Friday, April 30, 2010


The Lehmann Letter (SM)

Today the Commerce Department's Bureau of Economic Analysis released its estimate of first-quarter GDP (the nation's output):

The release said:

“Real gross domestic product … increased at an annual rate of 3.2 percent in the first quarter of 2010... In the fourth quarter, real GDP increased 5.6 percent….

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by decreases in state and local government spending and in residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in exports, a downturn in residential fixed investment, and a larger decrease in state and local government spending that were partly offset by an acceleration in PCE and a deceleration in imports….”

The data show an economy that has hit bottom and is slowly climbing out of the trough. The recession is over, but just barely.

Consumption and investment are growing although net exports and government spending are not. Within the investment component, residential and nonresidential construction remained weak. Business purchases of equipment, however, are rebounding strongly. But the reversal of the inventory liquidation continues to be the strongest positive element. Businesses are now rebuilding their stocks of goods rather than disposing of them.

Curiously, despite the federal stimulus, government's contribution remained flat. A slight gain in federal expenditures could not offset a somewhat larger drop in state and local spending.

In sum: Although business expenditures on inventories and equipment are rebounding, gains elsewhere remain slow. A sharp turnaround continues to elude us.

© 2010 Michael B. Lehmann

Tuesday, April 27, 2010

A Long Way To Go

The Lehmann Letter (SM)

Today the Conference Board released its April consumer confidence figure:

At 57.9 consumer confidence is now higher than it has been for a year and a half and twice as high as it was during the depths of recession.

Lynn Franco, Director of The Conference Board Consumer Research Center said, "Consumer confidence, which had rebounded in March, gained further ground in April. The Index is now at its highest reading in about a year and a half (Sept. 2008, 61.4). Consumers’ concerns about current business and labor market conditions eased again. And, their outlook regarding business conditions and the labor market was also more positive than last month. Looking ahead, continued job growth will be key in sustaining positive momentum."

Let's put the latest number in perspective by using it to update the chart below.

Consumer Confidence

(Click on chart to enlarge.)

Recessions shaded

Even when consumer confidence reaches 60 it will be no higher than the trough into which it fell during most recessions. The latest reading of 57.9 is a big improvement over recent depths, but it also illustrates how far we must go before we return to a happy number.

This dichotomy is typical of many recent data releases. They have two faces. We should be aware of the frown as well as the smile.

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

© 2010 Michael B. Lehmann

Friday, April 23, 2010

Three Reports This Week

The Lehmann Letter (SM)

Three economic reports released this week show strength, but also illustrate how far the recovery must proceed before it becomes a true expansion.

Yesterday The National Association of Realtors announced 5.35 million existing-home sales that an annual rate in March:

That was a strong improvement over February's 5.01 million report. But updating the chart below in your mind's eye shows the difficulty in assessing recent developments.

Existing Home Sales

(Click on chart to enlarge.)

Recessions shaded

The initial announcement of the tax advantage for homebuyers caused sales to pop up over 6 million. Then they slumped to 5 million and now have improved to 5.35 million as the tax break is set to expire. It's too early to declare a trend, especially an upward trend, because of the recent volatility in the data generated by the tax incentive.

There is little doubt that this series has hit bottom and will probably rise. But we should prepare for the possibility of a drop in the data in the next report as the tax law expires. Then we can see how soon and how swiftly we return to 6 million home sales a year.

Today the Census Bureau announced 411,000 new-home sales at an annual rate in April:

That was a big improvement over February's 324,000 figure. But once again updating the chart below in your mind’s eye puts recent data in perspective.

New Home Sales

Click on chart to enlarge.)

Recessions shaded

You can see the crash and the bottom of about 400,000. The data have been fluctuating in this trough for a while. February's 324,000 rate was unusually low. March’s jump to 411,000 was probably influenced by the tax law that is set to expire at the end of April. It appears that we will have to pass through the 600,000 level before we can claim true expansion.

Today the Census Bureau also released April data on new orders for nondefense capital goods:

This figure represents bookings for all kinds of machinery and equipment for nonmilitary uses. April's $56.1 billion figure is less than March's $60.7 billion. You can gain perspective by updating the chart below.

New Orders For Nondefense Capital Goods

(Click on chart to enlarge.)

Recessions shaded

The data have been fluctuating recently below $60 billion. It appears that a breakthrough above $60 billion and solid growth from there would signal expansion. But we're not there yet and cannot claim that kind of expansionary trend. Lately there's been noise in the data as this series has moved sideways not upward.

This week's economic reports have confirmed that we have nowhere to go but up. The downtrend is over. But that's not to say that true expansion has begun.

(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

Tuesday, April 20, 2010

Leading Indicators

The Lehmann Letter (SM)

Yesterday The Conference Board announced that its Leading Economic Index ® increased by a strong 1.4% in March. This index of leading economic indicators, as is often called, has now increased steadily for a year. It's a good sign of economic recovery.

The index's upward march also fuels the controversy over whether or not the recession is over. That is a matter of definition. It is customary to speak of the end of recession once the downturn is over. By that standard there can be little doubt: The recession is over and recovery has begun.

But that does not speak to the recovery's strength, nor does it mean that economic improvement has been uniform. The leading indicators are a select group of statistics that reveal the economy's direction. They are not the most important signs of the economy's health.

Two key problems remain. The first, unemployment, is the most important. The unemployment rate is stuck at just below 10%. If one defines recovery as full employment, full recovery is probably years in the future.

Real estate and residential construction are the second problem. Housing remains weak; perhaps vulnerable to a second dip. The foreclosure crisis is not over and it contributes to the overhang of excess housing inventory that depresses home prices and retards building's recovery.

Those problems are key, but others remain. For instance, business expenditures on plant and equipment are depressed. The economy can't move strongly forward without them, and business capital expenditures will remain weak as long as business is not more fully using its existing capacity.

Even if we agree that the recession is over, that does not mean the recovery is close to complete.

© 2010 Michael B. Lehmann

Friday, April 16, 2010

The Past Week

The Lehmann Letter (SM)

Two reports out this week illustrate the difficulty of the current economic recovery.

The Census Bureau reported ( 685,000 housing starts in March. The chart below illustrates that this is a good jump above the trough of about half-a-million starts.

Housing Starts

(Click on chart to enlarge.)

Recessions shaded

But the strong relative increase cannot obscure how far we have to go. Any level below 1 million remains depressed. We are off the bottom; we're not out of the ditch.

The Federal Reserve's March data for capacity utilization tell a similar story: . Capacity utilization reveals how much industry is producing as a percentage of the maximum it could produce. Industry operated at 73.2% of capacity in March. Once again the chart shows that we've cleared the bottom.

Capacity Utilization

(Click on chart to enlarge.)

Recessions shaded

But the chart also shows that any figure below 75% is weak. We have a ways to go before the recovery shows strength.

These figures, and others, illustrate that the recession is over because the economy has stopped shrinking. Even the unemployment rate has begun to drop. But these observations only illustrate that we've stopped falling. They do not yet speak of a robust rebound.

(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

Tuesday, April 13, 2010

April’s First Half

The Lehmann Letter (SM)

Three important economic indicators show that April started strong, although cautionary signs remain.

The Purchasing Managers' Index was 59.6% in March, with any reading over 50% indicating expansion. This index tells us whether or not large industrial firms face tighter supply conditions when purchasing key inputs and materials. Tighter supply conditions indicate that manufacturing is gaining strength as firms compete for scarceer resources.

You can see from the chart that the index plunged during the recession. Manufacturers found it easy to purchase key inputs and materials during slack economic conditions. But now the economy has gained strength and you can see that the index has moved solidly above 50%. March's reading of almost 60% indicates a strong rebound.

Purchasing Managers’ Index

(Click on chart to enlarge.)

Recessions shaded

Sales of new automobiles confirm this strength. New-vehicle sales were 11.8 million at a seasonally adjusted annual rate in March. You can see from the chart that they dipped below 10 million during the recession. Now they are solidly above 10 million again.

New-Vehicle Sales

(Click on chart to enlarge.)

Recessions shaded

The latest consumer-credit data send a different signal. The chart clearly illustrates consumer credit's record-setting plunge during the recession. Households desperately repaid their debt in an attempt to strengthen and re-liquefy their balance sheets. Since consumer credit supports such a large share of households' expenditures on durable goods (including automobiles), it is difficult to envision a strong recovery until consumer borrowing turns solidly positive again.

Consumer Credit

(Click on chart to enlarge.)

Recessions shaded

Consumer credit was positive in January, but fell by $138 billion at a seasonally adjusted annual rate in February (the latest month for which data are available). Which reading is anomalous, January's positive number or February's negative figure? We will have to wait to see.

We definitely have recovery, but it will take time to assess its strength.

(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

Wednesday, April 7, 2010

The Lehmann Letter (SM)


As the Dow approaches 11,000, many people ask, "What's behind this remarkable surge?" The economic recovery is important and so are low interest rates. When interest-earning assets yield little, investors are more likely to turn to the stock market.

But corporate earnings have been crucial, too. Recently the Bureau of Economic Analysis announced fourth-quarter 2009 after-tax corporate profits: (See line 45 at this link.)

After-tax corporate profits increase by 50% over the past year to $1,270.1 billion in the fourth-quarter of 2009. If you plug that number into the chart below you will see how swiftly earnings have recovered.

After-tax Corporate Profits

(Click on chart to enlarge.)

Recessions shaded

But the recovery in profit margins has been even more dramatic. (Profit margins are profits per unit of output. Total profits equal the profit margin multiplied by the number of units sold.)

It is difficult to obtain a precise profit-margin figure across all sectors of the economy. So economists use the ratio of the implicit price deflator divided by unit labor costs as a proxy. Think of this as price divided by cost. If the number rises, that's a sign that profit margins are rising. If the number falls, profit margins are falling.

You can find the latest figures for the implicit price deflator and unit labor costs at the Bureau of Labor Statistics website:

The most recent figures (price/cost) are rising: 106 in the second quarter of 2009, 108 in the third quarter and 110 in the last quarter. Also notice that prices have been fairly steady but costs have recently declined. That's why the ratio has risen.

When you plug the latest number (110) into the chart below, you can observe profit margins' unusual record during the recent recession. This is the first recession since 1949 in which profit margins gained, and you can also see the extraordinary heights to which profit margins have climbed.

Corporate Profit Margins

(Click on chart to enlarge.)

Recessions shaded

This outcome derives from unusual developments during the recent recession. Slack demand has held prices and wages in check. But productivity (output per hour of work) has continued to grow. Consequently unit labor costs (the cost of producing a unit of output) have fallen because less labor time is required to produce each unit of output. Since labor input is down and wages have not risen, the cost of producing each unit of output has declined.

Mass unemployment has been the key consequence of rising productivity. Employers are using far less labor to produce a smaller quantity of output. As a result output per hour overwork has risen. This has held costs in check and thereby boosted profit margins.

Total earnings should grow as sales volume recovers in the face of these robust profit margins. Investors have seen this and rushed into stocks.

(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

Thursday, April 1, 2010

April Publication Schedule

The Lehmann Letter (SM)

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

Go to 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.


April 2010

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

Quarterly Data

BEA…………………………GDP……………………...……Fri, 30th

Monthly Data

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

BLS………………………….Employment………………… Fri, 2nd
Fed…………Consumer credit…(Approximate).Wed, 7th
Census……………………..Balance of trade……………… Tue, 13th
Census……………………...Retail trade…………………….Wed, 14th
Census……………………...Inventories…………………….. Wed, 14th
BLS………………………….Consumer prices……………... Wed, 14th
Fed…………………………Industrial production………….Thu, 15th
Fed………………………….Capacity utilization…………….Thu, 15th
Census……………………..Housing starts………………….Fri, 16th
Conf Bd…………………….Leading indicators…………….Mon, 19th

BLS………………………….Producer prices………………. Thu, 22nd

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

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