Thursday, March 31, 2011

April Indicators: Focus on Construction

The Lehmann Letter (SM)

Everybody is waiting for tomorrow's employment report to gain insight into the expansion’s strength.

But April’s economic indicator publication schedule reveals that employment is only one measure among many. This letter has argued that residential construction is key to the speed and strength of the economy's advance. Housing starts and home sales are critical. If residential construction remains in the doldrums the economy's progress will disappoint.

We'll see.


April 2011

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

Quarterly Data

BEA…………………GDP…………..……Thu, 28th

Monthly Data

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

BLS…………….Employment………… Fri, 1st

BEA..New-vehicle sales.(Approximate).Thu, 7th

Fed…..Consumer credit..(Approximate).Thu, 7th

Census……………...Inventories…….. Wed, 13th
BLS…………….Producer prices……. Thu, 14th
BLS…………….Consumer prices.….. Fri, 15th
Fed………..Industrial production…….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……...Mon, 25th
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

Wednesday, March 23, 2011

Home Sales Down: What Will Drive the Economy?

The Lehmann Letter (SM)

Yesterday's letter reported that February housing starts and existing-home sales fell. This morning the Census Bureau announced that February new-home sales dropped to 284,000:

Place this number on the chart to gain perspective. You can see that new-home sales have fluctuated below 400,000 since they crashed in 2007 -- 2009. This is further confirmation that residential construction remains in a rut.

New-Home Sales

(Click on chart to enlarge.)

Recessions shaded

That bears directly on the recovery's strength. The key issue remains: Will the economy gain sufficient momentum to provide full employment? Put differently: Will we return to the robust conditions that prevailed in the late 1990s or in the years 2003 -- 2007?

Probably not. Unusually high business capital expenditures - accompanying the introduction of a new technology - drove the economy forward during the 1990s dot-com years. Think of it as akin to the railway boom of the 19th century. Residential real estate sparked the economy during the early years of this century. Take another look at the chart and you'll see that we had a 100-year flood of residential building.

There is no sign that a new technological age, reminiscent of the dot-com boom, is about to bolster business capital expenditures. That's why residential construction is so important. If home-building stays in the doldrums, there is no other sector to carry us forward.

(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.)

© 2011 Michael B. Lehmann

Tuesday, March 22, 2011

Housing: A Drag on the Economy

The Lehmann Letter (SM)

There are three key reports on housing released each month: the Census Bureau's estimate of housing starts, the National Association of Realtor's bulletin on existing-home sales and the Census Bureau's figure for new-home sales.

The housing starts and existing-home numbers are out, and they are terrible:

February housing starts fell to 479,000 and February existing-home sales fell to 4.88 million. Both are seasonally adjusted annual rates.

These are clear setbacks, and the housing starts number is reminiscent of the depths of the recent recession.

New-home sales will be out tomorrow, and this letter will report on those. There is a good chance they will reinforce the dismal impression created by the earlier reports.

What's wrong?

The problem is that the federal government has not dealt adequately with the housing crisis. That crisis has been permitted to fester since residential real estate began its long slide into oblivion several years ago. The nation has allowed the market to find its own bottom without sufficient remediation from the effects of that bottom. Now we have the consequences: Widespread foreclosure, depressed home prices and rock-bottom construction activity.

The economy can't become robust until this problem is behind us. And at this rate the problem will be with us for a while.

More tomorrow.

© 2011 Michael B. Lehmann

Friday, March 18, 2011

More Debt: Good News

The Lehmann Letter (SM)

There is great concern about debt, both public and private. Most of us have borrowed at some time in our life, and most of us instinctively know that too much debt is dangerous. So it is no surprise when analysts point to high debt levels as a cause of the recent recession and anemic recovery.

Ironically and paradoxically it is also true that we must borrow more to finance the growth in spending needed to speed economic expansion. We may dislike debt, but right now we need more of it.

That's why a recent report by the Federal Reserve brings good news:

The report states that household and business debt grew $319.3 billion in 2010's fourth quarter.

Private Borrowing
(Click on chart to enlarge.)

Recessions shaded

The chart shows the massive drop in borrowing (i.e. new debt) that accompanied the recession's decline in spending. You can see that borrowing has been negative for over a year: Households and businesses have been repaying their debts rather than incurring new debt. When debt slumps, so does spending and the economy.

Now we have the first report that borrowing is positive and debt is growing once again. If you place $319.3 billion on the chart, you will see that this expansion remains in its early stages. Borrowing must increase at a good pace for several years before it returns to a robust level.

We may distrust debt, but right now we could use more of it.

(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.)

© 2011 Michael B. Lehmann

Thursday, March 17, 2011

Japan: Other Points of View

The Lehmann Letter (SM)

There has been so much doom and gloom accompanying events in Japan, it is refreshing to see other points of view.

Two Japanese, writing on the op-ed page of this morning's New York Times, expressed pride and hope in their country. They not only wish Japan well, they also expect better days ahead:

These views point out how difficult it is to forecast a nation's ability to deal with setbacks and adversity. So many crosscurrents come into play. For each cause for pessimism one can find a countervailing reason for optimism.

Stock markets suffered in Japan and abroad, and no one can be blamed for moving their funds out of equities into a safer haven. But that retreat is not necessarily a sign of things to come.

Japan may very well return to the regime of lackluster performance that prevailed before the disaster. That could not, however, be blamed on recent events. To the contrary, it would highlight the importance of circumstances prevailing before the earthquake and tsunami struck.

The American stock market also suffered. But Japan's crisis may have instigated an overdue selloff. After two years of strong performance fundamental questions prevail: Will the economy grow rapidly and will profits grow with the economy? Most of the answers to those questions are here at home, not abroad.

So, as Jesse Jackson says, "Keep hope alive!"

© 2011 Michael B. Lehmann

Tuesday, March 15, 2011


The Lehmann Letter (SM)

Events in Japan have troubled stock markets around the world.

Are this morning's downturns an omen of things to come?

Pessimism is called for if one judges by the impact of Hurricane Katrina on New Orleans. It's been years since that disaster struck, and New Orleans has not recovered. Both the economy and the population have shrunk.

But San Francisco rebounded swiftly from the 1906 earthquake and fire. It was not long before the city rebuilt and the economy was humming again.

San Francisco's experience reminds us that disaster often provide stimulus. Government, business and households borrow and spend in order to rebuild. Reconstruction provides jobs. A sense of optimism returns and folks get on with their lives.

On a grander scale, World War II devastated Germany and Japan. Yet, within a decade of war's end, observers spoke of Germany's and Japan's "economic miracles" and marveled at the swift pace of their reconstruction and recovery. Both nations went on to prosper mightily in the ensuing decades.

Returning to New Orleans, however, we are reminded that rebounding from disaster is not a snap. Think about Iraq. That nation is receiving, and will receive, massive assistance. But it's not at all clear that Iraq's economic prospects are good.

Then what will determine Japan's ability to bounce back? It's useful to look beyond the immediate circumstances and consider the background. Keep in mind that Japan's economy has struggled over the past two decades. The collapse of the stock-market and real-estate bubbles - 20 years ago - cast an evil spell. That meltdown's damage to household, business and banking balance sheets haunts the economy today. When Japan returns from rebuilding it will continue to face the conditions that prevailed before the earthquake and tsunami: Stagnant demand, weak growth and the threat of deflation.

But that does not mean that this morning's stock-market swoons are an omen of things to come. The world-wide declines reflect investors’ fears and their ability to dump stocks and move funds into safe havens such as U.S. Treasury securities. As fear subsides they will move their funds back into equities and markets will rebound.

Long-run conditions and fundamentals will guide the stock-markets’ long-run progress. These include the health of household, business and banking balance sheets, the ability of businesses to generate earnings now and in the future, and the price/earnings ratio.

© 2011 Michael B. Lehmann

Friday, March 11, 2011

What Now?

The Lehmann Letter (SM)

Tsunamis! Oil! Revolution!

What now?

Many are wondering if this economic expansion has legs and wondering whether or not the two-year bull market has run its course.

On Wednesday David Leonhardt published an article in The New York Times, discussing the impediments to continued economic expansion:

In yesterday's Wall Street Journal, David Wessel did the same:

But today's Wall Street Journal carried an optimistic article about households paying down their debts and thereby improving their ability to spend:

Yet Floyd Norris of The New York Times wrote pessimistically today about squandered opportunities for financial reform:

Don't worry about who is correct, just read these articles for a good cross-section of opinions on today's most important economic issues.

But it's also important not to get one's nose too close to the bark of the tree. Step back and get a glimpse of the grove and, perhaps, a peak at the forest.

This recovery and expansion is different. Here's how it worked in the past:

Before the 1991 Gulf War, recessions were V-shaped: Inflation surged, interest rates followed prices upward, recession hit, and the economy snapped back quickly as soon as interest rates fell.

In the early 1990s a malaise hung over the economy after the Gulf War recession. Then the dot-com boom brought bubble conditions by the end of the decade.

The 2001dot-com bust came to a quick end as rock-bottom interest rates initiated the real-estate bubble. The economy surged forward until the bubble collapsed in 2008.

Today the economy is recovering and expanding, so why are smart people so nervous? For a number of reasons that refer back to earlier successes: (1) Since high interest rates didn't cause the recent bust, low interest rates won't drive today's expansion in the same manner as they drove past expansions; (2) The dot-com boom and real-estate boom were isolated events and therefore unlikely to repeat; (3) It is now hard to believe that the forces that created strong conditions in the past are with us again today. In short: Where is the source of the next boom?

That's why there is so much doubt and uncertainty as to whether or not the current expansion and bull market have legs.

© 2011 Michael B. Lehmann

Tuesday, March 8, 2011

Consumer Credit Grows

The Lehmann Letter (SM)

The Middle Eastern and North African rebellions have generated $100-oil and fears of its potential impact on the economy.

This letter has expressed the view that a slowdown in the economic recovery and economic expansion is a greater risk than soaring consumer prices.

Thus far, however, oil's impact on consumer demand is not evident.

The Commerce Department reported February automobile sales of 13.4 million at a seasonally-adjusted annual rate. That's a nice bump upward from January's 12.6 million figure. New-vehicle sales have grown strongly throughout the winter.

Yesterday the Federal Reserve announced that consumer credit rose at a $60 billion annual rate in January. (Consumer credit measures automobile-borrowing and credit-card borrowing and other kinds of household indebtedness other than mortgage or real-estate borrowing.)

Consumer Credit

Recessions shaded

The chart clearly illustrates the unprecedented decline in consumer credit associated with the recent recession. Households stopped borrowing in order to repair their balance sheets by conserving cash and reducing debt. That, of course, crippled household spending and was an important ingredient in the slump.

Now, however, the strong auto-sales (13.4 million) and consumer-credit ($60 billion) data confirm that the worst is behind us. Monthly increases of $100 billion at a seasonally-adjusted rate, such as those we saw during the recent boom, may still elude us. But there is cause for optimism.

(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.)

© 2011 Michael B. Lehmann

Friday, March 4, 2011

Employment: Good News at Last

The Lehmann Letter (SM)

This morning's February employment report from the Bureau of Labor Statistics should bring smiles all around:

Employers added 192,000 jobs in February. As you can see from the chart, that's the biggest gain since the initial bounce back from the depths of the recession. Private employment grew even more strongly, adding 222,000 jobs, while government employment fell by 30,000.

The unemployment rate, at 8.9%, was virtually unchanged from January's 9.0%. This disconnect, between the large number of new jobs added and the stubbornly high unemployment rate, illuminates the rough road ahead. The economy requires 200,000 to 300,000 new jobs each month to reduce the unemployment rate to an acceptable level: Somewhere around 5%. Keep in mind that population growth brings new workers into the labor force each month. Moreover, as the employment situation improves, discouraged workers -- who had dropped out of the labor force -- will return to look for work. This means that new jobs must be found for all three populations: The unemployed, new entrants into the labor force and the return of discouraged workers.

The change in the political climate presents an additional challenge. During the depths of the recession, when the private sector lost millions of jobs, the federal government's stimulus program added government workers to payrolls. The transition to fiscal restraint puts the job-growth burden entirely on the private sector. Private job growth must be especially strong to offset the expected decline in government payrolls.

Job Growth

(Click on chart to enlarge.)

Recessions shaded

But let us rejoice in today's good news and let's hope it's an omen of more good news ahead.

(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.)

© 2011 Michael B. Lehmann

Tuesday, March 1, 2011

March Is Off To A Strong Start

The Lehmann Letter (SM)

This morning the Institute for Supply Management reported that its Purchasing Managers' Index increased to 61.4% in February from 60.8% in January:

This is a strong sign that manufacturing activity is growing and is a good omen for the overall economy.

Purchasing Managers’ Index

(Click on chart to enlarge.)

Recessions shaded

All readings over 50% indicate expansion. Those under 50% signal contraction. The chart shows that the index has been over 50% for some time. Today's 61.4% report confirms continued robust activity. The index reflects a manufacturing sector that has put recession behind it.

Keep in mind, however, that this letter has also tracked the Federal Reserve's releases on industrial production and capacity utilization. They indicated that industrial activity reached a plateau this winter and has not expanded lately. The Fed releases its March data on the 17th and this letter will examine those numbers to determine whether or not they confirm today's strong report. We can't put all our faith on one statistic.

Nonetheless this is a strong start for the new month.

(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.)

© 2011 Michael B. Lehmann