UPDATE TO ARTICLE 17, "JAPAN SYNDROME AMERUCAN STYLE"

In two graphs of article 17 not only new data comes in every month, but the old data are frequently revised. To keep uptodate, the two graphs must be updated accordingly. This article is dedicated to update those graphs with the original graphs in article 17 left unchanged. When the new and revised data deserves special attention, a short paragraph is added at such an update point.

Update: August 7, 2012

The annual revision published on July 31, 2012 has revised the Personal Income data substantially. The first graph of article 17 will become too crowded if those revisions are added, so it is abandoned. Instead an Interest Income component is added to the second graph of article 17, and is called Graph 1 here. Also a new graph of Nonfarm Payroll and Real Consumer Spending, called Graph 2, is posted.

The component of Private Wages and Salaries within Personal Income is heavily revised in the annual revision published on July 31 by Bureau of Economic Analysis. The green curve in Graph 1 is the component of Private Wages and Salaries befor the revision, and the red dots represent the revised data plus the value of June, 2012. The revised data is now more or less in conformity with Nonfarm Payroll data shown as the black curve in Graph 2.

We should note the effect of the warm winter of 2011 to 2012. Many jobs would have been done in the spring of 2012 (in a normal winter) were pulled into the warm winter season. This effect will boost Nonfarm Payroll number in the winter months but will suppress Nonfarm Payrolls in the spring to early summer of 2012. The softness of Nonfarm Payroll number from April to June of 2012 should thus be discounted. Looking from November of 2011 to June of 2012, Nonfarm Payroll number was growing in average about 160,000 per month, corresponding to a GDP growth like 2.3% per quarter.

Next, we should turn our attention to the black curve in Graph 1. That is the yield of 10 year T. Note expressed in logarithmic scale, but plotted upside down. This means when the black curve moves up, the yield of 10 year T. Note moves down and vice versa. The yield of 10 year T. Note dropped (the black curve of Graph 1 shot up) sharply from August of 2011 and hold at low level from September, 2011 until May, 2012. Then the yield has dropped further starting from June, 2012. Comparing the yield curve of 10 year T. Note with Nonfarm Payroll curve, we can see that it was the sharp break of the long-term interest rate, as represented as sharp upward move of the 10 year T. Note yield curve of Graph 1, that has pushed up the Nonfarm Payrolls starting from August of 2012. The second break of the long-term interest rate happened at June, 2012. The effect of boosting Nonfarm Payroll seems to be felt in the strengthening Nonfarm Payroll number of July, 2012 already. Ironically the timing of the breaks of long-term interest rate has nothing to do with the easing of The Federal Reserve but are purely the result of the worsening Euro crisis. Any time when Euro crisis flares up, stock market tumbles, U. S. Dollar strengths against Euro, and the long-term interest rate drops to boost U. S. economy. This effect in turn may cause trouble for U. S. economy in the second half of 2012. On August 3, 2012, the global stock markets rallied strongly and Euro bounced back against U. S Dollar. The reason of the rally is the optimism that ECB is going to buy sovereign bonds of Spain and Italy in the secondary market, so Euro crisis will calm down for a while. If this optimism holds up, long-term interest rate as represented inversely by the black curve in Graph 1 will reverse course and rise anew. This means that the strengthening Nonfarm Payroll visible in the July, 2012 report may be short lived, and The U. S. economy may encounter substantial head wind in the second half of 2012.

We should pay attention to the blue Interest Income curve in Graph 1, too. Up to the end of 2011, the blue curve is a mirror image of the black curve in Graph 1. This means when interest rate falls, interest income plunges and vice versa. However, starting from 2012, interest income just shot up in spite of falling interest rates. Only explanation of this surprising behavior of interest income is that consumers have finally come to the realization that The U. S. is in a Japan Syndrome as depicted in article 17, so near zero interest rate will continue for a long time and inflation will not be a problem. Thus consumers exchange their short-term saving instruments for higher yielding long-term instruments en mass. This also means that consumers will realize soon that their nest eggs will not grow properly to support a comfortable retirement life under the near zero-interest rate environment, so consumers will start to refrain from wanton spending. This trend of slower consumer spending may have set in already, judging from the behavior of the consumer spending curve, the green and red one in Graph 2.

Finally let us turn our attention to Comment 82 that discusses a mechanical recession indicator. The indicator is the year-to-year % change of Real GDP. If the indicator drops below 1.8%, then either a recession is already underway, or a recession will come within 4 quarters from the point when the indicator moves above 1.8% again. At the time of Comment 82, the indicator had dropped below 1.8% at the second quarter of 2011. However, the annual revision at the end of July, 2012 has changed the picture. The indicator at the second quarter was revised above 1.8%, but the indicator at the third quarter of 2011 had dipped below 1.8% to reach 1.6%. The indicator then has moved above 1.8% since the fourth quarter of 2011. Does this mean a recession is not far away? Before "The Great Recession" of 2008 - 2009, Real GDP had grown in average more than 3.0% per year. Some one has used the metaphor of an airplane to explain this magic line of 1.8%. When the airplane loses speed to a certain level, the airplane stalls and then crashes. This 1.8% annual growth rate of Real GDP probably corresponds to the stall velocity for a 3.0% plus economy. However, as explained in article 17, the current economic environment is a near zero-interest rate and a substantially slow growth environment that we call "Japan Syndrome American Style". Looks like Real GDP's annual growth rate is stuck between 1.5% and 2.5%. In such a case, the indicator using the year-to-year comparison of real GDP may dip below 1.8% line often, but without causing a recession that requires the indicator to fall below 1.0% line. On the other hand if the economy starts to grow more than 2.5% per year for a prolonged period, inflation probably will heat up and The Federal Reserve will be forced to drain liquidity from the market. In order to drain the liquidity The Federal Reserve needs to sell debt instruments in its portfolio. As has been pointed out in article 17, the portfolio of The Federal Reserve has already been twisted heavily toward long-term debt instruments. As The Federal Reserve sells those long-term debt instruments, the long-term interest rate will shoot up, causing heavy devaluation of the remaining long-term debt instruments in the portfolio of The Federal Reserve. At the end, The Federal Reserve will be driven into the situation of bankruptcy, probably followed by a sovereign debt crisis of The U. S., and an economic depression.

Update: June 30, 2012

In article 17, it is said that in the second graph, if the green curve crosses over line B, it constitutes a forewarning signal of an incoming recession. On June 29, 2012, new data from Bureau of Economic Analysis and the revision of the data of previous four months have made the green curve to cross over line B as shown in the graph. However, We are not issuing another recession warning yet, since at every end of July or at the beginning of August, an annual revision along with the newest monthly data will be issued, and the revision frequently changes the trend of the data substantially. A good example is the revision at the end of July, 2007 that had prompted us to issue a timely "Recession Watch". That is why we are withholding another "Recession Watch" at this point.