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 [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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