Wednesday, December 21, 2011

False Straws?

The Lehmann Letter (SM)

The Census Bureau and the National Association of Realtors reported slightly stronger housing starts and existing-home sales for November. Is this the start of an upward trend? We’ll see. There have been many false dawns.

The problem is: We’ve been down so long we grasp at false straws of hope. That’s a consequence of settling into a new regime of reduced circumstances and expectations. Small improvements are overblown.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Thursday, December 8, 2011

Consumer Spending

The Lehmann Letter (SM)

Take a look at two leading indicators recently released by the Federal Reserve and the Department of Commerce.

The Fed reported that consumer credit (excluding mortgage borrowing) had risen by $92.4 billion, at a seasonally adjusted annual rate, in October. The chart shows that a strong economy depends upon around $100 billion monthly in new consumer credit. The chart also shows that households desperately reduced outstanding debt during and immediately following the recession. Now they are beginning to borrow once again. We will see whether or not consumer credit rises to the $100 billion level required to generate strong growth in aggregate demand.

Consumer Credit

(Click on chart to enlarge)



(Recessions shaded)

The Commerce Department reported new-vehicle sales of 13.6 million, seasonally adjusted annual rate, in November. The chart reveals that this continues the upward trend, climbing out of the bottom of the recession. Will it continue rising to the 17-million annual rate that signals a vibrant auto industry? We'll see.

Auto sales

(Click on chart to enlarge)



(Recessions shaded)

This letter will return to these indicators regularly. The economy can't fully recover unless they fully recover.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Monday, December 5, 2011

It’s Housing

The Lehmann Letter (SM)

This letter has emphasized housing’s importance. Residential construction is flat. The economy won’t grow strongly until home building rebounds.

For validation of this view see Floyd Norris’s December 1 posting on The New York Times site:

http://www.nytimes.com/2011/12/02/business/time-to-accelerate-the-housing-recovery-floyd-norris.html?scp=3&sq=Floyd%20Norris&st=cse

Sad to say: It doesn’t look like any policy initiative will be successfully applied. That means the needed rebound will not occur.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Friday, December 2, 2011

Good News, Bad News

The Lehmann Letter (SM)

“The unemployment rate fell by 0.4 percentage point to 8.6 percent in November, and nonfarm payroll employment rose by 120,000, the U.S. Bureau of Labor Statistics reported today.”

That’s the first sentence from today’s Bureau of Labor Statistics employment report:

http://stats.bls.gov/news.release/empsit.nr0.htm

The unemployment rate fell as discouraged workers left the labor force, even though employment grew by 120,000. As this letter has said many times: Job growth must be twice as great, month after month for several years, before full-employment is restored. How will that happen?

Job Growth

(Click on chart to enlarge)



(Recessions shaded)

The chart illustrates current events as well as past success. Notice today’s plateau forming around 100,000 and earlier periods growing at over 200,000. This is just another inadequate plateau, similar to others we have seen develop across the data: Residential construction, auto sales, industrial activity and so on. We need a boost. From where will it arise?

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Thursday, December 1, 2011

PMI Remains Anemic

The Lehmann Letter (SM)

This morning the Institute for Supply Management announced that the Purchasing Managers Index (PMI) had risen to 52.7 in November from 50.8 in October:

http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942

The PMI measures purchasing managers' impressions of the economy's strength based on their experience buying inputs for their firms. A number below 50 indicates a contracting economy; a number above 50 indicates an expanding economy.

Purchasing Managers' Index

(Click on chart to enlarge)



(Recessions shaded)

Inventories

(Click on chart to enlarge)



(Recessions shaded)

The charts indicate the correlation between inventory expansion and the PMI. Manufacturing production slumped during the recession as businesses sold goods out of inventory and cut production. That is, businesses liquidated their stocks on hand as sales slowed. Consequently production fell faster than sales and the PMI slumped as purchasing managers reduced their orders for inputs.

Businesses rebuilt their inventories as the recession ended. Production recovered as a result and the PMI bounced back strongly. Now, however, inventory buildup is over and manufacturing production no longer has that additional boost. The PMI has been hovering at just above 50, and November's 52.7 is no cause for elation.

We can't reasonably expect a jump in production and the PMI until demand improves significantly.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Wednesday, November 30, 2011

December Publication Schedule

The Lehmann Letter (SM)

Stocks rallied today on word that key central banks launched a coordinated effort to shore up the euro. This is further evidence that European leaders will do what is necessary to prevent a crisis.

But that doesn’t ensure a robust economy here at home. Here’s a list of indicators that we will follow.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

December 2011

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

Quarterly Data

BEA...US International Transacs…Thu, 15th

BEA……….GDP & Profits…..……Thu, 22nd

Monthly Data

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

BLS………….Employment………… Fri, 2nd
BEA.New-vehicle sales.(Approximate).Mon, 5th

Fed. Consumer credit..(Approximate).Wed, 7th
Census…….......Inventories…….... Tue, 13th
BLS………...Producer prices……. Thu, 15th
Fed……….Capacity utilization……Thu, 15th
BLS……….Consumer prices.….. Fri, 16th
Census……...Housing starts…….Tue, 20th
NAR………Existing-home sales….Wed, 21st
Conf Bd…….Leading indicators….Thu, 22nd

Census……..New-home sales…... Fri, 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

© 2011 Michael B. Lehmann

Friday, November 25, 2011

Capital Expenditures

The Lehmann Letter (SM)

This week the Census Bureau reported $71.6 in October new orders for nondefense capital goods:

http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

These include all kinds of business purchases of nonmilitary machinery and equipment, from trucks and trains to backhoes and bake ovens,

Nondefense Capital Goods

(Click on chart to enlarge)



(Recessions shaded)

By placing the latest number on the chart you can see that new orders have reached a plateau in the mid-to-low 70s. New orders have not returned to the 80+ level that prevailed before the recession.

You may recall from earlier editions of this letter that this is typical of so many economic indicators: They have recovered from their recession lows, but are no longer advancing toward pre-recession levels. That’s not necessarily an omen of double-dip, but neither is it a signal of strong recovery.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Monday, November 21, 2011

Buying and Borrowing

The Lehmann Letter (SM)

Earlier this month the Commerce Department and the Federal Reserve reported 13.2 million October new-vehicle sales and an $88.8 billion September increase in consumer credit.

New Vehicle Sales

(Click on chart to enlarge)



(Recessions shaded)

Consumer Credit

(Click on chart to enlarge)



(Recessions shaded)

These numbers appear to be healthy when placed in the context of the charts: New vehicle sales have grown since their recession bottom and so has consumer credit. But there is a real danger that they will now stall, creating a plateau that is inadequate to sustain a healthy economy.

New vehicle sales and consumer credit move in tandem because auto buyers rely on consumer credit to finance their purchases. The charts inform us that new-vehicle sales were in the 16 to 17 million range from 2002 to 2007 and that consumer credit grew by about $100 billion monthly - at a seasonally adjusted annual rate - in those years. Will they return to those robust levels?

Consider consumer confidence.

Consumer Confidence

(Click on chart to enlarge)



(Recessions shaded)

Consumer confidence hovered around 100 during the 2002 to 2007 boom years. The chart reveals that consumer confidence has been fluctuating around 50 since the depths of the recession and has now dropped to around 40. The Conference Board is scheduled to release its latest data on November 29.

Unless consumer confidence pops upward to start a new climb, it's difficult to imagine that households will be sufficiently optimistic to begin a new auto-buying and borrowing binge. Gloomy consumers scale back; they don't push forward. Why should they? Their balance sheets remain compromised and good news has been scarce lately. Households have every reason to exercise restraint.

That's why it's hard to imagine a healthy level of auto buying and financing and a return to a robust economy.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Thursday, November 17, 2011

Housing Starts

The Lehmann Letter (SM)

Last month this letter reported that September housing starts had increased by 15% to 658,000. That was good news.

Unfortunately this morning's Census Bureau release says that figure was revised downward to 630,000 and that October starts were 628,000:

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

Housing Starts

(Click on chart to enlarge)



(Recessions shaded)

In any event the chart makes clear that housing starts have been hanging out at around 600,000 for some time. You can see where we have to go in order to return to a sense of normal.

And there is no sign that will happen anytime soon.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Wednesday, November 16, 2011

Strong Production

The Lehmann Letter (SM)

Today the Federal Reserve reported solid growth in its October index of industrial production:

http://www.federalreserve.gov/releases/g17/current/

Capacity utilization measures current production as a percentage of maximum output. You can see from the chart that capacity utilization dipped below 70% in the depths of recession. That was the worst performance since World War II. More than 30% of America's industrial capacity went unused.

Capacity Utilization

(Click on chart to enlarge)



(Recessions shaded)

Capacity utilization rose to 77.8% in October. That signals continued expansion after a sharp bounce-back followed by a spell of stagnation in the summer. It would be nice to see the upward trend resume.

Inventory restocking generated the strong post-recession bounce. Now the core question is: Will aggregate demand grow quickly enough to send capacity utilization through 80% anytime soon. That depends to a large extent on household demand for new residential construction and motor vehicles.

At least there is no sign of a double dip.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Tuesday, November 15, 2011

No Sign of Double Dip

The Lehmann Letter (SM)

This morning the Commerce Department released its September report on business sales and inventories:

http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

Sales grew slightly while inventories hardly changed. Consequently the inventory/sales ratio remained unchanged at 1.27.

Inventory/Sales Ratio

(Click on chart to enlarge)



(Recessions shaded)

You can see the spike in the inventories/sales ratio during the recent recession. When a sales decline surprises businesses, unsold goods pile up in inventories. As sales drop and inventories climb, the inventory/sales ratio rises.

No business wants inventories to rise as sales fall. Businesses sell goods out of inventories in order to deplete stocks they no longer need. Production drops and the economy is gripped by recession.

You can see from the chart that the crisis is well behind us. The inventories/sales ratio has fallen back to normal as businesses liquidated their inventories and sales began to recover. Once sales growth resumed, businesses could begin to replenish their inventories.

Now both inventories and sales are back to where they were before recession hit, and both continue to grow. That's a good sign and can be taken as an omen that a new recession is not around the corner.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Friday, November 11, 2011

Good News From Europe

The Lehmann Letter (SM)

Markets are rallying on the good news from Europe. It appears that Greece and Italy will install new governments to deal with their fiscal crises. There’s no sign yet that nations are abandoning Europe or the euro.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Wednesday, November 9, 2011

Europe

The Lehmann Letter (SM)

The stock market is down 2% today because of the Italian crisis. How matters will be resolved remains to be seen.

But readers of this letter know that its author remains upbeat. Europe has faced many crises over the past 65 years and emerged stronger with each. Step-by-step Europe has knit itself into a powerful and successful economic entity. Challenges remain, and Europe will meet them. Europe will emerge stronger from this challenge just as it has from past challenges.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Monday, November 7, 2011

Not Enough

The Lehmann Letter (SM)

A certain amount of cheer greeted the Commerce Department's recent announcement that October new-vehicle sales had risen to 13.2 million:

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

If you inspect the data, however, you will notice the recent plateau at about 13 million. We are inching upward, not climbing upward. The chart reveals that auto sales must return to 16 or 17 million to reach full production. We are nowhere near that level.

Job Growth

(Click on chart to enlarge)



(Recessions shaded)

This report further reinforces the impression that we are not falling into another recession, but we are in a period of slack performance and inadequate progress.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Friday, November 4, 2011

Luke Warm

The Lehmann Letter (SM)

The problem with today's economy is not that we are headed back toward recession. The problem is that the economy continues to grow at such a tepid pace that we are unable to deal with some of our severe problems.

This morning's October jobs report from the Bureau of Labor Statistics is an example:

http://stats.bls.gov/news.release/empsit.b.htm

Employment did grow by 80,000. As the chart indicates this is much better than the horrific declines of the recession. But it's far less than the 200,000 to 300,000 pace of job growth required to restore full employment. The unemployment rate is now 9% and will remain at that troublesome level until job growth accelerates.

Job Growth

(Click on chart to enlarge)



(Recessions shaded)

If you examine the detail in the link above you will notice that government jobs declined by 24,000. This is tragic because severe unemployment should generate a federal effort to stimulate hiring. Government employment should be growing not shrinking. But government efforts to stimulate employment are now bogged down in controversy over the federal deficit. It would be helpful to boost employment now and deal with the deficit later.

Some may take solace that our government problems don't seem as pressing as those in Europe. But Europe has a long post-World War II history of going to the brink, muddling through and then finding a solution that creates a stronger Europe. There is every reason to believe that Europe will pull the rabbit out of the hat once again, strengthening the euro and knitting a stronger continent.

There is less reason for optimism on this side of the Atlantic Ocean.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Saturday, October 29, 2011

November Publication Schedule

The Lehmann Letter (SM)

ECONOMIC INDICATOR PUBLICATION SCHEDULE

November 2011

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

Quarterly Data

BLS……….Productivity………….Thu, 3rd

BEA……….GDP & Profits…..……Tue, 22nd

Monthly Data

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

BEA.New-vehicle sales.(Approximate).Fr1, 4th

BLS………….Employment………… Fri, 4th
Fed. Consumer credit..(Approximate).Mon, 7th
Census…….......Inventories…….... Tue, 15th
BLS………...Producer prices……. Tue, 15th
Fed……….Capacity utilization……Wed, 16th
BLS……….Consumer prices.….. Wed, 16th
Census……...Housing starts…….Thu, 17th
Conf Bd…….Leading indicators….Fri, 18th

NAR………Existing-home sales….Mon, 21st
Census……….Capital goods…….. Wed, 23rd

Conf Bd….Consumer confidence.. Tue, 29th

Census……..New-home sales…...Mon, 28th

*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

© 2011 Michael B. Lehmann

Friday, October 28, 2011

Still No Sign of Recession

The Lehmann Letter (SM)

Yesterday the Commerce Department reported 2.5% third-quarter GDP growth:

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

Some fear that we are slipping into or will soon slip into recession. But recession has not begun as long as GDP – the total output of goods and services - continues to advance.

This letter believes we will avoid recession as the economy continues to slowly improve. Unfortunately “slowly” is the key word. Rapid progress can’t occur until residential construction, motor vehicles and other durables hasten their improvement. And that won’t happen until household balance sheets recover: Liquidity rises, asset prices grow, debt falls and net worth improves. So far no one has explained how all that will happen.

© 2011 Michael B. Lehmann

Thursday, October 27, 2011

Wish We Could Do The Same

The Lehmann Letter (SM)

Investors around the world celebrated Europe's plan to resolve its debt crisis. The details must be arranged and the plan implemented, but a good start has been made.

Meanwhile consider the irony. Here we have a continent of disparate peoples, cultures, history and nations that has fought like cats and dogs for centuries. But over the past 65 years Europe has slowly knit itself into a coherent and cohesive economic union. The job is not finished and pitfalls remain, but at the end of World War II most would have thought this kind of progress to be impossible.

Now consider us: One nation that seems to increasingly take its cue from the years preceding the Civil War. One-hundred-fifty years ago compromise was an alien concept. So it seems today, despite the obvious fact that the issues that divide us are not nearly as serious as the issue of slavery. So why can't we reach a compromise on economic matters such as federal spending and taxes? We send delegations to Northern Ireland and the Middle East in order to effect compromise, yet compromise remains elusive at home. We ask others to find the middle ground, to be reasonable, to be statesmen. Yet we cannot practice what we preach. Strange.

© 2011 Michael B. Lehmann

Wednesday, October 26, 2011

While The World Waits

The Lehmann Letter (SM)

While the world waits for news from Europe, the American economy proceeds in low gear.

This morning the Census Bureau released reports on September capital-goods expenditures and new home sales.

New orders for nondefense capital goods (nonmilitary machinery and equipment) held steady at $76.0 billion:

http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

Place this number on the chart and you'll see that new orders for capital goods have snapped back sharply from their recession lows. But they have not yet returned to the peak levels they enjoyed before the recession.

Nondefense Capital Goods

(Click on chart to enlarge)



(Recessions shaded)

New home sales are in far worse shape. The chart reveals that they continue to scrape along the bottom. September's 313,000 confirms the trend:

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

New Home Sales

(Click on chart to enlarge)



(Recessions shaded)

Today's data do not offer any kind of breakthrough. Neither business capital expenditures nor household purchases of new homes are strong enough to significantly boost the economy or substantially reduce unemployment.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Tuesday, October 25, 2011

Bad News

The Lehmann Letter (SM)

This morning the Conference Board released its October consumer confidence survey:

http://www.conference-board.org/press/pressdetail.cfm?pressid=4321

You can evaluate the 39.8 figure, following September's 46.4 reading, by putting them in context on the chart.

Consumer Confidence

(Click on chart to enlarge)



(Recessions shaded)

Not only is the index heading south, it's back to recession levels. Households are gloomy and that is a bad sign for future expenditures on homes, cars, other durables and discretionary items in general. It does not necessarily mean that we are headed back into recession. But it is further confirmation that the economy will remain sluggish.

It's also a bad sign for President Obama's reelection prospects. Consumer confidence had been falling and was at recession levels when Ronald Reagan asked the nation in 1980, "Are you better off today than you were four years ago?" Low consumer confidence hurt President George H. W. Bush in 1992 and also hurt the Republicans in 2008. When households are gloomy, they want a change in Washington. It doesn't matter who's to blame.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Monday, October 24, 2011

Worth Reading

The Lehmann Letter (SM)

The world is waiting for Europe’s response to its sovereign-debt (what government’s owe) crisis, while we worry about the impact of households’ debt upon household spending.

Here are two recent articles worth reading.
On today’s New York Times op-ed page, Paul Krugman is pessimistic:

http://www.nytimes.com/2011/10/24/opinion/the-hole-in-europes-bucket.html?_r=1&ref=todayspaper

Prof. Krugman believes that Europe’s opportunity to act has passed. He believes Europe’s post-WWII string of successes is now be over.

This letter is not so gloomy. Let’s wait and see.

Regarding domestic developments, Saturday’s Wall Street Journal had an excellent account describing the debilitating impact of household debt on consumer expenditures:

http://online.wsj.com/article/SB10001424052970204294504576614942937855646.html?KEYWORDS=jon+hilsenrath+++ruth+simon

As this letter has stated many times: We’re in a balance-sheet crisis. Too much debt, too little liquidity and shrinking net worth have hobbled households. They’ve reduced their key purchases (homes, autos, durables and other discretionary items) that drive our economy.

© 2011 Michael B. Lehmann

Wednesday, October 19, 2011

Residential Real Estate and Consumer Confidence

The Lehmann Letter (SM)

At first glance the Census Bureau's latest housing starts report looks good:

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

September starts were up by 15% to 658,000.

If you study the chart, however, you will receive a little lesson on the use of statistics.

Housing Starts

(Click on chart to enlarge)



(Recessions shaded)

The 15% increase seems good until you notice that 658,000 starts still leaves us in the doldrums. It will take many months of 15% increases, without any backsliding, before we reach the 1 million total that will truly signal a breakthrough.

That's too bad because the real-estate malaise holds everything back. See, for instance, the following article in today's New York Times:

http://www.nytimes.com/2011/10/19/business/economic-outlook-in-us-follows-home-prices-downhill.html?_r=1&ref=todayspaper

Millions of consumers have lost confidence in their prospects because of the deterioration in their homes' values. Their balance sheets have shrunk and equity contracted. Liquidity is in short supply. They can’t spend like they used to.

This is a sharp reversal from the decades leading up to the recent crisis. Most households borrowed and bought, confident that rising asset values (homes and stock market) would make everything possible. Liquidity was not a priority.

How that has changed. Spending on autos and other durable goods has suffered as well as real-estate purchases. We’re in a funk and the way out has not yet become apparent.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Wednesday, October 12, 2011

Uh Oh!

The Lehmann Letter (SM)

So many eyes are turned to Europe, sometimes a domestic statistic escapes widespread attention.

The Federal Reserve recently reported that consumer credit fell by $114.0 billion in August (the latest available month) on a seasonally-adjusted annual basis:

http://www.federalreserve.gov/releases/g19/current/g19.htm

(Subtract the August level from the July level and multiply by 12.)

You can see from the chart that these data display considerable volatility, so one month’s drop may not signal anything significant. But you can also see that, after many months of decline, consumer credit began growing once again. Now we must be on the alert: Is the August report a statistical vagary, or does it signal a downturn?

Consumer Credit

(Click on chart to enlarge)



(Recessions shaded)

Everyone knows the economy is weak and the recovery anemic. This could be an early signal that households intend to further reduce their expenditures.

Stay tuned.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2011 Michael B. Lehmann

Wednesday, October 5, 2011

Recession?

The Lehmann Letter (SM)

Today’s New York Times carried a grim front-page article on Europe’s prospects:

http://www.nytimes.com/2011/10/05/business/global/europe-finds-slope-ahead-is-growing-ever-steeper.html?ref=todayspaper

Entitled, “In Europe, Signs of 2nd Recession With Wide Reach,” its key paragraph said:

“Greece, Ireland, Portugal and Spain are already in downturns or fighting to avoid them, as high unemployment and austerity belt-tightening take their toll. But in the last few weeks, even prosperous Germany and France, the Continent’s powerhouses, have started to be dragged down, hurt by the ebbing of business orders from indebted countries in the rest of Europe.”

In other words: Greece, Ireland, Portugal and Spain are cutting their spending and raising their taxes to reduce their debts and meet European demands for austerity (as the price for receiving assistance from Europe). But these actions have depressed their economies, making them poor markets for European goods. This raises the likelihood of recession throughout Europe.

Meanwhile Fed chairman Ben Bernanke testified before the Joint Economic Committee of Congress yesterday:

http://www.federalreserve.gov/newsevents/testimony/bernanke20111004a.htm

Here are some of his key comments:

“Nevertheless, it is clear that, overall, the recovery from the crisis has been much less robust than we had hoped….
“The pattern of sluggish growth was particularly evident in the first half of this year, with real gross domestic product (GDP) estimated to have increased at an average annual rate of less than 1 percent…..
“Consumer behavior has both reflected and contributed to the slow pace of recovery. Households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit…..”

This letter continues to believe that we’re in for a period of sluggish growth, not recession. Europe, however, may be a different matter.

© 2011 Michael B. Lehmann

Saturday, October 1, 2011

October’s Economic Indicators

The Lehmann Letter (SM)

ECONOMIC INDICATOR PUBLICATION SCHEDULE

October 2011

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

Quarterly Data

BEA……….GDP & Profits…..……Thu, 27th

Monthly Data

ISM..Purchasing managers’ index…Mon, 3rd

BEA.New-vehicle sales.(Approximate).Wed, 5th

BLS………….Employment………… Fri, 7th
Fed. Consumer credit..(Approximate).Fri, 7th
Census…….......Inventories…….... Fri, 14th
Fed……….Capacity utilization……Mon, 17th
BLS………...Producer prices……. Tue, 18th
BLS……….Consumer prices.….. Wed, 19th
Census……...Housing starts…….Wed, 19th
NAR………Existing-home sales….Thu, 20th
Conf Bd…….Leading indicators….Thu, 20th

Conf Bd….Consumer confidence.. Tue, 25th

Census……..New-home sales…...Wed, 26th
Census……….Capital goods…….. Wed, 26th


*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

© 2011 Michael B. Lehmann

Wednesday, September 21, 2011

Out of the Office

The Lehmann Letter (SM)

The Lehmann Letter will be out of the office and plans to return on October 5.

© 2011 Michael B. Lehmann

The Fed’s Program

The Lehmann Letter (SM)

Today the Federal Reserve announced that it would, “… put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.” This was not good enough for stock-market investors, and share prices plunged.

But what can the Fed do? Interest rates are at historic lows. The Fed can’t push them any lower: At least not enough to make a difference. So we’re stuck. And so is the Fed.

The problem lies in the wreckage of the recent credit-excess and the consequent recession. Household balance sheets are in weak condition, limiting household borrowing and spending. And banks are reluctant to lend, setting stringent conditions to accompany low rates. Result: Weak demand and a stagnant economy.

There’s little the Fed can do.

© 2011 Michael B. Lehmann

Monday, September 19, 2011

Europe

The Lehmann Letter (SM)

The stock market is down today because of continuing concerns over the euro's fate and Greece's ability to avoid default.

It is difficult to sort through each nation's statements and interests regarding these events. But it is not difficult to put current developments in historical perspective.

The European nations were at each other's throats for over 500 years, going back to when the modern nation-state was born. World War II brought a cataclysmic end to that approach. For the past 65 years Europe has knit itself into an organization that would have been difficult to imagine 100 years ago. The European nations have renounced war and accepted their current frontiers while forging a customs union that goes well beyond internal tariff elimination. They succeeded in establishing a unified market.

Europe also, throughout most of its domain, installed a common currency. Now that currency faces its greatest challenge: A challenge associated with the lack of a central European government. Will Europe go forward and establish the new governance institutions necessary to stabilize the euro or will Europe go backward and permit the euro's collapse?

History indicates the Europeans will go forward. With every crisis since World War II Europe has forged stronger bonds rather than dismantle progress and its benefits. Let's hope Europe does so again.

© 2011 Michael B. Lehmann

Thursday, September 15, 2011

The President’s Plan: By the Numbers

The Lehmann Letter (SM)

Here is how the president's recent jobs bill breaks out: Extend payroll-tax cuts - $250 billion, extend unemployment benefits - $50 billion, hire more teachers, police and firefighters - $35 billion, infrastructure projects - $105 billion.

This is to be paid by a $400 billion increase in taxes on upper-income earners and a $40 billion increase in oil-industry taxes.

So $440 billion in tax-cut extensions and additional expenditures are to be paid by $440 billion in additional taxes.

If you look at these numbers, it seems that a $300 billion tax-cut extension and unemployment-benefit extension for low-income folks plus $140 billion of infrastructure spending and public-servant hiring will be funded by higher taxes on upper-income folks and the oil industry.

What impact will this have on the economy? To begin with, it's clear that not extending payroll-tax cuts and unemployment benefits would have a depressing effect. These measures enable more spending by those who have a high propensity to consume.

Keep in mind, however, that these cuts will be paid for by higher taxes on top-income earners. It is true that this will be expansionary to the extent that low-income taxpayers spend more of their income than high-income taxpayers. But there will be arguments about the net benefit.

Even the additional $140 billion of expenditures on hiring and infrastructure will be paid for by additional taxes. There will be arguments about the net benefit of that, too. Nonetheless, there is no doubt about that expenditure increase.

Will all this be sufficient to substantially reduce unemployment? The answer has to be "No." The current situation is too dismal to hope for that. But taxing the well-off to extend tax cuts and benefits for the not-well-off will have its appeal over and above any net employment gains, as will the hiring and infrastructure provisions.

© 2011 Michael B. Lehmann

Friday, September 9, 2011

The President’s Plan

The Lehmann Letter (SM)

The president challenged Congress to pass his jobs-creation plan forthwith.

The president also said that his plan created no new spending, and that other and future spending reductions would offset any present increase. The plan also extended the payroll-tax reduction.

An increase in public-works spending and public-employee hiring coupled with a tax-increase postponement should help the economy. And it makes sense to permit the deficit’s expansion now, to be offset by a sharper reduction later when the economy is more robust. Keep in mind, however, that even if the president gets his entire package it can’t by itself restore full employment. It’s just not large enough.

But the president has challenged Congress to pass his plan, and by doing so has begun his re-election campaign in earnest.

© 2011 Michael B. Lehmann

Thursday, September 8, 2011

The President’s Speech

The Lehmann Letter (SM)

The economy suffers from weak demand. Additional purchases would provide business with the incentive to boost production and hiring.

The president’s challenge: Stimulate expenditures to promote employment.

Cut taxes? Maybe…. But people may just save the additional funds to bolster their liquidity.

Increase spending on public works? That would provide direct employment gains, and newly hired employees would spend their earnings - promoting business production and private job gains.

If the increase in public-works expenditures is accompanied by reductions in federal spending elsewhere, the impact will be muted. The economy requires a net gain in spending rather than a reallocation.

A net gain in federal spending without a tax increase will swell the deficit. That may not be politically palatable, but someone must begin borrowing and spending because private purchases are stalled.

New-Vehicle Sales

(Click on chart to enlarge)



(Recessions shaded)

New-vehicle sales illustrate the problem. Most consumers finance their auto purchases. The Commerce Department recently reported 12.1 million sales in August. That’s well below pre-recession levels of 16 and 17 million. And the trend is flat. Sales have been around 12 or 13 million all year.

If the president’s plan is big and bold enough to help auto sales recover, it will be a success. But that’s asking a lot.

(The chart was taken from http://www.beyourowneconomist.com. Enroll for additional charts on the economy and a list and calendar of economic indicators.)

© 2011 Michael B. Lehmann

Tuesday, September 6, 2011

Europe Is Not The Problem

The Lehmann Letter (SM)

The stock market tumbled this morning following sell offs around the globe.

But Europe’s fiscal crisis and sovereign debt problems and questions about the Euro’s longevity are not the problem. See the front page article in today’s New York Times that discusses Europe’s efforts to forge a united front to deal with these issues:

http://www.nytimes.com/2011/09/06/business/global/reluctantly-europe-inches-closer-to-a-fiscal-union.html?_r=1&ref=todayspaper

Europe will probably succeed, salvage the Euro and grow stronger for the effort.

Today’s stock market woes are tied to the prospect of weak earnings here at home stemming from inadequate growth in aggregate demand. Sales volume can’t recover until households and businesses are willing to borrow and spend at a more expansive pace. But why should they? How can they? Household balance sheets remain impaired and business won’t aggressively invest in new plant and equipment until households lead the way.

Investors are concerned.

© 2011 Michael B. Lehmann

Friday, September 2, 2011

Employment Report Disappoints

The Lehmann Letter (SM)

This morning the Bureau of Labor Statistics reported that health care added jobs in August while all other sectors shed workers or showed virtually no change:

http://stats.bls.gov/news.release/empsit.nr0.htm

The consequence: No job growth last month.

Job Growth
(Click on chart to enlarge.)




Recessions shaded

As this letter has reported in the past, and the chart above makes clear, the economy must consistently add several hundred thousand jobs a month to provide evidence of robust and growing conditions. That hasn't happened during the recovery from the recent recession. Some months have attained that goal, but consistent job growth has eluded us.

That doesn't mean we're headed into a new recession: The feared double dip. But it does mean that high unemployment will linger, economic growth will be weak instead of robust and the stock market will not break through its pre--recession peak.

(The chart was taken from http://www.beyourowneconomist.com. Enroll for additional charts on the economy and a list and calendar of economic indicators.)

© 2011 Michael B. Lehmann

Wednesday, August 31, 2011

September's Economic Indicators

The Lehmann Letter (SM)

Here are September’s economic indicators. We’ll track these for signs of a Double Dip. Things are not that grim now, but growth is slow.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

September 2011

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

Quarterly Data

BLS……………Productivity …..……Thu, 1st

BEA..International Transactions…Thu, 15th

BEA……….GDP & Profits…..……Thu, 29th

Monthly Data

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

BLS………….Employment………… Fri, 2nd
BEA.New-vehicle sales.(Approximate).Tue, 6th

Fed. Consumer credit..(Approximate).Wed, 7th
Census…….......Inventories…….... Wed, 14th
BLS………...Producer prices……. Wed, 14th
BLS………….Consumer prices.….. Thu, 15th
Fed……….Capacity utilization……Thu, 15th
Census……...Housing starts…….Tue, 20th
NAR………Existing-home sales….Wed, 21st
Conf Bd…….Leading indicators….Thu, 22nd

Census……..New-home sales…...Mon, 26th
Census……….Capital goods…….. Wed, 28th

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

© 2011 Michael B. Lehmann

Tuesday, August 30, 2011

Drastic Drop

The Lehmann Letter (SM)

This morning The Conference Board reported that its index of consumer confidence fell to 44.5 in August from 59.2 in July:

http://www.conference-board.org/press/pressdetail.cfm?pressid=4276

It could be that August's debt-ceiling imbroglio was a major factor and that confidence will bounce back up in September with the settlement of that issue. We'll see.

Consumer Confidence

(Click on chart to enlarge.)



Recessions shaded

But you can see for yourself that the latest reading presents a sharp setback. Consumer confidence is not growing.

It's true that there is noise in the data. Consumer confidence can vary sharply from month to month. That reduces its accuracy as a short-term forecast of economic conditions.

By taking another look at the chart, however, you can also see that the general direction of consumer confidence has been a good leading indicator for many recessions. It's hard to imagine a robust economy if this important indicator remains in the doldrums.

(The chart was taken from http://www.beyourowneconomist.com. Enroll for additional charts on the economy and a list and calendar of economic indicators.)

© 2011 Michael B. Lehmann

Monday, August 29, 2011

No Double Dip

The Lehmann Letter (SM)

The stock market rallied today on word from the Commerce Department that personal consumption expenditures had risen strongly (0.8%) in August by considerably more than income (0.3%):

http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

This encouraged those who fear a double-dip recession. If households increase their spending by more than their income, that means they are borrowing once again. Perhaps household balance sheets are repaired sufficiently to permit strong consumer spending.

We'll see.

Just keep in mind the Commerce Department's Friday GDP report: Second-quarter GDP rose by 1% after a first-quarter increase of 0.4%. That's no sign of double-dip either, but it does keep us focused on the real risk: That the economy will expand sluggishly, impeding profit and employment growth.

© 2011 Michael B. Lehman

Thursday, August 25, 2011

Waiting for the Fed

The Lehmann Letter (SM)

Some folks are waiting for a pronouncement from Fed Chairman Ben Bernanke that will rescue the stock market: Something about expansionary monetary policy and low interest rates.

They shouldn’t set their hopes too high.

It’s true that low interest rates are good for the stock market, other things being equal. Interest-earning assets are an alternative to stocks. During the late 1970s, when inflation and interest rates were double-digit, investors abandoned stocks in favor of money-market funds. Today’s low interest rates promote stock-market investment. Low interest rates also promote borrowing and spending by households and businesses, stimulating economic activity and boosting profits. That’s why investors love low rates.

Trouble is: Rates are already low and monetary policy is expansionary. It’s true that lenders are leery of making the same errors that led to the 2008 debacle. Now borrowers must be credit-worthy, not risky. But there’s not much the Fed can do about that. After all, the Fed can’t appear to support the lax standards of 2003 – 2007.

In any event, neither high interest rates nor tightened loan standards are today’s principal impediment to robust borrowing and a booming economy. Household’s weakened balance sheet stands like a boulder in the road, preventing the rapid economic expansion required to restore full production, full employment, earnings growth and a rising stock market. Households have too few liquid assets, too much debt and too little net worth. That’s why they’re not borrowing and spending and businesses, in turn, aren’t investing in the plant and equipment required to make the goods that households are not buying. The Fed can’t fix that.

© 2011 Michael B. Lehman

Friday, August 19, 2011

The Root of the Problem

The Lehmann Letter (SM)

Yesterday the National Association of Realtors reported 4.67 million existing homes sold in July:

http://www.realtor.org/press_room/news_releases/2011/08/july_ehs

Past issues of this letter have focused on new home sales and new construction. But the Realtors' report gets to the heart of the current economic problem.

The latest data coupled with the chart don't indicate a slump and don't indicate growth. We see fluctuation in a range that is too high to bring on recession but not high enough to spark full employment.

Existing Home Sales

(Click on chart to enlarge)



(Recessions shaded)

We remain somewhere in between: Neither bust nor boom. The chart illustrates the problem. We had a terrific run for over a decade. Now we want to retake those heights. But that desire conflicts with what happened to household balance sheets during the fat years. We stretched thin both liquidity and equity while piling on debt. It is true that households are making a valiant effort to unring that bell, and many bad debts are being written off. But that doesn't mean that household balance sheets are in good shape or that the good old days have returned.

Lenders are picky and have escalated standards. Home prices have fallen and remain in the doldrums, removing a key incentive to buy. And households are far more protective of their liquidity and reluctant to take on debt than they once were. It's not enough to generate a slump, but it is enough to inhibit robust growth.

(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.)

© 2011 Michael B. Lehmann

Monday, August 8, 2011

Stocks Down

The Lehmann Letter (SM)

Stocks are down again this morning.

Lately the stock market has fallen to a level below its 2000 peak: The market has fluctuated in a range for the past decade. There’s been no progress.

S&P’s downgrade of U.S. debt is the proximate cause of this morning’s rout. But keep the big picture in mind: Stocks rode margins upward since the trough of the 2008 recession, and are now suffering because there’s little hope of rising sales volume.

© 2011 Michael B. Lehman

Friday, August 5, 2011

Employment Report

The Lehmann Letter (SM)

Stocks stabilized this morning as the Bureau of Labor Statistics reported that July’s unemployment rate remained virtually unchanged at 9.1% and that nonfarm employment grew by 117,000:

http://stats.bls.gov/news.release/empsit.nr0.htm

We’ll see if stocks hold steady through the close.

Job growth

(Click on chart to enlarge.)



Recessions shaded

A glance at the chart reveals that 117,000 new jobs, while better than some recent reports, is not up to the 200,000 – 300,000 usually associated with periods of expansion. The economy remains weak.

(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.)

© 2011 Michael B. Lehmann

Thursday, August 4, 2011

Doom & Gloom

The Lehmann Letter (SM)

The chickens are coming home to roost.

As this blog has stated, rising profit margins have buoyed earnings. Now we need growing sales volume to carry earnings forward. But sales volume can’t grow in a weak economy. Residential construction must expand to transform weakness into strength. And that won’t happen until household balance sheets recover. Which won’t be soon…………

© 2011 Michael B. Lehman

Wednesday, August 3, 2011

August Economic Indicators

The Lehmann Letter (SM)

The blogger is on vacation, returning to the office on August 15.

But he’s not too far away to escape the news. Now that the debt increase has been resolved for the moment, some are making dire forecasts that reflect their view of the settlement.

As this letter has observed throughout the year, the economy is in a fragile state. It is hard to imagine that – under the current political circumstances – we could have reasonably expected an outcome sufficiently expansionary to overcome the economy’s inherent weakness. Growth will be weak until household balance sheets are repaired. That will take a while.

Here are August’s economic indicators.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

August 2011

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

Quarterly Data

BLS……………Productivity …..……Tue, 9th

BEA…………………….GDP …..……Fri, 26th

Monthly Data

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

BEA.New-vehicle sales.(Approximate).Wed, 3rd

BLS………….Employment………… Fri, 5th
Fed Consumer credit..(Approximate).Fri, 5th
Census…….......Inventories…….... Fri, 12th
Fed……….Capacity utilization……Tue, 16th
Census……...Housing starts…….Tue, 16th
BLS………...Producer prices……. Wed, 17th
BLS………….Consumer prices.….. Thu, 18th
NAR………Existing-home sales….Thu, 18th
Conf Bd…….Leading indicators….Thu, 18th

Census……..New-home sales…...Tue, 23rd
Census……….Capital goods…….. Wed, 24th

Conf Bd….Consumer confidence.. Tue, 30th

*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

© 2011 Michael B. Lehman

Friday, July 29, 2011

Month’s End

The Lehmann Letter SM

July concluded on dismal notes.

Default talks in Washington are not resolved and the Commerce Department reported that second-quarter GDP grew at a puny 1.3%.

Today’s New York Times carried a good article on the slow recovery. It finds that weak household balance sheets have impeded the recovery:

http://www.nytimes.com/2011/07/29/business/economy/as-growth-slows-us-recovery-seems-to-repeat-a-pattern.html?_r=1&ref=todayspaper

We may avoid default in the coming days, but household balance sheets will require more time to repair.

© 2011 Michael B. Lehmann

Wednesday, July 27, 2011

Housing Starts

The Lehmann Letter SM

A flurry of excitement accompanied the Census Bureau's announcement last week that June housing starts had risen to 629,000. The Bureau's bulletin reported that this was a 14.6% improvement over May’s figure.

By now, however, readers of this letter know that they must examine the chart to put recent data in perspective.

Housing Starts

(Click on chart to enlarge)



(Recessions shaded)

And the chart clearly shows that housing starts remain in the doldrums. June's reading remains too small to generate lasting excitement. If it's the beginning of a trend, housing starts will commence rising toward 1 million. We must wait and see.

(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.)

© 2011 Michael B. Lehmann

Friday, July 15, 2011

Production Stalls

The Lehmann Letter SM

Go to http://www.federalreserve.gov/releases/g17/current/ to view this morning's Federal Reserve report on June industrial production and capacity utilization.

At year's mid-point industrial production is barely higher than it was at the start of the year. Capacity utilization, which measures current output as a percentage of the maximum, is actually lower.

Capacity Utilization

(Click on chart to enlarge)



(Recessions shaded)

The chart reveals a good bounce since recession's bottom. But capacity utilization has leveled off at about 77% since the beginning of the year. This seems to be further evidence that the economy's expansion has stalled.

The big question: When will these events begin to affect earnings and the stock market? So far both have been riding high on improved profit margins. But that can't last indefinitely. Production must grow for profits and the stock market to maintain their upward trend.

(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.)

© 2011 Michael B. Lehmann

Thursday, July 14, 2011

Auto Sales Slump

The Lehmann Letter SM

Readers of this letter are familiar with its focus on residential real estate and its view that the economy won't be back to full speed until real estate recovers.

But new-vehicle sales are also symptomatic of the economy's ills. Households' impaired balance sheets limit their ability to buy new cars by borrowing more. Earlier this month the Commerce Department reported June auto sales of 11.4 million at a seasonally-adjusted annual rate.

New-Vehicle Sales

(Click on chart to enlarge)



(Recessions shaded)

The chart makes clear that recovery has stalled: 11.4 million is not part of an upward trend. A close examination of the data only exacerbates concern. New-vehicle sales peaked at 13.4 million in February and have been heading south ever since. Sales haven't been this low since an identical 11.4 million reading in August of 2010. There's been no progress over the last year.

It is possible that temporary factors such as the Japanese earthquake and tsunami have skewed the data. Time will tell. But all of us should be concerned that weak auto sales only confirm the economy's slack state.

(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.)

© 2011 Michael B. Lehmann

Saturday, June 25, 2011

July Economic Indicators

The Lehmann Letter (SM)

I’ll be away on vacation, returning the week of July 11th.

Here are July’s economic indicators.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

July 2011

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

Quarterly Data

BEA…………………….GDP …..……Fri, 29th


Monthly Data

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

BEA.New-vehicle sales.(Approx).Wed, 6th
BLS………….Employment………… Fri, 8th
Fed Consumer credit..(Approx).Fri, 8th
Census……...Inventories…….... Thu, 14th
BLS………….Producer prices……. Thu, 14th
BLS………….Consumer prices.….. Fri, 15th
Fed……….Capacity utilization……Fri, 15th
Census……...Housing starts…….Tue, 19th
NAR………Existing-home sales….Wed, 20th
Conf Bd…….Leading indicators….Thu, 21st
Census……..New-home sales…...Tue, 26th
Conf Bd….Consumer confidence.. Tue, 26th
Census……….Capital goods…….. Wed, 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

© 2011 Michael B. Lehmann

Thursday, June 23, 2011

Home Sales: Bumping Along the Bottom

The Lehmann Letter (SM)

Today’s new-home sales report from the Census Bureau is as depressing as the last report:

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

319,000 new homes were sold in May. Take a look at the chart and you can see we’re bumping along the bottom.

New Home Sales

(Click on chart to enlarge.)



Recessions shaded

Here’s the deal: No construction recovery = No prosperity.

Slack home sales = Slack recovery.

It’s as simple as that.

(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.)

© 2011 Michael B. Lehmann

Monday, June 20, 2011

Foreclosure Slowdown: What Does It Mean?

The Lehmann Letter (SM)

Foreclosure Slowdown: What Does It Mean?

Take a look at Sunday's front-page New York Times article on foreclosures:

http://www.nytimes.com/2011/06/19/business/19foreclosure.html?_r=1&ref=davidstreitfeld

The pace of foreclosures has slowed dramatically, especially in those states (roughly half) where foreclosure involves a court procedure.

How will this affect residential construction's recovery? We all know that dumping foreclosed properties on the market depresses real-estate prices and dampens residential construction. But……….. Does dumping foreclosed properties on the market all at once, and sharply depressing home prices, speed recovery? Or is recovery best served when foreclosed properties are offered for sale over a longer period of time, thereby mitigating the effect in any single year?

And that's not all. Will the slowdown, whether or not the courts are involved, compel banks to renegotiate a larger share of loans and thus reduce foreclosures and more swiftly stabilize the market? If that's the case, the foreclosure slowdown will aid market-price recovery and ultimately boost residential construction.

There is one thing we do know: These questions increase rather than reduce uncertainty, and that can't be good for any market.

© 2011 Michael B. Lehmann

Thursday, June 16, 2011

Housing Starts Remain Dismal

The Lehmann Letter (SM)

Take a look at this morning’s Census Bureau report on May housing starts:

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

Then place the 560,000 figure in the chart.

Housing Starts

(Click on chart to enlarge.)



Recessions shaded

See any reason to cheer?

There isn’t any. And the economy can’t do what we want – prosper and provide jobs for all who seek them – until we do begin cheering about housing starts. But that won’t happen until we are on a solid trajectory to a report double that of today’s. And that won’t happen any time soon.

(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.)

© 2011 Michael B. Lehmann

Friday, June 10, 2011

Lukewarm

The Lehmann Letter (SM)

Two reports in the past week illustrate the lukewarm pace of this recovery.

The Commerce Department announced that May new-vehicle sales fell to 11.8 million at a seasonally-adjusted annual rate from 13.1 million in April. This may be due to the effect of the Japanese earthquake and tsunami upon sales and production in this country.

But the slowdown could be due to households' unwillingness to compromise their balance sheets with fewer liquid assets and more debt. After all, the old car may last a little longer or a used car may do just as well.

You can see from the chart that new-vehicle sales were well over 15 million annually for a decade before they collapsed in the recent recession. They must climb back to 15 million or higher before the economy becomes sufficiently robust to return to full employment.

New-Vehicle Sales

(Click on chart to enlarge.)



Recessions shaded

The Federal Reserve announced that April consumer credit grew by $75.6 billion at a seasonally adjusted annual rate. That continues a string of positive reports since the beginning of the year.

But you'll notice that, in the decade prior to the recent recession, consumer credit’s monthly advance was about $100 billion. Balance-sheet concerns now prevent consumers from undertaking the larger debt-levels consistent with strong economic expansion.

Consumer Credit

(Click on chart to enlarge.)



Recessions shaded

These reports are critical in understanding the economy's strength. If new-vehicle sales and growth in consumer credit have reached a plateau, the economy cannot return to full employment. Only by breaking out into the higher ranges of yesteryear can do the economy achieve robust conditions.

(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.)

© 2011 Michael B. Lehmann

Friday, June 3, 2011

54,000

The Lehmann Letter (SM)

The Bureau of Labor Statistics reported the economy added 54,000 jobs in May:

http://stats.bls.gov/news.release/empsit.nr0.htm

There were 83,000 private-sector gains and 29,000 public-sector losses.

The chart indicates that month-to-month data vary. But the chart also shows increases averaging around a quarter-million during periods of robust economic expansion. We can continue to hope for the best.

Job growth

(Click on chart to enlarge.)



But it will take more than hope to bring the unemployment rate down from 9.1% to an acceptable 5% level. The economy requires consistent monthly job growth between 200,000 and 300,000 over the next several years to achieve that acceptable level.

Success of this sort requires robust improvement in all major areas. As long as housing remains in the doldrums, anemic homebuilding will be an anchor holding back all other sectors. That's why the foreclosure crisis affects all of us, even if we dwell in residences that are secure from financial difficulty.

(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.)

© 2011 Michael B. Lehmann

Wednesday, June 1, 2011

Housing: Conflicting Views

The Lehmann Letter (SM)

Today’s stock market rout focused on the weak labor market.

In this letter’s view, the housing slump lies at the center of the economy’s problems. But some believe a turn-around is imminent.

A front-page story in today’s Wall Street Journal presented the problem:

http://online.wsj.com/article/SB10001424052702303657404576357170425058088.html?mod=ITP_pageone_0

A front-page story in the NY Times’s business section shared the views of those who think housing is about to break out of its slump:

http://www.nytimes.com/2011/06/01/business/01housing.html?_r=1&ref=todayspaper

We’ll see.

© 2011 Michael B. Lehmann

Tuesday, May 31, 2011

June Economic Indicators

The Lehmann Letter (SM)

This morning CNN/Money aired a report confirming the double-dip in home prices:

http://money.cnn.com/2011/05/31/real_estate/march_home_prices/index.htm

The story began: “Home prices hit another new low in the first quarter, down 5.1% from a year ago to levels not reached since 2002.”

The article went on to state that there is no end in sight to the decline and that falling prices depress home building because developers can’t compete with low-price existing homes.

No doubt buyers and builders have pulled back, waiting to see where and when the market stabilizes.

As this letter has said more than once, economic expansion can’t go forward at a healthy pace until residential construction turns around.

We’ll stay abreast of developments in June by watching the following.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

June 2011

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

Quarterly Data

BLS….Productivity & Costs…………Thu, 2nd
BEA…International Transactions…Thu, 16th
BEA…….GDP & Corp. Profits…..……Fri, 24th


Monthly Data

ISM..Purchasing managers’ index…Wed, 1st
BLS………….Employment………… Fri, 3rd
BEA.New-vehicle sales.(Approximate).Mon, 6th
Fed…Consumer credit..(Approximate).Tue, 7th
Census…….......Inventories…….... Tue, 14th
BLS………….Producer prices……. Tue, 14th
BLS………….Consumer prices.….. Wed, 15th
Fed……….Capacity utilization……….Wed, 15th
Census…….…..Housing starts…….Thu, 16th
Conf Bd…….Leading indicators….Fri, 17th
NAR………Existing-home sales….Tue, 21st
Census……..New-home sales…...Thu, 23rd
Census……….Capital goods…….. Fri, 24th
Conf Bd….Consumer confidence.. Tue, 28th

*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

© 2011 Michael B. Lehmann

Friday, May 27, 2011

End of Month Wrapup

The Lehmann Letter (SM)

The Commerce Department's recent report that first-quarter GDP grew by a meager 1.8% focused our attention, once again, on the economy's prospects:

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

Aggregate demand's growth has been weak. At this stage in the recovery household expenditures on residential construction and durable goods as well as business expenditures on plant and equipment should be surging forward. But they're not.

At the same time, government expenditures are shrinking. The federal government's stimulus plan worked to boost the economy out of the depths of recession. But it's over now and federal expenditures are no longer growing. Meanwhile state and local governments have been faced with shrinking tax revenues and have also reduced their expenditures in response to this shortfall. As a result total government spending has become an anchor holding the economy down rather than a balloon hoisting the economy upward.

There is no dot-com boom à la the 1990s, and there is no real-estate boom à la the 2000s. Household balance sheets are compromised and gasoline prices are high. But most importantly, residential real estate remains in the doldrums. The economy can't and won't achieve prosperity until residential real estate emerges from hibernation. There is no sign that will happen soon.

© 2011 Michael B. Lehmann

Tuesday, May 24, 2011

Home-Sales Disaster

The Lehmann Letter (SM)

This morning's Bureau of the Census release of April's new-home sales data (http://www.census.gov/const/newressales.pdf) began with this paragraph:

“Sales of new one-family houses in April 2011 were at a seasonally adjusted annual rate of 323,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.3 percent (±16.6%)* above the revised March rate of 301,000, but is 23.1 percent (±9.7%) below the April 2010 estimate of 420,000.”

It appears that building activity improved in the latest month but is down from a year ago. But that obscures the big picture. The chart shows that new-home sales have fluctuated under 400,000 in most months for the past several years. Residential construction is mired in a deep slump.

New Home Sales

(Click on chart to enlarge.)



Recessions shaded

New-home sales must double before we declare that the slump is over. And that still won’t provide robust conditions.

We have a problem.

(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.)

© 2011 Michael B. Lehmann

Monday, May 23, 2011

Foreclosure Overhang: The Distressed Property Glut

The Lehmann Letter (SM)

Take a look at this morning's New York Times article by Eric Dash entitled, "As Lenders Hold Homes in Foreclosure, Sales Are Hurt:"

http://www.nytimes.com/2011/05/23/business/economy/23glut.html?_r=1&ref=todayspaper

It begins by saying:

“The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.”

And then goes on to observe:

“Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.”

The article reports that banks have not been able to deal with the surge in distressed properties arising from the foreclosure crisis. More homes have piled up in banks' inventory than they have been ready, willing and able to sell. That supply overhang delays a home-price recovery.

It also discourages new-home construction by providing potential buyers with a surfeit of foreclosed properties that competes with newly built homes. Unfortunately the absence of new construction dampens economic expansion.

© 2011 Michael B. Lehmann

Tuesday, May 17, 2011

Housing Starts Unchanged: Gaining Historical Perspective

The Lehmann Letter (SM)

This morning the Census Bureau included the following in its report on new residential construction

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

“Privately-owned housing starts in April were at a seasonally adjusted annual rate of 523,000. This is 10.6 percent (±13.0%)* below the revised March estimate of 585 000 and is 23 9 percent (±7 0%) below the revised April 2010 rate of 687 000.”

Housing Starts

(Click on chart to enlarge.)



Recessions shaded

At first glance that seems to contradict this letter's heading, which announces that housing starts are unchanged. But if you look at the chart, you'll see that housing starts have limped along at about 600,000 for the past two years. The Census Bureau's announcement that housing starts fell by 10.6% from March's level and by 23.9% from the year-ago level creates the impression of a recent and sharp downturn. These numbers are misleading because they refer to a low base and because there has been so much fluctuation around that base. Similarly, a one-month increase of 10% would not signal a recovery.

Truth be told: Residential construction is stuck at a dismally low level and has been fluctuating around that level for some time. Month after month of improvement, leading into years of improvement, are required. Housing starts must double (that's right, double) before this leading sector resumes its positive role.

This is a good illustration of historical perspective's importance and the distortion created by short-run focus.

(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.)

© 2011 Michael B. Lehmann

Thursday, May 12, 2011

Foreclosures Down: Is the Glass Half-Full or Half-Empty?

The Lehmann Letter (SM)

Two articles on the real-estate crisis appeared on CNN's website this morning:

“Foreclosures Down for Seventh Straight Month"

http://money.cnn.com/2011/05/12/real_estate/foreclosures_fell_again/index.htm?iid=HP_River

and “Obama: Homeowners Need More Help"

http://money.cnn.com/2011/05/12/news/economy/obama_housing/index.htm?iid=HP_LN

The first article reported a drop in foreclosure filings and bank repossessions of foreclosed properties. That looks good, BUT……..

The article makes clear that banks have NOT slowed foreclosures because fewer homeowners are in trouble. Rather, banks have slowed foreclosures because they are double-checking their paperwork and because many markets already have a glut of foreclosed homes. The banks know that too many foreclosed homes mean a lower price for the property that they wish to sell. Consequently banks have slowed foreclosures in order to help markets absorb distressed properties. That way the banks receive a better price for the homes on which they have foreclosed and will foreclose.

Unfortunately that does not guarantee a reduction in future foreclosures. One-quarter of American mortgages are underwater. Many homeowners cannot or will not pay their mortgages. Their payments are in arrears even if the banks have not begun foreclosure proceedings. That means a longer stretch out of distressed homes going on the market in the years to come. It does not mean an overall reduction in distressed properties. True: The slowdown in foreclosures may help home prices, but it may not. The slowdown may only serve to lengthen the period of distress.

As for the President’s observation that homeowners need help…….. Who can argue? But the President has no new, viable plan. Indeed, House Republicans have just finished voting to discontinue the President's old plan. And the banks will not voluntarily agree to write down loan amounts, which is the only meaningful relief that would assist distressed homeowners. The President's moral suasion will fall on deaf ears.

"Foreclosures Down" looks like the glass is half-full. But in truth it serves to highlight the fact that the glass is half empty.

© 2011 Michael B. Lehmann

Monday, May 9, 2011

Double Dip: Home Prices Sink Again

The Lehmann Letter (SM)

Take a look at this front-page article in today's Wall Street Journal:

http://online.wsj.com/article/SB10001424052748704810504576309532810406782.html?mod=WSJ_hp_LEFTTopStories

It's entitled "Home Market Takes a Tumble." The chart accompanying the article illustrates a five-year drop in home prices. The rate of decline fell recently, but lately began to accelerate again. The article indicates that experts expect home prices will continue falling until 2012. The reason? Expiration of the homebuyers tax credit has dampened demand while foreclosures have boosted supply. Demand down + Supply up = Prices down.

These developments can't be good for homebuilding, and that's why this letter has doubts about the economic expansion's strength. It's not just that homebuilding is hobbled. These developments illustrate the weakness in households' balance sheets. Consumers believe they must conserve cash and limit debt. It's difficult for them to buy homes and autos under these circumstances. And it's hard to imagine a strong expansion while homebuilding and auto production remain depressed.

In addition, it's also hard to imagine a surge in inflation as home prices decline. That has not happened before.

© 2011 Michael B. Lehmann

Friday, May 6, 2011

Great Jobs Report

The Lehmann Letter (SM)

The stock market rallied strongly this morning following a great jobs report from the Bureau of Labor Statistics:

http://stats.bls.gov/news.release/empsit.nr0.htm

Employment grew by over 200,000 in February, March and April. That's good news.

Job growth

(Click on chart to enlarge.)



Recessions shaded

The chart makes clear that job growth has to be that strong, month after month and year after year, to achieve and maintain full employment. Let's hope the good news continues.

The stock market had trouble earlier this week because of weakness in the commodity markets. Prices for oil, gold and silver fell. Indexes for a broad range of primary products tumbled. That sent a signal that commodity speculators questioned the strength of the economic expansion. They thought stagnating demand would inevitably limit price inflation. Stock-market investors prefer mild inflation but not weak demand. They dumped stocks in response.

Commodity prices stabilized today because the strong employment report signaled robust demand and contradicted earlier fears that the economy is stalling. That's why oil and stocks are up.

But the jury remains out. Demand has recovered sufficiently to boost employment. It must keep growing for both jobs and the stock market to keep gaining.

(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.)

© 2011 Michael B. Lehmann

Thursday, May 5, 2011

Autos Stalled?

The Lehmann Letter (SM)

Yesterday the Bureau of Economic Analysis of the US Department of Commerce released its April estimate of new-vehicle sales:

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

(Scroll down to "Motor vehicles," open Excel spreadsheet and go to “Table 6” at the bottom.)

New-vehicle sales have grown strongly over the past year, breaking out of the 11 million range and climbing to 13 million. The chart shows that these figures continue the strong upward trend from less than 10 million in the depths of the recession.

New-Vehicle Sales

(Click on chart to enlarge.)



Recessions shaded

But the latest numbers provide cause for concern. Sales were 13.4 million at a seasonally-adjusted annual rate in February, 13.1 million in March and 13.1 million in April. That's a break in the upward trend.

It's tempting to ascribe the halt to lack of product from Japan due to the recent earthquake and tsunami. But the data don't bear this out. Both domestics and imports have been flat since February. (See Tables 1 and 4 in the source.)

Several more months of data are required before we can determine if we have reached a plateau or a temporary halt in an upward trend. If this truly is a plateau we are in trouble. The economy's continued advance depends upon strong gains in residential construction and new-vehicle sales.

Residential building has been flat and shown no signs of recovery. New-vehicle sales were a bright spot, part of manufacturing's uptrend. If auto sales stall now and don't reach the 15-million line in the chart, the economic expansion is in deep trouble. The economy can't keep growing at an adequate pace without a strong performance by residential building and autos.

What could be wrong? In a word: Households' balance sheets remain in a state of disrepair. The recession's wounds have not healed. Consumers have too much debt and too little liquidity. Their net worth has shrunk. Those who own stocks have had a good bounce over the past couple of years, but millions of homes remain underwater and weak home prices prevent many from purchasing a new car.

Households must reduce their debt and build their liquidity in order to repair their balance sheets. But borrowing and spending to buy a car reduces liquidity and boosts debt. That illustrates the great tension in our economy today: We must reduce our debts to repair our balance sheets, but we have to borrow and spend in order to stimulate the economy. Clearly we can't do both at the same time.

That's why auto sales remain an important indicator of the economy's direction. They tell us how consumers feel about their financial strength. If auto sales have reached a plateau and homebuilding remains flat, the economy cannot expand at an adequate rate.

(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.)

© 2011 Michael B. Lehmann

Wednesday, May 4, 2011

Profit-Margin Squeeze?

The Lehmann Letter (SM)

Yesterday's Wall Street Journal carried an article on the profit-margin squeeze generated by world-wide price increases:

http://online.wsj.com/article/SB10001424052748704436004576298912487327374.html?KEYWORDS=materials+costs

Manufacturing continues to grow while facing the following question: Can it raise prices in order to pass on cost -- especially fuel cost -- increases?

The chart indicates that this is an important question because business has benefited mightily from a 10-year surge in margins. Profit margins did not fall during the recent recession and now stand at an all-time high.

Profit Margins

(Click on chart to enlarge.)



Recessions shaded

Rising productivity is largely responsible for this trend. Management has boosted output while restraining input costs. During the recent recession and recovery businesses cut employment more than output, and then increased output more than employment, raising output per worker and profit margins.

But how long can this continue and how far can margins climb? If weak demand here at home restraints price increases while strong demand overseas raises input costs -- especially fuel costs -- then producers are in trouble. Profit margins, and eventually corporate earnings, will stop growing.

The stock market has run ahead of the overall economy, fueled by encouraging earnings reports. Those earnings and the market may hit a wall if management can't raise prices while paying more for inputs. Most of the earnings growth may very well be behind us.

(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.)

© 2011 Michael B. Lehmann

Saturday, April 30, 2011

May Economic Indicators: Looking for Strength

The Lehmann Letter (SM)

On Thursday the Bureau of Economic Analysis reported a meager 1.8% (adjusted for inflation) increase in first-quarter Gross Domestic Product (GDP). That’s not good enough to take us where we want to go. Corporate earnings and the stock market have recovered nicely, but that’s not the entire economy. And earnings and stocks can’t keep going north unless the remainder of the economy does well, too.

Residential construction must emerge from the doldrums for that to occur. Unfortunately home prices continue to decline under the weight of excess housing inventories exacerbated by mass foreclosures. When existing-home sales begin showing strength, that should begin clearing the way for new-home sales and new construction.

Here are the May indicators we’ll follow.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

May 2011

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

Quarterly Data

BLS….Productivity & Costs…………Thu, 5th

BEA…….GDP& Corp. Profits…..……Thu, 26th


Monthly Data

ISM..Purchasing managers’ index…Mon, 2nd

BEA..New-vehicle sales.(Approximate).Thu, 5th

BLS…………….Employment………… Fri, 6th

Fed…..Consumer credit..(Approximate).Fri, 6th

Census…………...Inventories…….. Thu, 12th
BLS…………….Producer prices……. Thu, 12th
BLS…………….Consumer prices.….. Fri, 13th
Fed………..Industrial production…….Tue, 17th
Fed……….Capacity utilization……….Tue, 17th
Census…….……..Housing starts…….Tue, 17th
NAR………Existing-home sales….Thu, 19th
Conf Bd…….Leading indicators….Thu, 19th
Census……..New-home sales…...Tue, 24th
Census……….Capital goods…….. Wed, 25th
Conf Bd….Consumer confidence.. Tue, 31st

*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

© 2011 Michael B. Lehmann