Consumer Credit

The Lehmann Letter ©

Today the Federal Reserve released May’s consumer-credit report:

http://www.federalreserve.gov/releases/g19/Current/

Consumer credit shrank by $39.6 billion at a seasonally adjusted annual rate.


Consumer Credit

(Click on chart to enlarge)




(Recessions shaded)


When people feel good, they borrow and spend. When they feel lousy, they repay. Consumers are now repaying their debts.

The table below reports consumer credit at the end of the month. You can derive the monthly change by subtracting one month from the next and multiplying by 12.

Jan 2008 2,526.0
Feb 2008 2,536.9
Mar 2008 2,549.0
Apr 2008 2,555.8
May 2008 2,565.5
Jun 2008 2,574.1
Jul 2008 2,581.8
Aug 2008 2,575.8
Sep 2008 2,582.8
Oct 2008 2,578.1
Nov 2008 2,568.8
Dec 2008 2,562.0
Jan 2009 2,566.2
Feb 2009 2,555.0
Mar 2009 2,539.4
Apr 2009 2,522.9
May 2009 2,519.6

Consumer credit outstanding is now less than it was 18 months ago.

The economy won’t rebound until this number grows again.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann

First Week

The Lehmann Letter ©

The Bureau of Labor Statistics’ employment report was a bad start for July’s first week: http://stats.bls.gov/news.release/empsit.nr0.htm

The economy lost 467,000 jobs in June, substantially more than May’s 345,000 loss. You can see from the chart that’s better than the early months of the year, but a disappointment for hopes that strong recovery would rapidly shrink this number.

Job Growth

(Click on chart to enlarge)



Recessions shaded

As this blog has consistently stated, the economy can not pop back as long as the foreclosure crisis continues. As foreclosed properties are relentlessly dumped on the market, home prices keep heading south. Without a recovery in home prices, don’t expect an upsurge in residential building. And as long as residential construction remains in the doldrums, the economy and employment will languish. Residential real estate got us into this mess, and we can’t get out until it begins to recover.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2009 Michael B. Lehmann

July Publication Schedule

The Lehmann Letter ©

Here’s the publication schedule for some of July 2009’s most important economic indicators.

PUBLICATION SCHEDULE

July 2009

Source (* below……Series Description……Day & Date

Quarterly Data

BEA…………………………GDP………...……Fri, 31st

Monthly Data

ISM……….Purchasing managers’ index……….Wed, 1st

BLS…………….Employment………… Thu, 2nd
Fed…………Consumer credit…..(Approximate).Tue, 7th
Censu……...Balance of trade………………Fri, 10th
Census……...Retail trade…………………….Tue, 14th
Census……...Inventories……………………..Tue, 14th
BLS………….Producer prices……………….Tue, 14th
Fed………..Industrial production………….Wed, 15th
Fed……….Capacity utilization…………….Wed, 15th
BL………….Consumer prices……………...Wed, 15th
Census……..Housing starts………………….Fri, 17th
Conf Bd…….Leading indicators…………….Mon, 20th

NAR…………Existing-home sales…….…….Thu, 23rd
Census……..New-home sales……………….Mon, 27th
Conf Bd…….Consumer confidence…………Tue, 28th

Census…….Capital goods……………….…..Wed, 29th


* BEA = Bureau of Economic Analysis of the U.S. Department of Commerce
* BLS = Bureau of Labor Statistics of the U.S. Department of Labor
* Census = U.S. Bureau of the Census
* Conf Bd = Conference Board
* Fed = Federal Reserve System
* ISM = Institute for Supply Management
* NAR = National Association of Realtors

© 2009 Michael B. Lehmann

Barn Sour

The Lehmann Letter ©

There’s a general consensus that we’ve hit bottom and the economy will now recover. But recovery is not synonymous with rebound, and the key question remains: How swiftly will the economy snap out of recession?

Take a look at the consumer-price-index, interest-rate and housing-starts charts before 1990. Notice the strong inverse relationship between interest rates and residential construction.

Consumer Prices
(Click on chart to enlarge)

(Recessions shaded)

Federal Funds Rate
(Click on chart to enlarge)

(Recessions shaded)

Housing Starts
(Click on chart to enlarge)

(Recessions shaded)


The Federal Reserve let interest rates fall whenever inflation subsided. Building activity immediately expanded, stimulating the entire economy. But escalating inflation soon prompted the Fed to raise interest rates and constrict residential construction. That depressed the economy and instigated recession. Inflation soon shrank, leading to a new round of rate cuts and building activity.

Think of that economy the way you’d think of a frisky horse. The economy broke into a gallop (boom) as soon as the rider (the Fed) let the reins dangle (low interest rates). But the economy came to a halt (recession) when the Fed pulled back on the reins (high interest rates), only to shoot forward again when the Fed relaxed its grip. Consequently those recessions were V-shaped, with sharp downturns and equally sharp recoveries.

The 1990-91 and 2001 recessions departed from this stereotype. The 1990-91 recession is associated with the first Persian Gulf War. That downturn came to an end when soaring computer and software expenditures led to the 1990s dot-com boom. The dot.com boom collapsed when full employment boosted wages and salaries, thereby constricting profit margins and business capital expenditures.

The Fed, in a traditional response, depressed interest rates from 2000 through 2003. The consequent real-estate bubble, and that bubble’s demise, led to the current recession. Once again the Fed dangled the reins, hoping the horse would gallop forward. But this horse remains exhausted from its 2002 – 2006 run. It’s barn sour and requires rest. It won’t break into another run for quite a while.

Tumbling real-estate is at the heart of the present crisis, and falling interest rates will not pull us out. Building won’t recover until the foreclosures cease and home prices stabilize. When the number of vacant homes begins to dwindle, builders’ confidence will return and construction will start to recuperate in earnest.

That means we can’t expect another V-shaped recovery. Right now we’re on the horizontal bar of an L, hoping at some point it will turn into a U. If rising real estate won’t pull us out of the ditch, what will?

Technology? It pulled us out of the 1990-91 slump. Unfortunately there’s nothing on the immediate horizon that resembles the PC and internet revolution of the dot-com boom.

Government stimulus? It will definitely start the recovery, and we’re much better off with it than without it. But it is not and will not be large enough to restore full employment. For that to occur, the private sector must come back and right now there are no signs that the private sector will snap back the way it did so many times before.

The horse is in the barn.

(The charts were taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann

The President’s Plan

The Lehmann Letter ®

President Obama’s plan to reorganize and modernize our nation’s financial-regulatory system will institute a big improvement over the status quo.

Think of these two issues:

1. With proper regulation, would as many homeowners have faced foreclosure? Would they have been cajoled, enticed and just plain encouraged to take on a mortgage-burden they could not afford? Suppose new regulations institutionalize reasonable down payments and other strictures that prevent irresponsible lending and borrowing, can we reduce the likelihood of another disaster?

2. With proper regulation, would financial intermediaries have been able to securitize those mortgages and pedal them around the globe? Would those toxic assets have found a market? Suppose new regulations impose reasonable restraints upon securitization?

It could have been different. The new regulations should prevent a repeat performance.

Some critics are saying the proposed changes will stifle innovation. Perhaps. Just remember that sub-prime mortgages and mortgage-securitization were innovations. Not all innovations are of equal social value.

Other critics say the new regulations will slow financial markets’ functioning. Perhaps. That would be a cost. But the benefits will likely be worth it.

© 2009 Michael B. Lehmann

Housing Rebound?

The Lehmann Letter ®

Today the Census Bureau announced that May housing starts rebounded to 532,000.

The chart below reveals that starts remain below all other post-WWII troughs. It’s still too early to declare victory.

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

Moreover, the foreclosure crisis continues unabated. Each month more existing homes are dumped on the market by lenders who have foreclosed on them.

New homes, whose construction has just begun, will also add to the total pool of available structures. That does not help resolve the crisis.

A construction turnaround would be more welcome if it did not exacerbate the glut of homes on the market.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann

Consumer Credit

The Lehmann Letter ©

Earlier this month the Federal Reserve released April data for consumer credit:

http://www.federalreserve.gov/releases/g19/Current/

It shrank be $188.4 billion at a seasonally adjusted annual rate.

The following chart puts that in perspective.


Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

After years of solid growth averaging over $100 billion per month, consumer credit is now contracting.

The table below reports consumer credit at the end of the month. You can derive the monthly change by subtracting one month from the next and multiplying by 12.

Jan... 2008 ...2,526.0
Feb ... 2008 ... 2,536.9
Mar ... 2008 ...2,549.0
Apr ... 2008....2,555.8
May... 2008... 2,565.5
Jun ... 2008...2,574.1
Jul ... 2008...2,581.8
Aug... 2008... 2,575.8
Sep ... 2008... 2,582.8
Oct ... 2008...2,578.1
Nov ... 2008 ...2,568.8
Dec... 2008...2,562.3
Jan ... 2009... 2,567.1
Feb...2009...2,556.2
Mar... 2009... 2,539.7
Apr ... 2009 ... 2,524.0

You can also see that consumer credit grew until last summer and has been falling since. When people feel good, they borrow and spend. When they don’t, they don’t. The economy won’t rebound until this number grows again.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann