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

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

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

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

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

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