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.


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

Friday, April 22, 2011

Sour Mood: Is Consumer Confidence Deteriorating?

The Lehmann Letter (SM)

The Conference Board's index of consumer confidence won't be out till next Tuesday, April 26. It fell last month.

And this morning's New York Times may provide an hors d'oeuvre of what to expect:

A front-page article entitled "Nation's Mood at Lowest Level in Two Years” begins by saying:

“Americans are more pessimistic about the nation’s economic outlook and overall direction than they have been at any time since President Obama’s first two months in office, when the country was still officially ensnared in the Great Recession, according to the latest New York Times/CBS News poll.

“Amid rising gas prices, stubborn unemployment and a cacophonous debate in Washington over the federal government’s ability to meet its future obligations, the poll presents stark evidence that the slow, if unsteady, gains in public confidence earlier this year that a recovery was under way are now all but gone.

“Capturing what appears to be an abrupt change in attitude, the survey shows that the number of Americans who think the economy is getting worse has jumped 13 percentage points in just one month. Though there have been encouraging signs of renewed growth since last fall, many economists are having second thoughts, warning that the pace of expansion might not be fast enough to create significant numbers of new jobs.”

Those sentiments are consistent with the drop in consumer confidence recorded by the Conference Board's last poll. It's a bad sign and runs counter to some recent good news: Job growth, corporate earnings gains and stock market advances. And the sour mood reflects more than just rising gasoline prices. The recession dealt a blow to one area of the economy that has shown no sign of recovery: Residential real estate. Nothing effective has been accomplished there, and that morass is part of the disillusionment.

The economic expansion remains fragile and worth watching closely.

© 2011 Michael B. Lehmann

Tuesday, April 19, 2011

Housing Starts: Uptick or Trend?

The Lehmann Letter (SM)

CNN issued an encouraging report on housing starts this morning:

It's true that March starts at 549,000, and building permits of 594,000, are up sharply from February.

But you should take a look at the full Census Bureau report to gain perspective:

If you examine monthly data over the past two years you will see that housing starts have fluctuated around 600,000: Sometimes more, sometimes less. The chart confirms this.

Housing Starts

(Click on chart to enlarge.)

Recessions shaded

We need an upward trend, and we don't have it yet. Optimistic reports, such as this morning's CNN piece, draw attention to the occasional spikes. Pessimistic reports focus on the plunges. The trend: Flat.

It's too soon to paint a happy face on the building data. And, as this letter has said before, the economy can't recover fully without a strong revival in homebuilding.

(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

Monday, April 18, 2011

Going Broke? This Morning's Federal Debt Scare

The Lehmann Letter (SM)

The stock market slumped this morning after Standard & Poor's presented its warning regarding US government deficits and debt. But the price of U.S. Treasury securities hardly fell.

Apparently bondholders are not overly concerned. The federal government will curtail spending and raise tax revenues in order to deal with the problem. We'll muddle through.

Private borrowing, however, is another matter. During the recession it shrank and then disappeared as households and businesses began to repay their debts rather than initiate new borrowing. The problem is: Spending -- financed by borrowing -- must grow for the economy to adequately expand. Moreover, reducing federal borrowing and curtailing federal spending only serves to magnify the need for additional private borrowing and spending.

And there is an additional difficultly: We used to borrow from ourselves, but now we borrow from the rest of the world. If the American economy spends its way to expansion by borrowing from overseas, our debt to the rest of the world will grow. But foreign lenders to the US often prefer to hold their dollar assets in the form of U.S. Treasury securities because U.S. Treasury securities are safe and readily marketable in massive quantities. Foreign holders of US private debt will exchange those private debts for U.S. Treasury securities.

That's where this morning's S&P report enters the picture. Investors fear a downgrade of U.S. Treasury securities because their price will fall and interest rates rise. No one wants to see a jump in interest rates. But what about a revival of private borrowing from the rest of the world? That, too, will ultimately oblige the rest of the world to increase its holdings of U.S. Treasury securities. If foreign investors become reluctant to hold any kind of American debt -- public or private -- that could compound any increase in interest rates.

© 2011 Michael B. Lehmann

Friday, April 15, 2011

Inflation: Gaining Perspective

The Lehmann Letter (SM)

Today's report by the Bureau of Labor Statistics on March's CPI increase -- at a 6% seasonally-adjusted annual rate -- rekindled fear of surging inflation:

Take a look at the chart to put matters in perspective. You will see that in the 1970s inflation grew from 5% at the beginning of the decade to 15% at the end. That's surging inflation. We are nowhere near those conditions now.


(Click on chart to enlarge)

(Recessions shaded)

What happened in the 1970s and what would have to happen today to reintroduce an inflationary increase of that magnitude? The answer: In the 1970s runaway gains in household borrowing fueled double-digit price growth. In addition the economy periodically bumped up against full-capacity utilization, depressing productivity and boosting costs. That is, as consumers deficit-financed rising expenditures on homes and autos, production climbed beyond the point of diminishing returns -- raising costs and prices.

Today's economy is very different. We have slack borrowing, slack demand and plenty of slack in our productive capacity. It is true that rapidly rising overseas demand has escalated our cost of imports, especially primary products such as fuel. Unless domestic demand grows rapidly, however, there is a good chance that rising fuel prices will drain purchasing power away from other areas. When households spend more on gasoline, they have fewer resources available to purchase everything else. That depresses inflation in those areas as fuel prices rise.

If private-sector demand grows rapidly, made possible by steep gains in private-sector borrowing, that would bump inflation upward because consumers could spend more on fuel and everything else. (Just as they did in the 1970s.) But, once again, that has not yet happened. And it will take a great deal of borrowing and spending to reintroduce the inflationary climate from which we suffered decades ago.

(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, April 7, 2011

Low-Wage America?

The Lehmann Letter (SM)

Last week this letter reported a solid improvement in March job gains, but also warned that those improvements must be replicated month after month for several years to restore full employment.

That wait will have consequences:

These New York Times and Wall Street Journal articles point out that high unemployment generates stagnant and even falling wages and salaries. That decline may be necessary to clear the labor market and restore full employment, but it does have consequences.

As they exhaust their unemployment insurance, many of the unemployed must take pay cuts in order to return to their old line of work. Others are forced to abandon careers and accept work in any job they can get, usually requiring less skill and offering reduced remuneration.

The upshot: Households with impaired purchasing power. These consumers will not wish to or be able to borrow and spend as they once did. And, as previous issues of this letter have pointed out, increased borrowing and spending are vital for a strong and sustained expansion.

© 2011 Michael B. Lehmann

Friday, April 1, 2011

At Last: Solid Job Growth Numbers

The Lehmann Letter (SM)

216,000: That's the March job-growth number. And the private-sector figure was even larger: 230,000.

You can see for yourself by going to the Bureau of Labor Statistics website:

This is the second month of solid employment gains. These figures are preliminary and subject to revision, but the trend so far is certainly positive.
You can see from the chart that a robust economy brings job gains of between 200,000 and 300,000 per month. We enjoyed that kind of growth from 1995 to 2000 (dot-com boom) and in the middle of the last decade (real-estate boom).

Job Growth

(Click on chart to enlarge.)

Recessions shaded

But the unemployment rate remains high at 8.8%. We can't say we've reached full employment until that rate drops below 5%.

That means the economy must grow swiftly enough to provide between 200,000 and 300,000 new jobs each and every month for several years into the future. This letter has expressed doubt that the task can be accomplished without the revival of the residential real-estate industry.

Unfortunately homebuilding remains in the doldrums. We will have to wait and see whether or not the economy can return to full employment without a strong contribution from one of its most important sectors.

(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