Wednesday, February 29, 2012

GDP: Still Looking Good

The Lehmann Letter (SM)

This morning’s revision of the GDP (total output) numbers is more welcome news. The Commerce Department now estimates that GDP grew by 3.0% in 2011’s last quarter, a slight upward revision from its earlier estimate of 2.8%:

As this letter reported last month when the initial figure was released:

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

The Commerce Department will publish another revision of the data on March 29. That announcement will contain the first release of corporate-earnings data for 2011’s fourth quarter. This figure should interest stock-market investors.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, February 28, 2012

Consumer Confidence Climbing

The Lehmann Letter (SM)

More good news: This morning The Conference Board, a New York business organization, announced that its index of consumer confidence had improved to 70.8 in February from 61.5 in January:

Lynn Franco, Director of The Conference Board’s Consumer Research Center, commented: “Consumers are considerably less pessimistic about current business and labor market conditions than they were in January. And, despite further increases in gas prices, they are more optimistic about the short-term outlook for the economy, job prospects, and their financial situation. ”

Consumer Confidence
(Click on chart to enlarge)

(Recessions shaded)

The chart shows that consumer confidence peaked at about 70 earlier in the year before dipping to around 40. Now it's back to 70 again. Let's hope this becomes part of a long, sustained climb.

The chart reveals robust consumer confidence accompanying every period of prosperity. That's why this important indicator must maintain its assent. We can not reasonably expect a prosperous economy if consumers are pessimistic.

The recent recession was so severe that consumer confidence dipped into the 20s, a post--World War II low. Now we’re back up to levels that usually accompany recession. But the trend is good if we measure from the recent trough.

Let's keep hope alive!

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, February 27, 2012

March Publication Schedule: Housing Remains Key

The Lehmann Letter (SM)

The economy has gathered strength.

Housing remains the big concern. It’s been a dragging anchor.

We’ll see what March has in store.


March 2012

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

Quarterly Data

BLS…....….Productivity…….……Wed, 7th
BEA..International Transactions..Wed, 14th
BEA……….GDP & Profits…..……Thurs, 29th

Monthly Data

ISM..Purchasing managers’ index…Thurs, 1st
BEA.New-vehicle sales.(Approximate).Mon, 5th
Fed. Consumer credit..(Approximate).Wed, 7th
BLS………….Employment………… Fri, 9th
Census…….......Inventories…….... Tue, 13th
BLS………...Producer prices……. Thu, 15th
BLS……….Consumer prices.….. Fri, 16th
Fed……….Capacity utilization……Fri, 16th
Census……...Housing starts…….Tue, 20th
NAR………Existing-home sales….Wed, 21st
Conf Bd…….Leading indicators….Thu, 22nd
Census……..New-home sales…... Fri, 23rd
Conf Bd….Consumer confidence.. Tue, 27th
Census……….Capital goods…….. Wed, 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

© 2012 Michael B. Lehmann

Friday, February 24, 2012

New-Home Sales Flat

The Lehmann Letter (SM)

Just when folks were beginning to say, “Full steam ahead!” We get a report like this.

The Census Bureau announced 321,000 new-homes sold in January at a seasonally adjusted rate:

Look at the chart, insert that number, and you can see for yourself that new-home sales remain flat. As this letter has consistently said, residential building must recover for the economy to become robust. And if builders can’t sell homes, they won’t build them.

New Home Sales
(Click on chart to enlarge)

(Recessions shaded)

A picture is worth a thousand words.

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, February 23, 2012

Europe and the Rules of the Game

The Lehmann Letter (SM)

Readers know that this letter believes that Europe will work through its debt crisis and emerge stronger and more united in the long run. That would be consistent with Europe's record since the end of World War II.

A historian could go back even further, to the days before World War I, to find a precedent for current events. A century ago Europe was on the gold standard. Each nation pegged the value of its currency to gold. A British pound was worth a certain amount of gold, a German mark a different amount, and so on. This arrangement determined what every participating currency was worth in terms of all the other participating currencies.

The gold-standard nations believed that these arrangements facilitated world trade and investment. As an analogy, think of how a single currency facilitates trade and investment within the United States. A resident of California can do business in New York without worrying about the fluctuation in the value of those states' currencies. They both use the dollar.

Occasionally, however, events strained the pre-World War I gold standard. If a nation faced difficulty (think of the Greek debt crisis) and holders of its currency began selling the currency, those holders might not be able to find buyers at the pegged price. No problem: They could go to the central bank of the nation in difficulty, redeem the currency for gold and exchange the gold for whatever other currency they desired.

Here is where the Rules of the Game came in. Any nation facing a run on its currency of the kind described in the paragraph above was expected to deal with that run with a deflationary policy. Its central bank was supposed to force interest rates upward thereby reducing borrowing and spending and also reducing prices. Lower prices would make its goods more attractive, raising exports and increasing demand for its currency. The increased demand for its currency would offset the sales of its currency to the central bank. The nation in difficulty could remain on the gold standard.

Europe's current approach to Greece is reminiscent of these Rules of the Game. Europe expects Greece to pursue a deflationary policy in order to remain on the euro standard. Europe demands Greece reduce government expenditures and raise taxes. Greece's economy will shrink and unemployment rise, but Europe hopes that this contraction in the government sector will enable Greece to repay its debts and remain in the Euro community.

On February 21 this letter compared Europe's policy to pre-World War I gunboat diplomacy: Europe would take over a nation's finances until that nation repaid its debts to European bondholders. The new Rules of the Game expect each European nation to endure economic contraction rather than risk default.

We'll see if it works.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, February 22, 2012

Existing-Home Sales: Still a Drag

The Lehmann Letter (SM)

The economy is gaining strength, but real estate continues to impede its progress.

That's not surprising because real estate was ground zero for the boom as well as the bust. Households compromised their balance sheets - too much debt, too little liquidity and not enough net worth - in order to acquire homes. Liquidity and net worth eroded further during the collapse as home-prices fell and households desperately attempted to repay their debts. Household balance sheets remain impaired today despite households' best efforts to retire debt, improve liquidity and boost net worth.

Consequently real estate remains ground zero for the economy's problems. Consumers can't buy homes and builders can't sell homes at a robust pace until households feel confident about their balance sheets. Consumers don't want to take on excessive debt and impair future liquidity with payment obligations. Until these facts change, real estate and residential construction can't improve. And that's enough to slow the economy's forward momentum.

Today's announcement from the National Association of Realtors that January existing-home sales grew slightly to 4.57 million at a seasonally-adjusted annual rate illustrates the problem:

Existing-Home Sales
(Click on chart to enlarge)

(Recessions shaded)

When you place 4.57 million on the chart you can see that home sales remain in the doldrums: No higher than levels attained 15 years ago and much lower than their 7 million peak at the height of the boom. Circumstances are improving. They are just not improving sufficiently rapidly.

On Friday the Census Bureau will announce January new-home sales. Don't expect a vastly different story.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, February 21, 2012

Gunboat Diplomacy: The Greek Debt Deal

The Lehmann Letter (SM)

A century ago it was referred to as gunboat diplomacy: European, and sometimes American, warships visited a small, weak nation to ensure that it repaid its debts to European and American bondholders.

On occasion gunboat diplomacy involved North Africa or the eastern Mediterranean. Sometimes it was the Caribbean and Central America. The Europeans and Americans established a protectorate in the target country and seized the customs authority for a number of years. The European and American authorities could then skim the customs revenue in order to repay the bondholders. There were times when the occupiers left soon after the bondholders obtained satisfaction. There were other times when they remained longer. Bottom line: The small country lost its sovereignty for a while.

Articles in today's New York Times and Wall Street Journal regarding the Greek debt deal are reminiscent of those bygone days:

There are no gunboats and no seizures of customs revenue, but Greece has compromised its sovereignty - by ceding control over its fiscal authority - in order to remain in good standing within the euro zone. It's part of a three-way deal: Greece must impose austerity measures in order to reduce its budget deficits, the bondholders take a loss with the write-down of Greek debt and the strong nations of Western Europe provide bailout funds.

There are risks. The bondholders know this. They will take a loss. The strong nations of Western Europe know this. They will provide the bailout funds. But the biggest risk revolves around the Greek austerity measures. Put simply: The Greek government must reduce its expenditures and increase its tax revenues. That will enable it to pay its debts. But reducing expenditures and raising tax revenues will have a contractionary impact on the Greek economy. Austerity will reduce Greek output and income, making it more difficult for the government to repay its debts. Why? Because a poorer nation demands more social services, raising government expense, and a poorer nation pays less taxes, reducing government revenue. Everyone hopes that the Greek government can clear this hurdle.

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, February 20, 2012

Iran And Sanctions

The Lehmann Letter (SM)

There is a great deal of concern regarding rising oil prices. Much of that concern centers on Iran and its nuclear program and our – and Europe’s – fear of a nuclear weapon in Iran’s hand. Military options exist, but other options are having an effect. Sanctions are tightening and applying pressure on Iran to come to the table.

For instance, did you see this article in Saturday’s, February 18, New York Times?

Here’s an excerpt:

“Yet another potentially crippling sanction against Iran moved a step closer on Friday when the Belgium-based Society for Worldwide Interbank Financial Telecommunication, known as Swift, said in a statement on its Web site that it was “ready to implement sanctions against Iranian financial institutions.

"….The move would essentially choke off Iran’s entire banking system by denying it the main conduit for exchanging crucial financial transaction information with banks in most countries.”

The Wall Street Journal carried a similar article on the same day.

There’s more to sanctions than meets the eye, and probably much that we don’t know.

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, February 17, 2012

Inflation: Still Not A Threat

The Lehmann Letter (SM)

Critics of the Federal Reserve have expressed concern that the Fed's expansionary policy will generate rising inflation. But it hasn't, and this morning's report from the Bureau of Labor Statistics should cause no concern:

The BLS reported that consumer prices grew at a 2.4% seasonally adjusted annual rate in January (multiply the 0.2% monthly figure by 12).

Take a look at the chart and you will see that prices have been rising on average by this amount for two decades. There is no current evidence for surging inflation.

Change in Consumer Prices
(Click on chart to enlarge)

(Recessions shaded)

Why not? Shouldn't the Fed 's expansionary policy lead to excess demand that drives prices higher at an increasing rate?

It depends. If households and businesses were willing to exuberantly borrow and spend, and if producers were operating at full capacity, then an expansionary monetary policy would be inflationary. But those are two big "ifs."

Households and businesses are not borrowing and spending at exuberant rates despite the Fed's low-interest-rate policy. (Also keep in mind that lenders have raised their standards, thereby offsetting the low rates of interest.) And producers are operating well below full capacity (see the February 15 issue of this letter), enabling them to boost output at minimum increase in cost.

Take another look at the chart. Inflation surged in the 1970s because of robust borrowing and spending and high capacity utilization. But those particular circumstances do not apply today.

Today's circumstances are much closer to the "pushing on a leash" scenario. The Fed's monetary policy is much better at restraining demand then stimulating demand. The Fed can hold the economy back by raising interest rates, but it is difficult under today's circumstances to push it forward by lowering interest rates. That's why the Fed's monetary easing has failed to generate rising inflation to date.

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, February 16, 2012

Residential Construction: Still Dragging

The Lehmann Letter (SM)

It's not that this morning's news was bad. The Census Bureau reported an improvement in January housing starts:

But it's not hard to see the problem when you post January's 699,000 on the chart. We're breaking out of the 600,000 range, but not by much.

Housing Starts
(Click on chart to enlarge)

(Recessions shaded)

Contrast this with our earlier report of 14.1 million new-vehicle sales in January. Place that on the chart and you can see the positive trend.

New-Vehicle Sales
(Click on chart to enlarge)

(Recessions shaded)

What's wrong with housing? Why can't it break loose like so many of the other indicators we watch? These are important questions because the economy can't recover fully without a resurgence in residential construction.

Federal Reserve Chairman Ben Bernanke spoke to this issue on February 10 before a meeting of the National Association of Home Builders in Orlando, Florida.

You can find his remarks at:

Here are some key excerpts. They are worth reading because they succinctly summarize the issues.

“The state of the housing sector has been a key impediment to a faster recovery. In the typical economic recovery, a resurgent housing sector helps fuel reemployment and rising incomes. But as you know all too well, that scenario has not played out this time….

“One way to understand conditions in the housing market is to focus on the balance of supply and demand. For the past few years, the actual and potential supply of single-family homes has greatly exceeded the effective demand….

“Looking ahead, the relatively high rate of foreclosures is likely to continue for a while, putting additional homes on the market and dislocating families and disrupting communities in the process….

“Additionally, housing may no longer be viewed as the secure investment it once was thought to be, given uncertainty about future home prices and the economy more generally….

“As I mentioned earlier, problems in the housing market have also restrained the broader economic recovery. For example, by some estimates, declines in house prices have reduced homeowners' equity by more than 50 percent in the aggregate since the peak of the housing boom, resulting in more than a $7 trillion loss of household wealth.4 Indeed, about 12 million homeowners--more than 1 out of 5 with a mortgage--are underwater, meaning they owe more on their mortgages than their homes are worth. One of the effects of declines in housing wealth is to reduce the ability and willingness of households to spend…

“One reason for the very slow recovery in mortgage credit, despite monetary policy actions that have helped drive mortgage rates to historically low levels, is that many lending institutions have tightened underwriting conditions dramatically, relative to the pre-recession period.”

There you have it:

The economy can't recover fully until housing recovers. But housing is a key asset in household balance sheets. Its depreciation has significantly reduced household wealth. Moreover households don't expect an improvement any time soon. Meanwhile lenders have tightened loan standards. Under these circumstances how can we expect households to burden their balance sheets with the mortgage borrowing required to restart residential construction on the scale required to rekindle boom conditions?

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, February 15, 2012

Industrial Output: Sign of Trouble?

The Lehmann Letter (SM)

There is a paradox in the current economic recovery: Most indicators are up, but housing is flat. That's why today's Federal Reserve release on industrial production may cause concern:

The Fed reported that industrial production (manufacturing, mining and public utilities output) failed to grow in January. Does this indicate that housing is dragging down the rest of the economy?

Probably not.

The chart displays industrial production in another light. It asks and answers the question: What is the current level of output expressed as a percentage of the maximum? You can see that capacity utilization rebounded sharply from the depths of recession. That reflected business restocking inventories depleted during the downturn. Restocking is over, and now we are in the tough slog of trying to return production to a normal level.

Capacity Utilization
(Click on chart to enlarge)

(Recessions shaded)

From examination of the chart you would probably agree that capacity utilization must return to 80% before we can be satisfied that industrial output is strong. The Fed reported capacity utilization of 78.5% in January. That is close to the 80% that signals a healthy economy.

Bottom line: Don't be alarmed by today's report that industrial production was flat in January. Industry continues to make steady progress. One month's data don't end a trend. The chart shows strength and will probably continue to do so in the coming months.

But housing does remain a concern. There will be a number of important
residential-building indicators released in the coming weeks. Stay tuned.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, February 14, 2012

Business Inventories & Sales: Good News

The Lehmann Letter (SM)

This letter has long expressed the view that the economy won't thrive until housing rebounds.

Nonetheless there have been many signs of a return to normalcy.

Take today's Census Bureau report on inventories:

December inventories grew at a seasonally-adjusted annual rate of $70 billion after increasing by $60 billion in November.

Place these numbers on the chart and compare them to the typical rate of expansion: They are right on the average.

Inventory Change
(Click on chart to enlarge)

(Recessions shaded)

What does this mean?

These data show that manufacturers, wholesalers and retailers are stocking their shelves at a rate consistent with their expectation of ongoing prosperity. Note the heavy restocking immediately after recession. That's over now. Depleted inventories have been replenished. Today business is adding inventories in anticipation of future sales.

The Census Bureau report also revealed that inventory growth kept pace with sales growth. There was no sign of exuberant shelf-stocking in anticipation of boom conditions. That's good: Booms always lead to busts.

Bottom line: Business inventory and sales data show an economy that's growing at a good clip.

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, February 13, 2012

Europe: Progress Continues. A Lesson for Us?

The Lehmann Letter (SM)

Today’s New York Times and Wall Street Journal carried stories on Europe’s attempt to resolve the Greek debt crisis and save the euro:

Summary: Solid progress, but difficulties remain.

This letter has been optimistic on Europe’s prospects and eventual success in resolving these issues: Europe will emerge stronger and more closely knit.

Why? Because Europe has made a concerted effort since WWII to strike out on a new path: One that puts the old divisions behind it and faces the future as a unified continent, economy and society. Progress has been halting and discontinuous when viewed in the time frame of a human life. But progress has proceeded with breath-taking speed when viewed in historical time. After centuries of war and strife, Europe established a common market and a currency union and is now establishing a common economic policy. Eventually Europe will have a common foreign policy, a common military, a common system of justice and many other accoutrements of sovereignty. A United States of Europe? We’ll see.

Meanwhile, here in the U.S., we’re finding agreement more elusive and difficult. In the 20th century a Great Depression forced an ideological shift. In the 19th century a Civil War settled the slavery issue. Why is it so difficult for us to find common ground?

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, February 9, 2012

Recap and Expectations

The Lehmann Letter (SM)

February has had a strong start: Employment up, consumer credit up, auto sales up.

Two questions remain: Will housing be equally strong? Will production and business investment continue growing?

There is only a slim chance that housing will make similar gains. This sector has been so weak and prices continue to decline. Sales and building have bottomed and there are glimmers of an upturn. We can hope that glimmer shows real light, but we are still a long way from bright.

Production and business investment have been stronger. The Fed will report on industry’s capacity utilization next Wednesday and the Census Bureau will release data on capital-goods orders on the last day of the month. Both have recovered more strongly than housing, but have not been robust. They have to keep gaining before we can say they’ve made the transition from recovery to expansion.

Here’s the calendar:

Housing starts ..................... February 16
Existing-home sales .............. February 22
New-home sales ................. February 24

Capacity utilization .............. February 15
Nondefense capital goods ...... February 28

We’ll see.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, February 7, 2012

Consumer Credit: A Great Report

The Lehmann Letter (SM)

Today’s consumer-credit report from the Fed was terrific:

We now have back-to-back gains of $244.8 billion and $231.6 billion at seasonally-adjusted annual rates for the latest available months.

Place these on the chart with your mind’s eye and you’ll see that these numbers exceed even a strong-growth period such as 2003 – 2007.

Consumer Credit
(Click on chart to enlarge)

(Recessions shaded)

If this pace continues, it’s good news for auto sales and any other household purchase financed with consumer credit (not mortgage credit).

Could the consumer be back? We’ll see.

(To be fully informed visit

© 2012 Michael B. Lehmann

Sunday, February 5, 2012

Autos: A Breakout Number

The Lehmann Letter (SM)

The Commerce Department reported great news for January auto sales. They reached 14.1 million at a seasonally-adjusted annual rate.

That’s about as high as they jumped in August 2009 during the cash-for-clunkers program. More important: It’s a breakout from the 13 million range – or less – at which they’ve been stuck since the recession. Now we’re back to a 2008 number - on the down slope from the pre-recession high of over 15 million.

New-Vehicle Sales
(Click on chart to enlarge)

(Recessions shaded)

The chart makes clear that 16 or 17 million is a truly healthy rate, but the latest figure is too good not to mention.

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, February 3, 2012

243,000 and 8.3%

The Lehmann Letter (SM)

The headline on today’s letter appears similar to, but a little better than, last month’s employment report. If we have improvements such as these for the rest of the year, the economy is out of the woods

The Bureau of Labor Statistics reported January’s unemployment rate fell to 8.3% and the economy created 243,000 new jobs:

The private sector was particularly strong, creating 257,000 positions. The work-week also lengthened, providing hourly workers with the opportunity to earn more overtime pay.

Job Growth
(Click on chart to enlarge)

(Recessions shaded)

You can see from the chart that periods of robust economic improvement, such as 2003 – 2007, typically average 250,000 more jobs month-after-month, year-after-year. Let’s keep hope alive!

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, February 2, 2012

Productivity and Profits: The Impact on the Stock Market

The Lehmann Letter (SM)

Many investors have a clear idea of the relationship among productivity, profits and the stock market. They ought to move together.

So today's Bureau of Labor Statistics report that productivity grew in 2011's last quarter is good news:

But there was even better news buried in that release: Prices continue to improve more rapidly than labor costs, thereby generating generous profit margins.

Ratio: Implicit Price Deflator to Unit Labor Costs

(Click on chart to enlarge)

(Recessions shaded)

The top chart provides a good proxy for profit margins. Just a quick glance shows how they have improved over the past decade. Profit margins are now at an all-time high.

After-tax Corporate Profits

(Click on chart to enlarge)

(Recessions shaded)

The next chart demonstrates that profits have recovered from the recent recession and are also at an all-time high. But they don't show the exuberance of profit margins. Why?

Because total profits are the product of profit margins multiplied by sales volume (profit margins X sales volume). Profit margins may have risen to an all-time high, but sales volume remains in the doldrums for many firms.

It appears that profit margins have risen to their limit. We can't expect productivity to continue growing sufficiently rapidly to further boost productivity above its current record-high level. Sales volume must now grow strongly for earnings to continue their upward march.

But where will those sales come from? The economy's prospects going forward are too weak to provide robust sales-volume growth. That means most of the biggest profit-gains are behind us.

This is not good news for the stock market. It may be true that productivity continues to improve, and it may be true that profit margins remain robust. But the outlook for sales-growth is not that rosy. And without that growth, earnings cannot improve rapidly. Investors should remain wary of this.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, February 1, 2012

Manufacturing Production: Gains Continue

This morning the Institute for Supply Management reported continued growth in its Purchasing Managers' Index:
Here's how the announcement began:

“The PMI registered 54.1 percent, an increase of 1 percentage point from December's seasonally adjusted reading of 53.1 percent, indicating expansion in the manufacturing sector for the 30th consecutive month….”

Let's put that in historical context by examining the chart.

Purchasing Managers' Index

(Click on chart to enlarge)

(Recessions shaded)

Begin by keeping in mind that any number over 50 indicates expansion. As the announcement says, we've had to 2 1/2 years of steady growth. You will notice explosive growth in 2010 as industry restarted production in order to restock depleted inventories. But that has ended. Now we are in a steady upward climb, hoping for continued month-to-month gains.

This is all part of our slow recovery from recession. Expect neither renewed setback or dramatic gains.

(To be fully informed visit

© 2012 Michael B. Lehmann