The Lehmann Letter ©
Here’s the publication schedule for some of April 2009’s most important economic indicators.
PUBLICATION SCHEDULE
April 2009
Source (* below)…………Series Description…………Day & Date
Quarterly Data
BEA…………………………GDP……………………...……Wed, 29th
Monthly Data
ISM………………….Purchasing managers’ index……….Wed, 1st
Fed…………………..Consumer credit….(Approximate).Tue, 7th
BLS…………….…………….Employment………………… Fri, 3rd
Census……………………...Balance of trade………………Thu, 9th
BLS………………………….Producer prices……………….Tue, 14th
Census……………………...Retail trade…………………….Tue, 14th
Census……………………...Inventories……………………..Tue, 14th
Fed………………………..Industrial production………….Wed, 15th
Fed………………………….Capacity utilization…………….Wed, 15th
BLS………………………….Consumer prices……………...Wed, 15th
Census……………………..Housing starts………………….Thu, 16th
Conf Bd…………………….Leading indicators…………….Mon, 20th
NAR…………………………Existing-home sales…….…….Thu, 23rd
Census……………………..New-home sales……………….Fri, 24th
Census…………………….Capital goods……………….…..Fri, 24th
Conf Bd…………………….Consumer confidence…………Tue, 28th
BEA.............….Personal Income & Consumption……….Thu, 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
Tuesday, March 31, 2009
Monday, March 30, 2009
Earnings Collapse
The Lehmann Letter ©
The Commerce Department and the Census Bureau recently reported fourth-quarter after-tax profits for all-corporations and manufacturers.
Begin with the chart below. You can see that after-tax earnings for all corporations recently rose to slightly more than $1.4 trillion at an annual rate. They were $1.3 trillion in the third quarter of 2008 before dropping to $931.2 billion in the fourth quarter. Connect those dots and you can see how steeply profits have fallen. Another drop like that and profits will be back to where they were during the 2001 recession.
All Corporations After-tax Profits
(Click on chart to enlarge)
Recessions shaded
Manufacturers are in even worse shape. The following chart shows that their earnings rose to $120 billion recently. They were $120.1 billion in 2008’s third quarter. In 2008’s last quarter manufacturers suffered $48.7 billion loss. That’s almost off the bottom of the chart.
Manufacturers’ After-tax Profits
(Click on chart to enlarge)
Recessions shaded
Has the stock market fully anticipated these earnings declines? Does the current P/E reflect them? If not, and especially if earnings fall further, the stock market will have difficulty rising above its recent lows.
(The charts were taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)
© 2009 Michael B. Lehmann
The Commerce Department and the Census Bureau recently reported fourth-quarter after-tax profits for all-corporations and manufacturers.
Begin with the chart below. You can see that after-tax earnings for all corporations recently rose to slightly more than $1.4 trillion at an annual rate. They were $1.3 trillion in the third quarter of 2008 before dropping to $931.2 billion in the fourth quarter. Connect those dots and you can see how steeply profits have fallen. Another drop like that and profits will be back to where they were during the 2001 recession.
All Corporations After-tax Profits
(Click on chart to enlarge)
Recessions shaded
Manufacturers are in even worse shape. The following chart shows that their earnings rose to $120 billion recently. They were $120.1 billion in 2008’s third quarter. In 2008’s last quarter manufacturers suffered $48.7 billion loss. That’s almost off the bottom of the chart.
Manufacturers’ After-tax Profits
(Click on chart to enlarge)
Recessions shaded
Has the stock market fully anticipated these earnings declines? Does the current P/E reflect them? If not, and especially if earnings fall further, the stock market will have difficulty rising above its recent lows.
(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
Wednesday, March 25, 2009
More Glimmers
The Lehmann Letter ®
Today the Census Bureau released two more glimmers of hope that buttressed recent upbeat data on housing starts and existing-home sales.
New orders for nondefense capital goods (i.e. business machinery and equipment, including transportation equipment) improved in February:
http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf .
Business ordered $52.7 billion in February, an improvement on January’s $49.2 billion. If you update the following chart with these figures, however, you can see how far the numbers have fallen. Moreover, February’s reading remains below December’s $54.0 billion pace.
Does the recent uptick signal a turnaround? You can see from the chart that there’s a lot of noise in the data. So it’s too soon to know.
Nondefense Capital Goods
(Click on chart to enlarge)
Recessions shaded
Census also said that new-home sales – at 337,000 - were up in February from January’s 322,000 pace: http://www.census.gov/const/newressales.pdf. But, once again, that’s less than December’s 371,000 rate. And the chart below reveal that all these numbers are record lows.
New Home Sales
(Click on chart to enlarge)
Recessions shaded
It’s good to know that all of this month’s major housing releases – new and existing-home sales and housing starts – were up. And we can take some cheer from the machinery and equipment uptick. But it really is too soon to tell whether or not we’ve hit bottom, not to mention that we’re heading back up.
(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
Today the Census Bureau released two more glimmers of hope that buttressed recent upbeat data on housing starts and existing-home sales.
New orders for nondefense capital goods (i.e. business machinery and equipment, including transportation equipment) improved in February:
http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf .
Business ordered $52.7 billion in February, an improvement on January’s $49.2 billion. If you update the following chart with these figures, however, you can see how far the numbers have fallen. Moreover, February’s reading remains below December’s $54.0 billion pace.
Does the recent uptick signal a turnaround? You can see from the chart that there’s a lot of noise in the data. So it’s too soon to know.
Nondefense Capital Goods
(Click on chart to enlarge)
Recessions shaded
Census also said that new-home sales – at 337,000 - were up in February from January’s 322,000 pace: http://www.census.gov/const/newressales.pdf. But, once again, that’s less than December’s 371,000 rate. And the chart below reveal that all these numbers are record lows.
New Home Sales
(Click on chart to enlarge)
Recessions shaded
It’s good to know that all of this month’s major housing releases – new and existing-home sales and housing starts – were up. And we can take some cheer from the machinery and equipment uptick. But it really is too soon to tell whether or not we’ve hit bottom, not to mention that we’re heading back up.
(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, March 24, 2009
The President’s Long View
The Lehmann Letter ®
In this evening’s press conference President Obama gave his long view of the federal deficit.
1. The current recession will be responsible for a substantial portion of the projected deficit over the coming decade because a depressed economy reduces federal tax revenues and requires additional expenditures.
2. One way to reduce the long-run deficit is to reduce federal expenditures by reforming health care, Medicare and Medicaid and other programs that swell federal outlays.
3. Another way to reduce the long-run deficit is to boost revenues by enhancing economic growth through education reform and energy-conservation programs. Faster economic growth generates additional federal tax revenues.
In sum, the President told the nation, “If you want long-run deficit reduction, help me deal with today’s recession and tomorrow’s structural reforms.”
© 2009 Michael B. Lehmann
In this evening’s press conference President Obama gave his long view of the federal deficit.
1. The current recession will be responsible for a substantial portion of the projected deficit over the coming decade because a depressed economy reduces federal tax revenues and requires additional expenditures.
2. One way to reduce the long-run deficit is to reduce federal expenditures by reforming health care, Medicare and Medicaid and other programs that swell federal outlays.
3. Another way to reduce the long-run deficit is to boost revenues by enhancing economic growth through education reform and energy-conservation programs. Faster economic growth generates additional federal tax revenues.
In sum, the President told the nation, “If you want long-run deficit reduction, help me deal with today’s recession and tomorrow’s structural reforms.”
© 2009 Michael B. Lehmann
Monday, March 23, 2009
Mr. Geithner’s Plan
The Lehmann Letter ®
Today the stock market reacted with enthusiasm when Treasury Secretary Timothy Geithner revealed his plan to relieve the nation’s banks of their heavily-depreciated mortgage-backed securities.
Many feared that some of the biggest banks were insolvent (their liabilities exceeded their assets, so that they had negative net worth) because they could not sell the mortgage-related securities in their portfolios (and this reduced the value of their assets). The securities had become worthless without a market on which to dispose of them. That market had vanished when home prices plunged and homeowners began to default on their mortgages.
Secretary Geithner proposed to resuscitate the market by offering to team-up with private purchasers of mortgage-backed securities. The government would provide most of the capital so that its private partners could bid on the securities. That would establish a market and market price for the securities and permit the banks to sell them. The government’s partners could afford to bid robustly for these securities and hold them until home values recover because the government provided most of the purchase price.
Here’s the hope: (1) The securities’ value swells as they are purchased, (2) the banks’ assets grow as the banks sell the securities at good prices or hold them as their prices rise. As asset values increase, so does net worth and the banks are solvent once more.
© 2009 Michael B. Lehmann
Today the stock market reacted with enthusiasm when Treasury Secretary Timothy Geithner revealed his plan to relieve the nation’s banks of their heavily-depreciated mortgage-backed securities.
Many feared that some of the biggest banks were insolvent (their liabilities exceeded their assets, so that they had negative net worth) because they could not sell the mortgage-related securities in their portfolios (and this reduced the value of their assets). The securities had become worthless without a market on which to dispose of them. That market had vanished when home prices plunged and homeowners began to default on their mortgages.
Secretary Geithner proposed to resuscitate the market by offering to team-up with private purchasers of mortgage-backed securities. The government would provide most of the capital so that its private partners could bid on the securities. That would establish a market and market price for the securities and permit the banks to sell them. The government’s partners could afford to bid robustly for these securities and hold them until home values recover because the government provided most of the purchase price.
Here’s the hope: (1) The securities’ value swells as they are purchased, (2) the banks’ assets grow as the banks sell the securities at good prices or hold them as their prices rise. As asset values increase, so does net worth and the banks are solvent once more.
© 2009 Michael B. Lehmann
Saturday, March 21, 2009
The CBO Forecast
The Lehmann Letter ®
You can view the Congressional Budget Office’s (CBO) latest forecast for the federal deficit at http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf .
The CBO’s earlier estimates of the 2009 and 2010 deficits were $1.3 trillion and $700 billion respectively. Now, without taking President Obama’s budget proposals into account, the CBO has revised its projections to $1.7 trillion and $1.1 trillion. That’s a $400 billion increase for both years. If, in addition, the President’s budget proposals are taken into account, the CBO’s projections rise to $1.8 trillion and $1.4 trillion.
You can see that the CBO believes the deficit will rise substantially, and that the deteriorating economy – not the President’s budget - gets most of the blame. The federal government collects less tax revenue and spends more whenever recession hits. The President’s budget adds “only” $100 billion to the deficit in 2009 and $300 billion in 2010.
But the situation becomes more dire going forward. The CBO estimates the cumulative deficit from 2010 to 2019 at $4.4 trillion before the President’s budget and $9.3 trillion including the President’s budget. That’s substantial.
Plugging these numbers into the following chart adds perspective.
Federal Deficit
(Click on chart to enlarge)
(Recessions shaded)
Trillion-dollar deficits are a new addition, and a stunning one at that. But an examination of the next chart helps our understanding of the role those federal deficits will play.
Private Borrowing
(Click on chart to enlarge)
(Recessions shaded)
Private borrowing is now a negative figure – for the first time since WWII. The private sector is repaying its debts instead of initiating new loans. That’s serious because our economy has come to depend on ever-larger private borrowing – think mortgages - to finance its growth. Now that the private sector has shriveled, the federal government must fill the gap.
If federal borrowing and spending does not offset the collapse of private borrowing and spending, the recession will become much worse than it is already.
(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
You can view the Congressional Budget Office’s (CBO) latest forecast for the federal deficit at http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf .
The CBO’s earlier estimates of the 2009 and 2010 deficits were $1.3 trillion and $700 billion respectively. Now, without taking President Obama’s budget proposals into account, the CBO has revised its projections to $1.7 trillion and $1.1 trillion. That’s a $400 billion increase for both years. If, in addition, the President’s budget proposals are taken into account, the CBO’s projections rise to $1.8 trillion and $1.4 trillion.
You can see that the CBO believes the deficit will rise substantially, and that the deteriorating economy – not the President’s budget - gets most of the blame. The federal government collects less tax revenue and spends more whenever recession hits. The President’s budget adds “only” $100 billion to the deficit in 2009 and $300 billion in 2010.
But the situation becomes more dire going forward. The CBO estimates the cumulative deficit from 2010 to 2019 at $4.4 trillion before the President’s budget and $9.3 trillion including the President’s budget. That’s substantial.
Plugging these numbers into the following chart adds perspective.
Federal Deficit
(Click on chart to enlarge)
(Recessions shaded)
Trillion-dollar deficits are a new addition, and a stunning one at that. But an examination of the next chart helps our understanding of the role those federal deficits will play.
Private Borrowing
(Click on chart to enlarge)
(Recessions shaded)
Private borrowing is now a negative figure – for the first time since WWII. The private sector is repaying its debts instead of initiating new loans. That’s serious because our economy has come to depend on ever-larger private borrowing – think mortgages - to finance its growth. Now that the private sector has shriveled, the federal government must fill the gap.
If federal borrowing and spending does not offset the collapse of private borrowing and spending, the recession will become much worse than it is already.
(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, March 17, 2009
A Glimmer Of Hope
The Lehmann Letter ®
Today the Census Bureau announced a big jump in February housing starts: http://www.census.gov/const/newresconst.pdf
The Bureau said:
“Privately-owned housing starts in February were at a seasonally adjusted annual rate of 583,000. This is 22.2 percent (±13.8%) above the revised January estimate of 477,000, but is 47.3 percent (±5.3%) below the revised February 2008 rate of 1,107,000.
“Single-family housing starts in February were at a rate of 357,000; this is 1.1 percent (±11.0%)* above the January figure of 353,000. The February rate for units in buildings with five units or more was 212,000.”
A 22.2 percent increase is great news. But the second paragraph provides important detail, together with the data available in the site referred to above.
Single-family-home starts barely improved. Apartment-house construction accounts for virtually all of the gain. Single-family starts edged up from 353,000 to 357,000. Apartment starts jumped from 118,000 to 212,000.
All of this activity helps the economy and is welcome news. But the housing crisis has arisen in single-family homes, and the continued weakness in single-family starts reflects this. Perhaps apartment-house construction jumped because builders expect a surge in apartment dwelling generated by the single-family home foreclosures.
Housing Starts
(Click on chart to enlarge)
(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
Today the Census Bureau announced a big jump in February housing starts: http://www.census.gov/const/newresconst.pdf
The Bureau said:
“Privately-owned housing starts in February were at a seasonally adjusted annual rate of 583,000. This is 22.2 percent (±13.8%) above the revised January estimate of 477,000, but is 47.3 percent (±5.3%) below the revised February 2008 rate of 1,107,000.
“Single-family housing starts in February were at a rate of 357,000; this is 1.1 percent (±11.0%)* above the January figure of 353,000. The February rate for units in buildings with five units or more was 212,000.”
A 22.2 percent increase is great news. But the second paragraph provides important detail, together with the data available in the site referred to above.
Single-family-home starts barely improved. Apartment-house construction accounts for virtually all of the gain. Single-family starts edged up from 353,000 to 357,000. Apartment starts jumped from 118,000 to 212,000.
All of this activity helps the economy and is welcome news. But the housing crisis has arisen in single-family homes, and the continued weakness in single-family starts reflects this. Perhaps apartment-house construction jumped because builders expect a surge in apartment dwelling generated by the single-family home foreclosures.
Housing Starts
(Click on chart to enlarge)
(Recessions shaded)
In any event, as the chart makes clear, even 583,000 starts remains below the trough of earlier recessions.
In any event, as the chart makes clear, even 583,000 starts remains below the trough of earlier recessions.
(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, March 16, 2009
Industrial Destruction Continued
The Lehmann Letter ©
Today the Federal Reserve reported (http://www.federalreserve.gov/releases/g17/Current/default.htm ) that capacity utilization had fallen to 70.9 percent in February. (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.)
Connect that dot to the chart below and you can see we’re headed for the basement. We’ve also tied the all-time low of 70.9 percent to which this statistic fell in December 1982.
Capacity Utilization
(Click on chart to enlarge)
(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
Today the Federal Reserve reported (http://www.federalreserve.gov/releases/g17/Current/default.htm ) that capacity utilization had fallen to 70.9 percent in February. (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.)
Connect that dot to the chart below and you can see we’re headed for the basement. We’ve also tied the all-time low of 70.9 percent to which this statistic fell in December 1982.
Capacity Utilization
(Click on chart to enlarge)
(Recessions shaded)
If capacity utilization continues to deteriorate, which seems likely, we will very soon have a new record low.
Too bad.
If capacity utilization continues to deteriorate, which seems likely, we will very soon have a new record low.
Too bad.
(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, March 12, 2009
The Big Rally
The Lehmann Letter ©
The stock market enjoyed a huge rally this week. Have we bounced off true bottom and is the bear market over? Or is this just another bear rally that’s about to send us to new bottoms?
The S&P is now 750. If you update the chart below (blue line – left scale) with that figure, you’ll notice the S&P has fallen beneath the 2002 trough that followed the cot-com bust. Whether or not it rises from its current trough depends upon earnings per share and the P/E ratio.
S&P, P/E Ratio & Earnings Per Share
(Click on chart to enlarge)
The stock market enjoyed a huge rally this week. Have we bounced off true bottom and is the bear market over? Or is this just another bear rally that’s about to send us to new bottoms?
The S&P is now 750. If you update the chart below (blue line – left scale) with that figure, you’ll notice the S&P has fallen beneath the 2002 trough that followed the cot-com bust. Whether or not it rises from its current trough depends upon earnings per share and the P/E ratio.
S&P, P/E Ratio & Earnings Per Share
(Click on chart to enlarge)
Recessions shaded
If investor gloominess is an accurate omen, then earnings per share (red line – right scale) could also tumble close to its 2002 level. The underlying economy is doing terribly and getting worse, so investor’s pessimism may be justified.
And if investor sentiment is truly down in the dumps and the economy and earnings continue to do miserably, the P/E ratio (green line – right scale) will fall to levels not seen since the late 1970s.
Earnings of $40 per share and a P/E of 15 (the historical average) imply an S&P of 600 (40 X 15 = 600). Earnings of $50 per share and a P/E of 10 (as in the late 1970s) imply an S&P of 500. Those numbers are below today’s S&P closing and even below the S&P’s recent bottom.
So it all depends on the economy and earnings. Good news on banks and retail sales buoyed investor confidence and prompted this week’s rally. But if the economy’s fundamentals continue to erode, dragging earnings down further, this week’s rally may not set a trend.
Let’s hope this week’s good news is the real deal.
© 2009 Michael B. Lehmann
If investor gloominess is an accurate omen, then earnings per share (red line – right scale) could also tumble close to its 2002 level. The underlying economy is doing terribly and getting worse, so investor’s pessimism may be justified.
And if investor sentiment is truly down in the dumps and the economy and earnings continue to do miserably, the P/E ratio (green line – right scale) will fall to levels not seen since the late 1970s.
Earnings of $40 per share and a P/E of 15 (the historical average) imply an S&P of 600 (40 X 15 = 600). Earnings of $50 per share and a P/E of 10 (as in the late 1970s) imply an S&P of 500. Those numbers are below today’s S&P closing and even below the S&P’s recent bottom.
So it all depends on the economy and earnings. Good news on banks and retail sales buoyed investor confidence and prompted this week’s rally. But if the economy’s fundamentals continue to erode, dragging earnings down further, this week’s rally may not set a trend.
Let’s hope this week’s good news is the real deal.
© 2009 Michael B. Lehmann
Monday, March 9, 2009
This Time Is Different
The Lehmann Letter ©
We’ve suffered through ten recessions since WWII, and are now in the eleventh. Over the past four decades, except for the 1990-91 recession, rapidly rebounding residential construction pulled us out of every slump. Moreover, those were V-shaped recessions with sharp downturns and equally sharp recoveries.
During the booms that preceded each of these recessions, escalating inflation prompted the Fed to raise interest rates and constrict residential construction. That depressed the economy. Once recession hit and shrinking demand snuffed out inflation, the Fed let rates fall. Building immediately recovered, resuscitating the rest of the economy.
The 1990-91 recession (an exception to the rule) 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.
In the 2000 – 2001 dot-com bust that followed the 1990s dot-com boom, dwindling profit margins – not rising interest rates – instigated decline. Nonetheless the Fed depressed interest rates from 2000 through 2003, initiating the real-estate expansion (and general economic revival) that led to the current recession.
Tumbling real-estate is at the heart of the present crisis. But this time, 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.
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 horizon that resembles the PC and internet revolutions.
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. Right now there are no signs that the private sector will snap back the way it did so many times before.
This time IS different.
© 2009 Michael B. Lehmann
We’ve suffered through ten recessions since WWII, and are now in the eleventh. Over the past four decades, except for the 1990-91 recession, rapidly rebounding residential construction pulled us out of every slump. Moreover, those were V-shaped recessions with sharp downturns and equally sharp recoveries.
During the booms that preceded each of these recessions, escalating inflation prompted the Fed to raise interest rates and constrict residential construction. That depressed the economy. Once recession hit and shrinking demand snuffed out inflation, the Fed let rates fall. Building immediately recovered, resuscitating the rest of the economy.
The 1990-91 recession (an exception to the rule) 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.
In the 2000 – 2001 dot-com bust that followed the 1990s dot-com boom, dwindling profit margins – not rising interest rates – instigated decline. Nonetheless the Fed depressed interest rates from 2000 through 2003, initiating the real-estate expansion (and general economic revival) that led to the current recession.
Tumbling real-estate is at the heart of the present crisis. But this time, 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.
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 horizon that resembles the PC and internet revolutions.
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. Right now there are no signs that the private sector will snap back the way it did so many times before.
This time IS different.
© 2009 Michael B. Lehmann
Friday, March 6, 2009
8.1%
The Lehmann Letter ©
The unemployment rate climbed to 8.1% last month, its highest since the tail end of the 1981-82 recession. You can read the Bureau of Labor Statistics’ release at
http://stats.bls.gov/news.release/empsit.nr0.htm
The unemployment rate was 7.6% in the previous month and 7.2% in the month before that. There is a real danger it will exceed 10% before the end of the year.
That would ruin the President’s hope that he can cut the deficit in half by the end of his first term. Why? Because his budget assumes unemployment will rise to 8.1% this year and fall slightly to 7.9% next year. Since unemployment is climbing rapidly and we’ve already reached 8.1%, it appears that the economy will do worse than the President anticipated. That means lower tax revenues and bigger deficits.
© 2009 Michael B. Lehmann
The unemployment rate climbed to 8.1% last month, its highest since the tail end of the 1981-82 recession. You can read the Bureau of Labor Statistics’ release at
http://stats.bls.gov/news.release/empsit.nr0.htm
The unemployment rate was 7.6% in the previous month and 7.2% in the month before that. There is a real danger it will exceed 10% before the end of the year.
That would ruin the President’s hope that he can cut the deficit in half by the end of his first term. Why? Because his budget assumes unemployment will rise to 8.1% this year and fall slightly to 7.9% next year. Since unemployment is climbing rapidly and we’ve already reached 8.1%, it appears that the economy will do worse than the President anticipated. That means lower tax revenues and bigger deficits.
© 2009 Michael B. Lehmann
Thursday, March 5, 2009
What Ails GM
The Lehmann Letter ©
Today GM reported that its auditors believe the company is circling the drain. It may not survive beyond the end of the month without another substantial cash infusion.
Corporations are affected by secular (long-run) and cyclical (short-run) trends.
The secular trend(s) worked against GM. Many would argue that GM’s secular dynamic can be summarized in two words: Poor Management. For too long the company acted as if the company’s success depended upon its ability to market the vehicles it felt like manufacturing. The company didn’t seem to care what it made as long as it could push the product on consumers. Then along came the imports, and they changed everything.
Since the mid 1990s, however, the cyclical trend(s) worked in GM’s favor. You can see in the chart below that new-vehicle sales reached 15 million at that time and then surged to 17 million in this decade. At a sales pace of 17 million vehicles per year anybody and everybody made money. That was especially true for GM and the other domestic manufacturers who enjoyed success in building and marketing large, profitable vehicles.
New-Vehicle Sales
(Click on chart to enlarge)
(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
Today GM reported that its auditors believe the company is circling the drain. It may not survive beyond the end of the month without another substantial cash infusion.
Corporations are affected by secular (long-run) and cyclical (short-run) trends.
The secular trend(s) worked against GM. Many would argue that GM’s secular dynamic can be summarized in two words: Poor Management. For too long the company acted as if the company’s success depended upon its ability to market the vehicles it felt like manufacturing. The company didn’t seem to care what it made as long as it could push the product on consumers. Then along came the imports, and they changed everything.
Since the mid 1990s, however, the cyclical trend(s) worked in GM’s favor. You can see in the chart below that new-vehicle sales reached 15 million at that time and then surged to 17 million in this decade. At a sales pace of 17 million vehicles per year anybody and everybody made money. That was especially true for GM and the other domestic manufacturers who enjoyed success in building and marketing large, profitable vehicles.
New-Vehicle Sales
(Click on chart to enlarge)
Recessions shaded
Then the roof fell in. Last month the industry suffered a 9.1 million sales pace. The outlook for the remainder of the year doesn’t look better.
GM can’t survive a year of under-10-million sales without government assistance. Cyclical circumstances have finally lined up with secular facts, and now the company is on the ropes.
Then the roof fell in. Last month the industry suffered a 9.1 million sales pace. The outlook for the remainder of the year doesn’t look better.
GM can’t survive a year of under-10-million sales without government assistance. Cyclical circumstances have finally lined up with secular facts, and now the company is on the ropes.
(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, March 4, 2009
Good News, Bad News
The Lehmann Letter ©
President Obama’s mortgage-default prevention program went into effect today. It helps underwater homeowners refinance into lower rates. They had been prevented from doing so because their home’s value had fallen below their mortgage obligation. President Obama’s program also assists homeowners - in default or at risk of default - restructure their loans so that the monthly payments do not exceed 31% of their income. This is a huge step forward in approaching ground zero of the economic crisis: The housing meltdown. It’s good news.
But the Fed had some bad news. Its Beige Book report (http://www.federalreserve.gov/fomc/beigebook/2009/20090304/default.htm ) began as follows:
“Reports from the twelve Federal Reserve Districts suggest that national economic conditions deteriorated further during the reporting period of January through late February. Ten of the twelve reports indicated weaker conditions or declines in economic activity; the exceptions were Philadelphia and Chicago, which reported that their regional economies "remained weak." The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions. Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010.”
You don’t need a degree in economics to see the bad news here.
© 2009 Michael B. Lehmann
President Obama’s mortgage-default prevention program went into effect today. It helps underwater homeowners refinance into lower rates. They had been prevented from doing so because their home’s value had fallen below their mortgage obligation. President Obama’s program also assists homeowners - in default or at risk of default - restructure their loans so that the monthly payments do not exceed 31% of their income. This is a huge step forward in approaching ground zero of the economic crisis: The housing meltdown. It’s good news.
But the Fed had some bad news. Its Beige Book report (http://www.federalreserve.gov/fomc/beigebook/2009/20090304/default.htm ) began as follows:
“Reports from the twelve Federal Reserve Districts suggest that national economic conditions deteriorated further during the reporting period of January through late February. Ten of the twelve reports indicated weaker conditions or declines in economic activity; the exceptions were Philadelphia and Chicago, which reported that their regional economies "remained weak." The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions. Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010.”
You don’t need a degree in economics to see the bad news here.
© 2009 Michael B. Lehmann
Tuesday, March 3, 2009
The President Was Correct
The Lehmann Letter ©
Today President Obama said the stock market remains a good long-run investment, and also said now is a good time to invest because share prices are unusually low.
The President was correct on both counts: The stock market IS a good long-run investment and share prices ARE unusually low.
But, if you reflect on that statement for a while, some interesting arithmetic can come to mind. For instance, suppose the Dow rises five or ten percent a year on average for the next five or ten years. That would certainly be an improvement over what we’ve seen lately. Yet a five percent annual improvement over ten years or a ten percent annual improvement over five years would merely bring the Dow back to 10,000, where it was ten years ago.
That illustrates how far the stock market has fallen. To dramatize the gains required to reclaim the lofty heights of only a couple of years ago, remember that today’s Dow – at less than 7,000 – must grow by more than 100% to reach the 14,000+ level of a couple of years ago. That will require a stretch of time we can all call the long run, and we still won’t be ahead of where we once were.
© 2009 Michael B. Lehmann
Today President Obama said the stock market remains a good long-run investment, and also said now is a good time to invest because share prices are unusually low.
The President was correct on both counts: The stock market IS a good long-run investment and share prices ARE unusually low.
But, if you reflect on that statement for a while, some interesting arithmetic can come to mind. For instance, suppose the Dow rises five or ten percent a year on average for the next five or ten years. That would certainly be an improvement over what we’ve seen lately. Yet a five percent annual improvement over ten years or a ten percent annual improvement over five years would merely bring the Dow back to 10,000, where it was ten years ago.
That illustrates how far the stock market has fallen. To dramatize the gains required to reclaim the lofty heights of only a couple of years ago, remember that today’s Dow – at less than 7,000 – must grow by more than 100% to reach the 14,000+ level of a couple of years ago. That will require a stretch of time we can all call the long run, and we still won’t be ahead of where we once were.
© 2009 Michael B. Lehmann
Monday, March 2, 2009
Why?
The Lehmann Letter ©
Today the Dow fell 300 points to 6763, a 12-year low. Why? What’s propelling it into the sub-basement?
Most analysts blamed financial stocks after AIG reported huge losses.
That’s probably true. But we shouldn’t let our financial-sector focus restrict our perspective. The underlying economy is doing miserably, as the following charts illustrate.
New-home sales fell to 309,000 in January. Connect the trend-line to that level in the chart below, and you can see that something is terribly wrong. Home sales have not been this weak since the Commerce Department began collecting the data 45 years ago. Moreover, the latest figures are only 25% of what they had been until recently. Finally, about 400,000 new-home sales marked the trough of earlier cycles. We’re 25% below that and there’s no indication we’ve reached bottom. This is a disaster.
New Home Sales
(Click on chart to enlarge)
Recessions shaded
Real-estate’s collapse has dispirited consumers. The Conference Board reported that consumer confidence fell to 25 in February. Connect the trend-line below to that number. We’ve gone from 140 ten years ago to one-fifth that level today. Households were not this gloomy during the sky-high inflation of the late 1970s or the 10% unemployment of the 1981-82 recession.
Consumer Confidence
(Click on chart to enlarge)
Recessions shaded
The result: Consumers are boycotting consumption in order to preserve their balance sheets. They’re trying to conserve cash, retire debts and build equity. You do that by saving, not spending. No woner everything is headed south.
Perhaps the stock market has further to fall.
(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
Today the Dow fell 300 points to 6763, a 12-year low. Why? What’s propelling it into the sub-basement?
Most analysts blamed financial stocks after AIG reported huge losses.
That’s probably true. But we shouldn’t let our financial-sector focus restrict our perspective. The underlying economy is doing miserably, as the following charts illustrate.
New-home sales fell to 309,000 in January. Connect the trend-line to that level in the chart below, and you can see that something is terribly wrong. Home sales have not been this weak since the Commerce Department began collecting the data 45 years ago. Moreover, the latest figures are only 25% of what they had been until recently. Finally, about 400,000 new-home sales marked the trough of earlier cycles. We’re 25% below that and there’s no indication we’ve reached bottom. This is a disaster.
New Home Sales
(Click on chart to enlarge)
Recessions shaded
Real-estate’s collapse has dispirited consumers. The Conference Board reported that consumer confidence fell to 25 in February. Connect the trend-line below to that number. We’ve gone from 140 ten years ago to one-fifth that level today. Households were not this gloomy during the sky-high inflation of the late 1970s or the 10% unemployment of the 1981-82 recession.
Consumer Confidence
(Click on chart to enlarge)
Recessions shaded
The result: Consumers are boycotting consumption in order to preserve their balance sheets. They’re trying to conserve cash, retire debts and build equity. You do that by saving, not spending. No woner everything is headed south.
Perhaps the stock market has further to fall.
(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
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