Wednesday, February 24, 2010

The Fed and Inflation

The Lehmann Letter SM

In prepared remarks today before the House Committee on Financial Services, Chairman Ben Bernanke of the Federal Reserve

(http://www.federalreserve.gov/newsevents/testimony/bernanke20100224a.htm)

said:

“Over the past year, the Federal Reserve has employed a wide array of tools to promote economic recovery and preserve price stability. The target for the federal funds rate has been maintained it a historically low range of 0 to 1/4 percent since December 2008. The FOMC 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 last dozen words are key. The Fed intends to keep interest rates low for the foreseeable future. That's good for the stock market and good for the economy. The stock market likes low interest rates because interest-earning investments compete with stocks. The higher the interest rate, the smaller the demand for stocks. And, of course, low interest rates encourage borrowing, spending and therefore the expansion of economic activity.

Clearly the Fed wants to do all it can to assist the recovery. There is no hint that the Fed fears an inflationary upsurge. If it did, the Fed would have broached the possibility of raising interest rates to curb borrowing, spending and inflation. It would not have made that low-interest-rate commitment.


© 2010 Michael B. Lehmann

Tuesday, February 23, 2010

Loss of Confidence

The Lehmann Letter SM

Today the Conference Board reported that its Index of Consumer Confidence fell to 46.0 in February from 56.5 in January.

You can see from the chart that consumer confidence has been fluctuating around 50 for most months since crashing from its pre-recession level of about 100. Roughly speaking it’s half of what it was. Don’t expect robust consumer expenditures and a buoyant economy until confidence returns to pre-recession levels.

Consumer Confidence

Click on chart to enlarge)



Recessions shaded

Recovery will be slow and painful until consumer confidence breaks out of the trough and begins climbing back to 100.

(The charts 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, February 19, 2010

What the Fed Said

The Lehmann Letter SM

Yesterday the Federal Reserve released the statement regarding its lending to banks:

http://www.federalreserve.gov/newsevents/press/monetary/20100218a.htm

There has been some speculation that this signals a reversal and tightening of Fed policy.

Here in part is what the Fed said:

“…The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period…”

Clearly, the Federal Reserve expects economic conditions to remain weak and consequently believes that low interest rates are warranted.

© 2010 Michael B. Lehmann

Wednesday, February 17, 2010

Good News

The Lehmann Letter SM

Today the Census Bureau reported 591,000 housing starts in January, a gain of 2.8% over December's figure: http://www.census.gov/const/newresconst.pdf

Any increase is a welcome sign, but the chart below shows that we have been stuck in a rut of fewer than 600,000 starts for a year. There won't be true recovery in residential construction until we reach and surpass a million starts. And that depends on a resolution of the foreclosure crisis. Too many homes continue to be dumped on the market at a steep discount. That discourages builders from starting new ones.

Housing Starts

Click on chart to enlarge.)



Recessions shaded

In another report released today, the Fed announced that industrial production and capacity utilization had both risen in January: http://www.federalreserve.gov/releases/g17/Current/default.htm

Capacity utilization now stands at 72.6%, a nice pop up from its steep trough below 70%. Industry is now ramping up production after liquidating its inventories. Yet you can see from the chart how far we have to go. Once businesses replenishes their depleted inventories, will production languish or continue to climb? That depends on whether or not the private sector can restore a robust rate of borrowing and spending.

Capacity Utilization

(Click on chart to enlarge.)



Recessions shaded

The news is good, but we have to build on today's numbers before we can rest easy.

(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, February 12, 2010

Big Week

The Lehmann Letter SM

Next week will be a big week for economic data: Housing starts, industrial production, capacity utilization and consumer and producer prices.

Let's focus on housing starts and capacity utilization, to be released Wednesday.

You can see that housing starts are in an unprecedented slump, hanging out at about half-million per month. Improvements in housing have been small and tenuous.
Construction can't become robust until the wave of foreclosures ends. Financial institutions continue to repossess homes and dump them on the market. Even when banks hold these properties off the market, that still creates an overhang that depresses home prices or prevents their increase. All of this creates a disincentive for builders and depresses new-home starts.

The federal government has provided interest-rate relief for some borrowers who can work with their lenders. But the numbers are small. Only a massive debt-write-down program could bring relief on the scale required. Meanwhile those owners whose homes are “under water” (whose mortgage exceeds the home’s value) have an incentive to walk away from the property. This exacerbates a bad situation.

Housing Starts

(Click on chart to enlarge.)



Recessions shaded

Capacity utilization measures a different kind of economic activity. It tells us how much industry is producing as a percentage of the maximum. You can see from the chart that capacity utilization slumped below 70% - an all-time low – during the recent recession. Industry is beginning to boost production now that it has liquidated its unwanted inventories. But that does not yet signal a robust recovery.

Capacity Utilization

(Click on chart to enlarge.)



Recessions shaded

We remain in a wait-and-see situation. The indicators are heading north, but we have a ways to go.

(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, February 10, 2010

Imports and Exports

The Lehmann Letter SM

Today the Department of Commerce, “…announced today that total December exports of $142.7 billion and imports of $182.9 billion resulted in a goods and services deficit of $40.2 billion, up from $36.4 billion in November, revised. “

You can find the report at http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm

We can expect the deficit in our balance of trade to continue to grow as the economy recovers. Higher incomes mean higher purchases both from overseas and at home. As the rest of the world recovers it will purchase more from us too. But if experience is any guide our purchases from the rest of the world will grow more rapidly than its purchases from us.

As the deficit in our balance of trade increases we will borrow more heavily from overseas in order to finance those purchases. Buying more means borrowing more, and that's the price we will have to pay for economic expansion.

© 2010 Michael B. Lehmann

Monday, February 8, 2010

February Publication Schedule

The Lehmann Letter

Here’s the publication schedule for some of February 2010’s most important economic indicators.

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.

PUBLICATION SCHEDULE

February 2010

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

Quarterly Data

BEA…………………………GDP………………………Fri, 26th

Monthly Data

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

BLS……………………Employment………………… Fri, 5th
Fed…………………Consumer credit…...(Approximate).Fri, 5th
Census………………Balance of trade………………Wed, 10th
Census………………Retail trade…………………….Thu, 11th
Census………………….Inventories……………………..Thu, 11th
Fed………………………Industrial production………….Wed, 17th
Fed……………………Capacity utilization…………….Wed, 17th
BLS……………………Consumer prices……………...Fri, 19th
BLS…………………Producer prices……………….Thu, 18th
Census………………….Housing starts………………….Wed, 17th
Conf Bd………………Leading indicators…………….Thu, 18th

Conf Bd……………Consumer confidence………… Tue, 23rd

NAR…………………Existing-home sales…….…….Thu, 25th
Census………..New-home sales……………….Wed, 24th
Census…………….Capital goods……………….…..Thu, 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

Friday, February 5, 2010

Half Full

The Lehmann Letter

Today’s employment report for January from the Bureau of Labor Statistics highlights this recession’s enigma:

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

Is the glass half full or half empty?

“Half full,” say those who focus on the unemployment rate’s drop to 9.7% from 10.0%.

“Half empty,” say those who focus on the 20,000 jobs lost and point out that the economy continues to lose jobs.

But the “half full” folks have time on their side because all the trends are in the right direction.

For instance, the chart below shows that job losses, which exceeded a half-million per month for a while, are now negligible. If the upward trend continues, we’ll be in positive territory before long.

Job Growth

(Click on chart to enlarge.)



Recessions shaded

In addition manufacturing, which had been losing jobs since the recession began in December 2008, finally added jobs in January. This is a sign that some manufacturers, such as auto companies, have sold their excess inventories and are ramping up production again.

Let’s go with “half full.”

(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