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


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 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:

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:

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 Enroll for additional charts on the economy and a list and calendar of economic indicators.)

© 2011 Michael B. Lehmann