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

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

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

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

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

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

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

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