Gasoline and Autos

The Lehmann Letter (SM)

Today's business news was not good. February reports on inflation and production showed the former up and the latter flat.

The Bureau of Labor Statistics said that consumer prices (CPI) rose 0.4%, which translates to a 4.8% annual rate:

http://stats.bls.gov/news.release/cpi.nr0.htm

And the Federal Reserve reported no change in industrial production and a slight decline in capacity utilization to 78.7%:

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

If you read the bulletins linked above you will learn that gasoline and autos were mostly responsible for the reports. You have noticed the jump in fuel prices at the pump and, of course, the CPI reflected this. Automobile production rose in January and fell in February, and that skewed the industrial-production report.

But one month does not constitute a trend. Gasoline prices and auto production fluctuate. There should be little concern at this time about runaway inflation and falling production.

Besides - as is usually the case - the charts help put everything in perspective.

CPI
(Click on chart to enlarge)

(Recessions shaded)

Although 4.8% is a somewhat higher rate of inflation than we've had in recent months, the chart makes clear that consumer prices have fluctuated between 0% and 5% for about 20 years. No upward trend has developed.

Capacity Utilization
(Click on chart to enlarge)

(Recessions shaded)

Capacity utilization - the rate at which industry uses its plant and equipment - is now just below 80%. We need to see continued growth here. A stall would not be good. You can tell that a rate above 80% will finally signal a return to industrial well-being.

This letter will continue to report on these indicators.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann

Producer Prices: No Cause for Concern

The Lehmann Letter (SM)

Today the Bureau of Labor Statistics announced that producer (wholesale) prices had risen by 0.4% in February, or 4.8% at a seasonally adjusted annual rate:

http://stats.bls.gov/news.release/ppi.nr0.htm

Take a look at the chart and you will see that this is no cause for concern. The index of prices at the wholesale (not retail) level has averaged 5% or less for quite some time. Despite the recent rise in gasoline prices we are nowhere near the sharp gains of the 1970s

Producer Prices
(Click on chart to enlarge)


(Recessions shaded)

Tomorrow the Bureau of Labor Statistics releases its February report for consumer prices (CPI).

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann

The U.S. International Deficit: A Dilemma

The Lehmann Letter (SM)

Today the Department of Commerce announced that the US current-account deficit grew to $124.1 billion in last year's fourth quarter:

http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htm

If you put this number in perspective by placing it on the chart, it appears unremarkable. If you take a longer view, you might think that matters look pretty good. The current-account deficit plunged for 20 years and then moved back toward positive territory during the recent recession. Was that a good sign?

US Current Account Deficit
(Click on chart to enlarge)


(Recessions shaded)

Therein lies the dilemma. During the boom years our economy was on a borrowing binge - both public and private. Our government borrowed, but so did the private sector. We borrowed from the rest of the world in order to buy homes and cars and travel to places from which we were borrowing: More prosperity here at home meant greater indebtedness to lenders abroad. That's why the line in the chart went south.

We stopped borrowing as much when the economy shrank during the recession: Less borrowing from abroad went along with less spending here at home. That's why the chart went north for a while.

Now that the economy is recovering, we are beginning to borrow more here at home and abroad. Our current account deficit is growing and the line in the chart is falling once more.

We have become so dependent on debt that we can't expand without borrowing overseas. More prosperity at home goes along with our greater indebtedness to the rest of the world.

Expect this dilemma to sharpen as the economy gains strength.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann

The Inventory/Sales Ratio: A Little-Discussed Number

The Lehmann Letter (SM)

Last month this letter observed that businesses' robust and steady inventory build-up was another sign of a strengthening recovery. More goods on the shelf signal an optimistic sales outlook for the months ahead.

Now let's examine the relationship between inventories and sales. How does it compare with historical experience?

The chart shows that the ratio has fallen over the past 20 years as businesses' drive for efficiency has enabled them to expand sales with a smaller proportion of goods on the shelf. A smaller inventories/sales ratio means that sales have grown more rapidly than inventories.

Focusing on the most recent years, the ratio remained below 1.3 except for the recession-spike.

Inventory/Sales Ratio
(Click on chart to enlarge)

(Recessions shaded)

Today's report from the Census Bureau shows no divergence:

http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

In January, the latest available month, inventories were 1.27 times larger than sales. This fits the trend of normal, steady growth for both inventories and sales.

It's a good sign.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehman

Forecasting Difficulty

The Lehmann Letter (SM)

The Federal Reserve has the best economic and forecasting staff of any large organization. Nonetheless today's economy presents a challenge to the Fed.

Take a look at the following quotes from this article in today's New York Times:

http://www.nytimes.com/2012/03/12/business/as-fed-meeting-nears-it-awaits

“…The Fed is not sure how fast the economy is growing. Some of the main measures, which produce a murky picture in the best of times, are now telling divergent stories. In particular, people do not appear to be buying enough goods and services to sustain the rising pace of job creation.

“The Fed’s chairman, Ben S. Bernanke, testified before Congress last month that job growth would probably slow because the other measures tended to be more accurate. But he added that the reverse also could be true. And the Fed would like to know the answer before it decides whether it should promise new efforts to improve growth.

“…The Fed is already engaged in an immense campaign to improve growth, which it has said it plans to continue for the next three years. The central bank is holding short-term interest rates near zero, and it has amassed a $2.5 trillion portfolio of Treasury securities and mortgage-backed securities to pull down long-term rates. Any new program probably would amount to only a modest increase in the scale of the overall effort.”

When the Fed's chairman gives his best guess of the economy future but then says that the reverse could also be true, you know forecasting is difficult. That difficulty notwithstanding, the article also says that the Fed plans to maintain its economic stimulus for three more years. That's a good indication of the current economy's weak recovery.

This letter has long maintained that we can't have a robust economy without robust residential real estate. There doesn't seem to be any reason to change that view.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann

Good News at Home and Abroad

The Lehmann Letter (SM)

We should rejoice with strong domestic and European developments.

Today's employment report from the Bureau of Labor Statistics is excellent:

http://stats.bls.gov/news.release/empsit.nr0.htm

Our economy added 227,000 jobs in February and the unemployment rate held steady.

Look at the chart and you can see that this is the kind of number associated with economic expansion. For three months job gains have been over 200,000.

Job Growth
(Click on chart to enlarge)


(Recessions shaded)

And today's headlines in The New York Times and The Wall Street Journal report important progress - a milestone - in resolving the Greek debt crisis.

http://www.nytimes.com/2012/03/09/business/global/deadline-nears-for-greek-bond-swap.html?_r=1&ref=todayspaper

http://online.wsj.com/article/SB10001424052970203961204577269643946192330.html?mod=ITP_pageone_0

The vast majority of Greek-debt holders have agreed to accept losses as part of an overall settlement of the Greek financial crisis. Technically that's a default, but it's a sign of order instead of the chaos.

Europe is taking care of business.

Let's hope the coming months continue to bring good news.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehman

Profit Margins and Profits

The Lehmann Letter (SM)

Yesterday the Bureau of Labor Statistics confirmed the slowing pace of productivity growth last year:

http://stats.bls.gov/news.release/prod2.nr0.htm

Don’t confuse productivity growth with production growth. The former measures efficiency; the latter measures output.

Productivity growth = Output growth / Labor input growth.

That’s why efficiency is a synonym for productivity. Both words indicate the rate at which output improves compared with the rate at which labor input increases. Productivity grows when output gains more rapidly than labor-time. More output per hour-of-work means more output per capita: The key to per-capita gains in income.

Productivity advanced during the slump and early recovery as employers shed workers more rapidly than output fell. Now employers must hire workers more workers to achieve additional output gains and, as labor growth catches up with output growth, productivity-growth suffers.

You can imagine that improved productivity benefits profit margins. Efficiency has a nice ring to it. Sure enough: The top chart illustrates recent strong profit-margin gains.

Ratio: Implicit Price Deflator to Unit Labor Costs
(Click on chart to enlarge)

(Recessions shaded)

But profit-margin gains have begun to stall as productivity gains have slowed. The ratio in the chart above, after improving for 20 years, may have reached its limit. Don’t expect further profit-margin improvement.

After-tax Corporate Profits
(Click on chart to enlarge)

(Recessions shaded)

Total profits are the product of profit margins multiplied by sales volume (profit margins X sales volume). Since it appears that profit margins have risen to their limit, sales volume must now grow strongly for earnings to continue their upward march. If sales growth is not robust, most of the biggest profit-gains (see the bottom chart) are behind us.

Can we reasonably expect strong sales growth in an economy with a weak residential-real-estate sector? That’s a question stock-market investors should keep in mind.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann