Thursday, May 29, 2008

Capital Goods


Yesterday’s Census Bureau report on orders and shipments of durable goods
( confirmed, once again, that new orders for business equipment are flat and have been flat for some time.

Here are the most recent numbers:

April = $74.4 billion
March = $75.4 billion
February = $74.4 billion

The following chart confirms that new orders have stalled, fluctuating in a range, for about two years.

New Orders for Nondefense Capital Goods

(Click on chart to enlarge)

Recessions shaded

That’s troubling for two reasons.

First, it seems that the expansion is over. This series is a leading indicator of business investment in new equipment. If it’s flat, that’s a signal that industry has stopped building its productive capacity.

Second, if we are in a recession and this series begins to head south as business expansion turns into business contraction, then this will have been one of the weakest expansions on record. Note that new orders doubled in most decades since 1960 and also doubled between recessions except for the back-to-back 1980 and 1981 - 1982 recessions. This time new orders barely exceeded their earlier peak. True, the decade is not over. But if the series fades it will soon fall below its 2000 level.

What happened to the New Economy? It was supposed to spew forth ever-larger quantities of new innovations that business eagerly installed. Has technology gone flat? That would be scary.

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

© 2008 Michael B. Lehmann

Wednesday, May 28, 2008

Housing and Autos


In the last two days The New York Times published analytical articles on housing and autos that speak poorly for the economy’s outlook.

Today’s edition carried a story by Vikas Bajaj ( that began:

“America’s home-buying season, when for-sale signs sprout like dandelions, is shaping up to be even worse than expected this year, with prices falling, sales slowing and few signs of a turnaround emerging…………

And went on to say:

“While Wall Street is growing hopeful that the economy may dodge a recession, many economists warn that the pain in the housing market may last for several years.

“Even markets that once seemed immune to the slump, like Seattle, are weakening. Prices nationwide might fall as much as 10 percent more before a recovery takes hold, economists said.

“As the home-buying season enters what is traditionally its busiest period, there are simply too many homes in many parts of the country, and too few people with the means to buy them.

“The situation is likely to get worse because a rising tide of foreclosures is flooding the market with even more homes, while a slack economy and tight mortgage market are reducing the pool of potential buyers……….

“Sellers confront a sober reality: There are more than 4.5 million homes on the market nationwide. The way houses are selling, it would take nearly 11 months to clear the market. The last time so many homes were for sale was in the early 1980s, when the economy was in a deep recession and interest rates were two to four times as high as they are today.”

The article did not mention another depressing element. Builders continue to spew forth almost a million new homes a year, adding to the 11-month inventory (at the current selling pace) of 4.5 million homes reported in the preceding paragraph. No wonder home prices are falling rapidly and are expected to fall further.

Meanwhile, depressed conditions in residential real estate spill over to the automobile industry.

Eric Dash reported on this problem in yesterday’s Times ( He began:

“The auto industry is getting sideswiped by the housing crisis.

And continued:

“Auto lenders and banks, closing their wallets, have prevented hundreds of thousands of consumers from obtaining the financing for a car. Home equity loans, which had been used in at least one of every nine deals, when lenders were more generous, are no longer a source of easy money for many prospective buyers. And used-car prices have fallen nearly 6 percent as repossessed cars and gas-guzzling trucks and S.U.V.’s flood auction lots.

“Those forces, on top of the softening economy, are putting enormous pressure on the American auto industry as it faces what may be its worst year in more than a decade. About 15 million vehicles are expected to be sold in 2008, down from 16.2 million last year, as sales reach the lowest levels since 1995, according to the marketing firm J. D. Power & Associates.

“The impact on the broader American economy could be profound. Not only is the car a consumer’s biggest purchase after the home, but the auto industry remains one of nation’s most important economic engines. With less money available to bolster the industry’s growth, the businesses that support it are also facing the prospect of a sharp slowdown………..

“As the pool of money available to auto lenders has dried up, they have cut back on making new loans. Since late last year, nearly every auto finance company has tightened its lending standards. They are forcing borrowers to put more money down. They are also demanding higher monthly payments and requiring stronger credit records and more stringent documentation.”

If it wasn’t for bad news, housing and autos wouldn’t have any news at all.

It’s not easy to see how we can Dodge (forgive me) a recession under these circumstances.

© 2008 Michael B. Lehmann

Tuesday, May 27, 2008

Consumer Confidence Heading South


This morning The Conference Board reported ( that consumer confidence had plunged to 57.2

If you update the chart with that number, you can see that consumer confidence has fallen to its lowest level since the aftermath of the 1990-91 recession. If it falls more than another ten points, we’ll be below any of the troughs recorded in the chart.

Consumer Confidence

(Click on chart to enlarge)

Recessions shaded

In the bulletin that accompanied The Conference Board’s announcement, Lynn Franco, Director of the Board’s Consumer Research Center said: "….Weakening business and job conditions coupled with growing pessimism about the short-term future have further depleted consumers' confidence in the overall state of the economy.”

On its web site the Associated Press ( quoted Mark Vitner, senior economist with Wachovia Corp., as saying that as "awful as these numbers" look, he doesn't believe that confidence has bottomed out yet, an ominous sign for consumer spending.”

It certainly seems that the bad news is overwhelming the good news.

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

© 2008 Michael B. Lehmann

Friday, May 23, 2008

That Was The Week That Was


“That Was The Week That Was” was the title of a television program many years ago. This was a week that many investors would like to forget.

What happened to the stock-market rally? Did it fade together with hopes of a second-half economic rebound?

Consider the following chart.

The Stock Market, Earnings Per Share and Price/Earnings Ratio

(Click on chart to enlarge)

Recessions shaded

The stock market (S&P) peaked at roughly the same level in 2007 as it had in 2000, but earnings per share (EPS) improved by more than half in those years. Since the Price/Earnings (P/E) ratio = S&P divided by earnings per share, and earnings per share increased from 2000 to 2007 while the stock market didn’t, the P/E is now back to the normal range it enjoyed before the late 1990s boom and bust. The P/E had risen to speculative levels during the frenzy, but has receded from those irrational heights.

Note, however, that the P/E ratio is still closer to 20 than to 10 and higher than the post-WWII average of 15 that prevailed before the boom. If the stock market is to improve, earnings per share or the P/E - or both – will have to rise. How likely is that?

The financial crisis may or may not be over, but the damage done to the economy by the housing bust is not over. It seems that most days carry another report of housing’s woes. Home prices have a ways to fall. There are also more reports of the automobile industry’s difficulties. It’s hard to see how the economy can go north if housing and autos continue south.

Maybe the federal government’s economic-stimulus package and the Federal Reserve’s low interest rates can work wonders. Maybe….

Meanwhile, if the economy remains in the doldrums, why should earnings or investor enthusiasm – as measured by the P/E - improve? And without their improvement, the stock market can’t climb.

The events of the past week give little cause for optimism.

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

© 2008 Michael B. Lehmann

Thursday, May 22, 2008

The Industrial Sector


Today the Office of Federal Housing Enterprise Oversight issued a press release ( that began:

“U.S. home prices fell in the first quarter of 2008 …… This decline...... is the largest quarterly price decline on record. Over the past year …….. This is the largest decline in the purchase only index’s 17-year history.”

Housing and financial markets have captured most of our attention lately. What about the industrial economy?

Residential construction affects it. Lumber and other building materials, furnaces, air conditioners and water heaters, kitchen and laundry appliance, carpets, furniture and furnishings are all manufactured goods whose health derives from building. Now’s not a good time for these industries.

But automobile sales also play an important manufacturing role. Think of all the steel, glass, upholstery, rubber tires and fuzzy dice that depend on motor-vehicle purchases. How is the passenger-car industry doing?

Here are the latest new-vehicle sales figures in millions from the Department of Commerce at a seasonally adjusted annual rate.



You can see the slippage begin with the start of the new year.

Put those figures in perspective by updating the chart below in your mind’s eye.

New-Vehicle Sales

(Click on chart to enlarge)

Recessions shaded

We were averaging around 16 or 17 million new-vehicle sales annually until recently. April 2008 was 14.4 million and the trend is downward.

What impact has this had on industry? Here are figures, provided by the Federal Reserve, that answer the following question, “What is the current level of industrial output expressed as a percentage of the maximum?”



Use those numbers to bring the chart below up to date.

Capacity Utilization

(Click on chart to enlarge)

Recessions shaded

Capacity utilization was hovering around 82%. It’s now below 80%.

If residential construction and new-vehicle sales continue to falter, the industrial economy will, too.

That casts doubt on the notion that the second half of 2008 is due for a bounce.

(The charts were taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2008 Michael B. Lehmann

Wednesday, May 21, 2008

The Fed’s Forecast


The Federal Reserve today released the April 29-30 meeting minutes of its Federal Open Market Committee ( , which sets the federal-funds rate at which banks lend reserves to one another. The Fed also released the forecast that accompanied the meeting. That was enough to clinch a brutal day on Wall Street.

Begin with the Fed’s synopsis of current conditions:

“The information reviewed at the April meeting, which included the advance data on the national income and product accounts for the first quarter, indicated that economic growth had remained weak so far this year. Labor market conditions had deteriorated further, and manufacturing activity was soft. Housing activity had continued its sharp descent, and business spending on both structures and equipment had turned down. Consumer spending had grown very slowly, and household sentiment had tumbled further. Core consumer price inflation had slowed in recent months, but overall inflation remained elevated.”

That was bad, but the projection was worse:

“The projections … suggest that FOMC participants expected economic growth to be much weaker in 2008 than last year, owing primarily to a continued contraction of housing activity, a reduction in the availability of household and business credit, and rising energy prices. The unemployment rate was expected to increase significantly. However, output growth further ahead was projected to pick up by enough to begin to reverse some of the increase in the unemployment rate by 2010. In light of the recent surge in the prices of oil and other commodities, inflation was expected to remain elevated in 2008. Inflation was projected to moderate in 2009 and 2010 as the prices of crude oil and other commodities level out and economic slack damps cost and price pressures. Most participants judged that the uncertainty around their projections for both output growth and inflation was greater than normal. Most viewed the risks to output as weighted to the downside. Participants were roughly evenly divided as to whether the risks to the inflation outlook are broadly balanced or skewed to the upside.

“The central tendency of participants' projections for real GDP growth in 2008, at 0.3 to 1.2 percent, was considerably lower than the central tendency of the projections provided in conjunction with the January FOMC meeting, which was 1.3 to 2.0 percent. Participants viewed activity as likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of the year. Incoming data on spending and employment already indicated a softening economy this year. Real incomes were being held down by higher oil prices; falling house prices had reduced household wealth; and households and businesses were facing tighter credit conditions. Exports were seen as a notable source of strength this year owing to continued economic growth overseas and the depreciation of the dollar over the past year or so. Many participants also said that the substantial easing of monetary policy since last year and the fiscal stimulus package should help to support spending in the second half of the year.

“With output growth well below trend this year, most participants expected that the unemployment rate would move up. The central tendency of participants' projections for the average rate of unemployment in the fourth quarter of 2008 was 5.5 to 5.7 percent, above the 5.2 to 5.3 percent unemployment rate forecasted in January and consistent with significant slack in labor markets and the economy. Most participants expected the unemployment rate to edge down in 2009 and 2010.”

(The Fed also included a table that showed output lower and unemployment and inflation higher than initially forecast for both 2008 and 2009.)

Note the second-to-the-last sentence of the second paragraph in quotation marks above: “Most viewed the risks to output as weighted to the downside.”

Note, too, the third sentence before that: “However, output growth further ahead was projected to pick up by enough to begin to reverse some of the increase in the unemployment rate by 2010.”

The risks to output are weighted to the downside and the unemployment rate won’t improve until 2010.

No wonder the stock market plunged. What about the second-half 2008 economic recovery that was supposed to send earnings and stocks higher?

© 2008 Michael B. Lehmann

Tuesday, May 20, 2008

Profits & Profit Margins


The stock market’s performance has generated some enthusiasm lately. Is the bad patch over?

Business earnings can provide a clue.

The following chart illustrates after-tax corporate profits throughout the economy. The huge increase since the 2001 recession inspired the stock-market gains that followed that slump. No other decade provided comparable performance.

But earnings in 2007’s last quarter were only $1,425 billion, marking 2007 as a year of little gain. (Update the following chart using that figure.) If profit growth has stalled, the stock market won’t continue to rise.

After-Tax Corporate Profits

(Click on chart to enlarge)

Recessions shaded

Manufacturer’s earnings confirm profits’ plateau. Manufacturer’s after-tax profits popped back up to $121 billion in 2007’s last quarter. If you update the next chart with that figure, it verifies the halt in a growth trend.

Manufacturers’ After-Tax Profits

(Click on chart to enlarge)

Recessions shaded

What happened to earnings? Why did they stall?

Total profit = Profit Margins X Sales Volume. Focusing on profit margins may provide a clue to the behavior of overall earnings.

The following chart shows the ratio of the price received per unit of output to the labor cost incurred in producing that unit of output. That’s a proxy for profit margins across the economy, and you can see that it, too, leveled off in 2007. If you update the chart with the fourth quarter’s 102.6, that confirms it.

Ratio: Implicit Price Deflator To Unit Labor Costs

(Click on chart to enlarge)

Recessions shaded

Finally, manufacturing confirms the trend. The next chart displays manufacturing margins in cents pre dollar of sales. They were back up to 7.7 cents at the end of 2007 (update the series in your mind’s eye), but that’s recovery not growth.

Manufacturing After-Tax Profits In Cents Per Dollar Of Sales

(Click on chart to enlarge)

Recessions shaded

What happened?

There’s been a squeeze. Business revenues have difficulty climbing while the residential-real-estate asset deflation continues. As wealth falls, demand weakens. At the same time, however, commodity inflation drives costs higher. So business is caught in a scissor’s crisis: Sluggish revenue and rapidly rising costs. Those circumstances squeeze profit margins and rein in profits.

If profits are constrained, how can the stock market reach new highs?

(The charts were taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2008 Michael B. Lehmann

Monday, May 19, 2008

This Month’s Indicators


The Conference Board announced today ( that its Index of Leading Economic Indicators advanced slightly in April after rising somewhat in March. The index remains down for the past six months and full year.

The chart below reveals that the leading indicators have stalled, showing no gain for some time.

Leading Indicators

(Click on chart to enlarge)

Recessions shaded

Does the recent uptick mean that the worst is over? Have we rounded the corner? Do we see the light at the end of the tunnel?

Probably not. Consider housing starts: Construction on 692,000 single-family homes began in April, according to Friday’s Census Bureau release ( Starts have been declining for two years and that was the lowest level since January of 1991. That’s no cause for optimism.

But why focus on single-family home construction? Because that’s the eye of the storm. The asset-deflation in single-family homes has led the economy south by destroying household wealth and discouraging new construction. And new construction merely exacerbates the problem by maintaining the inventory of unsold homes. That forestalls the conclusion to the downward home-price spiral and prolongs the slump. If builders add to the supply of unsold homes while demand remains weak, home prices will continue falling. Why would they do that? Because the contractors building new homes are not the realtors who are trying to sell existing homes. The two segments of the market are working at cross purposes.

Last Thursday’s press release from the National Association of Home Builders ( revealed the industry’s gloom:

“The single-family housing market is still deteriorating…..’ said NAHB President Sandy Dunn…….”

Ms. Dunn’s unhappy prognosis was based upon the Builders’ Housing Market Index that has hovered between 18 and 20 for the past nine months. It’s important to know that the index was as high as 70 three years ago and that the index was as low as 20 only once before. In January 1991, when single-family home construction was momentarily at today’s lows, home-builder sentiment dipped briefly but bounced quickly back. Builders are in a prolonged funk today because they understand their uniquely pessimistic circumstances. This is the first post-WWII housing downturn instigated by a prolonged house-price deflation.

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

© 2008 Michael B. Lehmann

Thursday, May 15, 2008

Half Full? Half Empty?


Yesterday’s Wall Street Journal ( and New York Times ( carried stories that questioned whether we’re in recession and whether recession is likely.

The Wall Street Journal article by Kelly Evans and Justin Lahart began:

“A funny thing happened to the economy on its way to recession: It's taken a detour.

“That, at least, is the view of a growing number of economists -- including some who not long ago were saying a recession was all but inevitable. They note that stock and credit markets have steadily improved since the Federal Reserve intervened to keep Bear Stearns Cos. from bankruptcy in early March, while a series of economic reports have been stronger than expected.

“Economists also cite swift policy responses, including a sharp reduction in interest rates by the Fed -- to 2% from 5.25% last September -- and the distribution of fiscal-stimulus checks to millions of Americans, as factors possibly easing the downturn.”

David Leonhardt’s New York Times article started this way:

“Only a month ago, a recession looked inevitable. Job cuts were picking up speed, and stock prices were falling. The Federal Reserve was cutting its benchmark interest rate rapidly, in an effort to keep the downturn from snowballing. But the notion that the economy could avoid a recession altogether seemed fanciful.

“It looks less fanciful today. The economic news hasn’t exactly been sunny lately, but there also haven’t been any nasty new surprises. If anything, the economy seems to have stabilized. The pace of layoffs has eased a bit, stocks have risen and the Fed has signaled that the rate cuts are over for now.

“And now the economy is being flooded with cash, courtesy of the federal government, and that will surely lift consumer spending in the months ahead. Two weeks ago, the Treasury Department began distributing the tax rebates from the recent $168 billion stimulus package. The effects of the Fed’s interest rate cuts, meanwhile, are still washing over the economy.”

Both the Journal and the Times made clear that problems remained, but the Times was more explicit. Its article examined profits, jobs and pay in some detail.

The Times distinguished between a slowing in home sales’ plunge and an actual sales recovery. Even if home sales are no longer falling freely, that doesn’t mean they’re about to increase markedly. For that to happen, the article continued, prices must fall further in order to improve housing affordability.

Corporate profits soared in the first half of the decade, floating the stock market, too. Now profits have stalled. The stock market won’t head north if profits go south.

Both job growth and pay growth have suffered, too.

Mr. Leonhardt sums his thinking as follows:

“When you step back and look at the whole picture, you see an economy that clearly seems a bit stronger than it was a month or two ago. The government stimulus now coming into the pipeline may well allow growth to stay above zero and for an official recession to be averted.

“To me, though, the odds of a recession still appear to be better than even. I don’t know how else to read the recent employment declines. Historically, when the job market has deteriorated as much as it has recently, it enters a vicious cycle of layoffs, stagnant pay, weak consumer spending and yet more layoffs.

“And even if that cycle is averted this time, the main economic story line for 2008 already looks clear. Further declines in housing prices are baked into the cake. The same goes for weak wage growth. Recession or not, it seems unlikely that the economy will feel healthy to most people anytime soon. “

That seems correct and could be reinforced. The residential-real-estate asset-deflation led the economy into the doldrums, exacerbated by falling profit margins and profits. There is no sign of pending relief in those areas. Until there is, cause for optimism seems scant.

© 2008 Michael B. Lehmann

Sunday, May 4, 2008

Brief Hiatus


The blogger is leaving the country for a week and will return on or about May 15.

© 2008 Michael B. Lehmann

Saturday, May 3, 2008

We'll See


Everyone was relieved that yesterday’s employment report ( showed a drop of only 20,000 jobs in April and that the unemployment rate fell a little. Maybe the recession won’t be so bad.

The stock market seems to think that the worst of the financial crisis is behind us. The Dow closed the week over 13,000 and the S&P over 1400.

Besides, the Fed reduced the federal-funds rate to two percent and the economic stimulus plan’s tax rebate checks are in the mail.

There’s blue sky ahead!

We’ll see about that. The big question is not whether or not we are in a recession, or how bad the recession will be or how long it will last. The important issue is: Can we reasonably expect the economy to resume robust growth any time soon?

Let’s review. During the boom of the 1990s we enjoyed an unusual supply-side phenomenon, driven by the New Economy’s new technology. That ended in the 2001 recession. The Fed replaced it with a demand-side boom driven by low interest rates that spurred the real-estate asset-inflation. That’s ending now.

What can we reasonably expect will provide a strong encore to these two expansions? What new-technology supply-side boom awaits us? Can reduced interest rates re-work their demand-side magic? There’s a great deal of excitement about the green revolution, but it isn’t upon us the way the New Economy was in the 1990s. Interest rates are falling, but they need to overwhelm a great asset deflation. Falling prices are a boulder in the real-estate market’s road to recovery. There’ll be no great supply-side or demand-side expansion soon.

That doesn’t mean the economy must plunge into another Great Depression. But it may mean that we can reasonably expect economic sluggishness for a while. If that’s true, GDP, productivity and profits will grow slowly. The stock market’s Price/Earnings (P/E) ratio may have to adjust downward. If earnings grow slowly and the P/E shifts downward, the stock market will remain in the doldrums for a while. If real-estate prices don’t recover robustly from the asset deflation, the nation’s wealth will languish. Hesitant consumers will dampen retail expansion. Sprawl will slow.

Blue sky ahead?

We’ll see.

© 2008 Michael B. Lehmann