Thursday, December 30, 2010

January Publication Schedule

The Lehmann Letter (SM)

This letter will follow the most important economic indicators as the New Year begins.

Households are key: Housing, autos, consumer credit, consumer confidence. Business investment is also critical: New orders for capital goods.

If these pick up, and improve strongly, employment gains will follow.


January 2011

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

Quarterly Data

BEA…………………GDP…………...……Fri, 28th

Monthly Data

ISM….Purchasing managers’ index….Mon, 3rd
BLS……………….Employment………… Fri, 7th
BEA….New-vehicle sales…(Approximate).Fri, 7th
Fed…...Consumer credit…...(Approximate).Fri, 7th
BLS……………….Producer prices……. Thu, 13th
Census………………...Inventories…….. Fri, 14th
BLS………………….Consumer prices.….. Fri, 14th
Fed……………..Industrial production…….Fri, 14th
Fed…………….Capacity utilization……….Fri, 14th
Census…….……..Housing starts…….Wed, 19th
Conf Bd……….Leading indicators…….Thu, 20th
NAR……………Existing-home sales….Thu, 20th
Conf Bd…….Consumer confidence….. Tue, 25th
Census………..New-home sales……...Wed, 26th
Census……….Capital goods……….. Thu, 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

Wednesday, December 29, 2010

Wrap Up and Forecast

The Lehmann Letter ©

Today's New York Times


and Wall Street Journal


carried retrospectives on the economy and residential real estate as well as a cross-section of forecasts for 2011.

The optimists point to expansionary monetary and fiscal policy: The recent round of tax-cut and unemployment-benefit extensions as well as the Federal Reserve's expansionary stance. The holiday shopping boom buttresses that rosy view.

This letter remains skeptical. Housing was the epicenter of the boom and bust, and housing continues in a slump. That's symptomatic of the damage done to household balance sheets: Diminished net worth and liquidity plus an overload of debt. Consumers will recover, but slowly. Expansion will be moderate.

Improved business productivity throughout the slump did boost earnings as business layoffs exceeded the drop in sales. That, of course, shifted the burden onto the shoulders of those who are now unemployed. Meanwhile this source of profitability is tapped out. Additional growth in earnings will have to come from additional sales. Those sales will grow slowly as household balance sheets gradually recover.

The economy eventually snapped out of the 1990-91 recession and began growing strongly in 1994 because of the beginning of the dot-com boom. The economy also bounced quickly back from the 2001 recession because of the residential real estate boom. Those were special circumstances that created especially good fortune in those decades. It's hard to see similar tidings on the horizon this time.

That doesn't mean no recovery, and it doesn't mean double-dip recession. It does mean slow and gradual gains.

© 2010 Michael B. Lehmann

Monday, December 20, 2010

Debt, Borrowing & Spending

The Lehmann Letter SM

We’re faced with this anomaly: Everyone hates debt, but it will take more debt to finance the spending required to boost the economy.

Q: How can you borrow more to finance increased spending while repaying your debts?

A: You can’t.

If households and businesses are to restore their balance sheets by rebuilding liquidity and retiring debt, they can’t at the same time borrow and spend the economy to prosperity.

Private Borrowing

(Click on chart to enlarge)

(Recessions shaded)

The chart illustrates the precipitous drop in borrowing that accompanied the recession. Borrowing turned negative when households and businesses began repaying their debts. Those repayments grew to over $500 billion and then shrank. Here are this year’s data:

Q1: -$76.3 billion
Q2: -$302.8 billion
Q3: -47.8 billion

Perhaps, as the New Year begins, repayments will cease and new borrowing will blossom, resuscitating spending. Let’s hope so.

The key question: Have the recent repayments been sufficient to reliquify private balance sheets and enable a new round of private borrowing and spending? Let’s hope so.

One possible problem: The repair was incomplete, enabling only limited borrowing and spending. We’ll see.

Meanwhile, keep the following in mind. Business has dealt with the problem more swiftly than households. Business balance sheets are in good condition, brimming with liquidity. That’s because revived earnings have restored cash flow. Not so for households: High unemployment and weak earnings have impeded recovery for their balance sheets. Consumers need more time.

(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

Wednesday, December 15, 2010

What the Fed Said

The Lehmann Letter ©

Yesterday the Federal Reserve’s Open Market Committee expressed disappointment with the recovery’s pace and clearly stated its intent to maintain an expansionary monetary policy:

Here’s what the Fed said:

“Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed…..

“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November….

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period….”

You don’t need a Ph.D. to understand. The Fed wants a stronger recovery, doesn’t see that happening soon and therefore will hold down interest rates until the economy shows sufficient improvement.

As readers know, this letter fears that low rates are like pushing on a string: Not very effective. But what else can the Fed do, other than lead the horse to water?

© 2010 Michael B. Lehmann

Wednesday, December 8, 2010

Good News

The Lehmann Letter (SM)

Yesterday's letter highlighted auto sales: A key component of consumer demand. The letter pointed out that auto sales have bounced back from their recession lows, but still have a long way to go before regaining robust health.

Today's letter examines consumer credit: Another important indicator of household strength. Households have been repaying their debts in a desperate attempt to bolster their balance sheets by reducing liabilities and building liquidity. That seems like a good sign until one realizes that reducing expenditures is a time-tested method for paying down debt and conserving cash. That's one reason this recession has been so intractable. People have stopped buying in order to bolster their balance sheets. Demand can't fully recover until this process concludes.

That's why the Federal Reserve's latest consumer-credit report is so encouraging:

For the second month in a row households have originated more consumer credit then they've repaid. (Keep in mind that consumer credit does not include first and second mortgage loans. Think of consumer credit as auto loans and credit-card debt and conventional retail debt.)

Consumer Credit
Click on chart to enlarge.)

Recessions shaded

Consumer credit's recent gain was not large: Only a $45.6 billion October increase, seasonally adjusted at an annual rate, following a $15.6 billion bump in September. But the chart shows that consumer credit had been falling for over a year, often at a $100 billion a month rate. That was not only unprecedented, it was also a sign of how desperately households were trying to put their balance sheets in order.

Let's hope they've now done so and that September and October's improvements signal a trend. If that's the case, it could be a good sign that consumers will begin spending more heavily on autos, appliances and furniture and furnishings - all of which rely heavily on consumer credit for their strength.

Housing data, due later in the month, will serve to corroborate or offset this optimism. Real estate was ground zero for the slump and we will wait to see whether or not households have repaired their balance sheets sufficiently to boost home purchases. But, one way or the other, the recent improvement in consumer credit is good news.

(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

Tuesday, December 7, 2010

Half Full or Half Empty

The Lehmann Letter (SM)

Auto sales provide a good illustration of the current recovery's enigma.

As is the case for the economy as a whole, new-vehicle sales have rebounded strongly but are still a long way from robust health.

Examine the data: Go to, scroll down to Supplemental Estimates and click on Motor vehicles. Open the Excel file and click on the Table 6 tab at the bottom. Look at column I.

Notice that new-vehicle sales were running between 16 and 17 million at a seasonally-adjusted annual rate for a decade until 2007. By 2009 sales had fallen to the 9 millions. Now, in October and November of 2010, sales were up to 12.2 million. That's a gain of over 25%, but sales are still almost 25% below their earlier peak.

So, is the glass half-full or half-empty?

New-Vehicle Sales

Click on chart to enlarge.)

Recessions shaded

Examining the chart and updating it with the most recent 12.2 million sales figure helps a little but does not provide a complete answer. We will have to monitor auto sales regularly and carefully. If new-vehicle sales continue to improve at the current rate, they should be back to 15,000,000 by 2012. That would be close enough to complete recovery. But if sales plateau at a their current level, we will be disappointed.

That's why half-full/half-empty is a good metaphor for the entire economy. We'll stay tuned.

(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, December 3, 2010

Employment Gains Slow

The Lehmann Letter (SM)

Today the Bureau of Labor Statistics announced that the labor market is - at best - treading water:

You can view the data in tabular form at:

There are 15.1 million unemployed and an unemployment rate of 9.8%. The labor market must add 250,000 jobs a month for several years in order to restore full employment.

That's why today's report, that November employment grew by 39,000 jobs. is so disappointing. Employment in government, construction, manufacturing, retail and finance all shrank. Professional and business services and education and health services did grow, but half of those gains were part-time.

Equally troubling: The workweek stopped growing. This is an important leading indicator because employers tend to extend hours for current employees before adding additional workers. The workweek had been expanding strongly and then stalled in November. That could be temporary, and both the workweek and total employment may resume stronger growth this month. Let's hope so.

But it is important to keep in mind that the demand for labor is a derived demand. Hiring depends upon growth in the economy's most depressed sectors, especially residential construction. Homebuilding was ground zero for the bubble, and when that bubble burst it became ground zero for the subsequent recession. It's hard to see how we can return to full employment without a strong recovery in the home-building sector.

© 2010 Michael B. Lehmann