Thursday, December 30, 2010

January Publication Schedule

The Lehmann Letter (SM)

This letter will follow the most important economic indicators as the New Year begins.

Households are key: Housing, autos, consumer credit, consumer confidence. Business investment is also critical: New orders for capital goods.

If these pick up, and improve strongly, employment gains will follow.

PUBLICATION SCHEDULE

January 2011

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

Quarterly Data

BEA…………………GDP…………...……Fri, 28th

Monthly Data

ISM….Purchasing managers’ index….Mon, 3rd
BLS……………….Employment………… Fri, 7th
BEA….New-vehicle sales…(Approximate).Fri, 7th
Fed…...Consumer credit…...(Approximate).Fri, 7th
BLS……………….Producer prices……. Thu, 13th
Census………………...Inventories…….. Fri, 14th
BLS………………….Consumer prices.….. Fri, 14th
Fed……………..Industrial production…….Fri, 14th
Fed…………….Capacity utilization……….Fri, 14th
Census…….……..Housing starts…….Wed, 19th
Conf Bd……….Leading indicators…….Thu, 20th
NAR……………Existing-home sales….Thu, 20th
Conf Bd…….Consumer confidence….. Tue, 25th
Census………..New-home sales……...Wed, 26th
Census……….Capital goods……….. Thu, 27th

* 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

© 2010 Michael B. Lehmann

Wednesday, December 29, 2010

Wrap Up and Forecast

The Lehmann Letter ©

Today's New York Times

(http://www.nytimes.com/2010/12/29/business/economy/29leonhardt.html?_r=1&ref=todayspaper)

and Wall Street Journal

(http://online.wsj.com/article/SB10001424052970203513204576047491075731426.html?mod=ITP_pageone_0)

carried retrospectives on the economy and residential real estate as well as a cross-section of forecasts for 2011.

The optimists point to expansionary monetary and fiscal policy: The recent round of tax-cut and unemployment-benefit extensions as well as the Federal Reserve's expansionary stance. The holiday shopping boom buttresses that rosy view.

This letter remains skeptical. Housing was the epicenter of the boom and bust, and housing continues in a slump. That's symptomatic of the damage done to household balance sheets: Diminished net worth and liquidity plus an overload of debt. Consumers will recover, but slowly. Expansion will be moderate.

Improved business productivity throughout the slump did boost earnings as business layoffs exceeded the drop in sales. That, of course, shifted the burden onto the shoulders of those who are now unemployed. Meanwhile this source of profitability is tapped out. Additional growth in earnings will have to come from additional sales. Those sales will grow slowly as household balance sheets gradually recover.

The economy eventually snapped out of the 1990-91 recession and began growing strongly in 1994 because of the beginning of the dot-com boom. The economy also bounced quickly back from the 2001 recession because of the residential real estate boom. Those were special circumstances that created especially good fortune in those decades. It's hard to see similar tidings on the horizon this time.

That doesn't mean no recovery, and it doesn't mean double-dip recession. It does mean slow and gradual gains.

© 2010 Michael B. Lehmann

Monday, December 20, 2010

Debt, Borrowing & Spending

The Lehmann Letter SM

We’re faced with this anomaly: Everyone hates debt, but it will take more debt to finance the spending required to boost the economy.

Q: How can you borrow more to finance increased spending while repaying your debts?

A: You can’t.

If households and businesses are to restore their balance sheets by rebuilding liquidity and retiring debt, they can’t at the same time borrow and spend the economy to prosperity.

Private Borrowing

(Click on chart to enlarge)



(Recessions shaded)

The chart illustrates the precipitous drop in borrowing that accompanied the recession. Borrowing turned negative when households and businesses began repaying their debts. Those repayments grew to over $500 billion and then shrank. Here are this year’s data:

Q1: -$76.3 billion
Q2: -$302.8 billion
Q3: -47.8 billion

Perhaps, as the New Year begins, repayments will cease and new borrowing will blossom, resuscitating spending. Let’s hope so.

The key question: Have the recent repayments been sufficient to reliquify private balance sheets and enable a new round of private borrowing and spending? Let’s hope so.

One possible problem: The repair was incomplete, enabling only limited borrowing and spending. We’ll see.

Meanwhile, keep the following in mind. Business has dealt with the problem more swiftly than households. Business balance sheets are in good condition, brimming with liquidity. That’s because revived earnings have restored cash flow. Not so for households: High unemployment and weak earnings have impeded recovery for their balance sheets. Consumers need more time.

(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.)

© 2010 Michael B. Lehmann

Wednesday, December 15, 2010

What the Fed Said

The Lehmann Letter ©

Yesterday the Federal Reserve’s Open Market Committee expressed disappointment with the recovery’s pace and clearly stated its intent to maintain an expansionary monetary policy:

http://www.federalreserve.gov/newsevents/press/monetary/20101214a.htm

Here’s what the Fed said:

“Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed…..

“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November….

“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 for the federal funds rate for an extended period….”

You don’t need a Ph.D. to understand. The Fed wants a stronger recovery, doesn’t see that happening soon and therefore will hold down interest rates until the economy shows sufficient improvement.

As readers know, this letter fears that low rates are like pushing on a string: Not very effective. But what else can the Fed do, other than lead the horse to water?

© 2010 Michael B. Lehmann

Wednesday, December 8, 2010

Good News

The Lehmann Letter (SM)

Yesterday's letter highlighted auto sales: A key component of consumer demand. The letter pointed out that auto sales have bounced back from their recession lows, but still have a long way to go before regaining robust health.

Today's letter examines consumer credit: Another important indicator of household strength. Households have been repaying their debts in a desperate attempt to bolster their balance sheets by reducing liabilities and building liquidity. That seems like a good sign until one realizes that reducing expenditures is a time-tested method for paying down debt and conserving cash. That's one reason this recession has been so intractable. People have stopped buying in order to bolster their balance sheets. Demand can't fully recover until this process concludes.

That's why the Federal Reserve's latest consumer-credit report is so encouraging:

http://www.federalreserve.gov/releases/g19/Current/

For the second month in a row households have originated more consumer credit then they've repaid. (Keep in mind that consumer credit does not include first and second mortgage loans. Think of consumer credit as auto loans and credit-card debt and conventional retail debt.)

Consumer Credit
Click on chart to enlarge.)



Recessions shaded

Consumer credit's recent gain was not large: Only a $45.6 billion October increase, seasonally adjusted at an annual rate, following a $15.6 billion bump in September. But the chart shows that consumer credit had been falling for over a year, often at a $100 billion a month rate. That was not only unprecedented, it was also a sign of how desperately households were trying to put their balance sheets in order.

Let's hope they've now done so and that September and October's improvements signal a trend. If that's the case, it could be a good sign that consumers will begin spending more heavily on autos, appliances and furniture and furnishings - all of which rely heavily on consumer credit for their strength.

Housing data, due later in the month, will serve to corroborate or offset this optimism. Real estate was ground zero for the slump and we will wait to see whether or not households have repaired their balance sheets sufficiently to boost home purchases. But, one way or the other, the recent improvement in consumer credit is good news.

(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.)

© 2010 Michael B. Lehmann

Tuesday, December 7, 2010

Half Full or Half Empty

The Lehmann Letter (SM)

Auto sales provide a good illustration of the current recovery's enigma.

As is the case for the economy as a whole, new-vehicle sales have rebounded strongly but are still a long way from robust health.

Examine the data: Go to http://www.bea.gov/national/index.htm#gdp, scroll down to Supplemental Estimates and click on Motor vehicles. Open the Excel file and click on the Table 6 tab at the bottom. Look at column I.

Notice that new-vehicle sales were running between 16 and 17 million at a seasonally-adjusted annual rate for a decade until 2007. By 2009 sales had fallen to the 9 millions. Now, in October and November of 2010, sales were up to 12.2 million. That's a gain of over 25%, but sales are still almost 25% below their earlier peak.

So, is the glass half-full or half-empty?

New-Vehicle Sales

Click on chart to enlarge.)



Recessions shaded

Examining the chart and updating it with the most recent 12.2 million sales figure helps a little but does not provide a complete answer. We will have to monitor auto sales regularly and carefully. If new-vehicle sales continue to improve at the current rate, they should be back to 15,000,000 by 2012. That would be close enough to complete recovery. But if sales plateau at a their current level, we will be disappointed.

That's why half-full/half-empty is a good metaphor for the entire economy. 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.)

© 2010 Michael B. Lehmann

Friday, December 3, 2010

Employment Gains Slow

The Lehmann Letter (SM)

Today the Bureau of Labor Statistics announced that the labor market is - at best - treading water:

http://stats.bls.gov/news.release/empsit.nr0.htm

You can view the data in tabular form at:

http://stats.bls.gov/news.release/empsit.b.htm

There are 15.1 million unemployed and an unemployment rate of 9.8%. The labor market must add 250,000 jobs a month for several years in order to restore full employment.

That's why today's report, that November employment grew by 39,000 jobs. is so disappointing. Employment in government, construction, manufacturing, retail and finance all shrank. Professional and business services and education and health services did grow, but half of those gains were part-time.

Equally troubling: The workweek stopped growing. This is an important leading indicator because employers tend to extend hours for current employees before adding additional workers. The workweek had been expanding strongly and then stalled in November. That could be temporary, and both the workweek and total employment may resume stronger growth this month. Let's hope so.

But it is important to keep in mind that the demand for labor is a derived demand. Hiring depends upon growth in the economy's most depressed sectors, especially residential construction. Homebuilding was ground zero for the bubble, and when that bubble burst it became ground zero for the subsequent recession. It's hard to see how we can return to full employment without a strong recovery in the home-building sector.

© 2010 Michael B. Lehmann

Tuesday, November 30, 2010

December Publication Schedule

The Lehmann Letter (SM)

Here’s a schedule for some of December’s most important data releases.

This letter will pay special attention to employment, homes and autos, capacity utilization and consumer confidence.

PUBLICATION SCHEDULE

December 2010

Source(* below)Series Description.Day & Date

Quarterly Data

BLS……………Productivity………….…Wed, 1st

BEA…International Transactions…Thurs, 16th

BEA…………………GDP…………...……Wed, 22nd

BEA……………….Profits…………...……Wed, 22nd


Monthly Data

ISM…Purchasing managers’ index……Wed, 1st

BLS…………………….Employment………… Fri, 3rd

BEA….New-vehicle sales…(Approximate).Mon, 6th

Fed…...Consumer credit…(Approximate).Tue, 7th
Census…………………...Inventories…….. Tue, 14th
BLS………………….Producer prices……. Tue, 14th
BLS………………….Consumer prices.….. Wed, 15th
Fed……………..Industrial production…….Wed, 15th
Fed…………….Capacity utilization……….Wed, 15th
Census……….……..Housing starts……….Thu, 16th
Conf Bd……….Leading indicators……….Fri, 17th

NAR………………Existing-home sales….Wed, 22nd
Census…………..New-home sales……...Thu, 23rd
Census………….Capital goods………….. Thu, 23rd

Conf Bd……….Consumer confidence….. Tue, 28th

* 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

© 2010 Michael B. Lehmann

Monday, November 29, 2010

Europe

The Lehmann Letter (SM)

Today's New York Times and Wall Street Journal carried stories on the Irish rescue package:

http://www.nytimes.com/2010/11/29/business/global/29euro.html?_r=1&adxnnl=1&ref=todayspaper&adxnnlx=1291050008-QRoi5whNUa5kohAQgbrn0A

http://online.wsj.com/article/SB10001424052748704700204575642270168946834.html?mod=ITP_pageone_0

Let's hope that calm returns to world currency and sovereign-debt markets.

Of almost equal importance, however, is the evidence that Europe has once again found its way through the thicket and bound itself together ever more firmly. Expressed fears that the Euro-zone would come apart have not materialized.

Over the past 65 years Europe has transformed itself from the wreckage of World War II into a novel and forward-looking political entity. For centuries the European nations had been at each other's throats. Now they work together for mutual economic, social and political improvement. Trace their history from the birth of the European Payments Union in 1950, through the 1957 Treaty of Rome that created the Common Market, the Single European Act of 1986 that dismantled trade barriers, to the 1992 Maastricht Treaty that established the European Union, the Euro and the European Central Bank, and you see a solid record of progress.

Compromise and accommodation are the most important ingredients in this accomplishment. The European nations have subordinated their individual interests in order to achieve a common goal that they knew would eventually generate maximum benefit for all. That's why there is little evidence of backsliding and dissolution despite the stresses and strains of periodic crises. Perhaps we, on our side of the ocean, could learn something from the folks over there and their devotion to the common weal.

© 2010 Michael B. Lehmann

Wednesday, November 24, 2010

Business Equipment Expenditures Look Rosy

The Lehmann Letter (SM)

The Census Bureau reported some good news today regarding business investment:

http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

New orders for business equipment rose in October.

But the chart provides an even stronger impression of recovery. October orders were $70.8 billion, a dramatic improvement from their $50+ billion low.

New Orders for Business Equipment

Click on chart to enlarge.)



Recessions shaded

If you use your mind's eye to update the chart with the latest $70 billion reading, you can see that businesses are planning for a brighter future.

That's an important sign that businesses are willing to increase production. It offsets the sluggishness in consumer demand for homes and cars.

So we have a struggle. Can business optimism prevail over households' pessimism? 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.)

© 2010 Michael B. Lehmann

Wednesday, November 17, 2010

Inflation: Bittersweet News

The Lehmann Letter (SM)

Inflation remained low last month (2.4%) and low over the past year (1.2%) the Bureau of Labor Statistics announced today:

http://stats.bls.gov/news.release/cpi.nr0.htm

Consumer Prices

(Click on chart to enlarge.)



Recessions shaded

Gasoline (9.5%) and fuel oil (14.5%) accounted for all of the inflationary pressure in the last 12 months. Inflation would have been negligible without them.

Since imports account for most of our energy needs, this tells us that inflation is not a cause for concern within our domestic economy. That's a function of demand's slow growth at home. Here's why.

When demand grows rapidly and pulls production up with it, the economy strains to supply the goods and begins to operate less efficiently. Think of your car's engine as an analogy. It speeds up when you depress the accelerator, but you get fewer miles per gallon. That's expensive. The same thing happens to the economy. If we make the economy grow too fast, it does so in a less efficient and more costly fashion. That's the supply-side lesson.

We have looked at the supply-side in this month's letters and yesterday's letter showed that the economy still has plenty of slack. We're running at a smooth 50 mph, not an overheated 80. That holds costs and inflation down but, of course, does not provide a job for all who need one.

So today's low-inflation news is bittersweet. The low inflation that we enjoy today is a consequence of not running our economy fast enough to generate full employment.

(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.)

© 2010 Michael B. Lehmann

Tuesday, November 16, 2010

Capacity Utilization

The Lehmann Letter (SM)

This month's letters are focused on the supply side: Production, costs and prices.

The objective: To determine whether or not output is growing in a sustainable fashion and whether or not rising costs and prices threaten.

(Recall that last month’s letters found demand’s bedrock indicators - real estate, motor vehicles and borrowing - to be weak and directionless.)

Yesterday's letter reported that manufacturers, wholesalers and retailers continued to rebuild inventories on the expectation of rising sales. That's a good sign.

This morning the Fed announced that capacity utilization remained flat in October:

http://www.federalreserve.gov/releases/g17/Current/default.htm

Capacity utilization hasn't changed since July. This mirrors industrial production’s record, which also hasn't grown since July.

Capacity utilization answers this question: What is the current level of output expressed as a percentage of the maximum? Industrial production and capacity utilization have remained flat for a quarter-year, and that is not a good sign. To some extent warm fall weather was responsible because electric output slumped as customers turned off their heaters. But manufacturing didn't do much either.

Capacity Utilization

(Click on chart to enlarge.)



Recessions shaded

So we will need to keep our eyes on the chart and remain vigilant. Capacity utilization that hovers under 75% is not a sign of robust growth. Historically 80% is a good marker of an economy running close to its full capacity. Anything above 85%risks rising costs and inflationary pressure.

The Bureau of Labor Statistics is scheduled to release its report on consumer prices tomorrow morning. That will provide an opportunity to measure costs and prices.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars a
nd then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2010 Michael B. Lehmann

Monday, November 15, 2010

Inventories

The Lehmann Letter (SM)

This morning the Census Bureau announced that September sales and inventories (stocks of goods on shelves) had increased for manufacturers as well as wholesalers and retailers:

http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

That's good news on two grounds:

1. These businesses continue to show sales gains.

2. They also show sustained optimism as they rebuild their stocks of goods in anticipation of future sales growth.

Inventories piled up on the shelves as sales slumped during the recession. That's why the Inventory/Sales ratio rose precipitously. The ratio began to drop in 2009 when businesses slashed inventories to bring them in line with depleted sales. In 2010 as sales began to recover businesses started to restock their shelves once more.

This morning's report provides evidence that the trend continues. Business sales are growing and inventory-restocking is climbing even more rapidly. Businesses are selling and they anticipate selling even more in the near future. That's good news.

© 2010 Michael B. Lehmann

Thursday, November 11, 2010

Profit Margins

The Lehmann Letter (SM)

Yesterday's letter said that rising commodity prices and inflation overseas would not boost inflation in the US. That's because domestic borrowing, spending and demand remain weak.

But rising commodity prices could nonetheless squeeze American firms' profit margins. US businesses must compete in product markets even if - or especially if - demand for their output is weak. At the same time they must purchase inputs on the open market as the cost of those inputs rises. That means American corporations’ profit margins will be squeezed by the rising prices they must pay for materials and the weak prices they receive for their products.

If domestic producers can't pass higher costs on to their customers, they'll be in the worst of both worlds. But that doesn't necessarily mean that we'll have rising inflation here at home.

© 2010 Michael B. Lehmann

Wednesday, November 10, 2010

Inflation

The Lehmann Letter ©

Today's Wall Street Journal has a lead article on commodity prices and inflation:

http://online.wsj.com/article/SB10001424052748704635704575604443663385672.html?mod=ITP_pageone_0

Investors are concerned that rising commodity prices will boost inflation throughout the economy. In the past soaring inflation squeezed profit margins and thereby generated a stock-market retreat.

But today's commodity-price surge may not lead to overall inflation and stock-market decline.

In past business cycles, such as the inflationary surges in the early and late 1970s, booming demand here at home - driven by robust borrowing and spending - pulled prices upward. Commodity prices led the charge higher, but that was in response to hyper-strong demand here at home.

Now borrowing, spending and demand are weak here at home. Strong demand in China and other emerging markets is responsible for rising commodity prices. That could affect us in two ways. First, prices on our imports of Chinese finished goods may rise, contributing to domestic inflation. Second, the general rise in commodity prices could boost costs for our producers. But neither of these scenarios for potential inflation find their way around the boulder in the road: Weak demand here at home. That's why rising commodity prices are not now reminiscent of past inflationary surges.

That doesn't mean there is no potential trouble down the road. It does, however, mean there's no automatic connection between the surge in commodity prices and escalating inflation in our own economy.

Tomorrow's letter will discuss the implications of commodity inflation on profits and the stock market in a weak non-inflationary economy.

© 2010 Michael B. Lehmann

Monday, November 1, 2010

Supply-Side Indicators

The Lehmann Letter ©

Over the past couple of months this letter has focused on the demand-side data in an attempt to evaluate the forces that could pull us out of the economic ditch. Conclusion: It will be a long, slow haul.

Consequently past editions of this letter concluded that growing profit margins rather than growing sales volume (earnings = margins X volume) had driven the recent stock market run-up and that slow sales-volume growth imperiled future stock-market gains.

See today's Wall Street Journal for a front-page article that takes a like-minded view: http://online.wsj.com/article/SB10001424052748704477904575586181999090898.html?mod=ITP_pageone_0

It reinforces a similar article in Sunday's New York Times: http://www.nytimes.com/2010/10/31/your-money/31fund.html?_r=1&scp=1&sq=Paul%20Lim&st=cse

If sales-volume growth faces a rocky future, what about the profit-margin growth that fueled the stock market's recent jump?

This month's letters will focus on the most important and readily accessible supply-side indicators in order to discern the production, cost and inflation trends that influence profit margins.

For instance, this morning's Institute for Supply Management's October Purchasing Managers' Index rose modestly to 56.9% from September's 54.4% (anything over 50% indicates expansion): http://www.ism.ws/ISMReport/MfgROB.cfm

The Index reports purchasing managers' ease or difficulty in obtaining manufacturing inputs. A rising Index indicates a stronger economy.

But rising output can also signal rising costs, a squeeze on profit margins and rising prices (inflation). Are we headed toward an inflationary profit-margin crunch? This month's letters will track these indicators to find a clue.

Here’s the publication schedule for some of November 2010’s most important supply-side indicators.

PUBLICATION SCHEDULE

November 2010

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

Quarterly Data

BEA……….…GDP……..……Tue, 23rd

Monthly Data

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

BLS…………….Employment……… Fri, 5th
Census………...Inventories…………..Mon, 15th
BLS…………….Producer prices…….Tue, 16th
Fed…………….Capacity utilization….Tue, 16th
BLS…………….Consumer prices…..Wed, 17th
Census……….Capital goods…..…..Wed, 24th

* 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
* Fed = Federal Reserve System
* ISM = Institute for Supply Management

© 2010 Michael B. Lehmann

Friday, October 29, 2010

GDP

The Lehmann Letter (SM)

This morning the Commerce Department announced that GDP grew by 2.0% in the third quarter:

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

That means the economy is out of recession, with recovery in the weak-to-moderate range.

GDP

(Click on chart to enlarge.)



Recessions shaded

It also means that we can expect no more benefit from fiscal or monetary policy. Here's why:

Federal government expenditures grew by 8.8% - a healthy clip. But that obviously was not sufficient to pull the entire economy along at a buoyant rate.

The Federal Reserve has kept interest rates low and plans to reduce long-term rates by even more. But, as readers of this letter know, lower rates are not likely to boost growth. The economy is still suffering from the burst real-estate bubble, and lower rates can't help that. (Lower rates have an immediate impact on spending in an inflationary climate, and that's not what we have today.)

In conclusion: The federal government and the Federal Reserve have done what they can do to stimulate the economy. It won't be enough. And we can't anticipate a technology boom a la the 1990s or a real-estate boom a la 2003 -space 2008. Green technology isn't there yet and housing is down for the count.

Now we have to prepare ourselves for a long, slow recovery. Not a double-dip recession – just a tedious slog.

We are entering a period unlike any other we've seen since World War II.

(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.)

© 2010 Michael B. Lehmann

Wednesday, October 27, 2010

New-Home Sales

The Lehmann Letter (SM)

Sales of new homes were 307,000 in September, a 6.6% increase over August, according to today's bulletin from the Census Bureau:

http://www.census.gov/const/newressales.pdf

The chart puts those numbers in perspective. New-home sales remain in the doldrums.

New Home Sales

Click on chart to enlarge.)



Recessions shaded

That brings to a close this month's cycle of important building data. The trend is clear: Residential real estate is flat, with recovery and growth a prospect for the future.

On Friday the Commerce Department is scheduled to release its first estimate for third-quarter GDP growth. This will provide an opportunity to turn from real estate to other aspects of the economy. It will be a good time, at the end of the month, to assess where we are now.

(The chart was taken from ht
tp://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2010 Michael B. Lehmann

Monday, October 25, 2010

Home Sales

The Lehmann Letter (SM)

This morning the National Association of Realtors reported that existing-home sales surged 10% in September:

http://www.realtor.org/press_room/news_releases/2010/10/sept_strong

Lawrence Yun, the Realtors' chief economist, commented: “A housing recovery is taking place but will be choppy at times depending on the duration and impact of a foreclosure moratorium. But the overall direction should be a gradual rising trend in home sales with buyers responding to historically low mortgage interest rates and very favorable affordability conditions.”

That assessment, i.e.”…a gradual rising trend…,” is right on. Once upon a time, in the housing slumps of the 1970s and early 1980s, the Fed's high-interest-rate-policies generated periodic housing contractions. Subsequent low-interest-rates would generate explosive housing recoveries. This time, from 2002 through 2009, we had an asset bubble that burst without Fed intervention. Since high interest rates didn't cause the recent problem, low interest rates won't do much to generate a recovery. That's why growth will be gradual, not explosive.

Home Sales

Click on chart to enlarge.)



Recessions shaded

This letter has said - over and over again - that the real-estate collapse was the recession's Ground Zero. The Realtors reported 4.53 million sales in September. Connect that dot to the line on the chart and you can see what it will take to put Ground Zero behind us. Mr. Yun’s assessment is sober and realistic.

(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.)

© 2010 Michael B. Lehmann

Tuesday, October 19, 2010

Housing Starts: How to Read the Numbers

The Lehmann Letter (SM)

Today's Census Bureau announcement that housing starts grew slightly in September was good news:

http://www.census.gov/const/newresconst.pdf

But it also illustrated the importance of putting data in historical perspective.

Chart 5.7 Housing Starts

Click on image to enlarge)



Recessions shaded

The chart shows that housing starts have fluctuated around 600,000 at a seasonally-adjusted annual rate for over year. Today's report of 610,000 starts falls within that range. But the most important observation is housing starts' tumble from their high of over 2 million and their continued languishing in the trough.

These readings demonstrate the importance of historical perspective. Don't let the latest numbers overwhelm your judgment. There is always noise (random fluctuations) in the data. Beware of percentage changes. Always inquire: What is the basis for the percentage comparison? And, as the chart amply illustrates, a picture is often worth a thousand words.

(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.)

© 2010 Michael B. Lehmann

Friday, October 15, 2010

The Chairman Speaks

The Lehmann Letter (SM)

Today's Boston speech by Federal Reserve Chairman Ben Bernanke (http://www.federalreserve.gov/newsevents/speech/bernanke20101015a.htm)
carried these words in its conclusion: "... (the Fed) is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate."

That means the Fed will pursue an expansionary policy in order to stimulate borrowing and spending and slightly lift inflation to levels consistent with a robust economy.

The Fed has a tough row to hoe. Additional ease can't hurt, but the economy's slack borrowing and spending have more to do with households' strained balance sheets than high interest rates. Today's rates are enticingly low, yet potential borrowers stay on the sidelines because they lack liquidity and carry too much debt.

There's an old saying: It's hard to push a string. That means the Fed has more success using high interest rates to restrain the economy (pulling back on a string), and less success using low interest rates to stimulate the economy (pushing on a string). Low interest rates used to work after a period of restraint brought on by high rates. But today's slump is due to a burst housing bubble that left household balance sheets in shambles. Further reduction of interest rates may be no more effective than pushing a string.

© 2010 Michael B. Lehmann

Thursday, October 14, 2010

Stock Market Run Up

The Lehmann Letter (SM)

The stock market has enjoyed a robust run up this fall. The chart reveals that the S&P 500 has gained about 50% from its recession lows. The chart also reveals that the S&P must gain another 25% to exceed the peaks enjoyed in 2000 and 2007. The stock market has fluctuated in a range over the past decade. What has driven the market thus far and will those forces be sufficient to drive it to new higher ground?

Chart 1.1 S&P 500

Click on image to enlarge)



Recessions shaded

Supply-side forces have prevailed to date. The financial panic is over and interest rates are at rock bottom. Inventory liquidation has concluded and firms have resumed production. Most important, profit margins have been exceptionally strong and grown to record highs. That has enabled total profits” full recovery.

But total profits continued growth depends on more than robust margins. Sales volume must expand rapidly as well (Profit margins X Sales volume = Total profits). This depends on strong demand growth throughout the economy, and achieving it won't be easy. All the indicators point to sluggish demand growth now and in the near future.

Can the S&P soon break through its previous highs and rise to over 1,600? It won't be easy with demand in its current weak condition.

(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.)

© 2010 Michael B. Lehmann

Wednesday, October 13, 2010

The Way Forward

The Lehmann Letter (SM)

The last letter began with this question: “What will lift the economy out of the doldrums?”

"Strong demand," is the answer.

But we haven't yet found the source for this much-needed demand.

Household borrowing and spending collapsed when real estate imploded. The federal government tried to make up the difference with its borrowing and spending. Now the government's efforts have become political liabilities. So we can't expect federal expenditures to show the way.

That means we'll have to wait for households to reduce their debts and re-liquefy their balance sheets before consumer spending begins to slowly gain strength.

The front page of today's New York Times carries an article by Michael Powell and Motoko Rich that illustrates the problem:

http://www.nytimes.com/2010/10/13/business/economy/13econ.html?_r=1&ref=todayspaper

The first sentence of the ninth paragraph sums it up: "Demand is inert."

We have painted ourselves into a corner and should not expect quick relief.

© 2010 Michael B. Lehmann

Thursday, October 7, 2010

Auto Sales

The Lehmann Letter (SM)

The Bureau of Economic Analysis has released September new-vehicle sales:

http://www.bea.gov/national/index.htm#gdp .

Scroll down to the “Motor vehicles” link and go to table six of the spreadsheet. You’ll see that new-vehicle sales were 11.7 million in September.

Now compare that to the historical data in the chart. There’s been a gradual recovery from recession lows, but it’s been a slow ascent. New-vehicle sales remain at levels not seen since the 1981-82 recession and earlier slumps.

Chart 5.5 New-Vehicle Sales

(Click on image to enlarge)



Recessions shaded

These figures are all part of the weak-economy syndrome. Auto sales were on a 16 - 17million annual plateau from the late 1990s to 2007. Now they are on an 11 -12 million annual plateau. What will break them loose so that they can rise to their earlier level?

That's the key question. Its answer will probably show us the way to renewed robust conditions.

(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.)

© 2010 Michael B. Lehmann

Monday, October 4, 2010

Foreclosure Crisis

The Lehmann Letter (SM)

Today's New York Times carries a front-page article on "Flawed Paperwork......" by Gretchen Morgenson:

http://www.nytimes.com/2010/10/04/business/04mortgage.html?_r=1&ref=todayspaper

It's about the foreclosure crisis and begins with these paragraphs:

"As some of the nation’s largest lenders have conceded that their foreclosure procedures might have been improperly handled, lawsuits have revealed myriad missteps in crucial documents.

"The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions."

The article goes on to describe and discuss the banks' rush to foreclose and the corners banks cut in order to ram an unprecedented volume of foreclosures through their bureaucracies. It's worth reading.

But more importantly the article tempts one to pause and reflect on what might have been done in order to prevent this sorry state of affairs. Suppose the federal government, at the beginning of the real-estate crisis, had mandated the following refinance program for troubled and underwater loans: The substantial write-down of principal to an affordable level, with the federal government saving banks harmless by compensating banks for the loss. That way loan values could have been crammed down to levels borrowers could afford without stressing lenders. True, the program would have cost plenty and there would have been complaints of moral hazard. Yet it might have prevented the current crisis.

The federal government has instituted a small number of voluntary programs with limited success. Consequently the market has run and is running its natural course. Millions have lost or will lose their homes, and the entire economy is being dragged down by its real-estate anchor. What an irony that the banks' paperwork skullduggery may eventually gum-up the system and slow foreclosures. Wouldn't it have been better to plan ahead?

© 2010 Michael B. Lehmann

Friday, October 1, 2010

October Publication Schedule

The Lehmann Letter (SM)

Last month this letter drew attention to weakness in housing because housing is a key indicator of consumer demand.

This month’s letters will also focus on consumer demand by examining new-vehicle sales, consumer credit and consumer confidence.

Here’s the schedule for some of October’s consume-demand-related releases.

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

BEA….New-vehicle sales…...(Approximate).Wed, 6th

Fed………..Consumer credit…...(Approximate).Thu, 7th
Census……….……..Housing starts………….Tue, 19th
NAR………………Existing-home sales…….Mon, 25th
Census…………..New-home sales………...Wed, 27th
Conf Bd………….Consumer confidence….. Thu, 21st


* BEA = Bureau of Economic Analysis of the U.S. Department of Commerce
* Census = U.S. Bureau of the Census
* Conf Bd = Conference Board
* Fed = Federal Reserve System
* NAR = National Association of Realtors

© 2010 Michael B. Lehmann

Monday, September 27, 2010

Profit Margins

The Lehmann Letter ©

Why is the stock market climbing although the economy is slack?

Record profit margins should be part of any answer.

Think of profit margins as the ratio between the price of the product divided by the cost of producing it. If the number rises, profit margins are rising as the gap between price and cost grows. If the number falls, profit margins are falling as the gap shrinks.

The chart shows profit margins for the whole economy. You can see that they now stand at a post-World War II high.

Chart 2.3 Profit Margins

(Click on image to enlarge)



Recessions shaded

Business now enjoys this good fortune because the cost of producing each unit of output has fallen while prices have held steady. During the recession employers reduced their workforces more than output fell. The employees who survived the mass layoffs now produce more per hour of work because workforce reduction exceeded output reduction. That means less labor time is required to produce each unit of output. Consequently unit labor costs (the cost of producing a unit of output) have fallen. The chart shows record profit margins as prices held steady while costs fell away.

But record profit margins by themselves can’t keep boosting total profits. Growing profits also require growing sales volume. (Total Profits = Profit Margins X Sales Volume) That’s why the economy’s recovery and improvement are also important.

(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.)

© 2010 Michael B. Lehmann

Friday, September 24, 2010

Weekly Review

The Lehmann Letter (SM)

The release of three major indicators made this a big week for real estate: Housing starts, existing-home sales and new-home sales.

Today the Census Bureau announced 288,000 new homes sold in August:

http://www.census.gov/const/newressales.pdf

That number shows no sign of recovery.

But it was yesterday's release by the National Association of Realtors of August's existing-home data that was a real eye catcher: 4.1 million following 3.8 million in July.

Existing Home Sales

(Click on chart to enlarge.)



Recessions shaded

If you plug those numbers into the chart it looks like a double dip. That's because the tax credit artificially inflated Spring sales, which then plunged with the tax credit's expiration.

But keep your eye on the chart. We are now hovering around 4 million sales per month, a figure lower than any during the depths of the recession. There is no sign of recovery here.

Finally, the Census Bureau also announced today that new orders for nondefense capital goods were flat in August:

http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

That's an important barometer for the direction of business capital expenditures. It's stuck in a rut, too.

It was not a good week.

(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.)

© 2010 Michael B. Lehmann

Tuesday, September 21, 2010

August Housing Starts

The Lehmann Letter (SM)

This morning the Census Bureau reported that construction began on 598,000 new housing units in August and revised July's starts to 541,000:

http://www.census.gov/const/newresconst.pdf

The Bureau's press release said this was a gain of 10.5% and also said that August's figure was 2.2% ahead of July 2009's 585,000 level.

Housing Starts

(Click on chart to enlarge.)



Recessions shaded

The chart puts these data in perspective. You can see that housing starts have been hanging out at 600,000 (plus or minus) for over a year. That's lower than any of the brief troughs of earlier post-war recessions. Today's numbers are so low that monthly fluctuations can appear large in percentage terms. We have got to break out of this range, say to one million or so, in order to claim any true improvement and an upward trend.

As yesterday's letter said: "(Housing starts) are important because residential real estate was the recession's ground zero. We can't have a robust recovery and expansion until residential real estate returns to health."

(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.)

© 2010 Michael B. Lehmann

Monday, September 20, 2010

This Week

The Lehmann Letter (SM)

This is a big week for housing data: On Tuesday and Friday the Census Bureau releases its reports on housing starts and new home sales, while on Thursday the National Association of Realtors announces figures for existing-home sales.

They are important because residential real estate was the recession's ground zero. We can't have a robust recovery and expansion until residential real estate returns to health.

But the building and bursting of the recent real-estate bubble created a new kind of recession. This recession did not flow from rising inflation and rising interest rates. Those past recessions were easily remedied by policies that generated falling inflation and falling interest rates. Low rates meant more borrowing and spending and a snappy recovery and expansion. This time we had an asset inflation followed by asset deflation. Now household balance sheets are compromised by scarce liquidity and falling equity. Low interest rates can't encourage households to buy new homes. They don't have the wherewithal and they remain poor risks.

As a result the asset deflation created both supply and demand problems. There are too many homes in foreclosure adding to the glut of unsold homes. At the same time households can't or won't buy new homes because their finances are too insecure.

New Home Sales

(Click on chart to enlarge.)



Recessions shaded

The chart is worth a thousand words. You can see the boom and bust, and you can see that new-home sales have been hanging out at a depressed 400,000 for the past year. That figure must increase by 50% to 600,000 before we can claim robust recovery and expansion. But July sales fell to only 276,000. On Friday we'll know August's sales figure. Let's hope it's headed sharply north.

(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.)

© 2010 Michael B. Lehmann

Friday, September 17, 2010

Payments Deficit

The Lehmann Letter (SM)

In a further endorsement of the economic recovery, yesterday the Commerce Department announced that the U.S. International deficit on current account had risen from $109.2 billion in the first quarter to $123.3 billion in the second quarter:

http://www.bea.gov/international/bp_web/simple.cfm?anon=71&table_id=1&area_id=3

This may seem paradoxical: How can a growing balance of payments deficit signal a growing economy?

The chart serves to deepen the mystery: Each recession (gray vertical bar) appears to have reduced the deficit (the line climbs back up), while expansions have grown the deficit (the line continues south).

That's because the balance of trade drives our balance of payments. In recession our imports drop because falling incomes reduce expenditures on foreign as well as domestic goods. Consequently our balance of payments improves as we spend less overseas. When economic recovery and expansion bring growing incomes and increased expenditure at home and abroad, our balance of payments deteriorates as we purchase more from the rest of the world.

Current Account

(Click on chart to enlarge.)



Recessions shaded

You can see from the chart that recent developments confirm this. Our balance of payments deficit dropped from over $200 billion per quarter to less than $100 billion in the course of the recent recession. Now the deficit is growing again as the economy and incomes recover and we purchase more from the rest of the world.

The chart also reveals the unmistakable trend over the past quarter century: The long run deterioration in our balance of payments as our purchases from the rest of the world grow. The recent recession provided a brief interruption in a disturbing trend. Now, as the economy gains momentum, you can expect the balance of payments deficit to deteriorate further and reach record levels 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.)

© 2010 Michael B. Lehmann

Wednesday, September 15, 2010

Industrial Production Grows

The Lehmann Letter (SM)

Today's Federal Reserve report on industrial production and capacity utilization was encouraging: http://www.federalreserve.gov/releases/g17/Current/default.htm

Both continued to grow in August, building on a year of recovery and improvement for manufacturing, mining and public utilities. That's good news.

Capacity Utilization

(Click on chart to enlarge.)



Recessions shaded

Capacity utilization stands at 74.7%. That means that industry now produces 74.7% of the maximum it could produce. Round that number to 75% and plug it into the chart, and you could say that industry is making a snappy recovery. Capacity utilization has improved by over 5% from its recent trough during the worst post--World War II recession.

But the recovery has slowed in recent months. Capacity utilization was 74.0% in May, so that we've gained less than 1% over the past quarter year. You can see from the chart that we have to push our way back to at least 80% to claim that industry is thriving once again.

What can be done to accomplish this? Aggregate demand must recover and thereby provide a market for the goods industry produces. Residential construction and auto sales are the best simple measures of demand's strength. Think of all the lumber, steel, glass, rubber, cement and other materials these industries consume directly. And then think of all the furniture, furnishings, heating and air conditioning units and kitchen and laundry appliances that go into new homes. That gives you an idea how strongly industry's wagon is hitched to building's and autos’ horses.

New home-sales and home-building data will be out soon. We'll take a look at that to gauge the overall economy's health.

(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.)

© 2010 Michael B. Lehmann

Monday, September 13, 2010

This Week

The Lehmann Letter (SM)

On Wednesday the Federal Reserve will release this week's most important economic data: August industrial production and capacity utilization figures.

Much hope for the recovery relies upon an industrial rebound. Businesses have improved their profit margins, but sales must also grow for earnings.' continued expansion. Rising capacity utilization signals that industry is using a greater share of its plant and equipment in order to meet a larger volume of orders. This is good news by itself, but also may signal industry's need to invest in additional plant and equipment if capacity utilization rises steeply. That would help the construction sector and heavy machinery and equipment manufacturers.

Capacity Utilization

(Click on chart to enlarge.)



Recessions shaded

The chart reveals how badly industry tumbled during the recession. It also shows the beginning of a rebound. Keep your eye on capacity utilization over the coming months. If the rate climbs past 75% and up toward 80%, that's a good sign that we're heading out of 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.)

© 2010 Michael B. Lehmann

Friday, September 10, 2010

Strong Sales

The Lehmann Letter (SM)

Today the Census Bureau reported strong sales gains across a broad swath of American industries: http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf

That's good news for our economy's recovery.

Businesses also continued to rebuild inventories while they maintained a low inventory/sales ratio. That's also encouraging because it reverses a development that dragged us into recession.

Here's why. Manufacturers' sales collapsed as the recession took hold. To make matters worse, inventories of unsold goods piled up on their shelves. The inventories/sales ratio climbed as sales plunged and inventories rose. Manufacturers brought the situation under control by slashing production by an amount greater than the sales drop, thereby bringing the inventories/sales ratio back down to normal levels. That was an important cause for the economy's rapid descent into recession and the equally rapid rise in unemployment.

Businesses did not resume strong manufacturing production until they had liquidated excess inventories. Today's report shows that this process is continuing as sales and inventories build once again while the inventories/sales ratio remains low after the inventory work off. This reversal of inventory liquidation, and the consequent rebound of manufacturing production, is an important ingredient in the economy's recovery.

But it won't be sufficient for a complete comeback or for the return of full employment. That will require stronger signs of life in demand for new housing and autos. Let's keep our fingers crossed.

© 2010 Michael B. Lehmann

Tuesday, September 7, 2010

No Double Dip Yet

The Lehmann Letter (SM)

Last week this letter urged readers to follow residential construction and auto sales for a clue on the economy's direction.

You already know about the weakness in housing. So let's examine new-vehicle sales.

The Commerce Department reports 11.4 million new-vehicle sales in August at a seasonally-adjusted annual rate. (See the end of this letter for instructions on retrieving the data.) The report also reveals that sales have been flat in the 11-million range for about half a year.

Much has been said about the auto industry's rebound. Profits have recovered and General Motors will soon return to private ownership after a spell under the wing of the federal government.

New-Vehicle Sales

(Click on chart to enlarge.)



Recessions shaded

But the chart makes clear that a profit rebound is not necessarily a sales rebound. We have not returned to the 16-17 million range the industry enjoyed before the bubble burst.

In a way, this performance is a metaphor for the entire economy. Profits are back while the economy isn't.

That does not mean we are falling into recession. But it does mean that we are, at least for the time being, stuck on a low plateau.

New-vehicle sales won't send a signal that the economy has recovered until they grow back toward the 15-million range.


(To examine the data on new-vehicle sales……..

Go to http://www.bea.gov/ and then

Step 1: Click on "Gross Domestic Product" under "National"
Step 2: Scroll down and click on "Motor Vehicles" under "Supplemental Estimates"
Step 3: Save to your desktop as an Excel file and then open the file
Step 4: Click on the "Table 6" tab at the bottom of the page
Step 5: Look at column I (Light Total) and scroll down for the latest data)

(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.)

© 2010 Michael B. Lehmann

Friday, September 3, 2010

Not Yet Robust

The Lehmann Letter (SM)

Today the Bureau of Labor Statistics reported that the economy lost 54,000 jobs in August:

http://stats.bls.gov/news.release/empsit.b.htm

The stock market interpreted the report as good news because the private sector gained 67,000 jobs while government jobs fell by 121,000. The reasoning went like this: It's good that the private economy is gaining jobs, even while the Census continues to shed jobs, because it's the private sector that must recover.

True enough. But keep in mind that we want the economy to truly recover, not merely avoid another recession.

Job Growth

(Click on chart to enlarge.)



Recessions shaded

The chart clearly illustrates the recession's damage to the labor market. At one time we were losing well over half a million jobs a month. Then we recovered into positive territory. But job losses recently reappeared as the Census shed workers.

Here's the point: The economy has to add 250,000 jobs a month to successfully drive the unemployment rate downward. That rate is now stuck between 9% and 10%. Those are not recovery numbers.

We need positive strength, not just the absence of weakness.


(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.)

© 2010 Michael B. Lehmann

Wednesday, September 1, 2010

September Publication Schedule

The Lehmann Letter (SM)

Today’s positive report on manufacturing from the Institute of Supply Management gave the stock market a boost. But it’s positive news from housing and autos that will signal the economy’s escape from its current morass.

• Here are the key consumer-demand indicators we'll examine and the September days and dates on which we can expect them to appear. They will give us up-to-the-minute information on demand's recovery.

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

BEA….New-vehicle sales…...(Approximate).Wed, 8th

Fed………..Consumer credit…...(Approximate).Wed, 8th
Census……….……..Housing starts………….Tue, 21st
NAR………………Existing-home sales…….Thu, 23rd
Census…………..New-home sales………...Fri, 24th
Conf Bd………….Consumer confidence….. Tue, 28th

• Production, employment and capital expenditures are important, but they’re not likely to lead the charge. Here’s what to watch.

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

Quarterly Data

BLS…………..Productivity…………….Thu, 2nd

BEA………..….GDP…………………….Thu, 30th

Monthly Data

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

BLS…………………….Employment………… Fri, 3rd
Census…………………...Inventories……….. Fri, 10th
Fed……………..Industrial production……….Wed, 15th
Fed…………….Capacity utilization………….Wed, 15th
BLS………………….Producer prices……. Thu, 16th
BLS………………….Consumer prices….….. Fri, 17th
Conf Bd……….Leading indicators……….Thu, 23rd

Census………….Capital goods………….. Fri, 24th


* 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

© 2010 Michael B. Lehmann

Monday, August 30, 2010

No More Rabbits In The Hat

The Lehmann Letter (SM)

Everyone wonders: Why is this recession so much worse than earlier recessions? Why is it dragging on for so long? Why is the recovery so weak?

To answer that, we must familiarize ourselves with earlier recessions and recoveries.

•Before the 1990s Dot-Com Boom. Household spending on homes and autos led the business cycle after World War II. As borrowing and spending surged, inflation and interest rates rose. That brought an end to the boom, and recession began. When inflation and interest rates fell due to recession, and encouraged renewed borrowing and spending, a new expansion began. That's why recessions were brief, recovery strong and unemployed workers in construction and manufacturing were quickly recalled to work.

•The 1990s Dot-Com Boom. In the early 1980s the Fed brought an end to the earlier boom-bust cycle and its inflationary bias. The economy slumped going into the 1990-91 Gulf War and remained weak for a couple of years after that. But the dot-com boom brought surging recovery and expansion without inflation. This time business, not households, led the charge as industry invested in personal computers, software applications and the Web. The economy and employment recovered and expanded sharply. We had pulled a rabbit out of the hat.

•The 2000-2001 Dot-Com Bust and the 2002-2007 Real-Estate Boom. Shrinking business capital expenditures, not contracting household purchases, generated the 2000-2001 dot-com recession. Once again concerns about a weak recovery and expansion arose, but the 2002-2007 real-estate bubble generated another expansion. That was the second rabbit we pulled from the hat.

•The Present Predicament. The bursting of the 2002-2007 real-estate bubble led to the present doldrums. The economy has passed from asset inflation to asset deflation, and the economy will remain weak as long as asset deflation prevails. We can't snap back quickly the way we did in the 1960s and 1970s when falling interest rates released an economy that had been temporarily stalled by rising inflation and interest rates. Nor is there a high-tech expansion available to rescue the economy; nor will low interest rates produce another asset inflation. There are no more rabbits in the hat.

Once upon a time we were blessed by a self-correcting business cycle that always brought snappy recovery and expansion from each recession. When that failed, the 1990s dot-com boom and the 2002-2007 real-estate bubble rescued us. Now we're in a jam and it could be a long time before we pull out of it. To repeat, there are no more rabbits in the hat.

© 2010 Michael B. Lehmann

Wednesday, August 25, 2010

Housing & Asset Deflation

The Lehmann Letter (SM)

Today the Census Bureau confirmed housing’s predicament:

http://www.census.gov/const/newressales.pdf

July sales of new homes fell to a new low of 276,000. This bad news follows directly on the heels of yesterday's word of the drop in existing-home sales.

New Home Sales

Click on chart to enlarge.)



Recessions shaded

And the chart makes clear that new-home sales have been stumbling around the bottom for the past year. To date all hopes of recovery have been premature.

Here's why.

1. We are in the midst of an asset deflation brought on by the reaction to the earlier housing boom. Since high interest rates did not cause the housing bust, low interest rates can't cure it.

2. Today's high unemployment is a consequence of housing's slump, not the cause of it. So don't expect falling unemployment to help any time soon. The causation will run the other way: Rising employment must wait for housing's recovery.

3. Households are busy re-liquefying their balance sheets. That won't permit large down payments and new mortgage-debt obligations.

4. There's a glut of homes on the market and the rising tide of foreclosures will sustain that glut in the near future. This will discourage homebuilders and new-home sales.

Only a massive mortgage write-down, funded by the federal government, could have alleviated this disaster. And that didn't happen.

So now it will take a long, long time to dig our way out.

(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.)

© 2010 Michael B. Lehmann

Tuesday, August 24, 2010

Housing

The Lehmann Letter (SM)

Housing

Today the National Association of Realtors announced a big drop in July existing-home sales. These data can vary sharply from month to month and the expiration of the housing-tax-credit had an effect. But the continued housing slump is cause for concern.

And it's not just existing-home sales that have been hit hard. New-home sales and residential construction are also in the doldrums. Residential real estate is in a slump.

Prevailing rock-bottom interest rates highlight the slump. They should stimulate building and buying, but they can't do the job. Households’ balance sheets are so illiquid and debt burdens so heavy, who can blame them for sitting on the sidelines?

In past business cycles, rising interest rates choked off housing and falling interest rates revived housing. But we've just come off a new post-World War II phenomenon: The housing-asset inflation and deflation. Be prepared for a very slow and weak recovery.

© 2010 Michael B. Lehmann

Thursday, July 22, 2010

August Publication Schedule

The Lehmann Letter (SM)

Everyone knows that housing led us into the recent recession. But what will lead us out? Here are the key August consumer-demand indicators that you can follow for up-to-the-minute information on demand's recovery.

Go to http://www.beyourowneconomist.com/ and click on Seminars, then click on Economic Indicators to navigate the sites that provide the data and click on Charts for a visual presentation that you can update.

• Home sales and construction remain in the doldrums. Consumer confidence and consumer credit are down, too. Households won't begin to spend heavily until they are willing to borrow heavily.
• Here are the key consumer-demand indicators we'll examine and the August days and dates on which we can expect them to appear. They will give us up-to-the-minute information on demand's recovery.
• Stay tuned to future editions of this letter as the story unfolds.

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

BEA….New-vehicle sales…...(Approximate).Wed, 4th

Fed………..Consumer credit…...(Approximate).Fri, 6th
Census…….………....Retail trade…….……….Fri, 13th
Census……….……..Housing starts………….Tue, 17th
NAR………………Existing-home sales…….Tue, 24th
Census…………..New-home sales………...Wed, 25th
Conf Bd………….Consumer confidence….. Tue, 31st

* BEA = Bureau of Economic Analysis of the U.S. Department of Commerce
* Census = U.S. Bureau of the Census
* Conf Bd = Conference Board
* Fed = Federal Reserve System
* NAR = National Association of Realtors

• We will also check on manufacturing activity and inventories as well as overall employment and capital expenditures to understand how strongly supply is responding to demand. The following indicators are key.

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

Quarterly Data

BEA……………….………GDP…………...……Fri, 27th

Monthly Data

ISM……….Purchasing managers’ index…….Mon, 2nd

BLS…………………….Employment………… Fri, 6th
BLS………………….Consumer prices….….. Fri, 13th
Census…………………...Inventories……….. Fri, 13th
Fed……………..Industrial production……….Tue, 17th
Fed…………….Capacity utilization………….Tue, 17th
BLS………………….Producer prices……. Tue, 17th
Conf Bd……….Leading indicators……….Thu, 19th

Census………….Capital goods………….. Wed, 25th

* 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

© 2010 Michael B. Lehmann

Wednesday, July 21, 2010

July Disappoints

The Lehmann Letter (SM)

The stock market slumped today in response to Fed Chairman Ben Bernanke's congressional testimony. The Chairman let Congress know that the outlook is not rosy.

But you need not have waited for Mr. Bernanke's testimony to reach a similar conclusion. Just take a look at housing starts and auto sales.

The Census Bureau announced 549,000 housing starts in June. Picture that number in the chart below. You can see the double-dip. Housing starts fell below 600,000, then snapped back only to fall below 600,000 again. The problem is clear. The tax incentive provided a temporary stimulus that has now expired. Mortgage rates are low, but that can't offset the overhang of unsold homes on the market and the flood of foreclosed homes that will soon join them. It's difficult for builders to make and sell new homes when so many existing properties glut the market.

Housing Starts

(Click on chart to enlarge.)



Recessions shaded

Auto sales present a similar problem. The Commerce Department reported June sales of 11.1 million new vehicles at an annual rate. You can see from the chart below that new-vehicle sales are stuck in the 11 million range. That's far below the 16 or 17 million sales plateau that prevailed before the recession.

New-Vehicle Sales

(Click on chart to enlarge.)



Recessions shaded

Residential construction and automobile production are important industries. Think of the activities that depend on them: Everything from lumber and building materials to kitchen appliances and furniture and furnishings to steel, glass and rubber tires. The economy can't be healthy until this entire constellation is restored to its higher plane.

Why aren't households borrowing and spending to purchase the homes and cars? Because they're protecting their balance sheets. Most consumers are trying to conserve liquidity and reduce debt. Those goals stand in direct contradiction to additional home and auto purchases. The recovery can't turn robust until this situation takes a turn for the better.

(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.)

© 2010 Michael B. Lehmann

Friday, July 2, 2010

On Vacation

The blogger is taking some time off and will post intemittently through mid August.

Have a good summer!

Tuesday, June 22, 2010

Still Struggling

The Lehmann Letter (SM)

Today the National Association of Realtors reported a small 2.2% drop in existing-home sales for May:

http://www.realtor.org/press_room/news_releases/2010/06/may_strong_pace

The Association's press release, in the lead sentence, said:

“Existing-home sales remained at elevated levels in May on buyer response to the tax credit, characterized by stabilizing home prices and historically low mortgage interest rates….”

But the 5.6 6 million May figure for home sales doesn't look so impressive when imposed on the chart below.

Existing Home Sales

(Click on chart to enlarge.)



Recessions shaded

You can see that home sales are still struggling and well off the sharp jump enjoyed when the tax credit was first announced. We can't say that home sales are truly recovering until they remain solidly above 6 million after the expiration of the tax credit.

That's important because real estate was ground zero for the economy's collapse. Its true recovery will signal the economy's return to health.

(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.)

© 2010 Michael B. Lehmann

Friday, June 18, 2010

Export Drive

The Lehmann Letter (SM)

Washington hopes that exports will help lead us out of the slump. But the latest data on our international accounts from the Commerce Department is not encouraging:

http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htm

Our first quarter current-account deficit rose to $109.0 billion from $100.9 billion in the last quarter of 2009. The growth in our trade deficit from $140.1 billion to $151.3 billion accounted for all of the increase. In other words, our imports surged by approximately $11 billion more than our exports. That's not a good omen.

Take a look at the chart below. You can see that our trade and payments balances have increasingly fallen into negative territory over the past 30 years. Recessions have brought corrections to that trend and the deficits have shrunk in those years. That's because, as our income fell with recession, we bought less from overseas. But as soon as the economy began to grow again, we ended up spending more abroad than we had before and the deficits became ever larger.

Balance on Current Account

(Click on chart to enlarge.)



Recessions shaded

Current developments forecast a return to these trends. As our economy recovers from the recent recession we can expect our imports to grow more rapidly than our exports. This will boost our trade and current-account deficits so that, before too long, we will probably be into record negative territory.

Exports may grow, but that doesn't mean they will grow more rapidly than imports.

(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.)

© 2010 Michael B. Lehmann

Wednesday, June 16, 2010

Conflicting Signals

The Lehmann Letter (SM)

Today's major statistical releases confirm the conflicted state of today's economy.

The Fed announced that American industry operate at 74.7% of capacity in May:

http://www.federalreserve.gov/releases/g17/Current/default.htm

That means that the manufacturing, mining and public utilities sectors are producing 74.7% of their maximum output. That looks pretty good when you impose that number on the chart below. It appears that industry is making a snappy comeback from recent lows. We are not yet up to the 80% level that indicates good health, but halfway there from the 70% lows we reached at the depths of the recession.

Capacity Utilization

(Click on chart to enlarge.)



Recessions shaded

So much for the good news. The bad news was that the Commerce Department's report that May housing starts had fallen to 593,000:

http://www.census.gov/const/newresconst.pdf

Plug that number into the chart below and you will see that residential construction remains in the doldrums. The temporary housing tax credit gave building a boost, but that's gone now. Residential construction is stuck in a rut. Housing won't recover and expand strongly until the overhang of distressed, foreclosed and vacant properties is resolved.

Housing Starts

(Click on chart to enlarge.)



Recessions shaded

Industry may be stronger because manufacturers liquidated their inventories and must now produce in order to sell. Remember, however, that real estate got us into this mess. We can't have a vibrant economy until its problems are resolved.

(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.)

© 2010 Michael B. Lehmann

Friday, June 11, 2010

Fragile

The Lehmann Letter (SM)

Today the Commerce Department announced that May retail sales fell 1.2% from the April level:

http://www.census.gov/retail/marts/www/marts_current.pdf

This serves as a reminder of the current recovery’s fragility. While it's true that these data vary from month to month, household purchases can't be counted on to pull the economy robustly forward. Consumers continue to put their balance sheets in order. This means reducing debt and building liquidity. That is bound to have a negative effect on spending.

The economy is recovering, but it's a struggle.

© 2010 Michael B. Lehmann

Wednesday, June 9, 2010

Beige Book

The Lehmann Letter (SM)

Here’s the Fed’s Beige Book summary for the past six weeks. It’s based on reports from business and community sources throughout the nation. You can find it at:

http://www.federalreserve.gov/fomc/beigebook/2010/20100609/default.htm

“Economic activity continued to improve since the last report across all twelve Federal Reserve Districts, although many Districts described the pace of growth as "modest." Consumer spending and tourism activity generally increased. Business spending also rose, on net, with employment and capital spending edging up but inventory investment slowing. By sector, nonfinancial services, manufacturing, and transportation continued to gradually improve. Residential real estate activity in many Districts was buoyed by the April deadline for the homebuyer tax credit. Commercial real estate remained weak, although some Districts reported an increase in leasing. Financial activity was little changed on balance, although a few Districts noted a modest increase in lending. Spring planting was generally ahead of the normal pace, while conditions in the natural resource sectors varied across the Districts. Prices of final goods and services were largely stable as higher input costs were not being passed along to customers and wage pressures continued to be minimal.”

The key phrase: “…….many Districts described the pace of growth as "modest."

We’re slowly pulling ourselves out of the ditch. That’s what’s holding back the stock market , and everything else. The recession is over, but this recovery will be weaker and more protracted than many hoped.

© 2010 Michael B. Lehmann

Tuesday, June 8, 2010

Consumer Credit & Autos

The Lehmann Letter (SM)

The stock market has stumbled lately, and we have looked to Europe as the cause. But our problems are primarily domestic, not imported. Consumer demand remains lukewarm.

Take a look at some recent data.

Yesterday the Federal Reserve released April figures for consumer credit:

http://www.federalreserve.gov/releases/g19/Current/

Household borrowing grew by only $12 billion at a seasonally adjusted annual rate. The chart below shows that $100 billion is a healthy number. Consumer credit may no longer be shrinking, but household borrowing is not yet robust. It has to grow more quickly if we want a strong signal that consumer demand is truly recovering.

Consumer Credit

(Click on chart to enlarge.)



Recessions shaded

The latest data on auto sales confirm the problem. Households borrow to support their spending, and that spending remains lukewarm.

If you go to the Bureau of Economic Analysis website at http://www.bea.gov/national/index.htm#gdp and scroll down to "Underlying Detail Tables" and then look at "Motor vehicles," you will find an Excel table. Click on tab number six to see new-vehicle sales.

The Commerce Department reported 11.6 million new-vehicle sales in May at a seasonally adjusted annual rate. The chart below reveals that sales must rise to 15 million before we can say that the auto industry has truly recovered. We are only halfway back from the depths reached at the bottom of the recession.

New-Vehicle Sales

(Click on chart to enlarge.)



Recessions shaded

Our biggest problem remains at home not abroad.

(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.)

© 2010 Michael B. Lehmann

Monday, May 31, 2010

June Publication Schedule

The Lehmann Letter (SM)

Here’s the publication schedule for some of June 2010’s most important economic indicators, together with some thoughts to accompany the data.

Go to http://www.beyourowneconomist.com/ and click on Seminars, then click on Economic Indicators to navigate the sites that provide the data and click on Charts for a visual presentation that you can update.

• Everyone knows that housing led us into the recent recession. But what will lead us out? Home sales and construction have only just begun to recover. Recent reports of large jumps in activity failed to disclose that we remain far below pre--recession levels. The same is true for new-vehicle sales.
• Neither has consumer confidence recovered pre-recession levels. Nor are households making robust use of consumer credit. Households won't begin to spend heavily until they are willing to borrow heavily.
• Here are the key consumer-demand indicators we'll examine and the June days and dates on which we can expect them to appear. They will give us up-to-the-minute information on demand's recovery.
• Stay tuned to future editions of this letter as the story unfolds.

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

BEA…New-vehicle sales…(Approximate).Fri, 4th

Fed…Consumer credit…(Approximate).Mon, 7th
Census…Retail trade……………………Fri, 11th
Census…Housing starts…………………Wed, 16th
NAR…Existing-home sales…………Tue, 22nd
Census…New-home sales………………Wed, 23rd
Conf Bd…Consumer confidence……… Tue, 29th

* BEA = Bureau of Economic Analysis of the U.S. Department of Commerce
* Census = U.S. Bureau of the Census
* Conf Bd = Conference Board
* Fed = Federal Reserve System
* NAR = National Association of Realtors

• Now for a logical question: If demand is so weak, why are corporate-earnings so strong? Because productivity (output per hour of work) jumped as employers reduced their workforces by more than they curtailed output. The remaining workers had to produce more per hour, boosting profit margins. That's why the stock market did well for so long despite the weak economy.
• We will also check on manufacturing activity and inventories as well as overall employment and capital expenditures to understand how strongly supply is responding to demand. The following indicators are key.

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

Quarterly Data

BLS……………………….Productivity………………Thu, 3rd

BEA…………………………GDP………………………Fri, 25th

Monthly Data

ISM……Purchasing managers’ index………Tue, 1st

BLS……………Employment………………Fri, 4th
Census………Inventories…………………Fri, 11th
Fed…………………Industrial production………….Wed, 16th
Fed………………Capacity utilization…………….Wed, 16th
BLS………………Producer prices………………Wed, 16th
BLS……………Consumer prices……………Thu, 17th
Conf Bd………Leading indicators…………Thu, 17th

Census………Capital goods………………Thu, 24th

* 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

• Finally, can we rely on international trade to help pull us out of the ditch? Probably not. It hasn't helped in the past, so we shouldn't count on it now.
• We'll fully explore the reasons as we examine the following.

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

Quarterly Data

Census………….US international transactions……Thu, 17th


Monthly Data

Census……………………Balance of trade……………Thu, 10th

* Census = U.S. Bureau of the Census

Here is a complete calendar of the June indicators mentioned above.

June 2010

PUBLICATION SCHEDULE

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

Quarterly Data

BLS………………………Productivity……………………Thu, 3rd

Census……US international transactions……Thu, 17th

BEA…………………………GDP……………………Fri, 25th

Monthly Data

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

BEA…New-vehicle sales………(Approximate).Fri, 4th

BLS……………….Employment………………… Fri, 4th
Fed………Consumer credit…(Approximate).Mon, 7th
Census………Balance of trade……………… Thu, 10th
Census………Retail trade…………………….Fri, 11th
Census……Inventories…………………….. Fri, 11th
Fed…………Industrial production………….Wed, 16th
Fed…………Capacity utilization…………….Wed, 16th
Census………Housing starts………………….Wed, 16th
BLS…Producer prices………………. Wed, 16th
BLS..Consumer prices……………... Thu, 17th
Conf Bd……Leading indicators…………Thu, 17th

NAR…………Existing-home sales……….Tue, 22nd
Census……..New-home sales……………….Wed, 23rd
Census…….Capital goods……………. Thu, 24th

Conf Bd…Consumer confidence…… Tue, 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

© 2010 Michael B. Lehmann