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.:

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:

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 [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:

Recent data are:


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 [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann