Friday, January 30, 2009


The Lehmann Letter ©

Today the Bureau of Economic analysis released
these GDP data (in $billions):

.........2008-I.... 2008-II...2008-III......2008-IV
C = Consumption
I = Investment
(X-M) = Net Exports
G= Government

Notice that, for the first time, every component except government expenditures fell. (Since net exports were negative because imports exceeded exports in all quarters, a larger number indicates a drop.) Consumption and investment declined by large amounts. The domestic private economy is contracting rapidly.

There is every indication that will continue into 2009.

© 2009 Michael B. Lehmann

Thursday, January 29, 2009

Home Sales: The Heart Of The Problem

The Lehmann Letter ©

Today the Census Bureau reported the sale of 331,000 new homes in December ( ).

Take a look at the chart. Home sales have fallen from a record high of about 1.3 million to a record low of about one-third of a million. That’s a drop of three fourths, an unprecedented decline. And they may continue to fall.

New-Home Sales

(Click on chart to enlarge)

Recessions shaded

This chart, perhaps more than any other, goes to the root of the problem. Our easy-credit and lax regulatory climate from 2000 through 2006 generated a 100-year flood of home building. This was part and parcel of a general residential-real-estate asset inflation. It also underlay the growth of output and employment.

But the bubble burst in 2007 and an asset deflation ensued. The market for new homes shriveled along with the market for existing homes. The one-million decline in new-home sales is, of course, linked to the spiraling rate of home foreclosures. As foreclosed properties have flooded the market, the incentives to buy and build new homes have withered. Output and employment have shrunk accordingly.

We will not escape from recession until this problem is resolved. And the problem won’t be resolved until the foreclosures cease. A general foreclosure amnesty and federally-mandated delinquent-mortgage-workout program should be part of the economic stimulus package.

(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.)

© 2009 Michael B. Lehmann

Wednesday, January 28, 2009

They Should Know

The Lehmann Letter ©

Today the Federal Reserve decided to maintain the federal-funds rate (the interest rate at which banks lend to each other) at near zero. The Federal Open Market Committee, which sets this rate for the Fed, made these comments on the economy ( ):

“Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.”

We all know that conditions are terrible. But that last sentence catches the eye. Maybe the situation will begin to improve at year’s end, but maybe it won’t. It’s too soon to tell.

That’s scary. And the Fed should know.

© 2009 Michael B. Lehmann

Tuesday, January 27, 2009

Consumer Confidence

The Lehmann Letter ©

Today the Conference Board released its consumer-confidence survey
( ).

The Board said:

“The Conference Board Consumer Confidence Index™, which had decreased in December, inched lower in January and continues to be at a historic low. The Index now stands at 37.7 (1985=100), down from 38.6 in December….”

The index has hovered at or below 40 since the fall. The following chart shows that these are unprecedented readings. It also makes clear that January’s number is no fluke. We’re stuck in a rut.

Consumer Confidence

(Click on chart to enlarge)

Recessions shaded

We probably won’t escape from that rut any time soon. Rising unemployment and the news of mass layoffs have more than offset falling inflation and gasoline prices. As long as the news remains grim, consumers will continue to feel grim. That, of course, will depress household expenditures and exacerbate the recession.

There’s no solace in these data.

(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.)

© 2009 Michael B. Lehmann

Friday, January 23, 2009

Head Down Or Feet Up?

The Lehmann Letter ®

Today the Associated Press reported ( ) that Democrats and Republicans continue to argue whether spending increases or tax cuts will have the swiftest positive impact on employment.

This is reminiscent of the argument over whether people grow from the head down or the feet up: Difficult to resolve.

The argument for spending increases says: If the government spends the funds, it’s done and fail-safe. The road gets built; the bridge is repaired. People are directly employed on the project.

Spending opponents disagree: By the time the funds are spent, the economy will be recovering of its own accord. If the spending is authorized now, it won’t occur until 2010. That’s probably too late. The federal project will pile on, not instigate recovery.

Tax-cut proponents assert: Cut taxes today and the recipients will spend tomorrow. No waiting.

Their critics say: The beneficiaries will save the funds, without any guarantee of any spending. Tax cuts may not generate any spending gains.

Who’s correct?

Who cares? There’s no time to waste. Do both. Neither will hurt. This recession will last so long and recovery will be so slow that any spending increase will probably not be late. And even if taxpayers save their tax-cut, the added liquidity will encourage additional expenditures before too long. Delayed assistance is better than none at all.

It will be expensive…….. Well over a trillion dollars, but worth it. There is no greater priority at the moment.

Head down or feet up….. It doesn’t matter.

© 2009 Michael B. Lehmann

Thursday, January 22, 2009

Another Record

The Lehmann Letter ®

Today the Census Bureau said ( ) that work began on 550,000 housing units in December. The chart below reveals that is a post-WWII record low.

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

Worse yet, this is a 101,000 drop from November’s 651,000 total. That’s a huge decline and seems to say we may not have hit bottom.

But when will that happen?

And how many more of these record lows – spread out over a variety of indicators – can we stand?

Could we be headed for a depression?

The economic stimulus package better be enacted – and begin stimulating – real soon.

(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.)

© 2009 Michael B. Lehmann

Wednesday, January 21, 2009

Industrial Destruction

The Lehmann Letter ©

The financial and business news has focused so heavily upon the banking system’s ailments that the underlying economy’s bad fortune has received short shrift.

For instance, on January 16 the Federal Reserve reported ( that capacity utilization had fallen to 73.6 percent in December. (Capacity utilization answers this question: What is the current rate of industrial production expressed as a percentage of the maximum? Industrial = Mining, manufacturing and public utilities.)

This seems like an ordinary and uninteresting statistic until one places it in the context of the chart below.

Capacity Utilization

(Click on chart to enlarge)

(Recessions shaded)

If you update the chart with the latest 73.6 reading you can see that capacity utilization has fallen to the low point reached during the 2001-2002 dot-com recession. That’s lower than the low point attained in all previous recessions except 1981-82. Since the trough of the current recession could be months away, there’s a chance that capacity utilization will fall to a post-WWII low.

That’s bad. Industry still counts, and it’s alarming how swiftly manufacturing (the lion’s share of this statistic) has collapsed. The only remaining question is, “How low will it go?”

(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.)

© 2009 Michael B. Lehmann

Friday, January 16, 2009

Borrowing & Spending Our Way To Prosperity

The Lehmann Letter ©

Today’s San Francisco Chronicle reported (
that the University of California’s Christina Romer, President-elect Obama’s nominee to head the Council of Economic Advisors, endorsed the House of Representative’s $825 billion stimulus package. Testifying at her confirmation hearing before the Senate Banking Committee, Prof. Romer said that her chief task will be to “ensure that the tragedy of the 1930s is not repeated.”

House Republicans were not so sure, as the Chronicle article reported:

"’Oh, my God,’ said House Republican leader John Boehner, R-Ohio. ‘It appears my Democratic colleagues think they can borrow and spend their way back to prosperity.’"

As a matter of fact, they do. And they are correct.

Our economy depends upon rising borrowing and spending for its health. Try to imagine residential construction without mortgage borrowing or auto sales without consumer credit. You know that’s grim because housing and autos’ decline are at the heart of today’s problem. Consumer demand grew robustly from 2002 through 2007 because households borrowed liberally to build new homes and buy new cars. Now that their borrowing and spending has waned, who will pick up the slack?

We can’t reasonably expect business to fill the breach. Why should industry borrow to build new facilities or buy new equipment when demand for its products is falling?

That leaves the federal government. Not even state and local government can help since most state constitutions prohibit deficit spending. So Uncle Sam must pick up the slack and borrow and spend our way out of the slump.

WWII proved the point. Massive borrowing and spending lifted us completely out of the Great Depression and into full employment. It doesn’t matter upon what we spend the funds. Even if it’s war goods that have no peacetime purpose; it’s spending that counts.

Some erroneously contend that this approach was tried during the New Deal and found wanting because unemployment remained substantial throughout the 1930s. We had to wait, this red herring continues, for WWII to pull us out of the ditch.

Not true. New Deal deficit spending would have worked had it been larger: $10 billion annually of government spending supported by $2 billion of borrowing during the 1930s paled in comparison to $100 billion annually of government spending buttressed by $50 billion of borrowing during WWII. Had New Deal borrowing and spending reached WWII levels, the Great Depression might have ended in 1934. Unfortunately, only wartime justified the requisite effort.

We see something similar today. Over a trillion dollars will be spent on the war in Iraq. So far the stimulus package is short of that.

© 2009 Michael B. Lehmann

Thursday, January 15, 2009

Consumer Credit

The Lehmann Letter ©

On January 8 The Federal Reserve announced ( that consumer credit fell $8 billion in November. Multiply that monthly figure by 12 to put it on an annual basis, and you have a roughly $96 billion decline.

The following chart shows that this is a big setback, especially if sustained in the coming months.

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

Consumer credit supports the purchase of many durable goods, especially motor vehicles. During the real-estate boom households treated their homes like fountains of money, refinancing their mortgages and using the proceeds for auto purchases. Now that this avenue is closed, consumer credit play a more important role and is an increasingly sensitive indicator of consumer expenditures.

The Fed customarily publishes this statistic around the fifth of each month. Track it to find the pulse of household expenditures.

(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.)

© 2009 Michael B. Lehmann

Wednesday, January 14, 2009

Involuntary Inventory Accumulation

The Lehmann Letter ©

Today the Census Bureau released November data for business sales and inventories:

Here’s the Bureau’s summary:

Sales. The U.S. Census Bureau announced today that the combined value of distributive trade sales and manufacturers’ shipments for November, adjusted for seasonal and trading-day differences but not for price changes, was estimated at $1,057.0 billion, down 5.1 percent (±0.2%) from October 2008 and down 8.9 percent (±0.5%) from November 2007.

Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,485.1 billion, down 0.7 percent (±0.1%) from October 2008, but up 3.3 percent (±0.5%) from November 2007.

Inventories/Sales Ratio. The total business inventories/sales ratio based on seasonally adjusted data at the end of November was 1.41. The November 2007 ratio was 1.24.

Note that sales were down 8.9% from a year ago while inventories were up 3.3%. Consequently the inventory/sales ratio (inventories divided by sales) rose from 1.24 to 1.41.

The Bureau’s chart illustrates the ratio’s rise.

The recent rise interrupted the long-run downward trend. Over the past decade businesses have required fewer and fewer inventories to support their sales. That was a measure of improved efficiency.

But the ratio’s recent rise is ominous because it’s a symptom of involuntary inventory accumulation. If sales fall and inventories rise – as they have over the past year – that’s a sign that unsold goods are piling up on shelves. Businesses have not been able to reduce production and orders swiftly enough to prevent the involuntary accumulation of unsold goods. In other words, the drop in sales was worse than business anticipated and caught business by surprise. Hence: Involuntary inventory accumulation.

Business will, of course, eventually be able to bring its inventories under control. But, in a world of declining sales volume, that implies a drastic reduction in output and orders. When the ratio stops rising and begins to fall, the recessions full downdraft will be upon us.

© 2009 Michael B. Lehmann

Tuesday, January 13, 2009

Crisis Recap

The Lehmann Letter ©

Today Federal Reserve Chairman Ben Bernanke, in a lecture given at the London School of Economics, provided his analysis of the recession’s causes as well as a recap of the Fed’s policies in dealing with the recession (

The entire speech provides an excellent accounting of what happened and the Fed’s response. But it also makes clear that Mr. Bernanke welcomes President-elect Obama’s fiscal-stimulus package and intends to buttress it with concerted Fed actions.

Here are some key passages:

“For almost a year and a half the global financial system has been under extraordinary stress--stress that has now decisively spilled over to the global economy more broadly. The proximate cause of the crisis was the turn of the housing cycle in the United States and the associated rise in delinquencies on subprime mortgages, which imposed substantial losses on many financial institutions and shook investor confidence in credit markets. However, although the subprime debacle triggered the crisis, the developments in the U.S. mortgage market were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit. Aspects of this broader credit boom included widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking.

“The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their capital depleted by losses and writedowns and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have shut down. Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on business and consumer confidence and precipitated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial.

“The global economy will recover, but the timing and strength of the recovery are highly uncertain. Government policy responses around the world will be critical determinants of the speed and vigor of the recovery………

“The Federal Reserve will do its part to promote economic recovery, but other policy measures will be needed as well. The incoming Administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity. In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system. History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively………

“The world today faces both short-term and long-term challenges. In the near term, the highest priority is to promote a global economic recovery. The Federal Reserve retains powerful policy tools and will use them aggressively to help achieve this objective. Fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit.”

Let’s hope it happens!

© 2009 Michael B. Lehmann

Monday, January 12, 2009

Full Speed Ahead

The Lehmann Letter ©

President-elect Obama has selected his economic advisors and outlined his economic-stimulus package.

But he won’t please everyone, as two recent op-ed pieces in the New York Times make clear.

Yesterday Gregory Mankiw, a Harvard economist, said (

“…….A recent study by Christina D. Romer and David H. Romer, then economists at the University of California, Berkeley, finds that a dollar of tax cuts raises the G.D.P. by about $3. According to the Romers, the multiplier for tax cuts is more than twice what Professor Ramey finds for spending increases.”

It’s clear that Prof. Mankiw cites Christina Romer, a University of California economist, as an authority to buttress his case that tax cuts will be more effective than a federal-spending increase in boosting us out of the recession.

Today Paul Krugman, a Princeton economist, said (

“On Saturday, Christina Romer, the future head of the Council of Economic Advisers, and Jared Bernstein, who will be the vice president’s chief economist, released estimates of what the Obama economic plan would accomplish. Their report is reasonable and intellectually honest, which is a welcome change from the fuzzy math of the last eight years.

“The Romer-Bernstein report acknowledges that “a dollar of infrastructure spending is more effective in creating jobs than a dollar of tax cuts.” It argues, however, that “there is a limit on how much government investment can be carried out efficiently in a short time frame.” But why does the time frame have to be short?”

It’s clear that Prof. Krugman cites Prof. Romer as an authority to buttress his case that a federal-spending increase will be more effective than a tax cut in boosting us out of the recession.

How can two economists use another economist to support divergent views?

All these folks are eminences. Prof. Mankiw has been a presidential advisor; Prof. Krugman is a Nobel laureate and Prof. Romer advises Mr. Obama. We can assume that Prof. Romer supports the president-elect’s plan. Profs. Mankiw and Krugman, however, would change the president-elect’s plan – in opposite directions - if they could.

What’s going on? They can’t all be right. Does that mean they’re all wrong? No. But it probably means that ideological differences – Prof. Mankiw is right-of-center while Prof. Krugman is left-of-center – have influenced their views.

What should the president-elect do? Stick with his plan. Mr Obama may very well think that his plan’s spending increase will satisfy Congressional Democrats while the tax cuts will attract Congressional Republicans. Those are, after all, the constituencies that Mr. Obama MUST please to get anything done.

Damn the ideological torpedoes. Full speed ahead.

© 2009 Michael B. Lehmann

Friday, January 9, 2009

3.6 Million

The Lehmann Letter ©

Today the Bureau of Labor Statistics released its December report ( It said, in part:

“Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors………

“In December, the number of unemployed persons increased by 632,000 to 11.1 million and the unemployment rate rose to 7.2 percent. Since the start of the recession in December 2007, the number of unemployed persons has grown by 3.6 million, and the unemployment rate has risen by 2.3 percentage points……..”

The last sentence bears repeating: The number of unemployed has grown by 3.6 million over the past year.

The new administration can no permit this disaster to proceed unchecked. It must take immediate and drastic action.

© 2009 Michael B. Lehmann

Thursday, January 8, 2009

We Are All Keynesians Again

The Lehmann Letter ©

John Maynard Keynes (rhymes with brains) wrote The General Theory Of Employment, Interest And Money in 1936. He noted aggregate demand’s collapse during The Great Depression and advocated public-sector spending to compensate for the paucity of private-sector expenditures. If households and businesses wouldn’t borrow and spend, government would have to fill the vacuum. That was the only way, said Lord Keynes, to restore full production and full employment.

Government public-works spending alleviated unemployment during the New Deal, but WWII restored full employment. Massive war time borrowing and spending lifted production to the point everyone could find work. Keynes’s analysis had been correct.

But Keynes’s prescription no longer seemed relevant in the general prosperity following WWII. Then President Kennedy resurrected it, with a twist, when he took office in 1961. JFK recommended a tax cut rather than a spending increase in order to spur economic growth. The logic was simple: A tax cut, without a government-spending reduction, would boost household disposable income and consumption, thereby augmenting aggregate demand. It didn’t matter if consumption rose or government spending rose, as long as total spending grew.

Republicans were skeptical, and Congress delayed the tax cut’s passage. After JFK’s assassination, however, the measure sailed through under President Johnson’s direction. The economy enjoyed robust growth, earnings and employment through the mid and late 1960s.

When recession struck in 1970, President Nixon broke free from Republican qualms. He embraced a tax cut without an offsetting reduction in federal expenditures. The federal deficit would rise, but revert to surplus once prosperity returned. Congress agreed. President Nixon summarized matters succinctly when he said, “We are all Keynesians now.” (Remember: Keynesian rhymes with brainsian.)

Keynesian economics, but not tax cuts, fell from favor during the Reagan years. President Reagan emphasized aggregate supply, not demand. Some wondered: How can you tell? A tax cut is a tax cut is a tax cut. It’s difficult to distinguish demand-stimulus from supply-stimulus. The motivation is less important than the outcome. Nonetheless Republicans stayed with supply-side economics and did not advocate increased federal spending to spur economic growth.

But the current recession has changed all that. Republicans recognize the need to stimulate aggregate demand. Despite warnings that we may be facing another Great Depression, that’s not likely to happen if the federal government responds swiftly. President-elect Obama’s call for massive public-works expenditures as well as tax cuts should, if enacted, forestall the kind of collapse that beset the economy from 1929 through 1932. In those earlier years the federal government stood by and let private borrowing and spending wither without an offsetting increase in federal borrowing and spending. There’s no need for that to happen this time.

We are all Keynesians once again.

© 2009 Michael B. Lehmann