Consumer Confidence: The Historical Context

The Lehmann Letter (SM)

Today's consumer confidence report from The Conference Board illustrates the importance of placing recent data in historical context:

http://www.conference-board.org/data/consumerconfidence.cfm

Consumer Confidence

(Click on chart to enlarge)



(Recessions shaded)

Update the chart in your mind's eye with January's 61.1 reading and December's 64.8 figure.

Both reports bring the index back to about 60 and offset last fall's brief downturn.

But you can see the clear upward trend from recession lows. And you can also see that 100 or more, such as we enjoyed in 2005, is a prosperous reading.

These observations put matters in perspective. The important point is not that consumer confidence fell a little from December to January. The key insight is that consumer confidence has clearly advanced from its recession lows and must continue that advance for quite some time before we can be pleased with the progress.

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

© 2012 Michael B. Lehmann

February Publication Schedule

The Lehmann Letter (SM)

Here are the February indicators we will follow.

As always, housing, auto sales and consumer confidence are of particular importance. But production – purchasing managers’ index and capacity utilization – as well as business investment in capital goods are also of concern.


ECONOMIC INDICATOR PUBLICATION SCHEDULE

February 2012

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

Quarterly Data

BLS…....….Productivity…….……Thu, 2nd
BEA……….GDP & Profits…..……Wed, 29th

Monthly Data

ISM..Purchasing managers’ index…Wed, 1st
BEA.New-vehicle sales.(Approximate).Fri, 3rd
BLS………….Employment………… Fri, 3rd
Fed. Consumer credit..(Approximate).Tue, 7th
Census…….......Inventories…….... Tue, 14th
Fed……….Capacity utilization……Wed, 15th
BLS………...Producer prices……. Thu, 16th
Census……...Housing starts…….Thu, 16th
Conf Bd…….Leading indicators….Fri, 17th
BLS……….Consumer prices.….. Fri, 17th
NAR………Existing-home sales….Wed, 22nd
Census……..New-home sales…... Fri, 24th
Census……….Capital goods…….. Tue, 28th
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

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

© 2012 Michael B. Lehmann

GDP OK

The Lehmann Letter (SM)

The gross domestic product rose by 2.8% in 2011's fourth-quarter according to this morning's Commerce Department bulletin:

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

That's the best performance of any 2011 quarter, a year in which GDP growth accelerated.

Households purchased more durable goods, such as autos, and homebuilding accelerated. Businesses added to their inventories, but plant and equipment expenditures sagged.

A noteworthy disappointment: Government expenditures lagged. At this point in a weak recovery, government spending should accelerate in order to make up for the slack in private expenditures. Later in the expansion, when private spending recovers, government spending can taper off. But military spending and state and local government spending fell, pulling down the government total. If government spending had risen, GDP growth would have been notably higher.

Nonetheless these numbers are an overall positive sign. The economy shows no sign of falling back into recession, although it will be a long, slow slog back to a conventional notion of prosperity. Unemployment will fall slowly; full employment is still a long way off.

And don't expect further strong gains in corporate earnings. The big bounce back in profits is behind us. Business has boosted its profit margins to record levels. Now sales volume must grow. That will happen, but it will happen slowly.

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

© 2012 Michael B. Lehmann

The Fed Speaks

The Lehmann Letter (SM)

Today the Federal Reserve released its latest statement from the Federal Open Market Committee (FOMC). This is the Fed’s key policy-setting body.

The FOMC said:

“… the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014 ….”

There you have it: Sluggish growth, high unemployment, negligible inflation.

The Fed will maintain low interest rates for the foreseeable future. But, as the January 2 edition of this letter said, the Fed’s control over interest rates is like the reins on a horse. Pulling back has been more effective than letting go. Right now the horse is exhausted, and those dangling reins aren’t motivating him to run.

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

© 2012 Michael B. Lehmann

Full Steam Ahead?

The Lehmann Letter (SM)

Some observers are moving from deep gloom to a sunnier prognosis for the economy.

This letter has long believed that expansion will be slow, tenuous and a struggle.

Let’s examine two charts to see where we are.

Purchasing Managers’ Index

(Click on chart to enlarge)



(Recessions shaded)

Capacity Utilization

(Click on chart to enlarge)



(Recessions shaded)

The purchasing managers’ index provides purchasing managers’ view of the industrial scene, and capacity utilization informs us of how heavily industry is using its plant and equipment. You can see that the former is below 55 and the latter is below 80.

The historical record makes clear that these are not robust numbers. Each of these indexes must consistently exceed each of these signposts before industrial expansion deserves the “robust” label.

The expansion is not yet in high gear.

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

© 2012 Michael B. Lehmann

Home Sales: No True Recovery Yet

The Lehmann Letter (SM)

Take a look at today’s bulletin on existing-home sales from the National Association of Realtors:

http://www.realtor.org/press_room/news_releases/2012/01/ehs_dec

It begins:

“Existing-home sales continued on an uptrend in December, rising for three consecutive months and remaining above a year ago, according to the National Association of Realtors®.

“The latest monthly data shows total existing-home sales1 rose 5.0 percent to a seasonally adjusted annual rate of 4.61 million in December from a downwardly revised 4.39 million in November, and are 3.6 percent higher than the 4.45 million-unit level in December 2010. The estimates are based on completed transactions from multiple listing services that include single-family homes, townhomes, condominiums and co-ops.

“Lawrence Yun, NAR chief economist, said these are early signs of what may be a sustained recovery. “The pattern of home sales in recent months demonstrates a market in recovery,” he said. “Record low mortgage interest rates, job growth and bargain home prices are giving more consumers the confidence they need to enter the market.”

“For all of 2011, existing-home sales rose 1.7 percent to 4.26 million from 4.19 million in 2010.”

Now take a look at the historical data.

Existing Home Sales

(Click on chart to enlarge)




(Recessions shaded)

The realtors’ bulletin speaks of home sales that have fluctuated in the 4 to 5 million range for two years. The most recent data may be part of an upward trend that has unfolded over the past several months, but sales remain weak when compared to the 6+ million level enjoyed during the boom of several years ago.

December’s rate was 4.6 million. The data need to break through 5 million and continue rising before home sales are well on their way to real recovery.

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

© 2012 Michael B. Lehmann

Housing: Frame of Reference Important

The Lehmann Letter (SM)

This morning the Census Bureau issued this report on new residential construction (http://www.census.gov/construction/nrc/pdf/newresconst.pdf):

“Privately-owned housing starts in December were at a seasonally adjusted annual rate of 657,000. This is 4.1 percent (±11.6%)* below the revised November estimate of 685,000, but is 24.9 percent (±18.3%) above the December 2010 rate of 526,000.”

Although there was a decline from November to December, starts are up by one-fourth from a year ago. Looks good until you examine the chart.

Housing Starts

(Click on chart to enlarge)



(Recessions shaded)

Housing starts have hovered around 600,000 for so long that a move up to the neighborhood of 700,000 seems great. But the chart reveals how far we have to go.

This illustrates the importance of the historical or long view.

Since housing was ground-zero in the recent bust, the chart also illustrates how much improvement is needed before we can declare victory over the slump.

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

© 2012 Michael B. Lehmann

Good News!

The Lehmann Letter (SM)

Today the Federal Reserve reported that consumer credit rose by $244.8 billion at a seasonally adjusted annual rate in November:

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

You can see from the chart that this is a healthy jump, much stronger than any recent month and historically stronger than most months. Be cautious, however, because you can also see that there is a great deal of noise in the data. Monthly readings vary greatly.

Consumer Credit

(Click on chart to enlarge)



(Recessions shaded)

Consumer credit outstanding remains lower than it was in 2008 at the economy’s peak just before recession. You can see that years of negative reports have shrunk the total. November’s strong, positive reading is welcome.

Why? Because households rely upon consumer credit to purchase autos and other durable goods such as furniture and home appliances. During recession households desperately tried to shore up their balance sheets by maintaining liquidity and reducing debt. The expenditures required to rebuild the economy consequently suffered. Big borrowing may be a sign of renewed spending.

We’ll see.

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

© 2012 Michael B. Lehmann

200,000 and 8.5%

The Lehmann Letter (SM)

This morning's Bureau of Labor Statistics report on December employment began with great news. The unemployment rate fell to 8.5% and the economy created 200,000 new jobs:

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

Some details in the report were especially pleasing. The private sector created 212,000 jobs and construction employment increased for the first time in months. Government, unfortunately, continued to shed workers. This is an unfortunate irony of current conditions. Government usually adds workers during slack times as a matter of policy priority. The current political climate has prevented that.

Job Growth

(Click on chart to enlarge)



(Recessions shaded)

The chart shows that monthly job growth of 200,000 or more is typical for a robust economy. See the years 1995 to 2000 and 2004 to 2007 for an example. Employment gains of this magnitude must become the rule rather than the exception for the unemployment rate to fall to an acceptably low level of 5% or less.

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

© 2012 Michael B. Lehmann

2012 Outlook

The Lehmann Letter (SM)

The economy will improve gradually in 2012, much as it did in 2011. Even employment will make slow gains, and the unemployment rate will gradually decline. The economy won't rebound sharply, as it did following the 1981-82 recession and earlier recessions, because the recent recession, unlike those earlier recessions, followed on the heels of an asset bubble and bust.

Those earlier recessions followed a simple course: The economy expanded rapidly due to easy-credit conditions and then lurched into recession as the Fed boosted interest rates to restrain inflation. Then, as soon as higher rates dampened inflation, the Fed shifted back to an expansionary low-interest-rate policy and the economy snapped back.

Think of the Fed as a rider on a frisky horse. The horse galloped (economic expansion) when the Fed relaxed the reins (low interest rates), but slowed to a walk (recession) when the Fed pulled back on the reins (high interest rates). As soon as inflation came under control, the Fed relaxed the reins again and the economy popped up.

In that old economy, with its stop-start characteristic, cyclical industries like home-construction and auto-production and their attendant industries accounted for most unemployment. But these were layoffs, not long-term job loss. Builders, lumber mills, carpet mills, automakers and tire makers quickly recalled employees as soon as orders improved. Layoffs occurred when the Fed pulled back on the reins, and employees were quickly brought back as soon as the Fed let the reins dangle.

But the recent recession followed a different course. Low interest rates helped generate a residential-real-estate asset-bubble from 2002 through 2007. Since overall inflation remained low, the Fed did not pull back on the reins. Rising home prices encouraged, rather than discouraged, growing demand. Homes were an asset, not a perishable commodity. They could always be resold for a gain. Or so investors thought. The bubble burst in 2008 when home prices rose beyond any reasonable relationship to rents. Buyers stepped aside once home prices began to fall, and they have not returned.

The old horse and rider metaphor no longer applied. The Fed relaxed the reins until interest rates were in the basement. But the horse had run himself into exhaustion. He needed a rest, water and some oats, and It will be a while before the horse can run again. Since high interest rates and Fed restraint had not burst the bubble, low rates could not initiate rapid recovery. Household balance sheets remained in a state of disrepair: Shrunken asset values, inadequate liquidity and excess debt.

This time there will be no quick employee recall. Since the economy won't spring back, neither will employment. Those jobs have been lost for a long time.

That's why the economy will expand slowly and employment will gradually recover in 2012. Neither will improve rapidly.

© 2012 Michael B. Lehmann

January Publication Schedule

The Lehmann Letter (SM)

Here are the January indicators that we will follow.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

January 2012

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

Quarterly Data

BEA……….GDP & Profits…..……Fri, 27th

Monthly Data

ISM..Purchasing managers’ index…Tue, 3rd
BEA.New-vehicle sales.(Approximate).Thu, 5th
BLS………….Employment………… Fri, 6th
Fed. Consumer credit..(Approximate).Mon, 9th
Census…….......Inventories…….... Thu, 12th
Conf Bd…….Leading indicators….Tue, 17th
BLS………...Producer prices……. Wed, 18th
Fed……….Capacity utilization……Wed, 18th
BLS……….Consumer prices.….. Thu, 19th
Census……...Housing starts…….Thu, 19th
NAR………Existing-home sales….Fri, 20th
Census……..New-home sales…... Thu, 26th
Census……….Capital goods…….. Thu, 26th
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

© 2012 Michael B. Lehmann