GDP

The Lehmann Letter (SM)

This morning the Commerce Department announced that GDP grew by 2.0% in the third quarter:

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

That means the economy is out of recession, with recovery in the weak-to-moderate range.

GDP

(Click on chart to enlarge.)



Recessions shaded

It also means that we can expect no more benefit from fiscal or monetary policy. Here's why:

Federal government expenditures grew by 8.8% - a healthy clip. But that obviously was not sufficient to pull the entire economy along at a buoyant rate.

The Federal Reserve has kept interest rates low and plans to reduce long-term rates by even more. But, as readers of this letter know, lower rates are not likely to boost growth. The economy is still suffering from the burst real-estate bubble, and lower rates can't help that. (Lower rates have an immediate impact on spending in an inflationary climate, and that's not what we have today.)

In conclusion: The federal government and the Federal Reserve have done what they can do to stimulate the economy. It won't be enough. And we can't anticipate a technology boom a la the 1990s or a real-estate boom a la 2003 -space 2008. Green technology isn't there yet and housing is down for the count.

Now we have to prepare ourselves for a long, slow recovery. Not a double-dip recession – just a tedious slog.

We are entering a period unlike any other we've seen since World War II.

(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

New-Home Sales

The Lehmann Letter (SM)

Sales of new homes were 307,000 in September, a 6.6% increase over August, according to today's bulletin from the Census Bureau:

http://www.census.gov/const/newressales.pdf

The chart puts those numbers in perspective. New-home sales remain in the doldrums.

New Home Sales

Click on chart to enlarge.)



Recessions shaded

That brings to a close this month's cycle of important building data. The trend is clear: Residential real estate is flat, with recovery and growth a prospect for the future.

On Friday the Commerce Department is scheduled to release its first estimate for third-quarter GDP growth. This will provide an opportunity to turn from real estate to other aspects of the economy. It will be a good time, at the end of the month, to assess where we are now.

(The chart was taken from ht
tp://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

Home Sales

The Lehmann Letter (SM)

This morning the National Association of Realtors reported that existing-home sales surged 10% in September:

http://www.realtor.org/press_room/news_releases/2010/10/sept_strong

Lawrence Yun, the Realtors' chief economist, commented: “A housing recovery is taking place but will be choppy at times depending on the duration and impact of a foreclosure moratorium. But the overall direction should be a gradual rising trend in home sales with buyers responding to historically low mortgage interest rates and very favorable affordability conditions.”

That assessment, i.e.”…a gradual rising trend…,” is right on. Once upon a time, in the housing slumps of the 1970s and early 1980s, the Fed's high-interest-rate-policies generated periodic housing contractions. Subsequent low-interest-rates would generate explosive housing recoveries. This time, from 2002 through 2009, we had an asset bubble that burst without Fed intervention. Since high interest rates didn't cause the recent problem, low interest rates won't do much to generate a recovery. That's why growth will be gradual, not explosive.

Home Sales

Click on chart to enlarge.)



Recessions shaded

This letter has said - over and over again - that the real-estate collapse was the recession's Ground Zero. The Realtors reported 4.53 million sales in September. Connect that dot to the line on the chart and you can see what it will take to put Ground Zero behind us. Mr. Yun’s assessment is sober and realistic.

(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

Housing Starts: How to Read the Numbers

The Lehmann Letter (SM)

Today's Census Bureau announcement that housing starts grew slightly in September was good news:

http://www.census.gov/const/newresconst.pdf

But it also illustrated the importance of putting data in historical perspective.

Chart 5.7 Housing Starts

Click on image to enlarge)



Recessions shaded

The chart shows that housing starts have fluctuated around 600,000 at a seasonally-adjusted annual rate for over year. Today's report of 610,000 starts falls within that range. But the most important observation is housing starts' tumble from their high of over 2 million and their continued languishing in the trough.

These readings demonstrate the importance of historical perspective. Don't let the latest numbers overwhelm your judgment. There is always noise (random fluctuations) in the data. Beware of percentage changes. Always inquire: What is the basis for the percentage comparison? And, as the chart amply illustrates, a picture is often worth a thousand words.

(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

The Chairman Speaks

The Lehmann Letter (SM)

Today's Boston speech by Federal Reserve Chairman Ben Bernanke (http://www.federalreserve.gov/newsevents/speech/bernanke20101015a.htm)
carried these words in its conclusion: "... (the Fed) is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate."

That means the Fed will pursue an expansionary policy in order to stimulate borrowing and spending and slightly lift inflation to levels consistent with a robust economy.

The Fed has a tough row to hoe. Additional ease can't hurt, but the economy's slack borrowing and spending have more to do with households' strained balance sheets than high interest rates. Today's rates are enticingly low, yet potential borrowers stay on the sidelines because they lack liquidity and carry too much debt.

There's an old saying: It's hard to push a string. That means the Fed has more success using high interest rates to restrain the economy (pulling back on a string), and less success using low interest rates to stimulate the economy (pushing on a string). Low interest rates used to work after a period of restraint brought on by high rates. But today's slump is due to a burst housing bubble that left household balance sheets in shambles. Further reduction of interest rates may be no more effective than pushing a string.

© 2010 Michael B. Lehmann

Stock Market Run Up

The Lehmann Letter (SM)

The stock market has enjoyed a robust run up this fall. The chart reveals that the S&P 500 has gained about 50% from its recession lows. The chart also reveals that the S&P must gain another 25% to exceed the peaks enjoyed in 2000 and 2007. The stock market has fluctuated in a range over the past decade. What has driven the market thus far and will those forces be sufficient to drive it to new higher ground?

Chart 1.1 S&P 500

Click on image to enlarge)



Recessions shaded

Supply-side forces have prevailed to date. The financial panic is over and interest rates are at rock bottom. Inventory liquidation has concluded and firms have resumed production. Most important, profit margins have been exceptionally strong and grown to record highs. That has enabled total profits” full recovery.

But total profits continued growth depends on more than robust margins. Sales volume must expand rapidly as well (Profit margins X Sales volume = Total profits). This depends on strong demand growth throughout the economy, and achieving it won't be easy. All the indicators point to sluggish demand growth now and in the near future.

Can the S&P soon break through its previous highs and rise to over 1,600? It won't be easy with demand in its current weak condition.

(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

The Way Forward

The Lehmann Letter (SM)

The last letter began with this question: “What will lift the economy out of the doldrums?”

"Strong demand," is the answer.

But we haven't yet found the source for this much-needed demand.

Household borrowing and spending collapsed when real estate imploded. The federal government tried to make up the difference with its borrowing and spending. Now the government's efforts have become political liabilities. So we can't expect federal expenditures to show the way.

That means we'll have to wait for households to reduce their debts and re-liquefy their balance sheets before consumer spending begins to slowly gain strength.

The front page of today's New York Times carries an article by Michael Powell and Motoko Rich that illustrates the problem:

http://www.nytimes.com/2010/10/13/business/economy/13econ.html?_r=1&ref=todayspaper

The first sentence of the ninth paragraph sums it up: "Demand is inert."

We have painted ourselves into a corner and should not expect quick relief.

© 2010 Michael B. Lehmann

Auto Sales

The Lehmann Letter (SM)

The Bureau of Economic Analysis has released September new-vehicle sales:

http://www.bea.gov/national/index.htm#gdp .

Scroll down to the “Motor vehicles” link and go to table six of the spreadsheet. You’ll see that new-vehicle sales were 11.7 million in September.

Now compare that to the historical data in the chart. There’s been a gradual recovery from recession lows, but it’s been a slow ascent. New-vehicle sales remain at levels not seen since the 1981-82 recession and earlier slumps.

Chart 5.5 New-Vehicle Sales

(Click on image to enlarge)



Recessions shaded

These figures are all part of the weak-economy syndrome. Auto sales were on a 16 - 17million annual plateau from the late 1990s to 2007. Now they are on an 11 -12 million annual plateau. What will break them loose so that they can rise to their earlier level?

That's the key question. Its answer will probably show us the way to renewed robust conditions.

(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

Foreclosure Crisis

The Lehmann Letter (SM)

Today's New York Times carries a front-page article on "Flawed Paperwork......" by Gretchen Morgenson:

http://www.nytimes.com/2010/10/04/business/04mortgage.html?_r=1&ref=todayspaper

It's about the foreclosure crisis and begins with these paragraphs:

"As some of the nation’s largest lenders have conceded that their foreclosure procedures might have been improperly handled, lawsuits have revealed myriad missteps in crucial documents.

"The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions."

The article goes on to describe and discuss the banks' rush to foreclose and the corners banks cut in order to ram an unprecedented volume of foreclosures through their bureaucracies. It's worth reading.

But more importantly the article tempts one to pause and reflect on what might have been done in order to prevent this sorry state of affairs. Suppose the federal government, at the beginning of the real-estate crisis, had mandated the following refinance program for troubled and underwater loans: The substantial write-down of principal to an affordable level, with the federal government saving banks harmless by compensating banks for the loss. That way loan values could have been crammed down to levels borrowers could afford without stressing lenders. True, the program would have cost plenty and there would have been complaints of moral hazard. Yet it might have prevented the current crisis.

The federal government has instituted a small number of voluntary programs with limited success. Consequently the market has run and is running its natural course. Millions have lost or will lose their homes, and the entire economy is being dragged down by its real-estate anchor. What an irony that the banks' paperwork skullduggery may eventually gum-up the system and slow foreclosures. Wouldn't it have been better to plan ahead?

© 2010 Michael B. Lehmann

October Publication Schedule

The Lehmann Letter (SM)

Last month this letter drew attention to weakness in housing because housing is a key indicator of consumer demand.

This month’s letters will also focus on consumer demand by examining new-vehicle sales, consumer credit and consumer confidence.

Here’s the schedule for some of October’s consume-demand-related releases.

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

BEA….New-vehicle sales…...(Approximate).Wed, 6th

Fed………..Consumer credit…...(Approximate).Thu, 7th
Census……….……..Housing starts………….Tue, 19th
NAR………………Existing-home sales…….Mon, 25th
Census…………..New-home sales………...Wed, 27th
Conf Bd………….Consumer confidence….. Thu, 21st


* BEA = Bureau of Economic Analysis of the U.S. Department of Commerce
* Census = U.S. Bureau of the Census
* Conf Bd = Conference Board
* Fed = Federal Reserve System
* NAR = National Association of Realtors

© 2010 Michael B. Lehmann