Wednesday, December 16, 2009

On Vacation

The Lehmann Letter (C)

The blogger will return in the New Year.

Happy Holidays!

Thursday, December 10, 2009

The Chairman Speaks

The Lehmann Letter ©

On December 7 Federal Reserve Chairman Ben Bernanke spoke before the Economic Club of Washington, D.C.: http://www.federalreserve.gov/newsevents/speech/bernanke20091207a.htm

Chairman Bernanke dealt with four frequently asked questions:
1. Where is the economy headed?
2. What has the Federal Reserve been doing to support the economy and the financial system?
3. Will the Federal Reserve's actions lead to higher inflation down the road?
4. How can we avoid a similar crisis in the future?

Here are brief excerpts from some of Chairman Bernanke’s responses.

1. Where is the economy headed?

“Though we have begun to see some improvement in economic activity, we still have some way to go before we can be assured that the recovery will be self-sustaining. Also at issue is whether the recovery will be strong enough to create the large number of jobs that will be needed to materially bring down the unemployment rate. Economic forecasts are subject to great uncertainty, but my best guess at this point is that we will continue to see modest economic growth next year--sufficient to bring down the unemployment rate, but at a pace slower than we would like.”

2. How can we avoid a similar crisis in the future?

“Although the sources of the crisis were extraordinarily complex and numerous, a fundamental cause was that many financial firms simply did not appreciate the risks they were taking. Their risk-management systems were inadequate and their capital and liquidity buffers insufficient.”

Chairman Bernanke concluded his speech by saying:

“In sum, we have come a long way from the darkest period of the crisis, but we have some distance yet to go. In the midst of some of the toughest days, in October 2008, I said in a speech that I was confident that the American economy, with its great intrinsic vitality, would emerge from that period with renewed vigor. I remain equally confident today.”

The chairman could have mentioned another contributing factor: Household balance sheets were distorted by years of borrowing and households’ dependence upon capital gains for continued solvency.

At the end of WWII household balance sheets were strong and liquid. They had a high ratio of liquid assets to debt and these liquid assets comprised a good portion of household net worth. In addition household debt was a small portion of household income.

Years later those ratios have changed. Households have relied upon capital gains in the stock market and residential real estate, rather than on saving, to boost their net worth. Consequently liquid assets are relatively small and debt relatively large because borrowing has supported household asset (particularly real estate) acquisition. In addition household indebtedness has grown more rapidly than household income.

The recent recession made matters worse by reducing net worth as stock-market and real-estate values melted down.

Now households’ over-extended balance sheets hinder their ability to borrow and spend. Unfortunately, our economy’s growth depends upon household borrowing and spending to support residential construction and automobile purchases. If households’ distorted balance sheet prevents their borrowing and spending, how will the economy grow sufficiently rapidly to achieve the Chairman’s objectives?

© 2009 Michael B. Lehmann

Friday, December 4, 2009

Good News!

The Lehmann Letter ©

“The unemployment rate edged down to 10.0 percent in November, and nonfarm
payroll employment was essentially unchanged (-11,000), the U.S. Bureau of Labor Statistics reported today.”

That’s the opening sentence from today’s employment report: http://stats.bls.gov/news.release/empsit.nr0.htm

Good news indeed! When you connect the latest dot to the chart below you can see how the situation has improved.

Job Growth

Click on image to enlarge)



Recessions shaded

And there was more good news in the report.

Manufacturing overtime, which had been 2.8 hours/week in the second quarter and 3.0 hours in the third, rose to 3.4 hours in November. This is an important leading indicator and provides additional hope that the worst of the employment contraction may be drawing to a close.

Knock on wood……

(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

Tuesday, December 1, 2009

Manufacturing Moves Forward

The Lehmann Letter ©

Today the Institute for Supply Management reported that its Purchasing Managers’ Index fell slightly in November to 53.6: http://www.ism.ws/ISMReport/MfgROB.cfm

Recent data are:

November….53.6
October…….55.7
September.52.6
August……..52.9
July………...48.9

Since any number over 50 signals expansion, you can see that manufacturing has been moving forward for the past four months.

Purchasing Managers’ Index

(Click on image to enlarge)



Recessions shaded

The chart also makes clear that manufacturing has been in the doldrums and is only now pulling out of a steep trough.

There are three principal influences on manufacturing: (1) Autos and residential construction and other household expenditures, (2) Business capital expenditures and (3) inventory maintenance.

1. Autos and residential construction are at the heart of the current crisis. They won’t recover strongly until households feel comfortable about borrowing once more. And that won’t happen until time heals households’ balance sheets, which are currently suffering from too much debt. It will be a while before household spending recovers.

2. Business capital expenditures are waiting for the recovery of household expenditures. They will follow, not lead.

3. Inventory maintenance probably explains manufacturing’s recovery. The recession caught manufacturers with excess inventories on hand. As sales slowed manufacturers stopped production and sold from their stocks of goods on the shelf. Manufacturers have finally reduced these stocks after many months of inventory liquidation. As inventories are depleted and fall into a leaner relationship to sales, manufacturers can resume production. (No manufacturer wishes to be caught short without goods on hand.) That’s where we are now.

But inventory replenishment alone cannot rescue manufacturing. Household expenditures and business investment must recover before manufacturing turns robust once 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

Monday, November 23, 2009

Big Jump in Home Sales

The Lehmann Letter ©

Today the National Association of Realtors announced a big jump in existing-home sales: http://www.realtor.org/press_room/news_releases/2009/11/record_big

Sales were a revised 5.5 million in September and jumped to 6.1 million in October at a seasonally adjusted annual rate.

You can see the strength of this gain if you plug October’s 6.1 million into the chart below. It represents a significant upward trend.

Existing Home Sales

(Click on image to enlarge)



Recessions shaded

Now for some big questions: Will this surge expire on April 30, 2010 along with the first-time home-buyer tax credit? (Recall that auto sales fell back to earth with the end of the cash-for-clunkers program.) Can momentum be maintained if the tax credit is extended, or have most potential buyers already acted? Is this an omen for new-home sales and residential construction, or will the market-overhang of unsold inventory and rising foreclosures continue to depress new-home building?

These questions are important because the economy can’t recover unless existing-home activity is reflected in new construction.

Stay tuned.

(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

Friday, November 20, 2009

Capital Spending

The Lehmann Letter ©

Everyone wants to know, “When will the economy gain momentum?”

Residential construction and motor-vehicle production remain lackluster.

So does capital spending.

New Orders for Nondefense Capital Goods

Click on image to enlarge)



Recessions shaded

The chart shows that new orders for nondefense capital goods (machinery and equipment) fell sharply in the recent recession. They’re down to where they were at the bottom of the dot-com bust. The latest report – for September – is a low $53.5 billion. You can see from the chart that this is no improvement from the recession’s low.

Full employment requires full production. That can’t occur without a strong gain in capital expenditures.

(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

Tuesday, November 17, 2009

Margins Drive The Market

The Lehmann Letter ©

Yesterday’s “Wall Street Journal” article by Tom Lauricella on earnings and the stock market (http://online.wsj.com/article/SB10001424052748703811604574536300482504172.html) confirmed our September 17 posting on “Profits & Profit Margins” and our October 30 posting on “10,000 Tops?”

Profit-margin improvements, not sales-volume growth, drove the stock market’s recent surge. But how long can earnings continue to climb without a boost from sales? That’s the key question.

© 2009 Michael B. Lehmann

Monday, November 16, 2009

From the Chairman

The Lehmann Letter ©

Here are some excerpts from today’s speech by Federal Reserve Chairman Ben Bernanke to the Economic Club of New York.

“I expect moderate economic growth to continue next year. Final demand shows signs of strengthening… the beneficial influence of the inventory cycle on production should continue for somewhat longer. …residential investment should become a small positive for growth next year rather than a significant drag, as has been the case for the past several years. Prospects for nonresidential construction are poor, however, given weak fundamentals and tight financing conditions.

“In the business sector…enhanced business confidence…should lead to a pickup in business spending on equipment and software, which has already shown signs of stabilizing.

“ … Banks' reluctance to lend will limit the ability of some businesses to expand and hire. I expect this situation to normalize gradually … Jobs are likely to remain scarce for some time, keeping households cautious about spending…as net gains of roughly 100,000 jobs per month are needed just to absorb new entrants to the labor force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect.

“…On net, notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time.

“The Federal Open Market Committee continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period….”

How would you interpret these remarks? V-shaped or U-shaped recovery? I go for the latter.

© 2009 Michael B. Lehmann

Thursday, November 12, 2009

Homes & Autos

The Lehmann Letter ©

Time for a reality check.

Look at these charts.

New-Home Sales

(Click on chart to enlarge)



(Recessions shaded)

New-Vehicle Sales

(Click on chart to enlarge)



(Recessions shaded)

New-home sales were 402,000 in September and new-vehicle sales were 10.4 million in October. We’ve barely moved off the bottom of these charts. What kind of recovery is that?

(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

Tuesday, November 10, 2009

The Dollar

The Lehmann Letter ©

There’s been much discussion of the dollar’s value lately. Two charts might help put matters in perspective.

Exchange Value of the U.S. Dollar

(Click on chart to enlarge)



(Recessions shaded)

U.S. Balance on Current Account

(Click on chart to enlarge)



(Recessions shaded)

You can see both the dollar’s and the balance on current account’s downward trend over the past 25 years. There are interruptions in those trends, and neither series is at its historic low. Nevertheless the trend is clear.

We borrow more and more from the rest of the world in order to buy more and more from the rest of the world. But the rest of the world lends us those funds reluctantly. Consequently the dollar’s value falls as the rest of the world demands more and more dollars for each unit of its own currency that the rest of the world lends to us.

How long can anyone keep borrowing in order to buy? How long will anyone lend in order to sell? Forever, if the parties are pleased with the arrangement. But the dollar’s fall indicates the lenders are not completely happy. If the lenders balk, the dollar will fall even more quickly. That will make it even more difficult for the U.S. to borrow. If the creditors wish to gain power over the U.S., they may continue to lend for quite a while.

(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

Friday, November 6, 2009

10.2%

The Lehmann Letter ©

Today the Bureau of Labor Statistics announced that the unemployment rate rose to 10.2% and that the economy lost 190,000 jobs in October: http://stats.bls.gov/news.release/empsit.nr0.htm

But there was some good news: Manufacturing overtime, which had been 2.8 hours per week in the second quarter and 3.0 hours/week in the third quarter, rose to 3.2 hours/week in October. That’s a sign of growing strength in a leading sector and, although manufacturing continues to lose jobs, provides a ray of hope.

Yet 10.2% is a big number and it may grow larger. We haven’t had 10+% unemployment since the 1981-82 recession. Some may recall that we popped quickly out of that trough and may hope for a repeat performance this time. It may not happen.

Recall that the Fed’s tight-money policy instigated the 1981-82 recession. Spiraling interest rates dragged the economy down. As soon as the Fed let interest rates fall, the economy bounded forward and began soaking up the unemployed. By 1984 the economy was hot and job-growth was strong.

The real-estate collapse, not high interest rates, instigated the 2008-09 recession. Interest rates have been rock-bottom for some time and the economy is only beginning to stir. We can’t rely on low interest rates to haul us out of the ditch. Today’s circumstances are very different from the 1983-84 recovery.

We can’t count on a swift rebound to absorb the unemployed.

© 2009 Michael B. Lehmann

Wednesday, November 4, 2009

The Fed Holds Steady

The Lehmann Letter ©

The Federal Reserve’s Federal Open Market Committee (that sets the rate at which banks lend reserves to each other) met today and said:

“….economic activity has continued to pick up….. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period…. “

The Fed expects the economy to remain weak and inflation to remain moderate for the foreseeable future: So weak that the Fed anticipates “….exceptionally low levels of the federal funds rate for an extended period…. “

Summing up: Weak growth + low inflation.

© 2009 Michael B. Lehmann

Friday, October 30, 2009

10,000 Tops?

The Lehmann Letter ©

The stock market had a nasty setback today as it struggles to break clear of the 10,000-on-the-Dow benchmark.

It’s an important struggle for two reasons.

First, we made our initial visit to Dow-10,000 a decade ago – at the end of the 1990s. Today the stock market is no higher than it was then. In the meantime there have been two peaks well over 10,000 and two troughs well under 10,000, but no upward trend. Are we stuck in a range?

Second, the September 17th posting of this blog discussed the favorable impact of – and the reasons for - today’s high profit margins. That posting went on to say: “Improved profit margins will be very good for earnings when sales volume recovers. It appears that investors have bid up stock prices in anticipation of this event.”

But robust profit margins are only half the story. Sales volume must also recover strongly for the stock market to hit new highs. (Recall that total profits = Profit margins X sales volume.) Investors have clearly become concerned that an anemic economic recovery will deprive the stock market of that necessary prerequisite.

© 2009 Michael B. Lehmann

Thursday, October 29, 2009

3.5 Percent

The Lehmann Letter ©

Today the Commerce Department announced (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm) that GDP snapped its downward spiral by growing 3.5 percent in the third quarter.

That was good news and the stock market rallied in response.

Close examination of the underlying data, however, provides cause for concern. The GDP grew by roughly $112 billion. Durable goods expenditures, at $55 billion, represented almost half the increase. Most of that was the federal government’s cash-for-clunkers program. It’s over and motor-vehicle sales have consequently fallen. This quarter’s GDP will reflect that decline.

Inventories represented $30 billion of the gain, but in a strange way. They fell by $30 billion less than in the previous quarter, so that’s a smaller negative number rather than a positive gain. It all counts, but we’re not yet at the point where business firms are building inventory in the expectation of rising sales. They’re still cutting back – although by a smaller amount – because their inventories are excessive.

Residential construction, services expenditures, business equipment expenditures and federal expenditures accounted for the remaining gains. If we keep in mind that federal housing assistance underwrote the residential-construction improvement, it’s clear that the federal government played a big role in GDP’s rebound.

The private sector remains anemic.

© 2009 Michael B. Lehmann

Thursday, October 8, 2009

On Vacation

The Lehmann Letter ©

The blogger will be on vacation until Monday, October 26.

Thank you for your interest.

© 2009 Michael B. Lehmann

Friday, October 2, 2009

263,000

The Lehmann Letter ©

Today the Bureau of Labor Statistics announced that the economy lost 263,000 jobs in September and that the unemployment rate rose to 9.8%: http://stats.bls.gov/news.release/empsit.nr0.htm

Job Growth

(Click on chart to enlarge)



Recessions shaded

You can observe this recession’s brutal impact on employment. You have to go back more than 30 years to find another recession in which monthly job losses exceeded 500,000. At least employment snapped back quickly from those recessions. If this recovery is a slow as the recoveries from the 1991 and 2001 recessions, we can expect serious unemployment through 1910.

(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

Friday, September 25, 2009

Rocky Road

The Lehmann Letter ©

Today the Census Bureau released two reports that illustrate how rough this recovery will be.

August new home sales (http://www.census.gov/const/newressales.pdf) of 429,000 were about one-third greater than their January trough of 329,000. But look at the following chart for perspective. We remain two-thirds below the peak of several years ago. It will be a long, hard slog back to robust growth.

Chart 5.9 New Home Sales

(Click on image to enlarge)



Recessions shaded

New orders for nondefense capital goods tell essentially the same story (http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf). August’s $52.7 billion remains in the trough. And the following chart makes clear that this trough is as bad as the 2001 dot-com bust and that today’s report is hardly better than readings from 15 years earlier.

Chart 4.1 New Orders for Nondefense Capital Goods

(Click on image to enlarge)



Recessions shaded

Finally, yesterday the National Association of Realtors reported August home sales of 5.1 million. A glance at the chart below only reinforces the impression created by today’s data releases. We have a long ways to go.

Chart 5.8 Existing Home Sales

(Click on image to enlarge)



Recessions shaded

(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

Monday, September 21, 2009

Five in a Row

The Lehmann Letter ©

Today The Conference Board released its Leading Economic Index (LEI): http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1

The index gained in August, the fifth consecutive monthly improvement following a 20-month losing streak. Ken Goldstein, a Conference Board economist said, “These numbers are consistent with the view that after a very severe downturn, a recovery is very near. But, the intensity and pattern of that recovery is more uncertain."

That says it all. The recession is over, but we can’t gauge the strength of the recovery. Keep in mind: Just because we’re no longer going south doesn’t mean we’re speeding north. This could take a while.

© 2009 Michael B. Lehmann

Thursday, September 17, 2009

Profits & Profit Margins

The Lehmann Letter ©

The stock market has done well over the past half year despite a limited recovery in corporate profits.

Chart 2.1 Profits

(Click on image to enlarge)



Recessions shaded

Perhaps investors’ enthusiasm has something to do with a much stronger performance by profit margins.

Chart 2.3 Profit Margins

(Click on image to enlarge)



Recessions shaded

You can see that profit margins continued to grow throughout the recession even as total profits fell. Recall that total profits = Profit margins X sales volume. If sales volume plunges by more than margins improve, total profits will fall. That’s what happened in 2008 – 2009.

It’s easy to understand why sales volume fell. But why did margins improve? The chart measures profit margins by dividing the change in prices business receives (numerator) by the labor cost per unit of output that business sells (denominator). Remember: Price = Revenue per unit of output sold. Examining the chart once more, it’s clear that revenue per unit of output sold (numerator) grew more rapidly than cost per unit of output sold (denominator). That is, margins (price/cost) rose.

But let’s not beg the question. Why did costs rise less than prices? Credit the New Economy. Business continues to improve its productivity (efficiency) by mobilizing technology to raise output per worker. More output per hour of work = Less time required to produce a unit of output. If it takes less time to produce a unit of output, that unit of output will cost less provided wages have risen slowly.

That’s key. If wages rise less rapidly than output per worker (productivity), unit labor costs (the cost of producing an additional unit of output) will fall. And, since wages have risen slowly lately, unit labor costs have indeed risen less rapidly than prices. The bottom Line = Profit margins (prices/costs) have grown.

Improved profit margins will be very good for earnings when sales volume recovers. It appears that investors have bid up stock prices in anticipation of this event.

(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

Monday, September 14, 2009

Federal Deficit

The Lehmann Letter ©

In a September 10 posting this blog said:

“Demand will grow sharply when – and only when – buyers begin borrowing freely once more in order to finance their purchases. As long as they scrimp and save, guarding their balance sheets, demand will remain in the doldrums.”

If that’s true for private borrowing and spending, what about public borrowing and spending? Can it take up the slack? Better Yet: Has federal borrowing and spending compensated for the shortfall in private borrowing and spending?

See for yourself.

Chart 7.1 Federal Deficit

(Click on image to enlarge.)



Recessions shaded

Federal expenditures are growing swiftly despite the drop in federal tax collections. That is, the federal government is putting more into the expenditure stream than it is removing from the revenue stream. Consequently the federal deficit has grown rapidly and now stands at a record $1.5 trillion ($1,500 billion) at an annual rate. This is a recent increase of around $1 trillion and is definitely expansionary.

Compare this with the private borrowing chart below.

Chart 6.3 Private Borrowing

(Click on image to enlarge.)



Recessions shaded

Private borrowing has recently fallen by $2 trillion, i.e. more rapidly than federal borrowing has grown. No wonder that federal fiscal policy (the stimulus package) has not yet rescued the economy from recession’s grip. The federal stimulus represents only half the private shortfall.

On the other hand, imagine how much worse conditions would be without the federal deficit. It has replaced private borrowing as the economy’s principal driver.

(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

Thursday, September 10, 2009

Private Borrowing

The Lehmann Letter ©


The rest of the economy stalled when home prices and home sales began falling in 2006. The financial crisis, for instance, began with the debacle in mortgage-backed securities.

Mortgage borrowing is an important component of total borrowing and the following chart illustrates their demise. The economy can’t recover strongly unless this line heads sharply upward.

Chart 6.3 Private Borrowing

(Click on image to enlarge.)



Recessions shaded

Purchasers put fewer dollars into the spending stream when borrowing contracts. Total spending falls even more if borrowers repay their debts, as they recently have.

Demand will grow sharply when – and only when – buyers begin borrowing freely once more in order to finance their purchases. As long as they scrimp and save, guarding their balance sheets, demand will remain in the doldrums.

(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

Wednesday, September 9, 2009

Good News… Bad News

The Lehmann Letter ©

Today the Federal Reserve released its Beige Book summary of economic conditions (http://www.federalreserve.gov/fomc/beigebook/2009/20090909/default.htm) . The report began, “Reports from the 12 Federal Reserve Districts indicate that economic activity continued to stabilize in July and August.”

That’s good news: Stability is better than decline. Soon the recession will be over because a sufficient number of indicators are no longer falling.

But that’s not the same as robust recovery. Yesterday, for instance, the Fed reported that consumer credit fell by $21.5 billion or 10.4% (http://www.federalreserve.gov/releases/g19/Current/ ). That’s a $258 billion drop at an annual rate. Households are repaying their debts at a furious pace.

Compare this with the trends in the chart below.

Chart 5.6 Consumer Credit

(Click on image to enlarge.)



Recessions shaded

$258 billion is larger than any negative number recorded in past recessions. This is a measure of the dire straits we’re in. Households have reduced their expenditures to repay their debts to strengthen their balance sheets. There will be little evidence of improvement in the economy until households complete this project and begin borrowing and spending again.

Households go into debt when they feel good. They repay when they feel bad. Right now households are repaying their debts in order to bolster their balance sheets. Financial security has become more important than consumption.

(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

Friday, September 4, 2009

Definitions

The Lehmann Letter ©


It’s become clear over the summer that everyone expects the recession to end shortly. But what does that mean?

Recession over = Economy no longer headed south.

That could signify a sharp recovery or it could signify no growth at all. Keep in mind: The economy only has to stop shrinking for the recession to be over. The recovery could be halting, shallow and disappointing and still count as a recovery.

So it’s worth repeating this blog’s earlier analysis of past recessions and recoveries.

Before the 1990-91 recession 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 late-1990s dot.com boom collapsed when full employment boosted wages and salaries, thereby constricting profit margins and business capital expenditures and leading to the 2001 recession.

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.

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.

© 2009 Michael B. Lehmann

Vacation’s Over

The Lehmann Letter ©

Hope you had a good summer.

The blogger is back

© 2009 Michael B. Lehmann

Thursday, August 6, 2009

9000, 2000, 1000

The Lehmann Letter ©

The stock market retreated slightly today, but all the major indexes have passed milestones lately: The Dow 9000, NASDAQ 2000 and the S&P 1000. We’re far ahead of recent bottoms.

But that doesn’t guarantee continued steep and strong gains. The economy and corporate earnings must improve dramatically, and that’s linked to residential real estate’s recovery. Remember that housing led us into the morass. It’s hard to envision a strong recovery while real estate remains weak.

The Federal Reserve has a role to play. The Fed promotes economic expansion by reducing interest rates, thereby stimulating borrowing and spending. If as a result prices rise too rapidly due to excess demand, the Fed raises interest rates to choke off borrowing and surplus spending. The Fed has a difficult job: Trying to promote growth without instigating inflation and trying to prevent inflation without binging on recession.

Think of the economy the way you’d think of a frisky horse. The economy breaks into a gallop (boom) as soon as the rider (the Fed) lets the reins dangle (low interest rates). But the economy comes to a halt (recession) when the Fed pulls back on the reins (high interest rates). The skilled equestrian knows how to handle those reins.

The Fed has obliged today’s optimists by pushing rates into the sub-basement. Since the Fed’s policy proved successful in the past, what imperils it today?

The answer lies in the consequences of the 2001 through 2003 rate cuts that rescued us from the 2001 recession. In past recoveries the Fed depressed rates briefly and raised them as soon as inflation threatened. Since inflation – as conventionally measured – did not threaten in 2002 through 2004, the Fed held rates down even though home prices rose rapidly. The consequence was the record real-estate boom that peaked in 2006. Recession began in 2007 when the boom collapsed under its own weight.

Low interest rates won’t prompt recovery today because high interest rates did not instigate recession in 2007. The Fed let the boom run from 2004 through 2007 until it collapsed from exhaustion. (That is, until home prices rose beyond any reasonable relation to rental values.) Since high interest rates did not instigate recession, low rates will have limited effectiveness in spurring recovery.

Returning to the earlier analogy, it was as if the Fed let rates dangle for so long (in 2002 – 2005) that the horse ran until it could go no further. Now the horse must remain in the barn for a good rest and some water and oats. Dangling the interest-rate reins won’t get him to move for quite some time.

That is, building won’t recover strongly until the foreclosures cease and home prices stabilize. When the number of vacant homes begins to dwindle, builders’ confidence will return and construction will recuperate in earnest. Then, and only then, will the private sector commence a true recovery.

For the time being, the horse is in the barn.


© 2009 Michael B. Lehmann

Monday, July 27, 2009

Are We Feeling Better?

The Lehmann Letter ©

Today the Census Bureau announced 384,000 new homes sold in June. That’s the best report since last November and was greeted as good news.

But look at the chart.

New Home Sales

(Click on image to enlarge.)



Recessions shaded

New home sales remain mired in a deep slump. We’ve got to climb well past 400,000 before rejoicing. Half-a-million would help.

(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

Thursday, July 16, 2009

On Vacation

The Lehmann Letter ©

The blogger is going on vacation and will blog (even more) intermittently. There will be occasional posts between now and Labor Day.

Have a good summer

© 2009 Michael B. Lehmann

Tuesday, July 14, 2009

Inventory/Sales Ratio Keeps Falling

The Lehmann Letter ©

Today’s Census Bureau sales and inventory report for May reveals more good news:

http://www.census.gov/mtis/www/mtis_current.html

(Click on image to enlarge.)



This blog has been upbeat about these data because the inventory/sales ratio has fallen throughout the year. Businesses are liquidating their inventories faster than their sales have fallen. Eventually inventories will have declined sufficiently that businesses can begin to restock their shelves. At that point production should revive.


© 2009 Michael B. Lehmann

Wednesday, July 8, 2009

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

Monday, July 6, 2009

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

Tuesday, June 30, 2009

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

Thursday, June 18, 2009

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

Tuesday, June 16, 2009

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

Monday, June 15, 2009

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

Thursday, June 11, 2009

More Good News

The Lehmann Letter ©

Today the Census Bureau released April sales and inventory data as well as the inventory/sales ratio:

http://www.census.gov/mtis/www/mtis_current.html

The ratio continues to fall, and that’s good news.

(Click on image to enlarge.)


The ratio is heading south because goods on the shelf are declining faster than total sales. Once goods on the shelf reach an irreducible minimum, management will have to revive production in order to replenish them.

That may take a while. You can see how swiftly the ratio rose in 2008. It will take some time to drop back down.

When it does and production revives, that will be the true turning point.

© 2009 Michael B. Lehmann

Wednesday, June 10, 2009

Less Borrowing. Less Spending

The Lehmann Letter ©

See today’s New York Times for an excellent article by David Leonhardt about the federal deficit and why it’s so hard to shrink it:

http://www.nytimes.com/2009/06/10/business/economy/10leonhardt.html?_r=1&ref=todayspaper

But even if we could reduce the deficit, another difficulty arises: Who will borrow and spend? If the government won’t, will we?

Because the fact of the matter is that our economy depends upon borrowing and spending, and less borrowing equals less spending.

So we’re damned if we do and damned if we don’t. We don’t want to resume our profligate ways, but we need that profligate spending to keep the engine humming. We don’t want to mortgage our future, but how else are we going to buy those homes and cars? And if we don’t buy the homes and cars, and then ask the government to cut back, too…………

We’re in a jam.


© 2009 Michael B. Lehmann

Friday, June 5, 2009

345,000

The Lehmann Letter ©

Go to http://stats.bls.gov/ to see today’s lead story on the Bureau of Labor Statistics web site. The economy lost 345,000 jobs in May, a welcome relief from the 600.000+ average for most recent months. But the unemployment rate rose to 9.4%.

Job Growth

(Click on chart to enlarge)


Recessions shaded

You can see the seriousness of the situation. Few recessions – certainly no recent ones – have generated 500,000+ job losses. We’re glad May’s figure is only 345,000, but that’s as bad as the worst of the dot-com bust.

It will be some time before the economy enjoys job gains. Meanwhile the unemployment rate will rise.

(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

Thursday, June 4, 2009

A Reader Writes

The Lehmann Letter ©

A reader raised the following issue regarding the federal stimulus:

“When private parties borrow from banks, the money is partially
from such things as deposits, but then multiplied by a factor of 20 or
so as the banks "create" money. If the people borrowing can pay the
money back with interest, because their businesses are profitable or
they have a healthy income, everybody is happy. But if consumers can no
longer buy your products at the hoped for level, and people lose their
jobs, then you and they can't repay the loans, and the banks fail.

“If, as you have shown, the government now replaces private
borrowers and lenders, it too creates money, but instead of investing it
in production of things people will buy (various kinds of widgets), it
invests in "infrastructure", which nobody buys. It creates or maintains
jobs; but the people getting paid are not producing anything that
directly generates revenue.

“I guess the theory is that people with those government created
jobs will buy things, and this will stimulate the private sector to get
back into profitable production. Maybe this will work. But I don't have
confidence that where the private sector fails in investing and
managing, "the government" is somehow going to do better.”

I responded by saying (edited for locale):

“It's not so much that the government is going to do better, as it is that the private sector ground to a temporary halt. So, for the time being, it's a choice between nothing (private sector) and something (government). When the private sector recovers, the government can and should pull back.

“In general the government does not do a good job providing goods and services to the market. That's why the private sector provides the vast majority of our goods and services and most of the goods and services the government provides are public goods (light houses, police, fire, national defense, streets, parks, etc.), public works (Shasta Dam, California Water Project, Bonneville Dam, San Francisco Bay Bridge, etc.), natural monopolies that private enterprise abandoned (San Francisco Municipal Railway, NY subways, etc.) and services that society wanted but the private sector did not adequately provide (public schools, postal service, etc.). I don't support the government taking over activities the private sector does well, e.g. the city taking over our local electric and gas company. But I generally believe the public/private mix makes sense given the economic and historical and societal forces at play. So I don't see danger in a temporary government surge.

“To me, the far greater danger in the current situation is the erosion of the private sector's balance sheet: Particularly the huge ratio of debt to liquid assets. Our economy now depends on private borrowing and spending that is imperiled by existing debts. Public borrowing and spending is no permanent substitute because the public sector can't endlessly incur more debt. So who's going to spend? It's a real problem.”

© 2009 Michael B. Lehmann

Tuesday, June 2, 2009

June Publication Schedule

The Lehmann Letter ©

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

PUBLICATION SCHEDULE

June 2009

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

Quarterly Data

BLS………………..…………Productivity…………………..Thu, 4th

BEA……………………Balance of Payments……………..Wed, 17th

BEA…………………………GDP……………………...……Thu, 25th

Monthly Data

BEA..........….Personal Income & Consumption………….Mon, 1st

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

Fed……………………..Consumer credit…...(Approximate).Fri, 5th
BLS………………………….Employment………………… Fri, 5th
Census……………………...Balance of trade………………Wed, 10th
Census……………………...Retail trade…………………….Thu, 11th
Census……………………...Inventories……………………..Thu, 11th
BLS………………………….Producer prices……………….Tue, 16th
Fed…………………………..Industrial production………….Tue, 16th
Fed………………………….Capacity utilization…………….Tue, 16th
Census……………………..Housing starts………………….Tue, 16th
BLS………………………….Consumer prices……………...Wed, 17th
Conf Bd…………………….Leading indicators…………….Thu, 18th

NAR…………………………Existing-home sales…….…….Tue, 23rd
Census……………………..New-home sales……………….Wed, 24th
Census…………………….Capital goods……………….…..Wed, 24th

BEA..........….Personal Income & Consumption…………….Fri, 26th

Conf Bd…………………….Consumer confidence…………Tue, 30th


* 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

Monday, June 1, 2009

Goodbye GM

The Lehmann Letter ®

In 1965 GM was the industrial paragon: Best managed, most efficient, most profitable, and a company that paid good wages to its workers. As the biggest of the Big Three, it was untouchable. Its position was impregnable.

Who could enter the industry? How could they amass sufficient capital? And even if they did they’d have to sell so many cars that they’d ruin the market for everyone, themselves included. Foreign competition? Forget it! At the most, niche players.

But management fought seat belts, emissions reduction, safety features and fuel economy. When imports appeared, they were dismissed as junk made by pauper labor.

Eventually it became all too clear: Management wanted to market the cars they wanted to make. They wanted to inflate the product (bigger and heavier) to realize fatter margins, and then advertise it into our driveways.

How the chickens have come home to roost. How the warnings were ignored. How the decades were squandered.

Too bad. It didn’t have to end this way.

© 2009 Michael B. Lehmann

Tuesday, May 26, 2009

Foreclosure Crisis

The Lehmann Letter ®

Today’s San Francisco Chronicle ran an excellent article by Carolyn Said on the housing market’s current state: http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2009/05/26/MNRB17JFHB.DTL .

Its message: Don’t be too optimistic.

There are plenty of conventional reasons to fear weak demand, such as rising unemployment and tight credit. But what about an historical analysis that shows that homes remain overpriced despite their recent drop? Or that recent purchases by bottom-fishers present a distorted image?

The supply side has even greater problems: The end of foreclosure moratoriums, imminent mortgage-interest-rate resets, banks’ inventories of foreclosed homes and the large number of underwater homes.

Read this article to see why the foreclosure crisis continues to grip the housing market. Until that grip weakens, we can’t expect relief at ground zero.

© 2009 Michael B. Lehmann

Consumers Confident?

The Lehmann Letter ®

Today the Conference Board announced (http://www.conference-board.org/economics/ConsumerConfidence.cfm ) that consumer confidence jumped in May after making a good gain in April.

Confidence now stands at 54.9. You can see that it was less than 30 earlier in the year.

Consumer Confidence

(Click on chart to enlarge)


(Recessions shaded)

Is this the light at the end of the tunnel?

We’ll stay tuned.

(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

Tuesday, May 19, 2009

Silver Lining?

The Lehmann Letter ®

Today the Census Bureau announced (http://www.census.gov/const/newresconst.pdf ) that April housing starts fell to a post-WWII low of 458,000.

You can see for yourself by posting this figure in the chart below

Housing Starts

(Click on chart to enlarge)


(Recessions shaded)

Where’s the silver lining in that number?

It appears when you disaggregate the 458,000 starts into its single-family and apartment-house components.

The single-family component seems to have hit bottom. There were 368,000 single-family starts in April, which was slightly better than any month since the beginning of the year. It doesn’t look like this number will drop below 350,000. That’s good.

But apartment-house construction is another matter. That sank to 78,000 from 135,000 the month before and 310,000 a year ago. It remains to be seen whether that low figure is an anomaly and apartment-house construction snaps back, or whether this activity collapses too.

We’ll stay tuned.

(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

Monday, May 18, 2009

Still Ground Zero

The Lehmann Letter ©

The stock market jumped this morning and all the indicators remain higher three hours before the market’s close.

But ground zero – the foreclosure crisis – remains ground zero.

Foreclosures continue to mount and about one-third of the nation’s homes are now worth less than the mortgages that financed them. That, combined with unemployment’s continued rise, spells future trouble.

It’s true that buyers are swooping in to snap up troubled properties as previous owners abandon them to foreclosure. But that has not yet been sufficient to stabilize home prices or stop additional foreclosures. Since effective preventive legislation no longer seems likely, it appears that the foreclosure crisis will gradually work its way out. Too bad, because there was an alternative: Mortgages could have been crammed down to affordable levels while the government saved the mortgage-holders harmless. Now that does not appear likely.

Housing is this recession’s root, as this blog’s author said in an article appearing in yesterday’s San Francisco Chronicle:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/17/INH117INUT.DTL

Until the housing crisis is resolved, it’s hard to see how the overall crisis will be resolved.

© 2009 Michael B. Lehmann

Thursday, May 14, 2009

Inventory Bright Spot

The Lehmann Letter ©

Yesterday the Census Bureau released March data for business sales, inventories and the inventory/sales ratio: http://www.census.gov/mtis/www/mtis_current.html

You can see that the inventory/sales ratio has stabilized at about 1.45 after rising from around 1.25.



(Click on chart to enlarge.)


Both sales and inventories continue to fall, but at last business has been able to reduce inventories more than sales. That has stopped the ratio’s rise.

Business doesn’t want a higher-than-necessary ratio of inventories to sales because business doesn’t want to tie-up cash in goods on the shelf. Business would rather run lean and put its cash to better use.

The rising ratio indicated that sales were falling so rapidly that business inadvertently wound up with more goods than required. A stable and falling ratio is a sign that business has brought its inventories under control.

That had to occur for business to stop cutting production. Why produce more if inventories are currently excessive?

The stabilizing inventory/sales ratio may be an omen that production will soon stop falling.

© 2009 Michael B. Lehmann




Friday, May 8, 2009

Are Things Looking Up?

The Lehmann Letter ©

Today the Bureau of Labor Statistics reported that private payroll employment fell by 539,000 in April. That’s better than the 600,000+ losses of the past several months but, as you can see from the following chart, job losses remain severe when compared with earlier recessions.

Job Growth

(Click on chart to enlarge)

(Recessions shaded)

Yesterday the Federal Reserve announced that consumer credit fell at a $133.2 billion annual rate in March. That maintains the negative streak evident in the chart below. Households are repaying their debts, which provides evidence of the drop in spending.

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

On Monday the Commerce Department releaseded the April new-vehicle sales rate of 9.3 million. Sales have been below 10 million since the turn of the New Year. The next chart indicates the severe nature of this slump.

New-Vehicle Sales

(Click on chart to enlarge)

(Recessions shaded)

Last Friday the Institute for Supply Management reporteded that its manufacturing Purchasing Managers’ Index rose to 40.1 in April. Any reading below 50 indicates contraction, and the index has been below 50 for a year. In December the index fell to a low of 32.9 and has been rising ever since, indicating that manufacturing is contacting at a slower rate. The chart reveals the severity of the current situation.

Purchasing Managers’ Index

(Click on chart to enlarge)

(Recessions shaded)

Bottom Line: Were in the trough of a bad recession. It may not be getting worse, but it’s not getting better in a hurry. Demand and production remain weak and layoffs continue.

(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


Thursday, May 7, 2009

Muddling Through

The Lehmann Letter ©

Today the government released the results of its stress test of the nations’ banks. The Findings: Some banks will require more capital if the economy deteriorates more than forecast. Others will not.

But the most important and apparently overlooked point is that the nations’ major banks have survived the crisis. The bailout worked.

Moreover, the banks’ enhanced capital requirement is a safety cushion. The banks will take on more capital even if worst does not come to worst. They’ll be safe either way.

That’s a much rosier set of circumstances than that perceived six months ago. Last fall there was talk of systemic collapse. You don’t hear that today.

So we’ve muddled through.

But what about the Japanese precedent? Their banks muddled through the 1990s with impaired balance sheets, unable to do the lending expected of them. They, too, wrestled with difficulties brought on by asset deflation.

Will our banks also under-perform in the coming decade because of the lingering consequences of our asset deflation?

We’ll see.


© 2009 Michael B. Lehmann

Thursday, April 30, 2009

May Publication Schedule

The Lehmann Letter ©

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

PUBLICATION SCHEDULE

May 2009

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

Quarterly Data

BLS……………………Productivity………………………..Thu, 7th

BEA…………………………GDP……………………...……Fri, 29th

Monthly Data

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

Fed……………………..Consumer credit….(Approximate).Thu, 7th
BLS………………………….Employment………………… Fri, 8th
Census……………………...Balance of trade………………Tue, 12th
Census……………………...Retail trade…………………….Wed, 13th
Census……………………...Inventories……………………..Wed, 13th
BLS………………………….Producer prices……………….Thu, 14th
Fed…………………………..Industrial production………….Fri, 15th
Fed………………………….Capacity utilization…………….Fri, 15th
BLS………………………….Consumer prices……………...Fri, 15th
Census……………………..Housing starts………………….Tue, 19th
Conf Bd…………………….Leading indicators…………….Thu, 21st

Conf Bd…………………….Consumer confidence…………Tue, 26th

NAR…………………………Existing-home sales…….…….Wed, 27th

Census……………………..New-home sales……………….Thu, 28th
Census…………………….Capital goods……………….…..Thu, 28th

BEA..........….Personal Income & Consumption……….Mon, June 1

* 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

No Cramdowns

The Lehmann Letter ©

Today, by a 45 – 51 vote, the U.S. Senate refused to enact legislation permitting bankruptcy judges to reduce mortgage debtors’ outstanding loan balances. This is a defeat for President Obama, who had counted on judicial authority to motivate mortgage lenders to modify mortgage contracts. The thinking: If judges have the authority to cram down loan balances, lenders are more likely to modify mortgages in the borrower’s favor. Outcome: Fewer foreclosures and a quicker end to the mortgage crisis.

Naturally the banking industry lobbied hard against the legislation. The banks, no doubt, viewed it as confiscatory. But would the banking industry have been more amenable if the Obama Administration had offered to save the banks harmless in the event of judicially-mandated cramdowns? For instance: Suppose the federal government had agreed to compensate the banks for any losses suffered in the course of a bankruptcy proceedings. Perhaps the banks would have been more amenable.

More important, would that have swayed the handful of additional senators required to enact the legislation?

© 2009 Michael B. Lehmann

Thursday, April 23, 2009

Rebound Vs. Trough

The Lehmann Letter ©

Rebound Vs. Trough

Today the National Association of Realtors announced that March existing-home sales fell slightly to 4.57 million: http://www.realtor.org/rmodaily.nsf/pages/News2009042301 .

The big picture helps interpret this number, and the chart below serves as illustration.

Existing-Home Sales

(Click on chart to enlarge)




(Recessions shaded)

It appears that home sales have plateaued at slightly under 5 million, where they’ve fluctuated over the past several months. Homes sales may not fall further, but there is no evidence (yet) of rebound.

The same is true for other recently-released economic data. Descent may have ceased, but that is not to say that ascent has begun.

At this stage the recovery looks more like an “L” than a “V.”

Stay tuned.

(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






Tuesday, April 21, 2009

What Good Is Economics?

The Lehmann Letter ©

The April 27 issue of BusinessWeek carries a story with the provocative title, What Good Are Economists Anyway? http://www.businessweek.com/magazine/content/09_17/b4128026997269.htm?chan=top+news_top+news+index+-+temp_dialogue+with+readers

It’s written in BusinessWeek’s folksy style and, perhaps, should have had the title: What Good Is Economics Anyway? But there it is, nonetheless, a devastating critique of the profession’s inability to deal with current events. Worse yet, it is also a devastating critique of the profession’s inability to put current events in a meaningful historical context. Because of that economists don’t even have the right tools to make their analysis, let alone the ability to conduct the analysis.

It’s as if you asked a fundamentalist preacher to explain natural selection. Or asked an Aristotelian astronomer, who believed the earth was at the center of the universe, to explain our heliocentric solar system. He couldn’t do it. Not because he was not smart enough, but because he had been trained to see things in a way that precluded him from arriving at the answer.

Economics is a static, timeless analysis, not a historical analysis. Economics tries to emulate physics in an attempt to achieve theoretical rigor. Unfortunately, economic events unfold over historical time, altering institutional parameters and thereby confounding simplistic analysis. That’s why consumer sentiment often provides a more accurate forecast than professional economists.

© 2009 Michael B. Lehmann

Thursday, April 16, 2009

Housing Starts

The Lehmann Letter ®

The Census Bureau published March housing starts figures today: http://www.census.gov/const/newresconst.pdf .

The data were worse than February and a little better than January.

Here’s what’s happening: Single-family starts are stuck at about 350,000 and apartment-house construction wobbles at around 150,000, adding up to a miserable half-million total.

Look at the chart and you’ll see that’s lower than any other post-WWII recession.

Can housing escape this rut?

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

It’s hard to see how until the foreclosure-crisis abates. As long as foreclosures continue to overwhelm the industry, prices will continue to drop. That undermines builders and buyers. It’s difficult to build new homes and entice buyers to purchase them as long as the prices of existing home continue to fall and the market remains glutted with vacant homes.

Today the Obama administration launched its mortgage-rescue plan, designed to prevent foreclosure and keep owners in their homes. Is it is as good as we can realistically expect under the prevailing political circumstances? Yes. Is it sufficient to “stop” the foreclosures? We’ll see.

(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

Wednesday, April 15, 2009

The Foreclosure Crisis

The Lehmann Letter ©

Today’s Wall Street Journal carried a grim story by Ruth Simon: http://online.wsj.com/article/SB123975395670518941.html#mod=todays_us_page_one .

Banks Ramp Up Foreclosures

“Some of the nation's largest mortgage companies are stepping up foreclosures on delinquent homeowners. That will likely lead to more Americans losing their homes just as the Obama administration's housing-rescue plan gets into gear…..

“Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration's housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers' payments to affordable levels. Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws.

“Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process.

“The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off.

“Some of the mortgage companies are themselves receiving funds under the government's financial-sector bailout, which could make their actions politically sensitive. But mortgage companies say they are taking steps to keep borrowers in their homes, and are only resorting to foreclosure when there are no other options……….”

The article goes on to provide additional detail and comment.

It’s all very sad on a number of levels.

First and foremost, millions of families and their lives are being uprooted and disrupted. It’s true that some were gullible and others were culpable. But it’s also true that the mortgage originators share the blame.

Secondly, the entire economy suffers because the residential-real-estate collapse is at the heart of the economic crisis. The bubble burst in 2006, initiating an asset deflation and recession that continue to engulf us and will continue to do so for some time.

Some say that the residential-real-estate market must touch bottom before it and the economy can recover. True enough. But wouldn’t it be better for the banks to continue to work with the federal government to keep the largest possible number of homeowners in their homes? Even if the government can’t save the banks completely harmless when they re-write stressed mortgages, the re-write may still be superior to foreclosure. If it’s not, why don’t the banks urge amended legislation that they could live with: Legislation that could stop the foreclosures and protect the banks. That way the residential real-estate market could touch bottom at a higher level, and spare everyone from a deeper than necessary recession.

© 2009 Michael B. Lehmann

Tuesday, April 14, 2009

Will The Ball Bounce?

The Lehmann Letter ©

Today President Obama, Fed Chairman Bernanke and Christina Romer, Chair of the President’s Council of Economic Advisors, all expressed hope that the economy may be bottoming out.

A few days ago Laurence Summers, Chair of the President’s National Economic Council, said that the economy no longer looked like a ball that had rolled off the edge of the table.

The Big Question: Will the ball land with a thud, like a baseball, or bounce like a tennis ball?

There has been some good news and the stock market has perked up, but a number of important questions remain. Here are two.

First: Has residential real estate hit bottom and when, and how swiftly, will it recover? Residential real estate led us into the trough and we won’t emerge from the trough until real estate snaps back. How will we know? When the foreclosures stop, home prices begin to rise nationwide and construction and new-home sales perk up. There are signs of life in some markets associated with purchases of foreclosed properties, but that’s not enough.

Second: Have households’ balance sheets mended sufficiently for households to resume robust borrowing and spending? Households’ balance sheets suffered when home and stock-market values plunged and indebtedness did not. The result: Net worth fell and liquidity dried up. Households won’t return to their spending ways until their balance sheets are repaired. And that will take time.

The ball may have stopped falling, but don’t expect a bounce.


© 2009 Michael B. Lehmann

Thursday, April 9, 2009

Consumer Credit & The Fed’s Forecast

The Lehmann Letter ©

The Federal Reserve released two sobering items this week.

On April 7 the Fed reported (http://www.federalreserve.gov/releases/g19/Current/) that consumer credit fell at an $88.8 billion annual rate in February. Household’s consumer debt has barely budged since mid 2008.

The chart shows that consumer credit had been growing at about $100 billion annually for the past 15 years. Now, you can see, it’s dipped sharply downward. Households are repaying their debts rather than initiating new borrowing.

When consumers feel good, they borrow and spend. When they don’t, they don’t. And that’s bad for the economy. We need all the borrowing and spending we can get right now.

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

On April 8 the Fed released its minutes from the March 17 and 18 meeting of its Open Market Committee (http://www.federalreserve.gov/monetarypolicy/fomcminutes20090318.htm ).

The Fed’s staff economic outlook said (emphasis added):

“In the forecast prepared for the meeting, the staff revised down its outlook for economic activity. The deterioration in labor market conditions was rapid in recent months, with steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and the buildup of some inventory overhangs. The incoming data on business spending suggested that business investment in equipment and structures continued to decline. Single-family housing starts had fallen to a post-World War II low in January, and demand for new homes remained weak. Both exports and imports retreated significantly in the fourth quarter of last year and appeared headed for comparable declines this quarter. Consumer outlays showed some signs of stabilizing at a low level, with real outlays for goods outside of motor vehicles recording gains in January and February. Financial conditions overall were even less supportive of economic activity, with broad equity indexes down significantly amid continued concerns about the health of the financial sector, the dollar stronger, and long-term interest rates higher. The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end. The weaker trajectory of real output resulted in the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised down slightly. Both core and overall PCE price inflation were expected to be damped by low rates of resource utilization, falling import prices, and easing cost pressures as a result of the sharp net declines in oil and other raw materials prices since last summer.”

The consumer-credit numbers fit right in with this weak prognosis.

(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