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:


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.


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:


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:"


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


“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"


and “Obama: Homeowners Need More Help"


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:


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:


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:


(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:


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