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

© 2010 Michael B. Lehmann

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