| IIIQ | 3.3 | 5.4 | 1.5 | 0.2 | 2.1 | 1.8 |
| IIQ | -7.5 | -4.2 | -0.5 | 0.1 | -0.9 | -0.5 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/english/statistics/tyo/zenkatu/index.html http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201206j.pdf
There are more details in Table VB-2. The all industry activity index increased 0.2 percent in Jun 2012 relative to May 2012 with increase of 0.1 percent of the tertiary or services sector, increase of industry of 0.4 percent while construction decreased 0.1 percent and government decreased 0.2 percent. Industry added 0.08 percentage points to growth in Jun while the tertiary sector added 0.08 percentage points, construction deducted 0.01 percentage points and government deducted 0.02 percentage points. It is not possible to explain accurately the overall index by the reported contributions of components. Weakness in Sep and Aug 2011 had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov followed by strong rebound in Dec that was interrupted in Jan-Mar 2012 with modest growth in Apr, new decline in May 2012 and moderate increase in Jun 2012. The highest risk to Japan is if weakening world growth would affect Japanese exports.
Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%
| CON | IND | TERT | GOVT | ALL IND | |
| Jun 2012 | -0.1 | 0.4 | 0.1 | -0.2 | 0.2 |
| Cont to Jun % Change | -0.01 | 0.08 | 0.07 | -0.02 | |
| May 2012 | 9.5 | -3.4 | 0.9 | -0.2 | -0.2 |
| Apr | -5.5 | -0.2 | -0.2 | 0.1 | 0.1 |
| Mar | -5.4 | 1.3 | -0.6 | -0.1 | -0.3 |
| Feb | 4.2 | -1.6 | 0.0 | -0.4 | -0.1 |
| Jan | 5.6 | 0.9 | -0.6 | 0.5 | -0.7 |
| Dec 2011 | -1.4 | 2.3 | 1.6 | -0.2 | 1.7 |
| Nov | 0.3 | -1.7 | -0.8 | 0.1 | -0.9 |
| Oct | -2.6 | 1.8 | 0.6 | 0.1 | 0.6 |
| Sep | 1.6 | -1.9 | -0.2 | 0.2 | -0.1 |
| Aug | 1.1 | 0.9 | 0.1 | -0.1 | 0.2 |
| Jul | 0.1 | 1.1 | 0.4 | -0.2 | 0.5 |
| Jun | -0.1 | 3.8 | 1.2 | 0.2 | 1.5 |
| May | 6.5 | 5.8 | 0.9 | 0.7 | 1.6 |
| Apr | -5.1 | 2.4 | 2.1 | -0.9 | 2.0 |
| Mar | -10.6 | -16.2 | -5.4 | 0.7 | -6.6 |
| Feb | 2.3 | 1.1 | 0.3 | 0.0 | 0.1 |
| Jan | 6.3 | 1.2 | 0.5 | -0.5 | 0.6 |
| Dec 2010 | -0.5 | 2.4 | -0.2 | 0.3 | 0.1 |
| Nov | -1.4 | 1.6 | 0.6 | -0.4 | 0.3 |
| Oct | 0.1 | -1.4 | 0.2 | -0.1 | 0.0 |
| Sep | -1.9 | -0.8 | -0.4 | -0.1 | -0.4 |
| Aug | 1.6 | -0.1 | 0.1 | 0.1 | -0.5 |
| Jul | 0.8 | 0.3 | 0.7 | 0.1 | 1.1 |
| Jun | -2.1 | -1.5 | 0.1 | -0.1 | 0.2 |
| May | 6.3 | -0.1 | -0.3 | 0.0 | 0.0 |
| Apr | -3.1 | 0.6 | 1.6 | -0.2 | 0.9 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Sources: http://www.meti.go.jp/english/statistics/tyo/zenkatu/index.html http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201206j.pdf
Percentage changes from a year earlier in calendar years and relative to the same quarter a year earlier if the all industry activity indices are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The all industry activity index increased 2.6 percent in IIQ2012 and GDP increased 3.5 percent relative to a year earlier. Industry increased 5.3 percent relative to a year earlier while the tertiary sector increased 2.2 percent, contributing combined 2.38 percentage points to growth of the all industry activity index of 2.6 percent. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy. The all-industry index fell 0.6 percent in 2011, almost equal to the revised decline of 0.7 percent in GDP. Industry fell 2.3 percent, deducting 0.43 percentage points, while the tertiary sector increased 0.1 percent, adding 0.07 percentage points. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201, declining world trade and revaluation of the yen in fear of world financial risks interrupted the recovery of the Japanese economy from the global recession.
Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%
| CON | IND | TERT | GOVT | ALL IND | REAL | |
| Weight | 5.7 | 18.3 | 63.2 | 11.4 | 100.0 | |
| Calendar Year | ||||||
| 2011 | -2.0 | -2.3 | 0.1 | -0.2 | -0.6 | -0.7 |
| Cont to 2011 % Change | -0.09 | -0.43 | 0.07 | -0.02 | ||
| 2010 | -7.0 | 16.4 | 1.3 | -0.7 | 3.1 | 4.5 |
| 2009 | -5.6 | -21.9 | -5.2 | 0.1 | -7.7 | -5.5 |
| 2008 | -7.6 | -3.4 | -1.0 | -1.4 | -1.9 | -1.0 |
| 2012 | ||||||
| II Q | 5.5 | 5.3 | 2.2 | 0.2 | 2.6 | 3.5 |
| Cont to IIQ % Change | 0.22 | 0.92 | 1.46 | 0.02 | ||
| IQ | -0.3 | 4.8 | 2.4 | 0.1 | 2.4 | 2.9 |
| 2011 | ||||||
| IVQ | -2.8 | -1.6 | 0.6 | 0.6 | 0.0 | -0.7 |
| IIIQ | -3.2 | -0.9 | 0.3 | -0.1 | -0.1 | -0.6 |
| IIQ | -5.1 | -5.8 | -0.5 | -0.4 | -1.6 | -1.8 |
| IQ | 2.3 | -1.3 | -0.3 | -1.0 | -0.5 | 0.0 |
| 2010 | ||||||
| IV Q | -0.6 | 5.9 | 1.6 | -0.8 | 2.1 | 3.2 |
| III Q | -3.2 | 14.0 | 1.8 | -0.6 | 3.2 | 5.6 |
| IIQ | -11.3 | 21.3 | 1.4 | -0.7 | 3.5 | 4.5 |
| IQ | -12.4 | 28.0 | 0.8 | -0.5 | 3.9 | 4.8 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/english/statistics/tyo/zenkatu/index.html http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201206j.pdf
Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index increased 0.5 percent in Jun 2012 relative to Jun 2011. Industry fell 1.5 percent in Jun 2012 relative to a year earlier, subtracting 0.29 percentage points to growth of the all industry activity index. The tertiary sector increased 0.8 percent, adding 0.53 percentage points. Construction added 0.25 percentage points to the index and government added 0.04 percentage points. The percentage point contributions add to the increase of the index by 0.5 percent.
Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%
| CON | IND | TERT | GOVT | ALL IND | |
| Jun 2012 | 6.4 | -1.5 | 0.8 | 0.3 | 0.5 |
| Cont to Jun % Change | 0.25 | -0.29 | 0.53 | 0.04 | |
| May | 6.4 | 6.0 | 3.2 | -0.7 | 3.3 |
| Apr | 3.7 | 12.9 | 2.6 | 0.8 | 4.1 |
| Mar | 4.1 | 14.2 | 4.2 | 0.6 | 5.5 |
| Feb | -1.6 | 1.5 | 2.4 | -0.7 | 1.6 |
| Jan | -3.4 | -1.6 | 0.4 | 0.4 | -0.1 |
| Dec 2011 | -3.0 | -3.0 | 1.2 | 0.8 | 0.2 |
| Nov | -1.2 | -2.9 | -0.3 | 0.8 | -0.7 |
| Oct | -4.0 | 0.9 | 0.9 | 0.2 | 0.5 |
| Sep | -0.4 | -2.4 | 0.1 | 0.1 | -0.3 |
| Aug | -4.3 | 1.6 | 0.8 | -1.1 | 0.4 |
| Jul | -4.8 | -1.7 | 0.1 | 0.5 | -0.4 |
| Jun | -4.6 | -0.6 | 1.0 | 0.3 | 0.4 |
| May | -6.5 | -4.6 | -0.2 | -0.8 | -1.3 |
| Apr | -4.1 | -12.7 | -2.3 | -0.6 | -4.0 |
| Mar | -2.8 | -12.4 | -3.4 | 0.0 | -4.6 |
| Feb | 4.4 | 4.5 | 2.0 | -1.4 | 2.1 |
| Jan | 5.9 | 6.1 | 1.0 | -1.4 | 1.8 |
| Dec 2010 | -0.5 | 5.9 | 1.8 | -0.7 | 2.1 |
| Nov | -0.5 | 7.0 | 2.5 | -1.9 | 2.7 |
| Oct | -1.1 | 5.0 | 0.5 | 0.3 | 1.3 |
| Sep | -2.8 | 12.1 | 1.3 | -0.6 | 2.7 |
| Aug | -1.7 | 15.5 | 2.3 | -1.1 | 3.8 |
| Jul | -5.3 | 14.6 | 1.6 | -0.1 | 3.3 |
| Jun | -8.3 | 16.6 | 1.0 | -0.7 | 3.0 |
| May | -8.1 | 20.7 | 1.2 | -0.9 | 3.4 |
| Apr | -17.0 | 27.0 | 1.9 | -0.4 | - |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/english/statistics/tyo/zenkatu/index.html http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201206j.pdf
The structure of exports and imports of Japan is in Table VB-5. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities, oscillating under shocks of risk aversion. Mineral fuels account for 31.1 percent of Japan’s imports and increased 0.1 percent in the 12 months ending in Jul 2012. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 13.5 percent of Japan’s exports with decrease of 5.3 percent in the 12 months ending in Jul. Machinery contributes 20.1 percent of Japan’s exports with decrease of 13.5 percent in the 12 months ending in Jul. Electrical machinery contributes 18.1 percent of Japan’s exports with decrease of 9.2 percent in the 12 months ending in Jul. The best outcome is exports of transport equipment with share of 23.7 percent in total exports and increase of 1.2 percent in the 12 months ending in Jul largely because of the low level after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The breakdown of transport equipment in Table VB-5 shows increase of the major categories of motor vehicles of 4.6 percent: cars increased 6.4 percent with decreae of 7.0 percent in the minor category of buses and trucks, increase of 1.3 percent for parts of motor vehicles, decrease of 27.2 percent for motorcycles and decrease of 18.0 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade with oscillations when risk aversion causes reversion of carry trades from zero interest rates to commodity prices.
Table VB-5, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens
| Jul 2012 | Value JPY Millions | % of Total | 12 Months ∆% | Contribution Degree % |
| Exports | 5,313,281 | 100.0 | -8.1 | -8.1 |
| Foodstuffs | 27,495 | 0.5 | 0.3 | 0.0 |
| Raw Materials | 82,902 | 1.6 | 1.5 | 0.0 |
| Mineral Fuels | 104,376 | 2.0 | -24.6 | -0.6 |
| Chemicals | 513,738 | 9.7 | -8.2 | -0.8 |
| Manufactured Goods | 717,047 | 13.5 | -5.3 | -0.7 |
| Machinery | 1,068,934 | 20.1 | -13.5 | -2.9 |
| Electrical Machinery | 962,060 | 18.1 | -9.2 | -1.7 |
| Transport Equipment | 1,260,949 | 23.7 | 1.2 | 0.3 |
| Motor Vehicles | 805,624 | 15.2 | 4.6 | 0.6 |
| Cars | 679,333 | 12.8 | 6.4 | 0.7 |
| Buses & Trucks | 114,021 | 2.1 | -7.0 | -0.1 |
| Parts of Motor Vehicles | 272,664 | 5.1 | 1.3 | 0.1 |
| Motorcycles | 13,762 | 0.3 | -27.2 | -0.1 |
| Ships | 121,066 | 2.3 | -18.0 | -0.5 |
| Other | 575,779 | 10.8 | -14.9 | -1.7 |
| Imports | 5,830,663 | 100.0 | 2.1 | 2.1 |
| Foodstuffs | 496,498 | 8.5 | 2.1 | 0.2 |
| Raw Materials | 402,454 | 6.9 | -15.1 | -1.3 |
| Mineral Fuels | 1,813,025 | 31.1 | 0.1 | 0.0 |
| Chemicals | 523,905 | 9.0 | -3.3 | -0.3 |
| Manufactured Goods | 475,341 | 8.2 | -5.6 | -0.5 |
| Machinery | 440,667 | 7.6 | 2.1 | 0.2 |
| Electrical Machinery | 740,278 | 12.7 | 8.0 | 1.0 |
| Transport Equipment | 201,832 | 3.5 | 70.1 | 1.5 |
| Other | 737,113 | 12.6 | 11.6 | 1.3 |
Source: http://www.customs.go.jp/toukei/latest/index_e.htm
Table VB-6 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2011. Exports grew at the average yearly rate of 3.4 percent while imports grew at 3.3 percent per year in the years from 1979 to 2011. Abstracting from the global recession and the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, exports grew at the average annual rate of 4.8 percent between 1979 and 2007 and imports at 4.0 percent. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980.
Table VB-6, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens
| Years | Exports | Imports | Balance |
| 1950 | 298 | 348 | -50 |
| 1955 | 723 | 889 | -166 |
| 1960 | 1,459 | 1,616 | -157 |
| 1965 | 3,042 | 2,940 | 102 |
| 1970 | 6,954 | 6,797 | 157 |
| 1975 | 16,545 | 17,170 | -625 |
| 1979 | 22,531 | 24,245 | -1,714 |
| 1980 | 29,382 | 31,995 | -2,613 |
| 1981 | 33,468 | 31,464 | 2,004 |
| 1982 | 34,432 | 32,656 | 1,776 |
| 1983 | 34,909 | 30,014 | 4,895 |
| 1984 | 40,325 | 32,321 | 8,004 |
| 1985 | 41,955 | 31,084 | 10,871 |
| 1986 | 35,289 | 21,550 | 13,739 |
| 1987 | 33,315 | 21,736 | 11,579 |
| 1988 | 33,939 | 24,006 | 9,933 |
| 1989 | 37,822 | 28,978 | 8,844 |
| 1990 | 41,456 | 33,855 | 7,601 |
| 1991 | 42,359 | 31,900 | 10,459 |
| 1992 | 43,012 | 29,527 | 13,485 |
| 1993 | 40,202 | 26,826 | 13,376 |
| 1994 | 40,497 | 28,104 | 12,393 |
| 1995 | 41,530 | 31,548 | 9,982 |
| 1996 | 44,731 | 37,993 | 6,738 |
| 1997 | 50,937 | 40,956 | 9,981 |
| 1998 | 50,645 | 36,653 | 13,992 |
| 1999 | 47,547 | 35,268 | 12,279 |
| 2000 | 51,654 | 40,938 | 10,716 |
| 2001 | 48,979 | 42,415 | 6,564 |
| 2002 | 52,108 | 42,227 | 9,881 |
| 2003 | 54,548 | 44,362 | 10,186 |
| 2004 | 61,169 | 49,216 | 11,953 |
| 2005 | 65,656 | 56,949 | 8,707 |
| 2006 | 75,246 | 67,344 | 7,902 |
| 2007 | 83,931 | 73,135 | 10,796 |
| 2008 | 81,018 | 78,954 | 2,424 |
| 2009 | 54,170 | 51,499 | 2,671 |
| 2010 | 67,399 | 60,764 | 6,635 |
| 2011 | 65,546 | 68,111 | -2,565 |
Source: http://www.customs.go.jp/toukei/latest/index_e.htm
The geographical breakdown of exports by imports of Japan with selected regions and countries is provided in Table VB-7 for Jul 2012. The share of Asia in Japan’s trade is more than one half, 55.6 percent of exports and 45.1 percent of imports. Within Asia, exports to China are 19.0 percent of total exports and imports from China 21.6 percent of total imports. The second largest export market for Japan in Jul 2012 is the US with share of 17.6 percent of total exports and share of imports from the US of 8.8 percent in total imports. Western Europe has share of 9.6 percent in Japan’s exports and of 11.0 percent in imports. Rates of growth of exports of Japan in Jul are sharply negative for most countries and regions with the exception of 4.7 percent for exports to the US, 15.3 percent to Canada and 9.0 percent for exports to the Middle East. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity, which could be part of the explanation for the decline of Japan’s exports by 8.1 percent in Jul 2012 while imports increased by 2.1 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Jul are sharply higher with exception of declines in imports mostly of raw materials: minus 5.4 percent for Middle East, minus 6.6 percent for Australia and minus 27.7 percent for Brazil. Imports from Asia increased 2.8 percent in the 12 months ending in Jul while imports from China increased 3.3 percent.
Table VB-7, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens
| Jun 2012 | Exports | 12 months ∆% | Imports Millions Yens | 12 months ∆% |
| Total | 5,313,281 | -8.1 | 5,830,663 | 2.1 |
| Asia | 2,956,186 | -9.0 | 2,629,261 | 2.8 |
| China | 1,009,095 | -11.9 | 1,259,160 | 3.3 |
| USA | 934,186 | 4.7 | 512,324 | 7.6 |
| Canada | 63,745 | 15.3 | 93,209 | 15.8 |
| Brazil | 38,537 | -8.7 | 72,324 | -27.7 |
| Mexico | 69,165 | -5.6 | 29,749 | 15.9 |
| Western Europe | 510,315 | -28.4 | 639,386 | 8.4 |
| Germany | 137,005 | -19.8 | 169,862 | 14.9 |
| France | 38,336 | -33.3 | 94,594 | 18.8 |
| UK | 70,222 | -32.0 | 47,673 | 25.2 |
| Middle East | 184,758 | 9.0 | 989,543 | -5.4 |
| Australia | 110,817 | -25.0 | 399,395 | -6.6 |
Source: http://www.customs.go.jp/toukei/latest/index_e.htm
The geographical distribution of Japan’s trade balance is provided in Table VB-8. The combined trade surpluses with the US, UK and Mexico of JPY 483,827 million are more than erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East, adding to JPY 1,093,363 million. China typically contributes a sizeable trade deficit of Japan with deficit of JPY 250,065 million in Jul 2012.
Table VB-8, Japan, Trade Balance, Millions of Yen
| Jun 2012 | Millions of Yen |
| Total | -517,382 |
| Asia | 326,925 |
| China | -250,065 |
| USA | 421,862 |
| Canada | -29,464 |
| Brazil | -33,787 |
| Mexico | 39,416 |
| Western Europe | -129,071 |
| Germany | -32,857 |
| France | -56,258 |
| UK | 22,549 |
| Middle East | -804,785 |
| Australia | -288,578 |
Source: http://www.customs.go.jp/toukei/latest/index_e.htm
Long-term economic growth in Japan was significantly improved by increasing competitiveness in world markets. Net trade of exports and imports in an important component of the GDP accounts of Japan. Table VB-9 provides quarterly data for net trade, exports and imports of Japan. Net trade had strong positive contributions to GDP growth in Japan in all quarters from IQ2007 to IIQ2009. The US recession is dated by the National Bureau of Economic Research (NBER) as beginning in IVQ2007 (Dec) and ending in IIQ2009 (Jun) (http://www.nber.org/cycles/cyclesmain.html). Net trade contributions help to cushion the economy of Japan from the global recession. Net trade has deducted from GDP growth in six of the eight quarters from IIIQ2010 IIQ2012. The only strong contribution of net trade was 2.7 percent in IIIQ2011. Private consumption has assumed the role of driver of Japan’s economic growth but should moderate as in most mature economies.
Table VB-9, Japan, Contributions to Changes in Real GDP, Seasonally Adjusted Annual Rates (SAAR), %
| Net Trade | Export | Imports | |
| 2012 | |||
| I | 0.6 | 2.0 | -1.4 |
| II | -0.3 | 0.7 | -1.0 |
| 2011 | |||
| I | -1.0 | -0.2 | -0.8 |
| II | -3.7 | -3.6 | 0.0 |
| III | 2.7 | 4.7 | -2.0 |
| IV | -2.9 | -2.3 | -0.6 |
| 2010 | |||
| I | 2.0 | 3.3 | -1.2 |
| II | 0.7 | 3.6 | -2.9 |
| III | -0.4 | 0.7 | -1.1 |
| IV | -0.4 | -0.1 | -0.2 |
| 2009 | |||
| I | -4.4 | -16.5 | 12.0 |
| II | 7.7 | 5.2 | 2.5 |
| III | 1.7 | 4.8 | -3.2 |
| IV | 2.9 | 4.0 | -1.1 |
| 2008 | |||
| I | 1.1 | 1.5 | -0.5 |
| II | 0.9 | 1.8 | -1.0 |
| III | 1.8 | 1.3 | 0.5 |
| IV | 1.5 | 2.0 | -0.5 |
| 2007 | |||
| I | 1.1 | 1.5 | -0.5 |
| II | 0.9 | 1.8 | -1.0 |
| III | 1.8 | 1.3 | 0.5 |
| IV | 1.5 | 2.0 | -0.5 |
Source: http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html
VC China. China estimates an index of nonmanufacturing purchasing managers on the basis of a sample of 1200 nonmanufacturing enterprises across the country (http://www.stats.gov.cn/english/pressrelease/t20120803_402824426.htm). Table CIPMNM provides this index and components from Jan to Jul 2012. The index fell from 57.3 in Mar to 55.2 in May but climbed to 56.7 in Jun, which is lower than 58.0 in Mar and 57.3 in Feb but higher than in any other of the months in 2012. In Jul 2012 the index fell marginally to 55.6
Table CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| Total Index | New Orders | Interm. | Subs Prices | Exp | |
| Jul | 55.6 | 53.2 | 49.7 | 48.7 | 63.9 |
| Jun | 56.7 | 53.7 | 52.1 | 48.6 | 65.5 |
| May | 55.2 | 52.5 | 53.6 | 48.5 | 65.4 |
| Apr | 56.1 | 52.7 | 57.9 | 50.3 | 66.1 |
| Mar | 58.0 | 53.5 | 60.2 | 52.0 | 66.6 |
| Feb | 57.3 | 52.7 | 59.0 | 51.2 | 63.8 |
| Jan | 55.7 | 52.2 | 58.2 | 51.1 | 65.3 |
Notes: Interm.: Intermediate; Subs: Subscription; Exp: Business Expectations
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120803_402824426.htm
Chart CIPMNM provides China’s nonmanufacturing purchasing managers’ index from Jun 2011 to Jun 2012. There was slowing of the general index in Apr 2012 after the increase in Jan-Mar 2012 and further decline to 55.2 in May 2012 but increase to 56.7 in Jun 2012 with marginal decline to 55.6 in Jul 2012.
Chart CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120803_402824426.htm
Table CIPMNMFG provides the index of purchasing managers of manufacturing seasonally adjusted of the National Bureau of Statistics of China. The general index (IPM) rose from 50.5 in Jan 2012 to 53.3 in Apr and declined to 50.1 in Jul. The index of new orders (NOI) fell from 54.5 in Apr 2012 to 49.0 in Jul. The index of employment also fell from 51.0 in Apr to 49.5 in Jul.
Table CIPMNMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| IPM | PI | NOI | INV | EMP | SDEL | |
| Jul | 50.1 | 51.8 | 49.0 | 48.5 | 49.5 | 49.0 |
| Jun | 50.2 | 52.0 | 49.2 | 48.2 | 49.7 | 49.1 |
| May | 50.4 | 52.9 | 49.8 | 45.1 | 50.5 | 49.0 |
| Apr | 53.3 | 57.2 | 54.5 | 48.5 | 51.0 | 49.6 |
| Mar | 53.1 | 55.2 | 55.1 | 49.5 | 51.0 | 48.9 |
| Feb | 51.0 | 53.8 | 51.0 | 48.8 | 49.5 | 50.3 |
| Jan | 50.5 | 53.6 | 50.4 | 49.7 | 47.1 | 49.7 |
IPM: Index of Purchasing Managers; PI: Production Index; NOI: New Orders Index; EMP: Employed Person Index; SDEL: Supplier Delivery Time Index
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120801_402823727.htm
China estimates the manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20120801_402823727.htm). Chart CIPMM provides the index from Jul 2011 to Jul 2012. There is deceleration from 51.2 in Sep 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012 but then declined to 50.4 in May 2012 and 50.1 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011.
Chart CIPMMFG, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/pressrelease/t20120801_402823727.htm
The HSBC Flash China Manufacturing Purchasing Managers’ Index™ (PMI™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9950) deteriorated. The overall Flash China Manufacturing PMI™ decreased from 49.3 in Jul to 47.8 in Aug for a nine-month low, while the Flash China Manufacturing Output Index decreased from 50.8 in Jul to 47.9 in Aug, at a five-month low and in contraction territory below 50.0. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that deterioration of the index suggests China is struggling with world economic activity and that further policy easing could occur in the form of investment in infrastructure (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9950).The HSBC China Services PMI™, compiled by Markit, shows improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 50.6 in Jun to 51.9 in Jul with both manufacturing and services growing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9920). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds stabilizing economy in China, suggesting that with lower inflation there is room for further stimulus (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9920). The HSBC Business Activity index increased from 52.3 in Jun to 53.1 with improving activity in services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9920). The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, increased to 49.3 in Jul from 49.3 in May, indicating moderate reduction of activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9882). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that improving economic slowdown in China still requires further easing of policy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9721).
Wang Xiaotian, writing on China Daily, on “China cuts its reserve ratio again,” published by Xinhuanet on May 13, 2012 (http://news.xinhuanet.com/english/china/2012-05/13/c_131584252.htm), informs that the People’s Bank of China (PBC) (http://www.pbc.gov.cn/publish/english/963/index.html) reduced the reserve requirement imposed on Chinese lenders by 50 basis points with the objective of injecting liquidity to strengthen the economy. This is the second such reduction of reserve requirements in 2012. The reduction is estimated to release CNY 400 in China’s money market. The reserve requirement will be 20 percent for larger banks and 16.5 percent for smaller banks. The measures are intended to strengthen the economy. Xinhuanet, writing on “China announces surprise rate cuts amid economic downshift,” on Jun 5, 2012 (http://news.xinhuanet.com/english/china/2012-07/05/c_131697843.htm), informs that the central bank of China People’s Bank of China reduced the one year deposit rate by 25 basis points and the one year lending rate by 31 basis points effective Jun 6, 2012. The People’s Bank of China posts the new rates (http://www.pbc.gov.cn/publish/english/955/2012/20120608171005950734495/20120608171005950734495_.html). Table CNY provides the country data table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Jul 12-month ∆%: minus 2.9 Jul month ∆%: minus 0.8 |
| Consumer Price Index | Jul month ∆%: 0.1 Jul 12 months ∆%: 1.8 |
| Value Added of Industry | Jul month ∆%: 0.76 Jan-Jul 2012/Jan-Jul 2011 ∆%: 10.3 |
| GDP Growth Rate | Year IIQ2012 ∆%: 7.6 |
| Investment in Fixed Assets | Jul month ∆%: 1.42 Total Jan-Jul 2012 ∆%: 20.4 Real estate development: 15.4 |
| Retail Sales | Jul month ∆%: 1.05 Jan-Jul ∆%: 14.2 |
| Trade Balance | Jul balance $25.2 billion Cumulative Jul: $94.5 billion |
Links to blog comments in Table CNY:
8/19/12 http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html
8/12/12 http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html
7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html
VD Euro Area. Table VD-EUR provides inflation, unemployment and real GDP growth in the euro area yearly from 1999 to 2011 together with growth forecasts of EUROSTAT for 2012 and 2013. Inflation in the euro zone remained subdued around 2 percent in the first five years of the euro zone from 1999 to 2004, as shown in Table VD-EUR. Inflation climbed above 2.0 percent after 2005, peaking at 3.3 percent in 2008 with the surge in commodity prices but falling to 0.3 percent in 2009 with the collapse of commodity prices. Inflation climbed back to 1.6 percent in 2010 and 2.7 percent in 2011. Under the regime of zero interest rates inflation returns worldwide during relaxation of risk aversion. The rate of unemployment increased in 2011 while the rate of GDP growth fell. EUROSTAT forecasts slightly negative growth of 0.3 percent in 2012 and growth of 1.0 percent in 2013.
Table VD-EUR, Euro Area, Yearly Percentage Change of Harmonized Index of Consumer Prices, Unemployment Rate and GDP, ∆%
| Year | HICP ∆% | Unemployment | GDP ∆% |
| 1999 | 1.2 | 9.6 | 2.9 |
| 2000 | 2.2 | 8.7 | 3.8 |
| 2001 | 2.4 | 8.1 | 2.0 |
| 2002 | 2.3 | 8.5 | 0.9 |
| 2003 | 2.1 | 9.0 | 0.7 |
| 2004 | 2.2 | 9.3 | 2.2 |
| 2005 | 2.2 | 9.2 | 1.7 |
| 2006 | 2.2 | 8.5 | 3.3 |
| 2007 | 2.1 | 7.6 | 3.0 |
| 2008 | 3.3 | 7.6 | 0.4 |
| 2009 | 0.3 | 9.6 | -4.4 |
| 2010 | 1.6 | 10.1 | 2.0 |
| 2011 | 2.7 | 10.2 | 1.5 |
| 2012* | -0.3 | ||
| 2013* | 1.0 |
*EUROSTAT forecast
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/
The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI®, combining activity in manufacturing and services, was virtually unchanged at 46.6 in Aug from 46.5 in Jul, for seven consecutive declines and eleven drops in twelve months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9951). Chris Williamson, Chief Economist at Markit, finds that the Markit Flash Eurozone PMI suggests recession in the economy of the euro zone in IIIQ2012; the combined Jul and Aug indexes are consistent with decline of GDP of 0.5 percent to 0.6 percent in IIIQ2012 GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9951). The Markit Eurozone PMI® Composite Output Index, combining services and manufacturing activity with close association with GDP, increased from 46.4 in Jun to 46.5 in Jul, which is the tenth contraction in the past eleven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9888) in the deepest contraction in three years. Chris Williamson, Chief Economist at Markit, finds that the data are consistent with decline of GDP at a quarterly rate of 0.6 percent IIQ2012, which could result in a consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9888). The Markit Eurozone Manufacturing PMI® fell from 45.1 in Jun to 44.0 in Jul, which indicates the sharpest deteriorating activity in 37 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9854). Chris Williamson, Chief Economist at Markit, finds that the index suggests manufacturing in the euro area declined at a quarterly rate of about 1 percent, exerting pressure on GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9854). Table EUR provides the regional data table for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IIQ2012 ∆% -0.2; IIQ2012/IIQ2011 ∆% -0.4 Blog 8/19/12 |
| Unemployment | Jun 2012: 11.2% unemployment rate Jun 2012: 17.801 million unemployed Blog 8/5/12 |
| HICP | Jul month ∆%: -0.5 12 months Jul ∆%: 2.4 |
| Producer Prices | Euro Zone industrial producer prices Jun ∆%: -0.5 |
| Industrial Production | Jun month ∆%: -0.6; Jun 12 months ∆%: -2.8 |
| Retail Sales | Jun month ∆%: 0.1 |
| Confidence and Economic Sentiment Indicator | Sentiment 87.9 Jul 2012 Confidence minus 21.5 Jul 2012 Blog 8/5/12 |
| Trade | Jan-Jun 2012/Jan-Jun 2011 Exports ∆%: 8.3 Jun 2012 12-month Exports ∆% 12.3 Imports ∆% 2.1 |
Links to blog comments in Table EUR: 8/19/12 http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html
8/5/12 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html
VE Germany. Table VE-DE provides yearly growth rates of the German economy from 1992 to 2011, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economy. The German economy grew at 3.7 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.3 percent in IQ2011, 0.3 percent in IIQ2011 and 0.6 percent in IIIQ2011 to decline of 0.2 percent in IVQ2011 and growth of 0.5 percent in IQ2012. The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):
“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”
Table VE-DE, Germany, GDP Year ∆%
| Price Adjusted Chain-Linked | Price- and Calendar-Adjusted Chain Linked | |
| 2011 | 3.0 | 3.1 |
| 2010 | 4.2 | 4.0 |
| 2009 | -5.1 | -5.1 |
| 2008 | 1.1 | 0.8 |
| 2007 | 3.3 | 3.4 |
| 2006 | 3.7 | 3.9 |
| 2005 | 0.7 | 0.8 |
| 2004 | 1.2 | 0.7 |
| 2003 | -0.4 | -0.4 |
| 2002 | 0.0 | 0.0 |
| 2001 | 1.5 | 1.6 |
| 2000 | 3.1 | 3.3 |
| 1999 | 1.9 | 1.8 |
| 1998 | 1.9 | 1.7 |
| 1997 | 1.7 | 1.8 |
| 1996 | 0.8 | 0.8 |
| 1995 | 1.7 | 1.8 |
| 1994 | 2.5 | 2.5 |
| 1993 | -1.0 | -1.0 |
| 1992 | 1.9 | 1.5 |
Source: Statistisches Bundesamt (Destatis)
https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
The Flash Germany Composite Output Index of the Markit Flash Germany PMI®, combining manufacturing and services, fell from 47.5 in Jul to 47.0 in Aug, which is the lowest since Jun 2009 and the fourth consecutive month of decline with declines of both services and manufacturing and sharp decline of new export orders for manufacturers (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9949). Tim Moore, Senior Economist at Markit, finds deterioration in business conditions in Germany relative to the first semester of 2012 with new export orders in manufacturing falling at the sharpest rate since Apr 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9949).The Markit Germany Composite Output Index of the Markit Germany Services PMI®, combining manufacturing and services with close association with Germany’s GDP, fell from 48.1 in Jun to 47.5 in Jul, which is the lowest level since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9923). Tim Moore, Senior Economist at Markit and author of the report, finds that the economy of Germany is beginning the third quarter from a weaker base since the global recession (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9923). There was marginal improvement in the Germany Services Business Activity Index from 49.9 in Jun to 50.3 in Jul (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9923). The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing output, fell from 45.0 in Jun to 43.0 in Jul, which is the weakest reading since Jun 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9890). Tim Moore, Senior Economist at Markit and author of the report, finds that Germany’s manufacturing output is showing the sharpest drop in about three years with contracting orders from export markets and lack of new work (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9890 ).Table DE provides the country data table for Germany.
Table DE, Germany, Economic Indicators
| GDP | IIQ2012 0.3 ∆%; II/Q2012/IIQ2011 ∆% 0.5 1.0 CA 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 8/26/12 5/27/12 |
| Consumer Price Index | Jul month NSA ∆%: 0.4 |
| Producer Price Index | Jul month ∆%: -0.1 CSA, 0.0 NSA |
| Industrial Production | Mfg Jun month SA ∆%: -1.1 |
| Machine Orders | MFG Jun month ∆%: -1.7 |
| Retail Sales | Jun Month ∆% -0.1 12-Month ∆% 2.9 Blog 8/5/12 |
| Employment Report | Unemployment Rate Jun 5.2% |
| Trade Balance | Exports Jun 12-month NSA ∆%: 7.4 Blog 8/12/12 |
Links to blog comments in Table DE:
8/19/12 http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html
8/12/12 http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html
8/5/12 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html
5/27 http://cmpassocregulationblog.blogspot.com/2012_05_01_archive.html
Table VE-1 provides percentage change of Germany’s GDP in one quarter relative to the prior quarter from 2003 to 2012. Germany’s GDP contracted during four consecutive quarters from IIQ2008 to IQ2009. The deepest contraction was 4.1 percent in IQ2009. Growth was quite strong from IIIQ2009 to IQ2011 for cumulative growth of 7.3 percent in seven quarters or at the average rate of 1.o percent per quarter, which is equivalent to 4.1 percent per year. Economic growth decelerated in IIQ2011 to 0.5 percent but rebounded to 0.7 percent in IIIQ2011. The economy contracted mildly by 0.1 percent in IVQ2011 and grew 0.5 percent in IQ2012 and 0.3 percent in IIQ2012.
Table VE-1, Germany Quarter GDP ∆% Relative to Prior Quarter, Seasonally and Calendar Adjusted
| IQ | IIQ | IIIQ | IV | |
| 2012 | 0.5 | 0.3 | ||
| 2011 | 1.2 | 0.5 | 0.4 | -0.1 |
| 2010 | 0.7 | 2.2 | 0.7 | 0.6 |
| 2009 | -4.1 | 0.2 | 0.8 | 0.9 |
| 2008 | 1.0 | -0.4 | -0.4 | -2.0 |
| 2007 | 0.6 | 0.5 | 0.9 | 0.4 |
| 2006 | 1.1 | 1.5 | 1.0 | 1.3 |
| 2005 | -0.1 | 0.6 | 0.8 | 0.3 |
| 2004 | 0.0 | 0.3 | -0.2 | 0.0 |
| 2003 | -0.8 | -0.1 | 0.5 | 0.4 |
Source: Statistisches Bundesamt (Destatis)
https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Table VE-2 provides percentage changes of Germany’s GDP in a quarter relative to the same quarter a year earlier. Growth was weak in the recovery from the recession of 2001 through 2005, as in most of the euro area (see Pelaez and Pelaez, The Global Recession Risk (2007), 116-46). Germany’s economy then grew robustly in 2006 and 2007 until the global recession after 2007. Germany recovered with strong growth in 2010 and vigorous 5.2 percent in IQ2011. The economy decelerated in the final three quarter of 2011, growing 1.7 percent in IQ2012 relative to IQ2011. Growth decelerated further to 0.5 percent in IIQ2012 without calendar adjustment and 1.0 percent with calendar adjustment.
Table VE-2, Germany, Quarter GDP ∆% Relative to Same Quarter a Year Earlier, Price Adjusted NSA
| IQ | IIQ | IIIQ | IV | |
| 2012 | 1.7 | 0.5 | ||
| 2011 | 5.2 | 3.1 | 2.6 | 1.4 |
| 2010 | 2.8 | 5.0 | 4.5 | 4.2 |
| 2009 | -6.5 | -7.4 | -5.0 | -1.6 |
| 2008 | 2.1 | 3.1 | 1.1 | -1.9 |
| 2007 | 4.3 | 3.4 | 3.3 | 2.2 |
| 2006 | 4.3 | 2.4 | 3.5 | 4.6 |
| 2005 | -0.8 | 1.2 | 1.2 | 1.0 |
| 2004 | 1.5 | 1.6 | 0.6 | 0.9 |
| 2003 | 0.0 | -1.1 | -0.5 | 0.1 |
Calendar and price adjusted NSA
Source: Statistisches Bundesamt (Destatis)
https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
There are strong calendar effects in economic activity in Germany. Table VE-3 provides Germany’s percentage change in a quarter relative to the same quarter a year earlier adjusting for price changes and calendar effects. Germany’s GDP increased 1.0 percent in IIQ2012 calendar-adjusted in contrast with only 0.5 percent without calendar adjustment. As the Statistisches Bundesamt, Germany’s Federal Statistical Agency, explains: “In a year-on-year comparison, too, GDP increased. The price-adjusted GDP rose 0.5% in the second quarter of 2012 compared with the same quarter of 2011. The relatively small increase was among other things due to the negative calendar effect as the reference quarter had one working day less than the same quarter of the previous year. Thus, in calendar-adjusted terms, the GDP increase was larger (+1.0%)” (https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1).
Table VE-3, Germany, Quarter GDP ∆% Relative to Same Quarter a Year Earlier, Calendar and Price Adjusted NSA
| IQ | IIQ | IIIQ | IV | |
| 2012 | 1.2 | 1.0 | ||
| 2011 | 4.9 | 3.0 | 2.7 | 1.9 |
| 2010 | 2.7 | 4.6 | 4.5 | 4.2 |
| 2009 | -6.7 | -6.2 | -5.1 | -2.3 |
Source: Statistisches Bundesamt (Destatis)
https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Table VE-4 provides annual growth rates of the German economy from 1992 to 2011, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economies. The German economy grew at 4.2 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.2 percent in IQ2011, 0.5 percent in IIQ2011 and 0.4 percent in IIIQ2011 to decline of 0.1 percent in IVQ2011, growth of 0.5 percent in IQ2012 and only 0.3 percent in IIQ2012. The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):
“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”
Table VE-4, Germany, GDP Year ∆%
| Price Adjusted Chain-Linked | Price- and Calendar-Adjusted Chain Linked | |
| 2011 | 3.0 | 3.1 |
| 2010 | 4.2 | 4.0 |
| 2009 | -5.1 | -5.1 |
| 2008 | 1.1 | 0.8 |
| 2007 | 3.3 | 3.4 |
| 2006 | 3.7 | 3.9 |
| 2005 | 0.7 | 0.8 |
| 2004 | 1.2 | 0.7 |
| 2003 | -0.4 | -0.4 |
| 2002 | 0.0 | 0.0 |
| 2001 | 1.5 | 1.6 |
| 2000 | 3.1 | 3.3 |
| 1999 | 1.9 | 1.8 |
| 1998 | 1.9 | 1.7 |
| 1997 | 1.7 | 1.8 |
| 1996 | 0.8 | 0.8 |
| 1995 | 1.7 | 1.8 |
| 1994 | 2.5 | 2.5 |
| 1993 | -1.0 | -1.0 |
| 1992 | 1.9 | 1.5 |
Source: Statistisches Bundesamt (Destatis)
https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
The Statistisches Bundesamt (Destatis) provides the analysis of percentage point contributions to GDP on growth from the same quarter a year earlier, shown in Table VE-5. The original data are adjusted for price but not for seasonality. There is strong internal demand, or consumption and investment, which is uncommon in advanced economies. Consumption provided 1.2 percentage points to growth in IQ2012 and grew 1.6 percent from the same quarter a year earlier and provided 0.7 percentage points in IIQ2012 with growth of 0.9 percent. Growth of fixed capital formation (GFCF) provided 0.2 percentage points to growth of GDP in IQ2012 and grew 1.1 percent from the same quarter a year earlier but deducted 0.3 percentage points in IIQ2012 and declined 1.5 percent relative to a year earlier. Domestic uses contributed 1.3 percentage points in IQ2012 and grew 1.3 percent from the same quarter a year earlier but deducted 0.6 percentage points in IIQ2012 and fell 0.6 percent relative to a year earlier. Net exports contributed 0.4 percentage points in IQ2012 and added 1.1 percentage points in IIQ2012. The rates of growth of exports and imports fell from over 10 percent to single digits with 4.1 percent growth of exports and 3.8 percent growth of imports in IQ2012 and 4.7 percent growth of exports and 2.9 percent growth of imports in IIQ2012. GDP per person in employment grew 3.6 percent in IIIQ2011 relative to IIIQ2010 but only 1.6 percent in IVQ2011, -0.6 percent in IQ2012 and -0.4 percent in IIQ2012.
Table VE-5, Germany, Percentage Point Contributions of Use of Gross Domestic Product on Growth from Same Quarter Year earlier, Price Adjusted
| IIIQ 11 PP | ∆% IIIQ 11 | IVQ 11 PP | ∆% IVQ 11 | IQ12 PP | ∆% IQ 12 | IIQ 12 PP | ∆% | |
| Consumption | 0.9 | 1.1 | 1.2 | 1.5 | 1.2 | 1.6 | 0.7 | 0.9 |
| Households Consumption | 0.5 | 0.9 | 1.0 | 1.7 | 0.9 | 1.7 | 0.5 | 0.8 |
| Government | 0.3 | 1.7 | 0.2 | 1.0 | 0.3 | 1.5 | 0.2 | 1.1 |
| Gross Capital Formation | 1.6 | 9.8 | 1.3 | 7.2 | 0.1 | 0.3 | -1.2 | -6.8 |
| Gross Fixed | 1.0 | 5.9 | 1.1 | 6.2 | 0.2 | 1.1 | -0.3 | -1.5 |
| GFCF including | 0.7 | 10.3 | 0.5 | 7.0 | 0.2 | 2.4 | -0.2 | -3.1 |
| GFCF in Construction | 0.3 | 3.2 | 0.6 | 5.8 | 0.0 | 0.1 | -0.1 | -1.2 |
| Change in Inventories | 0.6 | 0.2 | -0.1 | -0.9 | ||||
| Domestic Uses | 2.6 | 2.5 | 2.4 | 2.4 | 1.3 | 1.3 | -0.6 | -0.6 |
| Net Exports | 1.7 | 0.6 | 0.4 | 1.1 | ||||
| Exports | 13.7 | 7.8 | 4.1 | 4.7 | ||||
| Imports | 11.1 | 7.4 | 3.8 | 2.9 | ||||
| GDP | 4.2 | 3.0 | 1.7 | 0.5 | ||||
| GDP per Person in Employment | 3.6 | 1.6 | 0.3 | -0.7 | ||||
| GDP per Hour Worked | 1.8 | 1.6 | -0.6 | -0.4 |
Source: Statistisches Bundesamt (Destatis)
Percentage changes from year earlier of gross value added by economic sectors are shown for Germany in Table VE-6. The two rows of industry ex construction and manufacturing reveal sharp reductions in yearly growth rates from double digits in 2010, upper single digits in 2011, lower single digits in IQ2012 and contraction in IIQ2012. Finance and insurance rebounded from decline of 1.7 percent in 2007 to growth of 5.2 percent in IIQ2012. Business services also grew at relatively higher rates from minus12.3 percent in 2007 to 4.2 percent in IQ2012 and 3.1 percent in IIQ2012.
Table VE-6, Germany, Percentage Change from Year Earlier of Gross Value Added by Economic Sector, Price Adjusted NSA
| 2009 | 2010 | 2011 | IQ 2012 | IIQ 2012 | |
| Agriculture | 4.0 | -14.8 | -9.2 | 0.9 | -3.9 |
| Industry ex | -17.7 | 15.8 | 6.2 | 1.1 | -1.4 |
| Manufacturing | -22.1 | 19.5 | 8.3 | 2.2 | -1.5 |
| Construction | -6.5 | 6.9 | 4.6 | 1.0 | -1.6 |
| Trade, Transport | -0.4 | 1.7 | 3.1 | 2.6 | 1.0 |
| Information & Communications. | 9.9 | -0.2 | 1.9 | 3.4 | 3.2 |
| Finance & Insurance | -1.7 | 1.4 | 1.4 | 2.2 | 5.2 |
| Real Estate | 1.6 | -1.7 | 0.6 | 1.8 | 1.5 |
| Business Services | -12.3 | 2.6 | 4.2 | 4.2 | 3.1 |
| Public Services, Education & Health | 1.4 | 1.7 | 0.9 | 0.8 | 1.1 |
| Other Services | -0.6 | -1.5 | -0.5 | 1.2 | 0.7 |
| Total Gross Value Added | -5.6 | 4.6 | 3.0 | 1.8 | 0.8 |
Source: Statistisches Bundesamt (Destatis)
Chart VE-1 of the Statistisches Bundesamt (Federal Statistics Agency of Germany) provides GDP at current prices from 2003 to 2012. The German economy is productive with significant dynamism over the long term. There are fluctuations in an increasing trend since 2009.
Chart VE-1, Germany, GDP, Current Prices, Billion Euro
Source: Statistisches Bundesamt (Destatis)
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart VE-2 of the Statistisches Bundesamt (Destatis)(Federal Statistics Agency of Germany) provides the index of price-adjusted chain-linked GDP of Germany from 2007 to 2012. Germany was growing rapidly before the global contraction and rebounded with significant strength along a strong upward trend.
Chart VE-2, Germany, Index of Price-Adjusted Chain-Linked GDP, 2000=100
Source: Statistisches Bundesamt (Destatis)
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Table VE-7 provides Germany’s GDP of €661.1 billion in IIQ2012 and its uses. Private consumption is 57.4 percent of GDP and GFCF 17.4 percent with government consumption of 19.4 percent and net exports 5.8 percent. Germany’s savings ratio has been in the rate of 9.9 percent to 13.7 percent.
Table VE-7, Germany, GDP and Uses, Euro Billions and %
| GDP Euro Billions IIQ2012 | 661.07 |
| Percent Distribution of Uses | |
| Gross Capital Formation | 17.4 |
| Private Consumption | 57.4 |
| Balance of Exports and Imports | 5.8 |
| Government Consumption | 19.4 |
| Memo: Savings Ratio % | |
| IIQ2012 | 9.9 |
| IQ2012 | 13.7 |
| 2011 | 10.4 |
| 2010 | 10.9 |
| 2009 | 10.9 |
| 2008 | 11.5 |
Source: Statistisches Bundesamt Deutschland (Destatis)
VF France. Table VF-FR provides growth rates of GDP of France with the estimates of Institut National de la Statistique et des Études Économiques (INSEE). The long-term rate of GDP growth of France from IIQ1949 to IIQ2012 is quite high at 3.3 percent. France’s growth rates were quite high in the four decades of the 1950s, 1960, 1970s and 1980s with an average growth rate of 4.1 percent compounding the average rates in the decades and discounting to one decade. The growth impulse diminished with 1.8 percent in the 1990s and 1.7 percent from 2000 to 2007. The average growth rate from 2000 to 2012, using second quarter data, is 1.1 percent because of the sharp impact of the global recession from IVQ2007 to IIQ2009. 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 US 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 the G7 in Japan and France in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Lucas (2011May) compares growth of the G7 economies (US, UK, Japan, Germany, France, Italy and Canada) and Spain, finding that catch-up growth with earlier rates for the US and UK stalled in the 1970s.
Table VF-FR, France, Average Growth Rates of GDP Fourth Quarter, 1949-2012
| Period | Average ∆% |
| 1949-2012* | 3.3 |
| 2000-2012* | 1.1 |
| 2000-2011 | 1.1 |
| 2000-2007 | 1.7 |
| 1990-1999 | 1.8 |
| 1980-1989 | 2.6 |
| 1970-1979 | 3.8 |
| 1960-1969 | 5.7 |
| 1950-1959 | 4.2 |
*Second Quarter on Second Quarter
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20120814
The Markit Flash France Composite Output Index increased from 47.9 in Jul to 48.9 in Jun, indicating moderate contraction for a sixth consecutive month (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9948). Jack Kennedy, Senior Economist at Markit and author of the report, finds weakness in IIIQ2012 GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9948).
The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased from 47.3 in Jun to 47.9 in Jun, indicating contraction of private sector activity at a more moderate rate and the highest reading in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9887). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds that improving activity in services was compensated by deeper decline in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9887). The Markit France Services Activity index rose from 47.9 in Jun to 50.0 in Jul for the highest reading in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9887). The Markit France Manufacturing Purchasing Managers’ Index® fell to 43.4 in Jul from 45.2 in Jun, which was the sharpest decline of the manufacturing economy since May 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9864). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds continuing deterioration in manufacturing with weakening new orders and adversities at home and abroad (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9864). Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Jul month ∆% -0.4 |
| PPI | Jun month ∆%: -1.1 Blog 8/5/12 |
| GDP Growth | IIQ2012/IQ2012 ∆%: 0.0 |
| Industrial Production | Jun SA ∆%: |
| Consumer Spending | Jun Manufactured Goods |
| Employment | IQ2012 Unemployed 2.746 million |
| Trade Balance | Jun Exports ∆%: month -1.9, 12 months 4.3 Jun Imports ∆%: month -0.4, 12 months 5.8 Blog 8/12/12 |
| Confidence Indicators | Historical averages 100 Jul Mfg Business Climate 90 Blog 7/29/12 |
Links to blog comments in Table FR: 8/19/12 http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html
8/12/12 http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html
8/5/12 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html
7/29/12 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html
6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html
VG Italy. The Markit/ADACI Business Activity Index was virtually unchanged at 43.0 in Jul relative to 43.1 in Jun, indicating sharp contraction of output of Italy’s services sector in 14 consecutive months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9921). Phil Smith, economist at Markit and author of the Italy Services PMI®, finds that the rate of contraction in services was only sharpest in four other readings in the history of the index, which occurred during the global recession (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9921). The Markit/ADACI Purchasing Managers’ Index® (PMI®), fell from 45.2 in Jun to 43.4 in Jul for ten consecutive months of contraction of Italy’s manufacturing quite sharp relative to the history of the index with the weakest reading since May 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9864). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI®, finds continuing sharp contraction of new orders of manufacturing in Italy both at home and abroad (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9864). Table IT provides the country data table for Italy.
Table IT, Italy, Economic Indicators
| Consumer Price Index | Jul month ∆%: 0.0 |
| Producer Price Index | Jun month ∆%: -0.1 Blog 8/5/12 |
| GDP Growth | IIQ2012/IQ2012 SA ∆%: minus 0.7 |
| Labor Report | Jun 2012 Participation rate 63.9% Employment ratio 56.9% Unemployment rate 10.8% Blog 8/5/12 |
| Industrial Production | Jun month ∆%: -1.4 |
| Retail Sales | May month ∆%: -0.2 May 12-month ∆%: -2.0 Blog 7/29/12 |
| Business Confidence | Mfg Jul 87.1, Mar 90.9 Construction Jul 84.0, Mar 82.6 Blog 7/29/12 |
| Trade Balance | Balance Jun SA €1592 million versus May €343 |
Links to blog comments in Table IT: 8/12/12 http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html
8/5/12 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html
7/29/12 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery_29.html
Annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of 4.0 percent in 2009 after dropping 1.0 percent in 2008. Recovery of 1.8 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.8 percent in 2011. The bottom part of Table VH-UK provides average growth rates of UK GDP since 1948. The UK economy grew at 2.7 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 3.0 percent. Growth in the current cyclical expansion has been only at 1.3 percent as advanced economies struggle with weak internal demand and world trade.
Table VH-UK, UK, Gross Domestic Product, ∆%
| ∆% on Prior Year | |
| 1998 | 3.5 |
| 1999 | 3.2 |
| 2000 | 4.2 |
| 2001 | 2.9 |
| 2002 | 2.4 |
| 2003 | 3.8 |
| 2004 | 2.9 |
| 2005 | 2.8 |
| 2006 | 2.6 |
| 2007 | 3.6 |
| 2008 | -1.0 |
| 2009 | -4.0 |
| 2010 | 1.8 |
| 2011 | 0.8 |
| Average ∆% per Year | |
| 1948-2011 | 2.7 |
| 1948-1959 | 2.9 |
| 1960-1969 | 3.3 |
| 1970-1979 | 2.5 |
| 1980-1989 | 3.2 |
| 1990-1999 | 2.6 |
| 2000-2011 | 1.7 |
| 2000-2007 | 3.0 |
| 2009-2011 | 1.3 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
The Business Activity Index of the Markit/CIPS UK Services PMI® fell from 51.3 in Jun to 51.0 in Jul with growth during 19 consecutive months but at the weakest level in that period (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9922). Paul Smith, Senior Economist at Markit, finds that weather and the Olympics preparations restrained activity but that combining the index with that of construction the index fell below 50.0 for the first time in 39 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9922). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) fell from 48.4 in Jun to 45.4 in July, which is the lowest reading since May 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9893). The decline of 4.3 points in May is the second sharpest decline in the history of 20 years of the index. Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI®, finds weakness in output to the sharpest level since Mar 2009 with lack of demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9893).
Table UK provides the country data table for the United Kingdom.
Table UK, UK Economic Indicators
| CPI | Jul month ∆%: 0.1 |
| Output/Input Prices | Output Prices: |
| GDP Growth | IIQ2012 prior quarter ∆% minus 0.5; year earlier same quarter ∆%: minus 0.5 |
| Industrial Production | Jun 2012/Jun 2011 NSA ∆%: Production Industries minus 4.3; Manufacturing minus 4.3 |
| Retail Sales | Jul month ∆%: 0.3 |
| Labor Market | Apr-Jun Unemployment Rate: 8.0%; Claimant Count 4.9%; Earnings Growth 1.6% |
| Trade Balance | Balance Jun minus ₤4308 million |
Links to blog comments in Table UK:
8/19/12 http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism_19.html
8/12/12 http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html
Annual data in Table VH-1 show the strong impact of the global recession in the UK with decline of GDP of 4.0 percent in 2009 after dropping 1.0 percent in 2008. Recovery of 1.8 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.8 percent in 2011. The bottom part of Table VH-UK provides average growth rates of UK GDP since 1948. The UK economy grew at 2.7 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 3.0 percent. Growth in the current cyclical expansion has been only at 1.3 percent as advanced economies struggle with weak internal demand and world trade.
Table VH-1, UK, Gross Domestic Product, ∆%
| ∆% on Prior Year | |
| 1998 | 3.5 |
| 1999 | 3.2 |
| 2000 | 4.2 |
| 2001 | 2.9 |
| 2002 | 2.4 |
| 2003 | 3.8 |
| 2004 | 2.9 |
| 2005 | 2.8 |
| 2006 | 2.6 |
| 2007 | 3.6 |
| 2008 | -1.0 |
| 2009 | -4.0 |
| 2010 | 1.8 |
| 2011 | 0.8 |
| Average ∆% per Year | |
| 1948-2011 | 2.7 |
| 1948-1959 | 2.9 |
| 1960-1969 | 3.3 |
| 1970-1979 | 2.5 |
| 1980-1989 | 3.2 |
| 1990-1999 | 2.6 |
| 2000-2011 | 1.7 |
| 2000-2007 | 3.0 |
| 2009-2011 | 1.3 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data, additions and revisions are analyzed here. Table VH-2 provides quarter on quarter chained value measures of GDP since 1998. Growth in IIQ2011 was reduced to minus 0.1 percent. The estimate for IIIQ2011 is at 0.6 percent. The estimate for IVQ2011 is contraction of 0.4 percent, which is higher than contraction of 0.2 percent in the second estimate. The GDP of the UK contracted in a second consecutive quarter by 0.3 percent in the latest estimate for IQ2012. The second estimate for IIQ2012 is contraction of 0.5 percent. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.
Table VH-2, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%
| IQ | IIQ | IIIQ | IV | |
| 2012 | -0.3 | -0.5 | ||
| 2011 | 0.5 | -0.1 | 0.6 | -0.4 |
| 2010 | 0.6 | 0.7 | 0.6 | -0.4 |
| 2009 | -1.5 | -0.2 | 0.4 | 0.4 |
| 2008 | 0.1 | -0.9 | -1.8 | -2.1 |
| 2007 | 1.1 | 1.2 | 1.2 | 0.2 |
| 2006 | 0.5 | 0.3 | 0.2 | 0.9 |
| 2005 | 0.6 | 1.2 | 0.8 | 1.1 |
| 2004 | 0.7 | 0.2 | 0.0 | 0.6 |
| 2003 | 0.6 | 1.2 | 1.2 | 1.2 |
| 2002 | 0.4 | 0.8 | 0.8 | 0.9 |
| 2001 | 1.3 | 0.7 | 0.5 | 0.4 |
| 2000 | 1.0 | 1.4 | 0.3 | 0.2 |
| 1999 | 0.5 | 0.3 | 1.7 | 1.3 |
| 1998 | 0.8 | 0.7 | 0.6 | 0.9 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VH-3. (1) Growth rates were quite high from 2000 to 2007. (2) There were six continuous quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 4.6 percent in IVQ2008, 6.1 percent in IQ2009, 5.4 percent in IIQ2009 and 3.3 percent in IIIQ2009. (3) The economy bounced strongly with 2.1 percent in IIQ2010, 2.4 percent in IIIQ2010 and 1.5 percent in IVQ2010. (4) Recovery in 2011 did not continue at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2010. Growth relative to the same quarter a year earlier fell from 1.5 percent in IVQ2010 to 1.4 percent in IQ2011, 0.6 percent in IIQ2011, 0.5 percent in IIIQ2011 and 0.6 percent in IVQ2011 but contraction of 0.2 percent in IQ2012 relative to IQ2011 and contraction of 0.5 percent in IIQ2012 relative to IIQ2011. In IQ2012, GDP fell 0.3 percent for a second consecutive quarter and fell 0.2 percent relative to a year earlier. In IIQ2012, GDP fell 0.5 percent relative to IIQ2012 and fell 0.5 percent relative to a year earlier. Fiscal consolidation in an environment of weakening economic growth is much more challenging.
Table VH-3, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%
| IQ | IIQ | IIIQ | IV | |
| 2012 | -0.2 | -0.5 | ||
| 2011 | 1.4 | 0.6 | 0.5 | 0.6 |
| 2010 | 1.2 | 2.1 | 2.4 | 1.5 |
| 2009 | -6.1 | -5.4 | -3.3 | -0.9 |
| 2008 | 2.7 | 0.5 | -2.4 | -4.6 |
| 2007 | 2.6 | 3.6 | 4.6 | 3.8 |
| 2006 | 3.7 | 2.7 | 2.1 | 2.0 |
| 2005 | 1.5 | 2.5 | 3.3 | 3.8 |
| 2004 | 4.4 | 3.4 | 2.2 | 1.6 |
| 2003 | 3.3 | 3.6 | 4.0 | 4.3 |
| 2002 | 2.0 | 2.2 | 2.5 | 3.1 |
| 2001 | 3.3 | 2.5 | 2.8 | 2.9 |
| 2000 | 4.4 | 5.6 | 4.1 | 2.9 |
| 1999 | 2.8 | 2.4 | 3.5 | 4.0 |
| 1998 | 4.0 | 3.7 | 3.3 | 3.1 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Growth rates of GDP and components of gross value added in a quarter from the preceding quarter are provided in Table VH-4. The first row of the table provides the weights of components. Contraction of GDP in IIQ2012 resulted from sharp contraction of construction by 3.9 percent with total production declining 1.3 percent and manufacturing 0.9 percent while services fell 0.1 percent. Contraction of GDP in IQ2012 resulted from sharp contraction of construction by 4.9 percent and contraction of total production by -0.5 percent with manufacturing contracting 0.3 percent while services crawled 0.2 percent. Contraction of GDP of 0.4 percent in IVQ2011 resulted from sharp contraction of 1.4 percent in total production, with manufacturing declining 1.1 percent. Even services fell by 0.2 percent in IVQ2011. Growth of 0.6 percent in IIIQ2011 originated almost entirely in growth by services of 0.8 percent with virtually no growth by other components with exception of 0.1 percent of construction. Growth in 2011 originated mostly in services. GDP contracted 0.4 percent in IVQ2010, 0.1 percent in IIQ2011, 0.4 percent in IVQ2010, 0.3 percent in IQ2012 and 0.5 percent in IIQ2012. All components are negative in IV2011 and services fell 0.2 percent while all components are negative in IQ2012 with meager growth of services of 0.2 percent and decline of manufacturing by 0.3 percent. All components are negative in IIQ2012 with output falling 1.3 percent, construction 3.9 percent and services 0.1 percent.
Table VH-4, UK, GDP and Gross Value Added by Components, ∆% on Prior Quarter
| GDP | Total | Mfg | CONS | Services | |
| Weights* | 1000 | 156 | 105 | 68 | 770 |
| IIQ12 | -0.5 | -1.3 | -0.9 | -3.9 | -0.1 |
| IQ12 | -0.3 | -0.5 | -0.3 | -4.9 | 0.2 |
| IVQ11 | -0.4 | -1.4 | -1.1 | 0.0 | -0.2 |
| IIIQ11 | 0.6 | 0.0 | -0.3 | 0.1 | 0.8 |
| IIQ11 | -0.1 | -1.2 | 0.3 | 0.9 | 0.3 |
| IQ11 | 0.5 | -0.1 | 0.7 | 0.5 | 0.7 |
| IVQ10 | -0.4 | 0.1 | 0.5 | -1.8 | -0.4 |
| IIIQ10 | 0.6 | 0.4 | 1.6 | 2.9 | 0.5 |
| IIQ10 | 0.7 | 1.4 | 1.9 | 6.3 | 0.1 |
| IQ10 | 0.6 | 1.1 | 0.8 | 2.3 | 0.2 |
| IV09 | 0.4 | 0.3 | 1.1 | 0.5 | 0.6 |
| III09 | 0.4 | -1.1 | -0.4 | -0.1 | 0.5 |
| II09 | -0.2 | 0.0 | 0.2 | -2.6 | 0.0 |
| I09 | -1.5 | -4.3 | -5.2 | -5.8 | -0.5 |
| IV08 | -2.1 | -4.9 | -5.2 | -5.8 | -1.4 |
| III08 | -1.8 | -1.1 | -1.3 | -3.0 | -1.6 |
| II08 | -0.9 | -1.1 | -1.6 | -2.0 | -0.6 |
| I08 | 0.1 | -0.3 | 0.4 | 1.6 | 0.0 |
Note: CONS: construction’ MFG: manufacturing
*Weights (2009) may not add because of rounding and exclusion of Agriculture, Forestry and Fishing with weight of 6. Output components are valued at basic prices while GDP is valued at market prices. The preliminary estimate places GDP next to gross value added by components because it is the only contribution to change in GDP.
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Growth of UK value added by components on a quarter relative to the prior quarter is provided in Table VH-5. Total production fell 0.9 percent in IIQ2012 with manufacturing falling 0.9 percent and construction dropping 3.9 percent. Total production fell 0.5 percent in IQ2012 with manufacturing falling 0.3 percent, construction fell 3.6 percent and services increased 0.2 percent. Total production fell 1.4 percent in IVQ2011 with manufacturing declining 1.1 percent. Services fell 0.2 percent in IVQ2011 and grew 0.2 percent in IQ2012, reducing the support of economic activity in prior quarters. Business services & finance fell 0.3 percent in IQ2012 and 0.2 percent IVQ2011 but decreased marginally 0.1 percent in IIQ2012.
VH-5, UK, Quarter on Quarter Growth of Growth Value Added by Components, ∆% on Prior Quarter
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 | 2012 Q1 | 2012 Q2 |
| Agriculture | 8.2 | -0.9 | -0.7 | -1.8 | -2.2 | -2.6 |
| Total Production | -0.1 | -1.2 | 0.0 | -1.4 | -0.5 | -0.9 |
| Manufacturing | 0.7 | 0.3 | -0.3 | -1.1 | -0.3 | -0.9 |
| Extraction | -4.0 | -7.2 | -0.3 | -2.6 | -3.6 | -4.4 |
| Electricity, gas and air | -4.7 | -2.7 | 1.6 | -3.8 | 1.2 | 5.6 |
| Water & sewerage | 5.4 | -2.0 | 0.4 | 0.9 | 0.8 | -3.2 |
| Construction | 0.5 | 0.9 | 0.1 | 0.0 | -4.9 | -3.9 |
| Total Services | 0.7 | 0.2 | 0.8 | -0.2 | 0.2 | -0.1 |
| Distn, hotels & catering | 0.6 | 0.2 | 0.4 | -0.6 | 0.3 | -0.1 |
| Transport, storage & comms | -0.7 | 0.4 | 0.9 | -0.5 | 1.0 | -0.7 |
| Business services & finance | 0.7 | 0.2 | 1.2 | -0.2 | -0.3 | -0.1 |
| Government & other | 1.3 | 0.2 | 0.4 | 0.3 | 0.3 | 0.3 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Contributions to quarter on prior quarter to UK value added by components are shown in Table VH-6. In IIQ2012, total production deducted 0.2 percentage points with manufacturing deducting 0.1 percentage points, construction deducting 0.2 percentage points and total services deducted 0.1 percentage points. In IQ2012, total production deducted 0.1 percentage points, mining and quarrying subtracted 0.1 percentage points and construction deducted 0.4 percentage points with the only positive contribution being 0.1 percentage points by services. Total production subtracted 0.2 percentage points from growth in IVQ2011 with manufacturing subtracting 0.1 percentage points. There were equal subtractions of 0.1 percentage points by utilities and distribution, hotels and restaurants. Growth in IIIQ2011 originated in contribution of 0.6 percentage points by services of which 0.3 percentage points by business services and finance and 0.1 percentage points by government. Business services and finance deducted 0.1 percentage points in IVQ2011 and IQ2012 and was flat in IIQ2012 while government and other services contributed 0.1 percentage points in all quarters from IIIQ2011 to IIQ2012.
Table VH-6, UK, Contribution to Quarter on Prior Quarter of Growth of Value Added by Components, %
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 | 2012 Q1 | 2012 Q2 |
| Agriculture | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Total Production | 0.0 | -0.2 | 0.0 | -0.2 | -0.1 | -0.1 |
| Manufacturing | 0.1 | 0.0 | 0.0 | -0.1 | 0.0 | -0.1 |
| Extraction | -0.1 | -0.1 | 0.0 | -0.1 | -0.1 | -0.1 |
| Electricity, gas and air | -0.1 | 0.0 | 0.0 | -0.1 | 0.0 | 0.1 |
| Water & sewerage | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Construction | 0.0 | 0.1 | 0.0 | 0.0 | -0.4 | -0.3 |
| Total Services | 0.5 | 0.2 | 0.6 | -0.1 | 0.1 | -0.1 |
| Distn, hotels & catering | 0.1 | 0.0 | 0.1 | -0.1 | 0.0 | 0.0 |
| Transport, storage & comms | -0.1 | 0.0 | 0.1 | -0.1 | 0.1 | -0.1 |
| Business services & finance | 0.2 | 0.1 | 0.3 | -0.1 | -0.1 | 0.0 |
| Government & other | 0.3 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Table VH-7 provides UK growth of value added by components on a quarter relative to the same quarter a year earlier. There was significant deceleration in growth of total production from 1.8 percent in IQ2011 to minus 2.8 percent in 2012 with negative growth in all quarters from IIQ2011 to IIQ2012. Manufacturing growth fell from 4.7 percent in IQ2011 to minus 2.6 percent in IIQ2012. Construction growth fell from 7.9 percent in IQ2011 to minus 8.6 percent in IIQ2012. Growth of services has been more moderate with 1.0 percent in IQ2012 and 0.7 percent in IIQ2012.
Table VH-7, UK, Year on Year Growth of Value Added by Components, ∆% on Same Quarter Prior Year
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 | 2012 Q1 | 2012 Q2 |
| Agriculture | -5.1 | -4.1 | -2.7 | 4.6 | -5.4 | -7.1 |
| Total Production | 1.8 | -0.8 | -1.2 | -2.7 | -3.1 | -2.8 |
| Manufacturing | 4.7 | 3.1 | 1.2 | -0.4 | -1.4 | -2.6 |
| Extraction | -10.4 | -17.0 | -15.4 | -13.4 | -13.2 | -10.5 |
| Electricity, gas and air | -3.1 | -5.2 | 0.0 | -9.4 | -3.8 | 4.5 |
| Water & sewerage | 7.0 | 2.5 | 2.3 | 4.6 | 0.0 | -1.2 |
| Construction | 7.9 | 2.4 | -0.3 | 1.5 | -4.0 | -8.6 |
| Total Services | 0.9 | 1.0 | 1.4 | 1.6 | 1.0 | 0.7 |
| Distn, hotels & catering | 0.5 | 0.5 | 0.5 | 0.7 | 0.3 | 0.0 |
| Transport, storage & comms | 0.8 | 0.8 | 0.8 | 0.2 | 1.9 | 0.7 |
| Business services & finance | 1.4 | 1.2 | 1.9 | 1.9 | 0.9 | 0.6 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Table VH-8 provides contribution to growth on same quarter a year earlier. Contributions by total production have been negative in all quarter from IIQ2011 to IIQ2012. Manufacturing contributed minus 0.2 percentage points in IQ2012 and minus 0.3 percentage points in IIQ2012 compared with contribution of 0.5 percentage points in IQ2011 and 0.3 percentage points in IIQ2011. Total services contributed 0.8 percentage points in IQ2012 and 0.5 percentage points in IIQ2012.
VH-8, UK, Contribution to Growth on Same Quarter Prior Year of Value Added by Components, %
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 | 2012 Q1 | 2012 Q2 |
| Agriculture | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Total Production | 0.3 | -0.1 | -0.2 | -0.4 | -0.5 | -0.4 |
| Manufacturing | 0.5 | 0.3 | 0.1 | 0.0 | -0.2 | -0.3 |
| Extraction | -0.2 | -0.4 | -0.3 | -0.3 | -0.3 | -0.2 |
| Electricity, gas and air | 0.0 | -0.1 | 0.0 | -0.1 | -0.1 | 0.1 |
| Water & sewerage | 0.1 | 0.0 | 0.0 | 0.1 | 0.0 | 0.0 |
| Construction | 0.5 | 0.2 | 0.0 | 0.1 | -0.3 | -0.6 |
| Total Services | 0.7 | 0.8 | 1.1 | 1.2 | 0.8 | 0.5 |
| Distn, hotels & catering | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.0 |
| Transport, storage & comms | 0.1 | 0.1 | 0.1 | 0.0 | 0.2 | 0.1 |
| Business services & finance | 0.4 | 0.3 | 0.5 | 0.5 | 0.3 | 0.2 |
| Government & other | 0.2 | 0.3 | 0.3 | 0.5 | 0.3 | 0.3 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Table VH-9 provides UK growth of value added by components relative to a year earlier. There was significant deceleration in growth of total production from 2.1 percent in 2010 to minus 0.7 percent in 2011. Manufacturing growth fell from 3.8 percent in 2010 to 2.1 percent in 2011. Construction growth fell from 7.9 percent in 2010 to 2.8 percent in 2011. Total services grew at 3.3 percent in 2006 and 4.7 percent in 2007 to decline 0.2 percent in 2008 and 2.1 percent in 2009. Growth of services in 2010 and 2011 has been more moderate at 1.1 percent and 1.2 percent, respectively.
Table VH-9, UK, Year on Year Growth of Value Added by Components, ∆% on Prior Year
| Component | 2007 | 2008 | 2009 | 2010 | 2011 |
| Agriculture | -2.6 | 6.1 | -6.3 | -1.5 | -2.0 |
| Total Production | 0.5 | -2.8 | -9.1 | 2.1 | -0.7 |
| Manufacturing | 0.9 | -2.5 | -9.7 | 3.8 | 2.1 |
| Extraction | -2.7 | -6.2 | -9.0 | -4.3 | -14.1 |
| Electricity, gas and air | 0.5 | 0.3 | -4.7 | 3.2 | -4.5 |
| Water & sewerage | 3.4 | -1.6 | -8.5 | -0.9 | 4.1 |
| Construction | 2.1 | -2.7 | -13.5 | 7.9 | 2.8 |
| Total Services | 4.7 | -0.2 | -2.1 | 1.1 | 1.2 |
| Distn, hotels & catering | 5.2 | -2.6 | -4.1 | 1.4 | 0.5 |
| Transport, storage & comms | 5.4 | -0.5 | -5.7 | 2.8 | 0.7 |
| Business services & finance | 6.8 | 0.8 | -3.5 | 0.8 | 1.6 |
| Government & other | 1.4 | 0.0 | 2.8 | 0.6 | 1.4 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Total production subtracted 0.1 percentage points from value added in the UK in 2011 compared with addition of 0.3 percentage points in 2010, as shown in Table VH-10. Total services added 0.9 percentage points in 2010 and 0.9 percentage points in 2011 with flattening growth at the margin. The concern is with the decline of GDP at minus 0.4 percent in the final quarter of 2011, 0.3 percent in the first quarter of 2012 and 0.5 percent in the second quarter of 2012.
VH-10, UK, Contribution to Growth on Prior Year of Value Added by Components, %
| Component | 2007 | 2008 | 2009 | 2010 | 2011 |
| Agriculture | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Total Production | 0.1 | -0.5 | -1.5 | 0.3 | -0.1 |
| Manufacturing | 0.1 | -0.3 | -1.1 | 0.4 | 0.2 |
| Extraction | -0.1 | -0.2 | -0.2 | -0.1 | -0.3 |
| Electricity, gas and air | 0.0 | 0.0 | -0.1 | 0.0 | -0.1 |
| Water & sewerage | 0.0 | 0.0 | -0.1 | 0.0 | 0.0 |
| Construction | 0.2 | -0.2 | -1.0 | 0.5 | 0.2 |
| Total Services | 3.5 | -0.1 | -1.6 | 0.8 | 1.0 |
| Distn, hotels & catering | 0.7 | -0.4 | -0.6 | 0.2 | 0.1 |
| Transport, storage & comms | 0.6 | -0.1 | -0.6 | 0.3 | 0.1 |
| Business services & finance | 1.9 | 0.2 | -1.0 | 0.2 | 0.5 |
| Government & other | 0.3 | 0.0 | 0.6 | 0.1 | 0.3 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Table VH-11 provides growth on prior quarter of expenditure components of GDP. Household final consumption fell 0.1 percent in IQ2012 and fell again 0.4 percent in IIQ2012. Gross fixed capital formation fell 3.2 percent in IIQ2011 after being more dynamic in earlier quarters. Exports fell 1.7 percent in both IQ2012 and IIQ2012 while imports increased 1.4 percent in IIQ2012.
Table VH-11, UK, Growth Quarter on Prior Quarter, Expenditure Components of GDP
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 | 2012 Q1 | 2012 Q2 |
| Household final consumption expenditure | -0.8 | -0.6 | -0.7 | 0.5 | -0.1 | -0.4 |
| NPISH final consumption expenditure | -0.4 | 2.1 | -0.6 | 0.3 | 0.1 | 1.9 |
| General government final consumption expenditure | 0.1 | 0.4 | -0.1 | 0.8 | 1.9 | 0.0 |
| Gross capital formation | -2.3 | 5.2 | 5.9 | -7.8 | -2.0 | 4.8 |
| - of which GFCF | -0.8 | -0.1 | 0.6 | -0.6 | 1.9 | -3.2 |
| - of which Bus. Investment | -7.2 | 11.2 | 2.1 | -0.8 | 1.9 | -1.5 |
| Exports | 1.7 | -3.0 | 0.7 | 3.1 | -1.7 | -1.7 |
| less Imports | -2.2 | -0.8 | 0.2 | 1.6 | -0.3 | 1.4 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Contributions to growth quarter on prior quarter of expenditure components of GDP are provided in Table VH-12. Household final consumption deducted 0.1 percentage points in IQ2012 and 0.3 percentage points in IIQ2012. Gross fixed capital formation (GFCF) deducted 0.5 percentage points in IIQ2012 after adding 0.3 percentage points in IQ2012. Net trade deducted 1.0 percentage points in IIQ2012.
Table VH-12, UK, Contribution to Growth Quarter on Prior Quarter, Expenditure Components of GDP
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 | 2012 Q1 | 2012 Q2 |
| Household final consumption expenditure | -0.5 | -0.3 | -0.4 | 0.3 | -0.1 | -0.3 |
| NPISH final consumption expenditure | 0.0 | 0.1 | 0.0 | 0.0 | 0.0 | 0.1 |
| General government final consumption expenditure | 0.0 | 0.1 | 0.0 | 0.2 | 0.4 | 0.0 |
| Gross capital formation | -0.3 | 0.8 | 0.9 | -1.3 | -0.3 | 0.7 |
| - of which GFCF | -0.1 | 0.0 | 0.1 | -0.1 | 0.3 | -0.5 |
| - of which Bus. Investment | -0.6 | 0.8 | 0.2 | -0.1 | 0.2 | -0.1 |
| Exports | 0.5 | -0.9 | 0.2 | 1.0 | -0.5 | -0.5 |
| less Imports | -0.7 | -0.3 | 0.1 | 0.5 | -0.1 | 0.5 |
| Net trade | 1.2 | -0.7 | 0.1 | 0.4 | -0.4 | -1.0 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Growth of expenditure components of GDP on a quarter relative to the same quarter a year earlier are provided in Table VH-13. Household financial consumption expenditure has been negative in all quarters from IIQ2011 to IIQ2012. Gross fixed capital formation (GFCF) fell 1.2 percent in IIQ2012 relative to a year earlier. Exports grew 0.4 percent in IIQ2012 relative to a year earlier while imports increased 2.9 percent.
Table VH-13, UK, Growth Quarter on Same Quarter Prior Year, Expenditure Components of GDP
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 | 2012 Q1 | 2012 Q2 |
| Household final consumption expenditure | 0.1 | -1.3 | -1.8 | -1.6 | -0.9 | -0.8 |
| NPISH final consumption expenditure | 5.4 | 4.3 | 1.9 | 1.3 | 1.8 | 1.7 |
| General government final consumption expenditure | -0.6 | -0.3 | 0.3 | 1.2 | 3.0 | 2.6 |
| Gross capital formation | -2.6 | 3.8 | 1.3 | 0.4 | 0.6 | 0.3 |
| - of which GFCF | -2.5 | 0.0 | -2.0 | -0.9 | 1.9 | -1.2 |
| - of which Bus. Investment | -9.9 | 6.3 | 4.8 | 4.5 | 14.8 | 1.7 |
| Exports | 10.2 | 2.8 | 2.6 | 2.4 | -1.0 | 0.4 |
| less Imports | 4.3 | 0.5 | -1.3 | -1.2 | 0.7 | 2.9 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
Table VH-14 provides contributions to growth on a quarter relative to the same quarter a year earlier by expenditure components of GDP. Household final consumption has made negative contributions declining from 1.1 percentage points in IIIQ2011 and 1.0 percentage points in IVQ2011 to 0.5 percentage points in both IQ2012 and IIQ2012. Gross fixed capital formation deducted 0.2 percentage points in IIQ2012. Net trade deducted 0.5 percentage points in IQ2012 and deducted 0.8 percentage points in IIQ2012.
Table VH-14, UK, Contribution to Growth Quarter on Same Quarter Prior Year, Expenditure Components of GDP
| Component | 2011 Q1 | 2011 Q2 | 2011 Q3 | 2011 Q4 | 2012 Q1 | 2012 Q2 |
| Household final consumption expenditure | 0.1 | -0.8 | -1.1 | -1.0 | -0.5 | -0.5 |
| NPISH final consumption expenditure | 0.1 | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 |
| General government final consumption expenditure | -0.1 | -0.1 | 0.1 | 0.3 | 0.7 | 0.6 |
| Gross capital formation | -0.4 | 0.6 | 0.2 | 0.1 | 0.1 | 0.0 |
| - of which GFCF | -0.4 | 0.0 | -0.3 | -0.1 | 0.3 | -0.2 |
| - of which Bus. Investment | -0.8 | 0.5 | 0.4 | 0.4 | 1.1 | 0.1 |
| Exports | 3.0 | 0.8 | 0.8 | 0.7 | -0.3 | 0.1 |
| less Imports | 1.3 | 0.2 | -0.4 | -0.4 | 0.2 | 0.9 |
| Net trade | 1.6 | 0.7 | 1.2 | 1.1 | -0.5 | -0.8 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q2-2012/index.html
VI Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html
Table VI-1 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of unconventional monetary policy encouraging carry trades from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table VI-1 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar of 4.9 percent by Fri Aug 24, 2012. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table VI-1 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.
Table VI-1, Volatility of Assets
| DJIA | 10/08/02-10/01/07 | 10/01/07-3/4/09 | 3/4/09- 4/6/10 | |
| ∆% | 87.8 | -51.2 | 60.3 | |
| NYSE Financial | 1/15/04- 6/13/07 | 6/13/07- 3/4/09 | 3/4/09- 4/16/07 | |
| ∆% | 42.3 | -75.9 | 121.1 | |
| Shanghai Composite | 6/10/05- 10/15/07 | 10/15/07- 10/30/08 | 10/30/08- 7/30/09 | |
| ∆% | 444.2 | -70.8 | 85.3 | |
| STOXX EUROPE 50 | 3/10/03- 7/25/07 | 7/25/07- 3/9/09 | 3/9/09- 4/21/10 | |
| ∆% | 93.5 | -57.9 | 64.3 | |
| UBS Com. | 1/23/02- 7/1/08 | 7/1/08- 2/23/09 | 2/23/09- 1/6/10 | |
| ∆% | 165.5 | -56.4 | 41.4 | |
| 10-Year Treasury | 6/10/03 | 6/12/07 | 12/31/08 | 4/5/10 |
| % | 3.112 | 5.297 | 2.247 | 3.986 |
| USD/EUR | 6/26/03 | 7/14/08 | 6/07/10 | 8/24/2012 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.2512 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 8/24/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3558 |
| New House | 1963 | 1977 | 2005 | 2009 |
| Sales 1000s | 560 | 819 | 1283 | 375 |
| New House | 2000 | 2007 | 2009 | 2010 |
| Median Price $1000 | 169 | 247 | 217 | 203 |
| 2003 | 2005 | 2007 | 2010 | |
| CPI | 1.9 | 3.4 | 4.1 | 1.5 |
Sources: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
http://www.census.gov/const/www/newressalesindex_excel.html
http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Table VI-2 extracts four rows of Table VI-I with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table VI-4 below, the dollar has devalued again to USD 1.2512/EUR on Aug 24, 2012 or by 4.9 percent {[(1.2512/1.192)-1]100 = 4.9%}. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. Risk aversion erodes devaluation of the dollar. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD subsequently revaluing to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.3589/USD on Fri Aug 24, 2012, or by an additional 6.8 percent, for cumulative revaluation of 23.2 percent. The final row of Table VI-2 shows that revaluation of the CNY in two of the past four weeks by 0.1 percent and 0.2 percent but and no change in the weeks ending on Aug 17, 2012 and Aug 24, 2012.
Table VI-2, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate
| USD/EUR | 12/26/03 | 7/14/08 | 6/07/10 | 8/24/ |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.2512 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 8/24/ 2012 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.3558 |
| Weekly Rates | 7/20/2012 | 8/10/2012 | 8/17/2012 | 8/24/ 2012 |
| CNY/USD | 6.3726 | 6.3604 | 6.3589 | 6.3558 |
| ∆% from Earlier Week* | 0.1 | 0.2 | 0.0 | 0.0 |
*Negative sign is depreciation, positive sign is appreciation
Source:
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). Bob Davis and Lingling Wei, writing on “China shifts course, lets Yuan drop,” on Jul 25, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444840104577548610131107868.html?mod=WSJPRO_hpp_LEFTTopStories), find that China is depreciating the CNY relative to the USD in an effort to diminish the impact of appreciation of the CNY relative to the EUR. Table VI-2A provides the CNY/USD rate from Oct 28, 2011 to Aug 24, 2012 in selected intervals on Fridays. The CNY/USD revalued by 0.9 percent from Oct 28, 2012 to Apr 27, 2012. The CNY was virtually unchanged relative to the USD by Aug 24, 2012 to CNY 6.3558/USD from the rate of CNY 6.3588/USD on Oct 28, 2011. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress. An important statement by the People’s Bank of China (PBC), China’s central bank, on Apr 14, 2012, announced the widening of the daily maximum band of fluctuation of the renminbi (RMB) yuan (http://www.pbc.gov.cn/publish/english/955/2012/20120414090756030448561/20120414090756030448561_.html):
“Along with the development of China’s foreign exchange market, the pricing and risk management capabilities of market participants are gradually strengthening. In order to meet market demands, promote price discovery, enhance the flexibility of RMB exchange rate in both directions, further improve the managed floating RMB exchange rate regime based on market supply and demand with reference to a basket of currencies, the People’s Bank of China has decided to enlarge the floating band of RMB’s trading prices against the US dollar and is hereby making a public announcement as follows:
Effective from April 16, 2012 onwards, the floating band of RMB’s trading prices against the US dollar in the inter-bank spot foreign exchange market is enlarged from 0.5 percent to 1 percent, i.e., on each business day, the trading prices of the RMB against the US dollar in the inter-bank spot foreign exchange market will fluctuate within a band of ±1 percent around the central parity released on the same day by the China Foreign Exchange Trade System. The spread between the RMB/USD selling and buying prices offered by the foreign exchange-designated banks to their customers shall not exceed 2 percent of the central parity, instead of 1 percent, while other provisions in the Circular of the PBC on Relevant Issues Managing the Trading Prices in the Inter-bank Foreign Exchange Market and Quoted Exchange Rates of Exchange-Designated Banks(PBC Document No.[2010]325) remain valid.
In view of the domestic and international economic and financial conditions, the People’s Bank of China will continue to fulfill its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies to preserve stability of the Chinese economy and financial markets.”
Table VI-2A, Renminbi Yuan US Dollar Rate
| CNY/USD | ∆% from 10/28/2011 | |
| 8/24/12 | 6.3558 | 0.0 |
| 8/17/12 | 6.3589 | 0.0 |
| 8/10/12 | 6.3604 | 0.0 |
| 8/3/12 | 6.3726 | -0.2 |
| 7/27/12 | 6.3818 | -0.4 |
| 7/20/12 | 6.3750 | -0.3 |
| 7/13/12 | 6.3868 | -0.4 |
| 7/6/12 | 6.3658 | -0.1 |
| 6/29/12 | 6.3552 | 0.1 |
| 6/22/12 | 6.3650 | -0.1 |
| 6/15/12 | 6.3678 | -0.1 |
| 6/8/2012 | 6.3752 | -0.3 |
| 6/1/2012 | 6.3708 | -0.2 |
| 4/27/2012 | 6.3016 | 0.9 |
| 3/23/2012 | 6.3008 | 0.9 |
| 2/3/2012 | 6.3030 | 0.9 |
| 12/30/2011 | 6.2940 | 1.0 |
| 11/25/2011 | 6.3816 | -0.4 |
| 10/28/2011 | 6.3588 | - |
Source:
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
Chart VI-1 of the Board of Governors of the Federal Reserve System provides the CNY/USD exchange rate from Aug 24, 2000 to Aug 17, 2012 together with US recession dates in shaded areas. China fixed the CNY/USD rate for a long period as shown in the horizontal segment from 2000 to 2005. There was systematic revaluation of 17.6 percent from CNY 8.2765 on Jul 21, 2005 to CNY 6.8211 on Jul 15, 2008. China fixed the CNY/USD rate until Jun 7, 2010, to avoid adverse effects on its economy from the global recession, which is shown as a horizontal segment from 2009 until mid 2010. China then continued the policy of appreciation of the CNY relative to the USD with oscillations until the beginning of 2012 when the rate began to move sideways followed by a final upward slope of devaluation that is measured in Table VI-2A but virtually disappeared in the rate of CNY 6.3589/USD on Aug 17, 2012 nearly unchanged at CNY 6.3558/USD on Aug 24, 2012. Revaluation of the CNY relative to the USD by 23.2 percent by Aug 24, 2012 has not reduced the trade surplus of China but reversal of the policy of revaluation could result in international confrontation. The upward slope in the final segment on the right of Chart VI-I is measured as virtually stability in Table VI-2A.
Chart VI-1, Chinese Yuan (CNY) per US Dollar (US), Aug 24, 2000-Aug 17, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
The database of the World Economic Outlook (WEO) of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) is used to contract Table VI-3 with fiscal and current account imbalances projected for 2011 and 2015. The WEO finds the need to rebalance external and domestic demand (IMF 2011WEOSep xvii):
“Progress on this front has become even more important to sustain global growth. Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); others are not contributing enough (for example, key economies in emerging Asia). The first set needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation. The second set of economies needs significant currency appreciation alongside structural reforms to reduce high surpluses of savings over investment. Such policies would help improve their resilience to shocks originating in the advanced economies as well as their medium-term growth potential.”
The IMF (2012WEOApr, XVII) explains decreasing importance of the issue of global imbalances as follows:
“The latest developments suggest that global current account imbalances are no longer expected to widen again, following their sharp reduction during the Great Recession. This is largely because the excessive consumption growth that characterized economies that ran large external deficits prior to the crisis has been wrung out and has not been offset by stronger consumption in surplus economies. Accordingly, the global economy has experienced a loss of demand and growth in all regions relative to the boom years just before the crisis. Rebalancing activity in key surplus economies toward higher consumption, supported by more market-determined exchange rates, would help strengthen their prospects as well as those of the rest of the world.”
Table VI-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP
| GDP 2011 | FD | CAD | Debt | FD%GDP | CAD%GDP | Debt | |
| US | 15094 | -7.3 | -3.1 | 80.3 | -2.3 | -3.2 | 88.3 |
| Japan | 5869 | -9.1 | 2.0 | 126.6 | -5.8 | 2.4 | 155.0 |
| UK | 2418 | -5.8 | -1.9 | 78.3 | -0.8 | -0.4 | 88.1 |
| Euro | 13115 | -1.6 | 0.3 | 68.4 | 1.1 | 1.2 | 71.3 |
| Ger | 3577 | 0.7 | 5.7 | 56.1 | 1.4 | 4.3 | 52.4 |
| France | 2776 | -2.9 | -2.2 | 80.4 | 0.3 | -0.8 | 83.8 |
| Italy | 2199 | 0.8 | -3.2 | 99.6 | 4.4 | -1.6 | 101.5 |
| Can | 1737 | -4.1 | -2.8 | 33.3 | -1.1 | -2.5 | 37.4 |
| China | 7298 | -1.2 | 2.7 | 25.8 | -0.1 | 3.4 | 14.8 |
| Brazil | 2493 | 3.1 | -2.1 | 36.4 | 3.1 | -3.4 | 31.9 |
Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit
FD is primary except total for China; Debt is net except gross for China
Source: http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weoselgr.aspx
The current account of the US balance of payments is provided in Table VI-3A for IQ2011 and IQ2012. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US increased from $119.9 billion in IQ2011, or 3.2 percent of GDP to $137.3 billion in IQ2012, or 3.6 percent of GDP. The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71).
Table VI-3A, US Balance of Payments, Millions of Dollars NSA
| IQ2011 | IQ2012 | Difference | |
| Goods Balance | -181,358 | -194,462 | -13,104 |
| X Goods | 360,917 | 388,501 | 11.0 ∆% |
| M Goods | -542,276 | -582.963 | 12.9 ∆% |
| Services Balance | 44,133 | 43,465 | -668 |
| X Services | 147,894 | 154,420 | 9.1 ∆% |
| M Services | -103,761 | -110,955 | 8.0 ∆% |
| Balance Goods and Services | -137,225 | -150,997 | -13,772 |
| Balance Income | 52,451 | 47,571 | -4,880 |
| Unilateral Transfers | -35,223 | -33,887 | 1,336 |
| Current Account Balance | -119,997 | -137,313 | -17,316 |
| % GDP | IQ2011 | IVQ2011 | IQ2012 |
| 3.2 | 3.1 | 3.6 |
X: exports; M: imports
Balance on Current Account = Balance on Goods and Services + Balance on Income + Unilateral Transfers
Source: Bureau of Economic Analysis
http://www.bea.gov/international/index.htm#bop
In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):
“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”
The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.
This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.
The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net of financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):
“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”
The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below potential. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. Table VI-3B provides data on US fiscal and balance of payments imbalances. In 2007, the federal deficit of the US was $161 billion corresponding to 1.2 percent of GDP while the Congressional Budget Office (CBO 2012MarBEO, 2) estimates the federal deficit in 2012 at $1171 billion or 7.6 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5178 billion or 33 percent of the estimate of GDP of $15,508 billion for 2012 by the CBO (2012MarBEO, 2). Federal debt in 2007 was $5035 billion, less than the combined deficits from 2009 to 2012 of $5178 billion, and corresponded to 36.3 percent of GDP. Federal debt in 2011 was 67.7 percent of GDP and is estimated to reach 73.2 percent of GDP in 2012 (CBO2012MarBEO, 2). This situation may worsen in the future (CBO 2012LTBO):
“The budget outlook is much bleaker under the extended alternative fiscal scenario, which maintains what some analysts might consider “current policies,” as opposed to current laws. Federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.
The changes under this scenario would result in much lower revenues than would occur under the extended baseline scenario because almost all expiring tax provisions are assumed to be extended through 2022 (with the exception of the current reduction in the payroll tax rate for Social Security). After 2022, revenues under this scenario are assumed to remain at their 2022 level of 18.5 percent of GDP, just above the average of the past 40 years.
Outlays would be much higher than under the other scenario. This scenario incorporates assumptions that through 2022, lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2022, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; and that the automatic reductions in spending required by the Budget Control Act of 2011 will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place). Finally, under this scenario, federal spending as a percentage of GDP for activities other than Social Security, the major health care programs, and interest payments is assumed to return to its average level during the past two decades, rather than fall significantly below that level, as it does under the extended baseline scenario.”
Table VI-3B, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %
| 2000 | 2007 | 2008 | 2009 | 2010 | 2011 | |
| Goods & | -377 | -697 | -698 | -379 | -495 | -559 |
| Income | 19 | 101 | 147 | 119 | 184 | 227 |
| UT | -58 | -115 | -126 | -122 | -131 | -133 |
| Current Account | -416 | -710 | -677 | -382 | -442 | -466 |
| NGDP | 9951 | 14028 | 14291 | 13939 | 14526 | 15094 |
| Current Account % GDP | -3.8 | -5.0 | -4.9 | -2.7 | -3.4 | -3.7 |
| NIIP | -1337 | -1796 | -3260 | -2396 | -2471 | NA |
| NIIP % GDP | -13.4 | -12.8 | -22.8 | -17.2 | -17.0 | NA |
| Exports | 1425 | 2488 | 2657 | 2181 | 2519 | 2848 |
| NIIP % | -94 | -72 | -123 | -110 | -98 | NA |
| DIA MV | 2694 | 5274 | 3102 | 4331 | 4843 | NA |
| DIUS MV | 2783 | 3551 | 2486 | 3027 | 3451 | NA |
| Fiscal Balance | +236 | -161 | -459 | -1413 | -1294 | -1300 |
| Fiscal Balance % GDP | +2.4 | -1.2 | -3.2 | -10.1 | -9.0 | -8.7 |
| Federal Debt | 3410 | 5035 | 5803 | 7545 | 9019 | 10128 |
| Federal Debt % GDP | 34.7 | 36.3 | 40.5 | 54.1 | 62.8 | 67.7 |
| Federal Outlays | 1789 | 2729 | 2983 | 3518 | 3456 | 3598 |
| ∆% | 5.1 | 2.8 | 9.3 | 17.9 | -1.8 | 4.1 |
| % GDP | 18.2 | 19.7 | 20.8 | 25.2 | 24.1 | 24.1 |
| Federal Revenue | 2052 | 2568 | 2524 | 2105 | 2162 | 2303 |
| ∆% | 10.8 | 6.7 | -1.7 | -16.6 | 2.7 | 6.5 |
| % GDP | 20.6 | 18.5 | 17.6 | 15.1 | 15.1 | 15.4 |
Sources:
Notes: UT: unilateral transfers; NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which they original number of the CBO source is maintained. These discrepancies do not alter conclusions.
Sources: Balance of Payments and NIIP, Bureau of Economic Analysis (BEA) http://www.bea.gov/international/index.htm#bop
Gross Domestic Product, Bureau of Economic Analysis (BEA) http://www.bea.gov/national/index.htm#gdp
Federal Outlays, Revenues and Debt, Congressional Budget Office (CBO) http://www.cbo.gov/publication/42911
The International Monetary Fund (IMF) provides an international safety net for prevention and resolution of international financial crises. The IMF’s Financial Sector Assessment Program (FSAP) provides analysis of the economic and financial sectors of countries (see Pelaez and Pelaez, International Financial Architecture (2005), 101-62, Globalization and the State, Vol. II (2008), 114-23). Relating economic and financial sectors is a challenging task both for theory and measurement. The IMF (2012WEOApr) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2012GFSRApr) (http://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/text.pdf) and of fiscal affairs with the Fiscal Monitor (IMF 2012FMApr) (http://www.imf.org/external/pubs/ft/fm/2012/01/pdf/fm1201.pdf). There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider global economic and financial risks, which are analyzed in the comments of this blog.
Economic risks include the following:
1. China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. Lu Hui, writing on “China lowers GDP target to achieve quality economic growth, on Mar 12, 2012, published in Beijing by Xinhuanet (http://news.xinhuanet.com/english/china/2012-03/12/c_131461668.htm), informs that Premier Jiabao wrote in a government work report that the GDP growth target will be lowered to 7.5 percent to enhance the quality and level of development of China over the long term. The quarterly growth rate of GDP in IIQ2012 of 1.8 percent is equivalent to 7.4 percent per year and growth in IIQ2012 relative to IIQ2011 is estimated at 7.5 percent, which is the lowest since the global recession (see subsection VC at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html and earlier http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html). There is also ongoing political development in China during a decennial political reorganization. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm).
2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. (i) The US is experiencing the first expansion from a recession after World War II without growth and without jobs. The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.4 percent on an annual basis in 2011 to cumulative growth of 0.87 percent in the first two quarters of 2012, which is equivalent to 1.75 percent (http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html). Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 28.8 million people. (ii) The labor market continues fractured with 28.8 million unemployed or underemployed (Section I http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html). There are over 10 million fewer full-time jobs and hiring has collapsed (Section I http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html). (iii) There is a difficult climb from the record federal deficit of 9.9 percent of GDP in 2009 and cumulative deficit of $5135 billion in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (Section IB in this comment and Section VA at http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars_17.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 67.7 percent of GDP in 2011 and projected by the Congressional Budget Office (Table IB-3 above and CBO 2012AugBEO http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf iv) at 72.8 percent in 2012. The CBO (2012AugBEO) must use current law without any changes in the baseline scenario but also calculates another alternative scenario with different assumptions. In the alternative scenario, the debt/GDP ratio rises to 89.7 percent by 2022 (Table IB-6). The US is facing an unsustainable debt/GDP path. Feldstein (2012Mar19) finds that the most troubling uncertainty in the US is the programmed tax increases projected by the CBO (2012JanBEO) under current law with federal government revenue increasing from $2.4 trillion in fiscal year 2012 to $2.9 trillion in fiscal year 2013. The increase of $512 billion of federal revenue would be about 2.9 percent of GDP, raising the share of federal revenue in GDP from 15.8 percent in fiscal year 2012 to 18.7 percent of GDP in fiscal year 2013. In the analysis of Feldstein (2012Mar19), increasing revenue would originate in higher personal tax rates, payroll tax contributions and taxes on dividends, capital gains and corporate income tax. The share of federal revenue in GDP would increase to 19.8 percent in 2014, remaining above 20 percent during the rest of the decade. Feldstein (2012Mar19) finds that such a shock of sustained tax increases would risk another recession in 2013, requiring preventive legislation to smooth tax increases
3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. Japan’s GDP fell 0.6 percent in IVQ2011 relative to a year earlier but grew 2.9 percent in IQ2012 relative to a year earlier, 1.3 percent in IQ2012 relative to IVQ2011 and 0.3 percent in IIQ2012 relative to IIQ2011 (see Table V-3). The euro zone’s GDP fell 0.3 percent in IVQ2011 and was flat in IQ2012 and relative to a year earlier in IQ2011 but fell 0.2 percent in IIQ2012 and declined 0.4 percent relative to IIQ2011; Germany’s GDP fell 0.1 percent in IVQ2011 but grew 0.5 percent in IQ2012 and 1.7 percent relative to IQ2011, increasing 0.3 percent in IIQ2012 and 0.5 percent relative to IIQ2011; and the UK’s GDP fell 0.4 percent in IVQ2011, 0.3 percent in IQ2012 and 0.5 percent in IIQ2012 for cumulative decline of 1.2 percent in three consecutive quarters at annual equivalent rate of minus 1.6 percent and declined 0.5 percent in IIQ2012 relative to IIQ2011. There is still high unemployment in advanced economies
4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I Inflation Waves at http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism.html and earlier http://cmpassocregulationblog.blogspot.com/2012/07/world-inflation-waves-financial.html http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.html)
A list of financial uncertainties includes:
1. Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk. Adjustment programs consist of immediate adoption of economic reforms that would increase future growth permitting fiscal consolidation, which would reduce risk spreads on sovereign debt. Fiscal consolidation is challenging in an environment of weak economic growth as analyzed by Blanchard (2011WEOSep) and consolidation can restrict growth as analyzed by Blanchard (2012WEOApr). Adjustment of countries such as Italy requires depreciation of the currency to parity, as proposed by Caballero and Giavazzi (2012Jan15), but it is not workable within the common currency and zero interest rates in the US. Bailouts of euro area member countries with temporary liquidity challenges cannot be permanently provided by stronger members at the risk of impairing their own sovereign debt credibility
2. Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation. After deep global recession, regulation, trade and devaluation wars were to be expected (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181): “There are significant grounds for concern on the basis of this experience. International economic cooperation and the international financial framework can collapse during extreme events. It is unlikely that there will be a repetition of the disaster of the Great Depression. However, a milder contraction can trigger regulatory, trade and exchange wars”
3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes. For example, the DJIA has increased 35.8 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Jul 27, 2012, and the S&P 500 has gained 38.0 percent. It is challenging in theory and practice to assess when variables have peaked but sustained valuations to very high levels could be followed by contractions of valuations. Jonathan Cheng, writing on “Stocks add 66 points, post first-quarter record,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313123753822852.html?mod=WSJ_Markets_LEFTTopStories&mg=reno64-sec-wsj), finds that the DJIA rose 8.1 percent in IQ2012, which is the highest since 1998, while the S&P 500 gained 12 percent. Paul A. Samuelson remarked that “the stock market has predicted nine of the last five recessions.” Another version of this phrase would be that “the stock market has predicted nine of the last five economic booms.” The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (1)
Equation (1) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The present value of the firm can also be expressed as the discounted future value of net cash flows. Equities can inflate beyond sound values if cash flows that depend on economic activity prove to be illusory in continuing mediocre growth
4. Duration Trap of the Zero Bound. The yield of the US 10-year Treasury rose from 2.031 percent on Mar 9, 2012, to 2.294 percent on Mar 16, 2012. Considering a 10-year Treasury with coupon of 2.625 percent and maturity in exactly 10 years, the price would fall from 105.3512 corresponding to yield of 2.031 percent to 102.9428 corresponding to yield of 2.294 percent, for loss in a week of 2.3 percent but far more in a position with leverage of 10:1. Min Zeng, writing on “Treasurys fall, ending brutal quarter,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313400029412564.html?mod=WSJ_hps_sections_markets), informs that Treasury bonds maturing in more than 20 years lost 5.52 percent in the first quarter of 2012
5. Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy. The Federal Open Market Committee (FOMC) advised on its Jun 20, 2012 statement that: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” (http://www.federalreserve.gov/newsevents/press/monetary/20120620a.htm). At its meeting on Jan 25, the FOMC began to provide to the public the specific forecasts of interest rates and other economic variables by FOMC members. These forecasts are analyzed in Section IV Global Inflation. Thomas J. Sargent and William L. Silber, writing on “The challenges of the Fed’s bid for transparency,” on Mar 20, published in the Financial Times (http://www.ft.com/intl/cms/s/0/778eb1ce-7288-11e1-9c23-00144feab49a.html#axzz1pexRlsiQ), analyze the costs and benefits of transparency by the Fed. In the analysis of Sargent and Silber (2012Mar20), benefits of transparency by the Fed will exceed costs if the Fed is successful in conveying to the public what policies would be implemented and how forcibly in the presence of unforeseen economic events. History has been unkind to policy commitments. The risk in this case is if the Fed would postpone adjustment because of political pressures as has occurred in the past or because of errors of evaluation and forecasting of economic and financial conditions. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). The challenge of the Fed, in the view of Sargent and Silber 2012Mar20), is to convey to the public the need to deviate from the commitment to interest rates of zero to ¼ percent because conditions have changed instead of unwarranted inaction or policy changes. Errors have abounded such as a critical cause of the global recession pointed by Sargent and Silber (2012Mar20): “While no president is known to have explicitly pressurized Mr. Bernanke’s predecessor, Alan Greenspan, he found it easy to maintain low interest rates for too long, fuelling the credit boom and housing bubble that led to the financial crisis in 2008.” Sargent and Silber (2012Mar20) also find need of commitment of fiscal authorities to consolidation needed to attain sustainable path of debt.
The analysis by Kydland and Prescott (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:
Ut = Unt – α(πt – πe) α > 0 (1)
Where Ut is the rate of unemployment at current time t, Unt is the natural rate of unemployment, πt is the current rate of inflation and πe is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:
W = W(πt, Ut) (2)
The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (πt, Ut - Un) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999).
6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path. Some analytical aspects of the carry trade are instructive (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 101-5, Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4), Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-4). Consider the following symbols: Rt is the exchange rate of a country receiving carry trade denoted in units of domestic currency per dollars at time t of initiation of the carry trade; Rt+τ is the exchange of the country receiving carry trade denoted in units of domestic currency per dollars at time t+τ when the carry trade is unwound; if is the domestic interest rate of the high-yielding country where investment will be made; iusd is the interest rate on short-term dollar debt assumed to be 0.5 percent per year; if >iusd, which expresses the fact that the interest rate on the foreign country is much higher than that in short-term USD (US dollars); St is the dollar value of the investment principal; and π is the dollar profit from the carry trade. The investment of the principal St in the local currency debt of the foreign country provides a profit of:
π = (1 + if)(RtSt)(1/Rt+τ) – (1 + iusd)St (3)
The profit from the carry trade, π, is nonnegative when:
(1 + if)/ (1 + iusd) ≥ Rt+τ/Rt (4)
In words, the difference in interest rate differentials, left-hand side of inequality (4), must exceed the percentage devaluation of the currency of the host country of the carry trade, right hand side of inequality (4). The carry trade must earn enough in the host-country interest rate to compensate for depreciation of the host-country at the time of return to USD. A simple example explains the vulnerability of the carry trade in fixed-income. Let if be 0.10 (10 percent), iusd 0.005 (0.5 percent), St USD100 and Rt CUR 1.00/USD. Adopt the fixed-income rule of months of 30 days and years of 360 days. Consider a strategy of investing USD 100 at 10 percent for 30 days with borrowing of USD 100 at 0.5 percent for 30 days. At time t, the USD 100 are converted into CUR 100 and invested at [(30/360)10] equal to 0.833 percent for thirty days. At the end of the 30 days, assume that the rate Rt+30 is still CUR 1/USD such that the return amount from the carry trade is USD 0.833. There is still a loan to be paid [(0.005)(30/360)USD100] equal to USD 0.042. The investor receives the net amount of USD 0.833 minus USD 0.042 or US 0.791. The rate of return on the investment of the USD 100 is 0.791 percent, which is equivalent to the annual rate of return of 9.49 percent {(0.791)(360/30)}. This is incomparably better than earning 0.5 percent. There are alternatives of hedging by buying forward the exchange for conversion back into USD.
Research by the Federal Reserve Bank of St. Louis finds that the dollar declined on average by 6.56 percent in the events of quantitative easing, ranging from depreciation of 10.8 percent relative to the Japanese yen to 3.6 percent relative to the pound sterling (http://research.stlouisfed.org/wp/2010/2010-018.pdf). A critical assumption of Rudiger Dornbusch (1976) in his celebrated analysis of overshooting (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf) is “that exchange rates and asset markets adjust fast relative to goods markets” (Rudiger Dornbusch 1976, 1162). The market response of a monetary expansion is “to induce an immediate depreciation in the exchange rate and accounts therefore for fluctuations in the exchange rate and the terms of trade. During the adjustment process, rising prices may be accompanied by an appreciating exchange rate so that the trend behavior of exchange rates stands potentially in strong contrast with the cyclical behavior of exchange rates and prices” (Dornbusch 1976, 1162). The volatility of the exchange rate “is needed to temporarily equilibrate the system in response to monetary shocks, because underlying national prices adjust so slowly” (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf 3). The exchange rate “is identified as a critical channel for the transmission of monetary policy to aggregate demand for domestic output” (Dornbusch 1976, 1162).
In a world of exchange wars, depreciation of the host-country currency can move even faster such that the profits from the carry trade may become major losses. Depreciation is the percentage change in instants against which the interest rate of a day is in the example [(10)(1/360)] or 0.03 percent. Exchange rates move much faster in the real world as in the overshooting model of Dornbusch (1976). Profits in carry trades have greater risks but equally greater returns when the short position in zero interest rates, or borrowing, and on the dollar, are matched with truly agile financial risk assets such as commodities and equities. A simplified analysis could consider the portfolio balance equations Aij = f(r, x) where Aij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, ri, of n assets and x a vector of other relevant variables. Tobin (1969) and Brunner and Meltzer (1973) assume imperfect substitution among capital assets such that the own first derivatives of Aij are positive, demand for an asset increases if its rate of return (interest plus capital gains) is higher, and cross first derivatives are negative, demand for an asset decreases if the rate of return of alternative assets increases. Theoretical purity would require the estimation of the complete model with all rates of return. In practice, it may be impossible to observe all rates of return such as in the critique of Roll (1976). Policy proposals and measures by the Fed have been focused on the likely impact of withdrawals of stocks of securities in specific segments, that is, of effects of one or several specific rates of return among the n possible rates. In fact, the central bank cannot influence investors and arbitrageurs to allocate funds to assets of desired categories such as asset-backed securities that would lower the costs of borrowing for mortgages and consumer loans. Floods of cheap money may simply induce carry trades in arbitrage of opportunities in fast moving assets such as currencies, commodities and equities instead of much lower returns in fixed income securities (see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html).
It is in this context of economic and financial uncertainties that decisions on portfolio choices of risk financial assets must be made. There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table VI-1 after the first policy round of near zero fed funds and quantitative easing by the equivalent of withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China now complicated by political developments, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of growth standstill. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion or the “sharp shifts in risk appetite” of Blanchard (2012WEOApr, XIII). Table VI-4, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 8/24/12,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets (http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. There has been rollercoaster fluctuation in risk aversion and financial risk asset valuations: surge in the week of Dec 2, 2011, mixed performance of markets in the week of Dec 9, renewed risk aversion in the week of Dec 16, end-of-the-year relaxed risk aversion in thin markets in the weeks of Dec 23 and Dec 30, mixed sentiment in the weeks of Jan 6 and Jan 13 2012 and strength in the weeks of Jan 20, Jan 27 and Feb 3 followed by weakness in the week of Feb 10 but strength in the weeks of Feb 17 and 24 followed by uncertainty on financial counterparty risk in the weeks of Mar 2 and Mar 9. All financial values have fluctuated with events such as the surge in the week of Mar 16 on favorable news of Greece’s bailout even with new risk issues arising in the week of Mar 23 but renewed risk appetite in the week of Mar 30 because of the end of the quarter and the increase in the firewall of support of sovereign debts in the euro area. New risks developed in the week of Apr 6 with increase of yields of sovereign bonds of Spain and Italy, doubts on Fed policy and weak employment report. Asia and financial entities are experiencing their own risk environments. Financial markets were under stress in the week of Apr 13 because of the large exposure of Spanish banks to lending by the European Central Bank and the annual equivalent growth rate of China’s GDP of 7.4 percent in IQ2012 [(1.018)4], which was repeated in IIQ2012. There was strength again in the week of Apr 20 because of the enhanced IMF firewall and Spain placement of debt, continuing into the week of Apr 27. Risk aversion returned in the week of May 4 because of the expectation of elections in Europe and the new trend of deterioration of job creation in the US. Europe’s sovereign debt crisis and the fractured US job market continued to influence risk aversion in the week of May 11. Politics in Greece and banking issues in Spain were important factors of sharper risk aversion in the week of May 18. Risk aversion continued during the week of May 25 and exploded in the week of Jun 1. Expectations of stimulus by central banks caused valuation of risk financial assets in the week of Jun 8 and in the week of Jun 15. Expectations of major stimulus were frustrated by minor continuance of maturity extension policy in the week of Jun 22 together with doubts on the silent bank run in highly indebted euro area member countries. There was a major rally of valuations of risk financial assets in the week of Jun 29 with the announcement of new measures on bank resolutions by the European Council. New doubts surfaced in the week of Jul 6, 2012 on the implementation of the bank resolution mechanism and on the outlook for the world economy because of interest rate reductions by the European Central, Bank of England and People’s Bank of China. Risk appetite returned in the week of July 13 in relief that economic data suggests continuing high growth in China but fiscal and banking uncertainties in Spain spread to Italy in the selloff of July 20, 2012. Mario Draghi (2012Jul26), president of the European Central Bank, stated: “But there is another message I want to tell you.
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” This statement caused return of risk appetite, driving upward valuations of risk financial assets worldwide. Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html). Risk appetite continued in the week of Aug 3, 2012, in expectation of purchases of sovereign bonds by the ECB. Growth of China’s exports by 1.0 percent in the 12 months ending in Jul 2012 released in the week of Aug 10, 2012, together with doubts on the purchases of bonds by the ECB injected a mild dose of risk aversion. There was optimism on the resolution of the European debt crisis on Aug 17, 2012. The week of Aug 24, 2012 had alternating shocks of risk aversion and risk appetite from the uncertainties of success of the Greek adjustment program, the coming decision of the Federal Constitutional Court of Germany on the European Stability Mechanism, disagreements between the Deutsche Bundesbank and the European Central Bank on purchase of sovereign bonds of highly indebted euro area member countries and the exchange of letters between Darrell E. Issa (2012Aug1), Chairman of the House Committee on Oversight and Government Reform, and Chairman Bernanke (2012Aug22) on monetary policy. The highest valuations in column “∆% Trough to 8/24/12” are by US equities indexes: DJIA 35.8 percent and S&P 500 38.0 percent, driven by stronger earnings and economy in the US than in other advanced economies but with doubts on the relation of business revenue to the weakening economy and fractured job market. The DJIA reached 13,359.62 in intraday trading on May 1, 2012, which is the highest level in 52 weeks (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 8/24/12” had double digit gains relative to the trough around Jul 2, 2010 but now many valuations of equity indexes show increase of less than 10 percent: China’s Shanghai Composite is 12.2 percent below the trough; Japan’s Nikkei Average is 2.8 percent above the trough; DJ Asia Pacific TSM is 7.2 percent above the trough; Dow Global is 10.7 percent above the trough; STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 10.3 percent above the trough; and NYSE Financial is 7.8 percent above the trough. DJ UBS Commodities is 17.2 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 22.9 percent above the trough. Japan’s Nikkei Average is 2.8 percent above the trough on Aug 31, 2010 and 20.4 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9070.76 on Fri Aug 24, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 11.5 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 4.9 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 8/24/12” in Table VI-4 shows that there were decreases of valuations of risk financial assets in the week of Aug 24, 2012 such as 1.0 percent for DAX, 1.7 percent for STOXX 50, 0.3 percent for NYSE Financial, 0.2 percent DJ Asia Pacific TSM, 1.0 percent Japan’s Nikkei Average and 0.4 percent for Dow Global. DJ UBS Commodities increased 1.6 percent. China’s Shanghai Composite fell 1.1 percent. The DJIA decreased 0.9 percent and S&P 500 decreased 0.5 percent. The USD depreciated 1.4 percent. There are still high uncertainties on European sovereign risks and banking soundness, US and world growth slowdown and China’s growth tradeoffs. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table VI-4 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 8/24/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Aug 24, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 8/24/12” but also relative to the peak in column “∆% Peak to 8/24/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 17.4 percent, S&P 500 15.9 percent and DAX 10.1 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 14.1 percent, Nikkei Average by 20.4 percent, Shanghai Composite by 33.9 percent, DJ Asia Pacific by 6.2 percent, STOXX 50 by 6.6 percent and Dow Global by 9.6 percent. DJ UBS Commodities Index is now 0.2 percent above the peak. The US dollar strengthened 17.3 percent relative to the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul 2010 because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. An intriguing issue is the difference in performance of valuations of risk financial assets and economic growth and employment. Paul A. Samuelson (http://www.nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html) popularized the view of the elusive relation between stock markets and economic activity in an often-quoted phrase “the stock market has predicted nine of the last five recessions.” In the presence of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy. The interrelations of financial and economic variables prove difficult to analyze and measure.
Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 8/24/ /12 | ∆% Week 8/24/12 | ∆% Trough to 8/24/ 12 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 17.4 | -0.9 | 35.8 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 15.9 | -0.5 | 38.0 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -14.1 | -0.3 | 7.8 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | -9.6 | -0.4 | 10.7 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | -6.2 | -0.2 | 7.2 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -20.4 | -1.0 | 2.8 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -33.9 | -1.1 | -12.2 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -6.6 | -1.7 | 10.3 |
| DAX | 4/26/ | 5/25/ | -10.5 | 10.1 | -1.0 | 22.9 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 17.3 | -1.4 | -4.9 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | 0.2 | 1.6 | 17.2 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 1.684 |
T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)
Source: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table VI-5 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. The last row of Table VI-5 for Aug 24, 2012, shows that the S&P 500 is now 16.4 percent above the Apr 26, 2010 level and the DJIA is 17.4 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Relaxed risk aversion has contributed to recovery of valuations. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.
Table VI-5, Percentage Changes of DJIA and S&P 500 in Selected Dates
| 2010 | ∆% DJIA from prior date | ∆% DJIA from | ∆% S&P 500 from prior date | ∆% S&P 500 from |
| Apr 26 | ||||
| May 6 | -6.1 | -6.1 | -6.9 | -6.9 |
| May 26 | -5.2 | -10.9 | -5.4 | -11.9 |
| Jun 8 | -1.2 | -11.3 | 2.1 | -12.4 |
| Jul 2 | -2.6 | -13.6 | -3.8 | -15.7 |
| Aug 9 | 10.5 | -4.3 | 10.3 | -7.0 |
| Aug 31 | -6.4 | -10.6 | -6.9 | -13.4 |
| Nov 5 | 14.2 | 2.1 | 16.8 | 1.0 |
| Nov 30 | -3.8 | -3.8 | -3.7 | -2.6 |
| Dec 17 | 4.4 | 2.5 | 5.3 | 2.6 |
| Dec 23 | 0.7 | 3.3 | 1.0 | 3.7 |
| Dec 31 | 0.03 | 3.3 | 0.07 | 3.8 |
| Jan 7 | 0.8 | 4.2 | 1.1 | 4.9 |
| Jan 14 | 0.9 | 5.2 | 1.7 | 6.7 |
| Jan 21 | 0.7 | 5.9 | -0.8 | 5.9 |
| Jan 28 | -0.4 | 5.5 | -0.5 | 5.3 |
| Feb 4 | 2.3 | 7.9 | 2.7 | 8.1 |
| Feb 11 | 1.5 | 9.5 | 1.4 | 9.7 |
| Feb 18 | 0.9 | 10.6 | 1.0 | 10.8 |
| Feb 25 | -2.1 | 8.3 | -1.7 | 8.9 |
| Mar 4 | 0.3 | 8.6 | 0.1 | 9.0 |
| Mar 11 | -1.0 | 7.5 | -1.3 | 7.6 |
| Mar 18 | -1.5 | 5.8 | -1.9 | 5.5 |
| Mar 25 | 3.1 | 9.1 | 2.7 | 8.4 |
| Apr 1 | 1.3 | 10.5 | 1.4 | 9.9 |
| Apr 8 | 0.03 | 10.5 | -0.3 | 9.6 |
| Apr 15 | -0.3 | 10.1 | -0.6 | 8.9 |
| Apr 22 | 1.3 | 11.6 | 1.3 | 10.3 |
| Apr 29 | 2.4 | 14.3 | 1.9 | 12.5 |
| May 6 | -1.3 | 12.8 | -1.7 | 10.6 |
| May 13 | -0.3 | 12.4 | -0.2 | 10.4 |
| May 20 | -0.7 | 11.7 | -0.3 | 10.0 |
| May 27 | -0.6 | 11.0 | -0.2 | 9.8 |
| Jun 3 | -2.3 | 8.4 | -2.3 | 7.3 |
| Jun 10 | -1.6 | 6.7 | -2.2 | 4.9 |
| Jun 17 | 0.4 | 7.1 | 0.04 | 4.9 |
| Jun 24 | -0.6 | 6.5 | -0.2 | 4.6 |
| Jul 1 | 5.4 | 12.3 | 5.6 | 10.5 |
| Jul 8 | 0.6 | 12.9 | 0.3 | 10.9 |
| Jul 15 | -1.4 | 11.4 | -2.1 | 8.6 |
| Jul 22 | 1.6 | 13.2 | 2.2 | 10.9 |
| Jul 29 | -4.2 | 8.4 | -3.9 | 6.6 |
| Aug 05 | -5.8 | 2.1 | -7.2 | -1.0 |
| Aug 12 | -1.5 | 0.6 | -1.7 | -2.7 |
| Aug 19 | -4.0 | -3.5 | -4.7 | -7.3 |
| Aug 26 | 4.3 | 0.7 | 4.7 | -2.9 |
| Sep 02 | -0.4 | 0.3 | -0.2 | -3.1 |
| Sep 09 | -2.2 | -1.9 | -1.7 | -4.8 |
| Sep 16 | 4.7 | 2.7 | 5.4 | 0.3 |
| Sep 23 | -6.4 | -3.9 | -6.5 | -6.2 |
| Sep 30 | 1.3 | -2.6 | -0.4 | -6.7 |
| Oct 7 | 1.7 | -0.9 | 2.1 | -4.7 |
| Oct 14 | 4.9 | 3.9 | 5.9 | 1.0 |
| Oct 21 | 1.4 | 5.4 | 1.1 | 2.2 |
| Oct 28 | 3.6 | 9.2 | 3.8 | 6.0 |
| Nov 04 | -2.0 | 6.9 | -2.5 | 3.4 |
| Nov 11 | 1.4 | 8.5 | 0.8 | 4.3 |
| Nov 18 | -2.9 | 5.3 | -3.8 | 0.3 |
| Nov 25 | -4.8 | 0.2 | -4.7 | -4.4 |
| Dec 02 | 7.0 | 7.3 | 7.4 | 2.7 |
| Dec 09 | 1.4 | 8.7 | 0.9 | 3.6 |
| Dec 16 | -2.6 | 5.9 | -2.8 | 0.6 |
| Dec 23 | 3.6 | 9.7 | 3.7 | 4.4 |
| Dec 30 | -0.6 | 9.0 | -0.6 | 3.8 |
| Jan 6 2012 | 1.2 | 10.3 | 1.6 | 5.4 |
| Jan 13 | 0.5 | 10.9 | 0.9 | 6.4 |
| Jan 20 | 2.4 | 13.5 | 2.0 | 8.5 |
| Jan 27 | -0.5 | 13.0 | 0.1 | 8.6 |
| Feb 3 | 1.6 | 14.8 | 2.2 | 11.0 |
| Feb 10 | -0.5 | 14.2 | -0.2 | 10.8 |
| Feb 17 | 1.2 | 15.6 | 1.4 | 12.3 |
| Feb 24 | 0.3 | 15.9 | 0.3 | 12.7 |
| Mar 2 | 0.0 | 15.8 | 0.3 | 13.0 |
| Mar 9 | -0.4 | 15.3 | 0.1 | 13.1 |
| Mar 16 | 2.4 | 18.1 | 2.4 | 15.9 |
| Mar 23 | -1.1 | 16.7 | -0.5 | 15.3 |
| Mar 30 | 1.0 | 17.9 | 0.8 | 16.2 |
| Apr 6 | -1.1 | 16.6 | -0.7 | 15.3 |
| Apr 13 | -1.6 | 14.7 | -2.0 | 13.1 |
| Apr 20 | 1.4 | 16.3 | 0.6 | 13.7 |
| Apr 27 | 1.5 | 18.1 | 1.8 | 15.8 |
| May 4 | -1.4 | 16.4 | -2.3 | 12.9 |
| May 11 | -1.7 | 14.4 | -1.1 | 11.7 |
| May 18 | -3.5 | 10.4 | -4.3 | 6.4 |
| May 25 | 0.7 | 11.2 | 1.7 | 8.7 |
| Jun 1 | -2.7 | 8.2 | -3.0 | 5.4 |
| Jun 8 | 3.6 | 12.0 | 3.7 | 9.4 |
| Jun 15 | 1.7 | 13.9 | 1.3 | 10.8 |
| Jun 22 | -1.0 | 12.8 | -0.6 | 10.1 |
| Jun 29 | 1.9 | 14.9 | 2.0 | 12.4 |
| Jul 6 | -0.8 | 14.0 | -0.5 | 11.8 |
| Jul 13 | 0.0 | 14.0 | 0.2 | 11.9 |
| Jul 20 | 0.4 | 14.4 | 0.4 | 12.4 |
| Jul 27 | 2.0 | 16.7 | 1.7 | 14.3 |
| Aug 3 | 0.2 | 16.9 | 0.4 | 14.8 |
| Aug 10 | 0.9 | 17.9 | 1.1 | 16.0 |
| Aug 17 | 0.5 | 18.5 | 0.9 | 17.0 |
| Aug 24 | -0.9 | 17.4 | -0.5 | 16.4 |
Source: http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014
Table VI-6, updated with every blog comment, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23, 2011 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 16.1 percent to ZAR 8.4013/USD on Aug 24, 2012, which is still 27.4 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 7.2 percent stronger at SGD 1.2507/USD on Aug 24, 2012 relative to the trough of depreciation but still stronger by 19.5 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 16.7 percent relative to the trough to BRL 2.0273/USD on Aug 24, 2012 but still stronger by 16.6 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC by 50 basis points for the seventh consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3613&IDPAI=NEWS):
“Copom reduces the Selic rate to 8.0 percent
11/07/2012 8:35:00 PM
Brasília - Continuing the adjustment process of monetary conditions, the Copom decided to reduce the Selic rate to 8.00 percent.”
Jeffrey T. Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new measures by Brazil to prevent further appreciation of its currency, including the extension of the tax on foreign capital for three years terms, subsequently broadened to five years, and intervention in the foreign exchange market by the central bank. Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VI-6 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.
Table VI-6, Exchange Rates
| Peak | Trough | ∆% P/T | Aug 24, 2012 | ∆% T Aug 24, 2012 | ∆% P Aug 24, 2012 | |
| EUR USD | 7/15 | 6/7 2010 | 8/24/ 2012 | |||
| Rate | 1.59 | 1.192 | 1.2512 | |||
| ∆% | -33.4 | 4.7 | -27.1 | |||
| JPY USD | 8/18 | 9/15 | 8/24/ 2012 | |||
| Rate | 110.19 | 83.07 | 78.65 | |||
| ∆% | 24.6 | 5.3 | 28.6 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 8/24/ 2012 | |||
| Rate | 1.225 | 1.025 | 0.9597 | |||
| ∆% | 16.3 | 6.4 | 21.7 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 8/24/ 2012 | |||
| Rate | 2.006 | 1.388 | 1.5810 | |||
| ∆% | -44.5 | 12.2 | -26.9 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 8/24/ | |||
| Rate | 1.0215 | 1.6639 | 1.0404 | |||
| ∆% | -62.9 | 42.2 | 5.9 | |||
| ZAR USD | 10/22 2008 | 8/15 | 8/24/ 2012 | |||
| Rate | 11.578 | 7.238 | 8.4013 | |||
| ∆% | 37.5 | -16.1 | 27.4 | |||
| SGD USD | 3/3 | 8/9 | 8/24/ | |||
| Rate | 1.553 | 1.348 | 1.2507 | |||
| ∆% | 13.2 | 7.2 | 19.5 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 8/24/ | |||
| Rate | 7.813 | 7.752 | 7.7569 | |||
| ∆% | 0.8 | -0.1 | 0.7 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 8/24/ 2012 | |||
| Rate | 2.43 | 1.737 | 2.0273 | |||
| ∆% | 28.5 | -16.7 | 16.6 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 8/24/ | |||
| Rate | 22.19 | 18.693 | 19.884 | |||
| ∆% | 15.7 | -6.4 | 10.4 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 8/24/ 2012 | |||
| Rate | 9.313 | 7.108 | 6.606 | |||
| ∆% | 23.7 | 7.1 | 29.1 | |||
| CNY USD | 7/20 2005 | 7/15 | 8/24/ | |||
| Rate | 8.2765 | 6.8211 | 6.3558 | |||
| ∆% | 17.6 | 6.8 | 23.2 |
Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough
Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation
Source:
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
There are major ongoing and unresolved realignments of exchange rates in the international financial system as countries and regions seek parities that can optimize their productive structures. Seeking exchange rate parity or exchange rate optimizing internal economic activities is complex in a world of unconventional monetary policy of zero interest rates and even negative nominal interest rates of government obligations such as yield of minus 0.01 percent for the two-year government bond of Germany. Regulation, trade and devaluation conflicts should have been expected from a global recession (Pelaez and Pelaez (2007), The Global Recession Risk, Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008a)): “There are significant grounds for concern on the basis of this experience. International economic cooperation and the international financial framework can collapse during extreme events. It is unlikely that there will be a repetition of the disaster of the Great Depression. However, a milder contraction can trigger regulatory, trade and exchange wars” (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181). Chart VI-2 of the Board of Governors of the Federal Reserve System provides the key exchange rate of US dollars (USD) per euro (EUR) from Aug 17, 1999 to Aug 17, 2012. US recession dates are in shaded areas. The rate on Jan 4, 1999 was USD 1.1812/EUR, declining to USD 0.8279/EUR on Oct 25, 2000, or appreciation of the USD by 29.9 percent. The rate depreciated 21.9 percent to USD 1.0098/EUR on Jul 22, 2002. There was sharp devaluation of the USD of 34.9 percent to USD 1.3625/EUR on Dec 27, 2004 largely because of the 1 percent interest rate between Jun 2003 and Jun 2004 together with a form of quantitative easing by suspension of auctions of the 30-year Treasury, which was equivalent to withdrawing supply from markets. Another depreciation of 17.5 percent took the rate to USD 1.6010/EUR on Apr 22, 2008, already inside the shaded area of the global recession. The flight to the USD and obligations of the US Treasury appreciated the dollar by 22.3 percent to USD 1.2446/EUR on Oct 27, 2008. In the return of the carry trade after stress tests showed sound US bank balance sheets, the rate depreciated 21.2 percent to USD 1.5085/EUR on Nov 25, 2009. The sovereign debt crisis of Europe in the spring of 2010 caused sharp appreciation of 20.7 percent to USD 1.1959/EUR on Jun 6, 2010. Renewed risk appetite depreciated the rate 24.4 percent to USD 1.4875/USD on May 3, 2011. The rate appreciated 17.2 percent to USD 1.2315/EUR on Aug 17 2012, which is the last point in Chart VI-2. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-2, US Dollars (USD) per Euro (EUR), Aug 17, 1999 to Aug 17, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
Chart VI-3 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2012. The dollar depreciates during episodes of risk appetite but appreciate during risk aversion as funds seek dollar-denominated assets in avoiding financial risk.
Chart VI-3, US Dollar Currency Indexes
Source: Board of Governors of the Federal Reserve System
Chart VI-4 of the Board of Governors of the Federal Reserve System provides the exchange rate of the US relative to the euro, or USD/EUR. During maintenance of the policy of zero fed funds rates the dollar appreciates during periods of significant risk aversion such as the flight into US government obligations in late 2008 and early 2009 and during the various fears generated by the European sovereign debt crisis.
Chart VI-4, US Dollars per Euro, 2009-2012
Source: Board of Governors of the Federal Reserve System
Chart VI-5 of the Board of Governors of the Federal Reserve System provides the rate of Japanese yen (JPY) per US dollar (USD) from Jan, 1971 to Aug 8, 2012. The first data point on the extreme left is JPY 358.0200/USD is for Jan, 1971. The JPY has appreciated over the long-term relative to the USD with fluctuations along an evident long-term appreciation. Before the global recession, the JPY stood at JPY 124.0900/USD on Jun 22, 2007. The use of the JPY as safe haven is evident by sharp appreciation during the global recession to JPY 110.48/USD on Aug 15, 2008, and to JPY 87.8000/USD on Jan 21, 2009. The final data point in Chart VI-5 is JPY 78.6162/USD in Aug, 2012 for appreciation of 36.6 percent relative to JPY 124.0900/USD on Jun 22, 2007 before the global recession and expansion characterized by recurring bouts of risk aversion. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-5, Japanese Yen JPY per US Dollars USD, Monthly, 1971-2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
Continental territory, rich endowment of natural resources, investment in human capital, teaching and research universities, motivated labor force and entrepreneurial initiative provide Brazil with comparative advantages in multiple economic opportunities. Exchange rate parity is critical in achieving Brazil’s potential but is difficult in a world of zero interest rates. Chart IV-6 of the Board of Governors of the Federal Reserve System provides the rate of Brazilian real (BRL) per US dollar (USD) from BRL 1.2074/USD on Jan 4, 1999 to BRL 2.0176/USD on Aug 17, 2012. The rate reached BRL 3.9450/USD on Oct 10, 2002 appreciating 60.5 percent to BRL 1.5580/USD on Aug 1, 2008. The rate depreciated 68.1 percent to BRL 2.6187/USD on Dec 5, 2008 during worldwide flight from risk. The rate appreciated again by 41.3 percent to BRL 1.5375/USD on Jul 26, 2011. The final data point in Chart VI-6 is BRL 2.0176/USD on Aug 17, 2012 for depreciation of 31.2 percent. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-6, Brazilian Real (BRL) per US Dollar (USD) Jan 4, 1999 to Aug 17, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
Chart VI-7 of the Board of Governors of the Federal Reserve System provides the history of the BRL beginning with the first data point of BRL 0.8440/USD on Jan 2, 1995. The rate jumped to BRL 2.0700/USD on Jan 29, 1999 after changes in exchange rate policy and then to BRL 2.2000/USD on Mar 3, 1999. The rate depreciated 26.7 percent to BRL 2.7880/USD on Sep 21, 2001 relative to Mar 3, 1999.
Chart VI-7, Brazilian Real (BRL) per US Dollar (USD), Jan 2, 1995 to Aug 17, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10
Table VI-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.684 percent at the close of market on Fri Aug 24, 2012 would be equivalent to price of 108.6270 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 7.3 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the first to the last row of Table VI-7. The price loss between Jun 1, 2012 and Jun 8, 2012 would have been 1.6 percent, in just a week, and much higher with leverage of 10:1 as typical in Treasury positions. The price loss between Mar 9, 2012 and Mar 16, 2012 is 2.3 percent but much higher when using common leverage of 10:1. These losses defy annualizing. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table VI-7 are expectations of rising inflation and US government debt estimated to be around 72.8 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.5 percent of GDP in 2008, 54.1 percent in 2009 (Table IV-1 at http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html and Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 67.7 percent in 2011 (see Table IB-2). On Aug 22, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2808 billion, or $2.8 trillion, with portfolio of long-term securities of $2573 billion, or $2.6 trillion, consisting of $1557 billion Treasury nominal notes and bonds, $70 billion of notes and bonds inflation-indexed, $87 billion Federal agency debt securities and $859 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1509 billion or $1.5 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.
Table VI-7, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note
| Date | Yield | Price | ∆% 11/04/10 |
| 05/01/01 | 5.510 | 78.0582 | -22.9 |
| 06/10/03 | 3.112 | 95.8452 | -5.3 |
| 06/12/07 | 5.297 | 79.4747 | -21.5 |
| 12/19/08 | 2.213 | 104.4981 | 3.2 |
| 12/31/08 | 2.240 | 103.4295 | 2.1 |
| 03/19/09 | 2.605 | 100.1748 | -1.1 |
| 06/09/09 | 3.862 | 89.8257 | -11.3 |
| 10/07/09 | 3.182 | 95.2643 | -5.9 |
| 11/27/09 | 3.197 | 95.1403 | -6.0 |
| 12/31/09 | 3.835 | 90.0347 | -11.1 |
| 02/09/10 | 3.646 | 91.5239 | -9.6 |
| 03/04/10 | 3.605 | 91.8384 | -9.3 |
| 04/05/10 | 3.986 | 88.8726 | -12.2 |
| 08/31/10 | 2.473 | 101.3338 | 0.08 |
| 10/07/10 | 2.385 | 102.1224 | 0.8 |
| 10/28/10 | 2.658 | 99.7119 | -1.5 |
| 11/04/10 | 2.481 | 101.2573 | - |
| 11/15/10 | 2.964 | 97.0867 | -4.1 |
| 11/26/10 | 2.869 | 97.8932 | -3.3 |
| 12/03/10 | 3.007 | 96.7241 | -4.5 |
| 12/10/10 | 3.324 | 94.0982 | -7.1 |
| 12/15/10 | 3.517 | 92.5427 | -8.6 |
| 12/17/10 | 3.338 | 93.9842 | -7.2 |
| 12/23/10 | 3.397 | 93.5051 | -7.7 |
| 12/31/10 | 3.228 | 94.3923 | -6.7 |
| 01/07/11 | 3.322 | 94.1146 | -7.1 |
| 01/14/11 | 3.323 | 94.1064 | -7.1 |
| 01/21/11 | 3.414 | 93.4687 | -7.7 |
| 01/28/11 | 3.323 | 94.1064 | -7.1 |
| 02/04/11 | 3.640 | 91.750 | -9.4 |
| 02/11/11 | 3.643 | 91.5319 | -9.6 |
| 02/18/11 | 3.582 | 92.0157 | -9.1 |
| 02/25/11 | 3.414 | 93.3676 | -7.8 |
| 03/04/11 | 3.494 | 92.7235 | -8.4 |
| 03/11/11 | 3.401 | 93.4727 | -7.7 |
| 03/18/11 | 3.273 | 94.5115 | -6.7 |
| 03/25/11 | 3.435 | 93.1935 | -7.9 |
| 04/01/11 | 3.445 | 93.1129 | -8.0 |
| 04/08/11 | 3.576 | 92.0635 | -9.1 |
| 04/15/11 | 3.411 | 93.3874 | -7.8 |
| 04/22/11 | 3.402 | 93.4646 | -7.7 |
| 04/29/11 | 3.290 | 94.3759 | -6.8 |
| 05/06/11 | 3.147 | 95.5542 | -5.6 |
| 05/13/11 | 3.173 | 95.3387 | -5.8 |
| 05/20/11 | 3.146 | 95.5625 | -5.6 |
| 05/27/11 | 3.068 | 96.2089 | -4.9 |
| 06/03/11 | 2.990 | 96.8672 | -4.3 |
| 06/10/11 | 2.973 | 97.0106 | -4.2 |
| 06/17/11 | 2.937 | 97.3134 | -3.9 |
| 06/24/11 | 2.872 | 97.8662 | -3.3 |
| 07/01/11 | 3.186 | 95.2281 | -5.9 |
| 07/08/11 | 3.022 | 96.5957 | -4.6 |
| 07/15/11 | 2.905 | 97.5851 | -3.6 |
| 07/22/11 | 2.964 | 97.0847 | -4.1 |
| 07/29/11 | 2.795 | 98.5258 | -2.7 |
| 08/05/11 | 2.566 | 100.5175 | -0.7 |
| 08/12/11 | 2.249 | 103.3504 | 2.1 |
| 08/19/11 | 2.066 | 105.270 | 3.7 |
| 08/26/11 | 2.202 | 103.7781 | 2.5 |
| 09/02/11 | 1.992 | 105.7137 | 4.4 |
| 09/09/11 | 1.918 | 106.4055 | 5.1 |
| 09/16/11 | 2.053 | 101.5434 | 0.3 |
| 09/23/11 | 1.826 | 107.2727 | 5.9 |
| 09/30/11 | 1.912 | 106.4602 | 5.1 |
| 10/07/11 | 2.078 | 104.9161 | 3.6 |
| 10/14/11 | 2.251 | 103.3323 | 2.0 |
| 10/21/11 | 2.220 | 103.6141 | 2.3 |
| 10/28/11 | 2.326 | 102.6540 | 1.4 |
| 11/04/11 | 2.066 | 105.0270 | 3.7 |
| 11/11/11 | 2.057 | 105.1103 | 3.8 |
| 11/18/11 | 2.003 | 105.6113 | 4.3 |
| 11/25/11 | 1.964 | 105.9749 | 4.7 |
| 12/02/11 | 2.042 | 105.2492 | 3.9 |
| 12/09/11 | 2.065 | 105.0363 | 3.7 |
| 12/16/11 | 1.847 | 107.0741 | 5.7 |
| 12/23/11 | 2.027 | 105.3883 | 4.1 |
| 12/30/11 | 1.871 | 106.8476 | 5.5 |
| 01/06/12 | 1.957 | 106.0403 | 4.7 |
| 01/13/12 | 1.869 | 106.8664 | 5.5 |
| 01/20/12 | 2.026 | 105.3976 | 4.1 |
| 01/27/12 | 1.893 | 106.6404 | 5.3 |
| 02/03/12 | 1.923 | 106.3586 | 5.0 |
| 02/10/12 | 1.974 | 105.8815 | 4.6 |
| 02/17/12 | 2.000 | 105.6392 | 4.3 |
| 02/24/12 | 1.977 | 105.8535 | 4.5 |
| 03/02/12 | 1.977 | 105.8535 | 4.5 |
| 03/09/12 | 2.031 | 105.3512 | 4.0 |
| 03/16/12 | 2.294 | 102.9428 | 1.7 |
| 03/23/12 | 2.234 | 103.4867 | 2.2 |
| 03/30/12 | 2.214 | 103.6687 | 2.4 |
| 04/06/12 | 2.058 | 105.1010 | 3.8 |
| 04/13/12 | 1.987 | 105.7603 | 4.4 |
| 04/20/12 | 1.959 | 106.0216 | 4.7 |
| 04/27/12 | 1.931 | 106.2836 | 5.0 |
| 05/04/12 | 1.876 | 106.8004 | 5.5 |
| 05/11/12 | 1.845 | 107.0930 | 5.8 |
| 05/18/12 | 1.714 | 108.3393 | 7.0 |
| 05/25/12 | 1.738 | 108.1098 | 6.8 |
| 06/01/12 | 1.454 | 110.8618 | 9.5 |
| 06/08/12 | 1.635 | 109.0989 | 7.7 |
| 06/15/12 | 1.584 | 109.5924 | 8.2 |
| 06/22/12 | 1.676 | 108.7039 | 7.4 |
| 06/29/12 | 1.648 | 108.9734 | 7.6 |
| 07/06/12 | 1.548 | 109.9423 | 8.6 |
| 07/13/12 | 1.49 | 110.5086 | 9.1 |
| 07/20/12 | 1.459 | 110.8127 | 9.4 |
| 07/27/12 | 1.544 | 109.9812 | 8.6 |
| 08/03/12 | 1.569 | 109.7380 | 8.4 |
| 08/10/12 | 1.658 | 108.8771 | 7.5 |
| 08/17/12 | 1.814 | 107.3864 | 6.1 |
| 08/24/12 | 1.684 | 108.6270 | 7.3 |
Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10
Source:
http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000
Table VI-7A provides the maturity distribution and average length in months of marketable interest-bearing debt held by private investors from 2007 to Mar 2012. Total debt increased from $3635 billion in 2007 to $8609 billion in Mar 2012 or increase by 136.8 percent. There are two concerns with the maturity distribution of US debt. (1) Growth of debt is moving total debt to the point of saturation in investors’ portfolio. In a new environment of risk appetite and nonzero fed funds rates with economic growth at historical trend of around 3 percent, yields on risk financial assets are likely to increase. Placement of new debt may require increasing interest rates in an environment of continuing placement of debt by the US Treasury without strong fiscal constraints. (2) Refinancing of maturing debt is likely to occur in an environment of higher interest rates, exerting pressure on future fiscal budgets. In Mar 2012, $2821 billion or 32.8 percent of outstanding debt held by investors matures in less than a year and $3477 billion or 40.3 percent of total debt matures in one to five years. Debt maturing in five years or less adds to 6298 billion or 73.2 percent of total outstanding debt held by investors of $8609 billion. This historical episode may be remembered as one in which the US managed its government debt with short-dated instruments during record low long-dated yields and on the verge of fiscal pressures on all interest rates, which kind of maximizes over time interest payments on government debt by taxpayers that is precisely the opposite of the objective of sound debt management and taxpayer welfare.
Table VI-7A, Maturity Distribution and Average Length in Months of Marketable Interest-Bearing Public Debt Held by Private Investors, Billions of Dollars
| End of Fiscal Year or Month | 2007 | 2008 | 2009 | 2010 | 2011 | Mar 2012 |
| Total* | 3635 | 4745 | 6229 | 7676 | 7951 | 8609 |
| <1 Year | 1176 | 2042 | 2605 | 2480 | 2504 | 2821 |
| 1-5 Years | 1310 | 1468 | 2075 | 2956 | 3085 | 3477 |
| 5-10 Years | 678 | 719 | 995 | 1529 | 1544 | 1498 |
| 10-20 Years | 292 | 352 | 351 | 341 | 309 | 284 |
| >20 Years | 178 | 163 | 204 | 371 | 510 | 528 |
| Average | 58 | 49 | 49 | 57 | 60 | 57 |
*Amount Outstanding Privately Held
Source: United States Treasury. 2012Jun. Treasury Bulletin. Washington, DC, Jun 2012.
Chart VI-8 of the Board of Governors of the Federal Reserve System provides the yield of the ten-year constant maturity Treasury from Jan 3, 1977 to Aug 21, 2012. The yield stood at 7.67 percent on Feb 16, 1977. A peak was reached at 15.21 percent on Oct 26, 1981 during the inflation control effort by the Fed. There is a second local peak in Chart VI-8 on May 3, 1984 at 13.94 percent followed by another local peak at 8.14 percent on Nov 21, 1994 during another inflation control effort (see Appendix I The Great Inflation). There was sharp reduction of the yields from 5.44 percent on Apr 1, 2002 until they reached a low point of 3.13 percent on Jun 13, 2003. Yields rose again to 4.89 percent on Jun 14, 2004 and 5.23 percent on Jul 5, 2006. Yields declined sharply during the financial crisis, reaching 2.08 percent on Dec 18, 2008, lowered by higher prices originating in sharply increasing demand in the flight to the US dollar and obligations of the US government. Yields rose again to 4.01 percent on Apr 5, 2010 but collapsed to 2.41 percent on Oct 8, 2010 because of higher demand originating in the flight from the European sovereign risk event. During higher risk appetite, yields rose to 3.75 percent on Feb 8, 2011 and collapsed to 1.80 percent on Aug 21, 2012, which is the last data point in Chart VI-8. There has been a trend of decline of yields with oscillations. During periods of risk aversion investor seek protection in obligations of the US government, causing decline in their yields. In an eventual resolution of international financial risks with higher economic growth there could be the trauma of rising yields with significant capital losses in portfolios of government securities. The data in Table VI-7 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-8, US, Ten-Year Treasury Constant Maturity Yield, Jan 3, 1977 to Aug 21, 2012
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/update/
Chart VI-9 of the Board of Governors of the Federal Reserve System provides securities held outright by Federal Reserve banks from 2002 to 2012. The first data point in Chart VI-9 is the level for Dec 18, 2002 of $629,407 million and the final data point in Chart VI-9 is level of $2,583,672 on Aug 22, 2012.
Chart VI-9, US, Securities Held Outright by Federal Reserve Banks, Wednesday Level, Dec 18, 2002 to Aug 22, 2012, USD Millions
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm
VII Economic Indicators. Crude oil input in refineries decreased 0.6 percent to 15,582 thousand barrels per day on average in the four weeks ending on Aug 17, 2012 from 15,671 thousand barrels per day in the four weeks ending on Aug 10, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 92.1 percent on Aug 17, 2012, which is higher than 89.7 percent on Aug 19, 2011 and almost equal to 92.6 percent on Aug 10, 2012. Imports of crude oil decreased 4.1 percent from 8,806 thousand barrels per day on average in the four weeks ending on Aug 10 to 8,449 thousand barrels per day in the week of Aug 17. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.2 million barrels per day last week, down by 510 thousand per day from the previous week [Aug 10]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Decreasing utilization in refineries with decreasing imports at the margin in the prior week resulted in decrease of commercial crude oil stocks by 5.5 million barrels from 366.2 million barrels on Aug 10 to 360.7 million barrels on Aug 17. Motor gasoline production increased 0.2 percent to 9,226 thousand barrels per day in the week of Aug 17 from 9,212 thousand barrels per day on average in the week of Aug 10. Gasoline stocks decreased 1.0 million barrels and stocks of fuel oil increased 1.0 million barrels. Supply of gasoline decreased from 9,166 thousand barrels per day on Aug 19, 2011, to 9,012 thousand barrels per day on Aug 17, 2012, or by 1.7 percent, while fuel oil supply decreased 4.4 percent. Part of the fall in consumption of gasoline is due to high prices and part to the growth recession. WTI crude oil price traded at $96.00/barrel on Aug 17, 2012, increasing 16.6 percent relative to $82.33/barrel on Aug 19, 2011. Gasoline prices fell 4.6 percent from Aug 22, 2011 to Aug 20, 2012. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion. Gasoline prices had been increasing to the highest levels at this time of the year.
Table VII-1, US, Energy Information Administration Weekly Petroleum Status Report
| Four Weeks Ending Thousand Barrels/Day | 8/17/12 | 8/10/12 | 8/19/11 |
| Crude Oil Refineries Input | 15,582 Week ∆%: -0.6 | 15,671 | 15,549 |
| Refinery Capacity Utilization % | 92.1 | 92.6 | 89.7 |
| Motor Gasoline Production | 9,226 Week ∆%: +0.2 | 9,212 | 9,336 |
| Distillate Fuel Oil Production | 4,682 Week ∆%: +0.5 | 4,661 | 4,595 |
| Crude Oil Imports | 8,449 Week ∆%: -4.1 | 8,806 | 9,047 |
| Motor Gasoline Supplied | 9,012 ∆% 2012/2011= -1.7% | 8,907 | 9,166 |
| Distillate Fuel Oil Supplied | 3,667 ∆% 2012/2011 = -4.4% | 3,647 | 3,837 |
| 8/17/12 | 8/10/12 | 8/19/11 | |
| Crude Oil Stocks | 360.7 ∆= -5.5 MB | 366.2 | 351.8 |
| Motor Gasoline Million B | 202.7 ∆= -1.0 MB | 203.7 | 211.4 |
| Distillate Fuel Oil Million B | 125.2 | 124.2 | 155.7 |
| WTI Crude Oil Price $/B | 96.0 ∆% 2012/2011 16.6 | 92.94 | 82.33 |
| 8/20/12 | 8/13/12 | 8/22/11 | |
| Regular Motor Gasoline $/G | 3.744 ∆% 2012/2011 | 3.721 | 3.581 |
B: barrels; G: gallon
Source: US Energy Information Administration
Chart VII-1 of the US Energy Information Administration shows commercial stocks of crude oil of the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks but with fluctuations followed by several sharp weekly increases alternating with declines.
Chart VII-1, US, Weekly Crude Oil Ending Stocks
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W
Chart VII-2 of the US Energy Information Administration (EIA) provides commercial stocks of crude oil from 2011 to 2012. There was sharp upward trend in the first half of 2012 followed by sharp downward trend.
Chart VII-2, US, Crude Oil Stocks
Source: US Energy Information Administration
Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 at $145.29/barrel on Jul 3, 2008, can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices. Risk aversion resulted in another drop in recent weeks followed by some recovery.
Chart VII-3, US, Crude Oil Futures Contract
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D
There is typically significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims increased 4,000 from 368,000 on Aug 11, 2012, to 372,000 on Aug 18. Claims not adjusted for seasonality decreased 7,320 from 317,441 on Aug 11, 2012 to 310,121 on Aug 18. Strong seasonality is preventing clear analysis of labor markets.
Table VII-2, US, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| Aug 18, 2012 | 372,000 | 310,121 | 368,000 |
| Aug 11, 2012 | 368,000 | 317,441 | 364,250 |
| Change | +4,000 | -7,320 | +3,750 |
| Aug 4, 2012 | 364,000 | 320,219 | 369,250 |
| Prior Year | 414,000 | 344,870 | 405,750 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average
Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 461,780 on Aug 15, 2009 to 346,014 on Aug 13, 2011, and 310,121 on Aug 18, 2012. There is strong indication of significant decline in the level of layoffs in the US but some doubts at the margin after the high increase in unadjusted claims in the weeks of Jun 9, 2012 and Jul 7, 2012. Hiring has not recovered (http://cmpassocregulationblog.blogspot.com/2012/08/recovery-without-hiring-ten-million.html).
Table VII-3, US, Unemployment Insurance Weekly Claims
| Not Seasonally Adjusted Claims | Seasonally Adjusted Claims | |
| Aug 18, 2001 | 317,046 | 402,000 |
| Aug 17, 2002 | 313,869 | 399,00 |
| Aug 16, 2003 | 312,087 | 398,000 |
| Aug 14, 2004 | 262,936 | 332,000 |
| Aug 13, 2005 | 257,151 | 319,000 |
| Aug 12, 2006 | 256,259 | 310,000 |
| Aug 18, 2007 | 257,573 | 321,000 |
| Aug 16, 2008 | 342,164 | 423,000 |
| Aug 15, 2009 | 461,780 | 562,000 |
| Aug 14, 2010 | 405,484 | 484,000 |
| Aug 13, 2011 | 346,014 | 408,000 |
| Aug 18, 2012 | 310,121 | 372,000 |
Source: http://www.workforcesecurity.doleta.gov/unemploy/claims.asp
VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In the three months May to Jul 2012, CPI inflation for all items seasonally adjusted was minus 1.2 percent in annual equivalent, that is, compounding inflation in May-Jul 2012 and assuming it would be repeated for a full year. In the 12 months ending in Jul, CPI inflation of all items not seasonally adjusted was 1.4 percent. Inflation in Jul 2012 seasonally adjusted was unchanged relative to Jun 2012 and minus 0.2 not seasonally adjusted (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.1 percent in 12 months and 2.0 percent in annual equivalent Jan-Jul 2012. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.09 percent for three months, 0.13 percent for six months, 0.18 percent for 12 months, 0.27 percent for two years, 0.37 percent for three years, 0.71 percent for five years, 1.13 percent for seven years, 1.69 percent for ten years and 2.80 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Jul inflation is low because of the unwinding of carry trades from zero interest rates to commodity futures prices but could ignite again with subdued risk aversion. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):
“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”
Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.
Table VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%
| ∆% 12 Months Jul 2012/Jul | ∆% Annual Equivalent May-Jul 2012 SA | |
| CPI All Items | 1.4 | -1.2 |
| CPI ex Food and Energy | 2.1 | 2.0 |
Source: US Bureau of Labor Statistics
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. The analysis is sharpened 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 the G7 in Japan and France in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Long-term economic growth and prosperity are measured by the key indicators of growth of real income per capita, or what is earned per person after inflation. A refined concept would include real disposable income per capita, or what is earned per person after inflation and taxes.
Table IX-1 provides the data required for broader comparison of the cyclical expansions of IQ1983 to IVQ1985 and the current one from 2009 to 2012. First, in the 13 quarters from IQ1983 to IVQ1985, GDP increased 19.6 percent at the annual equivalent rate of 5.7 percent; real disposable personal income (RDPI) increased 14.5 percent at the annual equivalent rate of 4.3 percent; RDPI per capita increased 11.5 percent at the annual equivalent rate of 3.4 percent; and population increased 2.7 percent at the annual equivalent rate of 0.8 percent. Second, in the 12 quarters of the current cyclical expansion from IIIQ2009 to IIQ2012, GDP increased 6.75 percent at the annual equivalent rate of 2.2 percent; real disposable personal income (RDPI) increased 3.8 percent at the annual equivalent rate of 1.2 percent; RDPI per capita increased 1.4 percent at the annual equivalent rate of 0.5 percent; and population increased 2.3 percent at the annual equivalent rate of 0.8 percent. Third, since the beginning of the recession in IVQ2007 to IIQ2012, GDP increased 1.7 percent, or barely above the level before the recession; real disposable personal income increased 3.5 percent; population increased 3.7 percent; and real disposable personal income per capita is 0.2 percent lower than the level before the recession. Real disposable personal income is the actual take home pay after inflation and taxes and real disposable income per capita is what is left per inhabitant. The current cyclical expansion is the worst in the period after World War II in terms of growth of economic activity and income. 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.
Table IX-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %
| # Quarters | ∆% | ∆% Annual Equivalent | |
| IQ1983 to IVQ1985 | 13 | ||
| GDP | 19.6 | 5.7 | |
| RDPI | 14.5 | 4.3 | |
| RDPI Per Capita | 11.5 | 3.4 | |
| Population | 2.7 | 0.8 | |
| IIIQ2009 to IIQ2012 | 12 | ||
| GDP | 6.75 | 2.2 | |
| RDPI | 3.8 | 1.2 | |
| RDPI per Capita | 1.4 | 0.5 | |
| Population | 2.3 | 0.8 | |
| IVQ2007 to IIQ2012 | 19 | ||
| GDP | 1.7 | ||
| RDPI | 3.5 | ||
| RDPI per Capita | -0.2 | ||
| Population | 3.7 |
RDPI: Real Disposable Personal Income
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
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Appendix I. The Great Inflation
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 I1 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 I1 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 from 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.”
Chart I1, Brazil, Phillips Circuit 1963-1987
©Carlos Manuel Pelaez, O cruzado e o austral. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.
DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).
Table I1, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982
| ∆% GDP | ∆% CPI | UNE | |
| 1960 | 2.5 | 1.4 | 6.6 |
| 1961 | 2.3 | 0.7 | 6.0 |
| 1962 | 6.1 | 1.3 | 5.5 |
| 1963 | 4.4 | 1.6 | 5.5 |
| 1964 | 5.8 | 1.0 | 5.0 |
| 1965 | 6.4 | 1.9 | 4.0 |
| 1966 | 6.5 | 3.5 | 3.8 |
| 1967 | 2.5 | 3.0 | 3.8 |
| 1968 | 4.8 | 4.7 | 3.4 |
| 1969 | 3.1 | 6.2 | 3.5 |
| 1970 | 0.2 | 5.6 | 6.1 |
| 1971 | 3.4 | 3.3 | 6.0 |
| 1972 | 5.3 | 3.4 | 5.2 |
| 1973 | 5.8 | 8.7 | 4.9 |
| 1974 | -0.6 | 12.3 | 7.2 |
| 1975 | -0.2 | 6.9 | 8.2 |
| 1976 | 5.4 | 4.9 | 7.8 |
| 1977 | 4.6 | 6.7 | 6.4 |
| 1978 | 5.6 | 9.0 | 6.0 |
| 1979 | 3.1 | 13.3 | 6.0 |
| 1980 | -0.3 | 12.5 | 7.2 |
| 1981 | 2.5 | 8.9 | 8.5 |
| 1982 | -1.9 | 3.8 | 10.8 |
| 1983 | 4.5 | 3.8 | 8.3 |
| 1984 | 7.2 | 3.9 | 7.3 |
| 1985 | 4.1 | 3.8 | 7.0 |
| 1986 | 3.5 | 1.1 | 6.6 |
| 1987 | 3.2 | 4.4 | 5.7 |
| 1988 | 4.1 | 4.4 | 5,3 |
| 1989 | 3.6 | 4.6 | 5.4 |
| 1990 | 1.9 | 6.1 | 6.3 |
Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series
Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
http://www.bls.gov/web/empsit/cpseea01.htm
http://data.bls.gov/pdq/SurveyOutputServlet
There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. 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). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.
Table I2, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994
| 1994 | FF | 30Y | 30P | 10Y | 10P | MOR | CPI |
| Jan | 3.00 | 6.29 | 100 | 5.75 | 100 | 7.06 | 2.52 |
| Feb | 3.25 | 6.49 | 97.37 | 5.97 | 98.36 | 7.15 | 2.51 |
| Mar | 3.50 | 6.91 | 92.19 | 6.48 | 94.69 | 7.68 | 2.51 |
| Apr | 3.75 | 7.27 | 88.10 | 6.97 | 91.32 | 8.32 | 2.36 |
| May | 4.25 | 7.41 | 86.59 | 7.18 | 88.93 | 8.60 | 2.29 |
| Jun | 4.25 | 7.40 | 86.69 | 7.10 | 90.45 | 8.40 | 2.49 |
| Jul | 4.25 | 7.58 | 84.81 | 7.30 | 89.14 | 8.61 | 2.77 |
| Aug | 4.75 | 7.49 | 85.74 | 7.24 | 89.53 | 8.51 | 2.69 |
| Sep | 4.75 | 7.71 | 83.49 | 7.46 | 88.10 | 8.64 | 2.96 |
| Oct | 4.75 | 7.94 | 81.23 | 7.74 | 86.33 | 8.93 | 2.61 |
| Nov | 5.50 | 8.08 | 79.90 | 7.96 | 84.96 | 9.17 | 2.67 |
| Dec | 6.00 | 7.87 | 81.91 | 7.81 | 85.89 | 9.20 | 2.67 |
Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months
Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t
© Carlos M. Pelaez, 2010, 2011, 2012
