Monday, April 30, 2012

May Publication Schedule

The Lehmann Letter (SM)
Many are concerned that the expansion is slowing and may slow further.

Here are the economic indicators – together with their publication schedule – that we’ll examine in May.

Slowdown? Probably not. Slow expansion? Probably.

We’ll try to avoid semantic quibbles.


May 2012

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

Quarterly Data

BLS………Productivity…………..Thu, 3rd

BEA……….GDP & Profits..…..……Thu, 31st

Monthly Data

ISM..Purchasing managers’ index…Tue, 1st  

BEA.New-vehicle sales.(Approximate).Thu, 3rd

Fed. Consumer credit..(Approximate).Mon, 7th

BLS………….Employment…….…   Fri, 4th
BLS………...Producer prices……. Fri, 11th
BLS……….Consumer prices.….... Tue, 15th
Census…….......Inventories…..... Tue, 15th
Fed……….Capacity utilization……Wed, 16th
Census……...Housing starts…….Wed, 16th
NAR………Existing-home sales….Tue, 22nd
Conf Bd…….Leading indicators….Thu, 17th   

Census……..New-home sales…... Wed, 23rd
Conf Bd….Consumer confidence.. Tue, 29th

Census……….Capital goods…….. Thu, 24th

*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

Friday, April 27, 2012


The Lehmann Letter (SM)

Today's GDP number was OK. The Commerce Department reported that gross domestic product grew by 2.2% in the first quarter:

That's not bad. We had smaller numbers for several quarters in 2011, as the chart indicates.

There were, however, some components of interest. Household expenditures on durable goods, such as motor vehicles, grew strongly. That's not surprising since new-vehicle sales have been robust in recent months. Residential construction's vigorous performance was of greater interest because the housing numbers have not been especially encouraging. Perhaps the first quarter's good winter weather permitted an unseasonably large amount of construction activity. Housing starts did pop up a bit in January and February and builders may have done an unusually large amount of work on structures in progress.

There were also some disappointing negative numbers. Business investment in plant and equipment fell after showing recent strength. Sadly, too, both federal and state and local government spending continued to slide. It's too bad that we've chosen to curtail government expenditures while the private sector continues to struggle.

GDP Change
(Click on chart to enlarge)
(Recessions shaded)

But all in all and all things considered, this has not been a bad quarter.

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, April 26, 2012

France’s Next President?

The Lehmann Letter (SM)

This morning’s New York Times covered a press conference by Francois Hollande, France’s Socialist candidate for president:

One might think that he would advocate a radical departure from the policies of Nicolas Sarkozy, the incumbent, with respect to European solidarity.

But it’s hard to find them in this story. Here’s an extensive excerpt:

“In the first news conference of his campaign, Mr. Hollande said that he would propose four modifications to the European Union treaty, favored by Germany and approved in March but not yet ratified. Most significant, perhaps, he called for the creation of collective euro bonds, but to be used to finance industrial infrastructure projects, not to consolidate debt, which the Germans oppose.
“He said he would also call for a financial transaction tax, as his rival, President Nicolas Sarkozy has done, and for loosening up regulations to allow unused European Union structural funds to be spent on growth. Finally, he urged the European Investment Bank to place a greater emphasis on job creation in its allocation of financing.
“The main risk to Europe now, Mr. Hollande said, “is that the European economy remains in a recession because not enough credit is provided to companies.” He said that increased growth would help shrink debt, and that other European leaders were coming closer to his argument that increased growth is “ultimately a more effective way of reaching the same goal of controlling the debt and reducing deficits.””
There is no mention of additional fiscal stimulus, i.e. permitting peripheral nations such as Spain an increase in their budget deficits in order to stimulate aggregate demand. There is no mention of struggling with Angela Merkel of Germany, Europe’s champion of fiscal conservatism. And, most important, there is no suggestion of breaking up the euro-zone and derailing Europe’s march toward greater cohesion.
Could it be that, if elected, Mr. Hollande, the Socialist candidate, will stay the course just as Mr. Sarkozy has: Putting European solidarity above all other long-run goals.
It would not be surprising.

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© 2012 Michael B. Lehmann

Wednesday, April 25, 2012

Capital Goods: More Bifurcation

The Lehmann Letter (SM)

This morning the Census Bureau reported that capital-goods orders were down in March:

This letter has always focused on a portion of that report: New orders for nondefense capital goods, a measure of business (not household) investment in new equipment.

The chart shows that these orders have popped up strongly since the recession. This provides more evidence of our bifurcated recovery: Everything but housing seems to be doing well.

March's $73 billion was down sharply from February's $81.6 billion. There is always noise in the data, and this statistic is particularly volatile because of its inclusion of new aircraft orders. So the real story remains: Business capital expenditures have recovered sharply from the recession.

Nondefense Capital Goods

(Click on chart to enlarge)

(Recessions shaded)

But we should pay attention to the chart. Business capital expenditures are supposed to exceed their previous peaks by a great deal. If this series is to do as well as it did in the 1980s and 1990s, it has to move up to the $100 billion range. That's a tall order.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, April 24, 2012

More Bifurcation: New Home Sales and Consumer Confidence

The Lehmann Letter (SM)

This morning's bulletins provide additional signs of bifurcation.

New-home sales remain in the doldrums:

While consumer confidence has moved up and out of recession's trough:

Update the charts with these new numbers.

There were 328,000 new homes sold in March, a dip from February's revised 353,000. The chart reveals that those are not bad numbers. There is no sign of a double dip. At the same time you can see that a true expansion has not yet begun.

Consumer confidence was 69.2 in April, about the same as March's 69.5. That seems, like new-home sales, to indicate a plateau. But the chart shows us that there has been some recovery from recession lows.

New Home Sales
(Click on chart to enlarge)

(Recessions shaded)

Consumer Confidence
(Click on chart to enlarge)

(Recessions shaded)

Here is a fair way to summarize: Neither of these indicators provides evidence of robust expansion, but they do tell different stories. Households are more confident than they were several years ago. Unfortunately this confidence has not helped housing. New-home sales are barely higher.

This is evidence of the bifurcated economy. Everything except housing is trying to head north. Unfortunately, without housing, the economy can't move quickly ahead.

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, April 23, 2012

French Elections

The Lehmann Letter (SM)

The stock market is down this morning on renewed fears regarding Europe. There will be a runoff in the French presidential elections and the incumbent did not lead. Will his challenger, if he wins, be as resolute in defense of the euro? Investors appear to have their doubts.

This letter has always been optimistic that Europe will muddle through, just as it has done over the past 65 years. Too much is at stake and too much history points to the road forward. This gives hope that France will take no detours and will refuse to endanger the goal of an increasingly united Europe.

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, April 20, 2012

Economic Recovery: Recommended Reading

The Lehmann Letter (SM)

This letter recommends several articles in this morning's newspapers.

Both The New York Times and The Wall Street Journal carried stories about the weak economic recovery.

The New York Times also published a separate story on Europe's travails.

All of these focus on the weak recovery both here and abroad: Noting that signs of strong growth are often mitigated by setbacks.

But the most interesting story, from this letter's perspective, appeared in The New York Times and analyzed domestic household debt levels.

The article relied heavily on a recent report by the McKinsey institute that analyzed recent recoveries from debt crises. It was generally upbeat, but carried a warning in its closing paragraphs.

“Susan Lund, the director of research for the McKinsey institute, says the two areas where the United States is weakest are in coming up with a credible fiscal plan and in stabilizing the real estate market. Home prices continue to fall in some of the hardest hit areas, where debts continue to be high relative to income. ……

“Ms. Lund points out that from 2003 to 2007, American homeowners took out $2.2 trillion from home equity loans and mortgage refinancings, a source of economic stimulus that will not return anytime soon. “Compared to the much-debated government fiscal stimulus, this was more than twice the size,” she noted. She thinks the household deleveraging process will continue for two more years.”


It's housing and household balance sheets!

They are retarding recovery and they will take a long time to mend.

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© 2012 Michael B. Lehmann

Thursday, April 19, 2012

Home Sales and the Bifurcated Economy

The Lehmann Letter (SM)

This morning's report from the National Association of Realtors illustrates a point that this letter has attempted to make for some time:

The Realtors reported 4.5 million existing-homes sold in March, down from February's revised 4.6 million.

The news release goes on to say: ““The recovery is happening though not at a breakout pace, but we have seen nine consecutive months of year-over-year sales increases…”

That's true and describes the situation, until you take a look at the chart and put matters in historical perspective.

Existing Home Sales
(Click on chart to enlarge)

(Recessions shaded)

Home sales, unlike much of the rest of the economy, are in a rut. They may have improved from recession's depths, but that is not saying much. Plain and simple: There is no growth trend.

We are in a bifurcated economy. Everything except housing shows improvement. And that's a problem because a robust economy depends upon housing’s recovery.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, April 18, 2012

Europe: Still in the News

The Lehmann Letter (SM)

The European debt crisis remains in the news.

Today's New York Times carries a story about renewed concerns whether or not Europe's peripheral nations, such as Spain, will be able to meet their obligations.

Some in Europe, including the International Monetary Fund, suggest that increased assistance flow to troubled debtors. Germany resists this, insisting that fiscal discipline will only occur when borrowers confront their obligations. Call it a deterrent policy.

This letter has described the "tough medicine" approach as a throwback to the rules-of-the-game of the gold standard from 100 years ago. According to those rules, currency devaluation - like abandoning the euro today - was not an option. Nations were supposed to impose austerity on their economies and soldier on, adhering to the gold standard at all costs. Germany's prescription is reminiscent of those rules.

But there are some, such as Paul Krugman, who believe this approach is self-defeating. See his op-ed column in Monday's New York Times.

Prof. Krugman argues that Spanish austerity will only exacerbate conditions. The Spanish economy will shrink as Spain attempts to raise taxes and cut its expenditures. That will reduce income, output and employment even further, thereby making it more difficult to collect taxes and resolve the debt crisis. Prof. Krugman believes Europe, by these policies, is placing itself in jeopardy of a severe recession.

Even if a worst-case scenario does not develop, it's entirely possible that Europe soldiers through its debt crisis but consequently suffers for it.

We will see

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, April 17, 2012

Two Reports: Two Stories

The Lehmann Letter (SM)

Today's two reports remind us that the long view is a long road and that we should expect many bumps on that road. The recovery is in place, but we are not roaring back.

More specifically, industrial production is coming back while housing is going nowhere.

The Federal Reserve reported that capacity utilization had fallen back to 77.8% in March from a revised 78.0% in February:

This report reveals industry's operating rate: How much of its plant and equipment industry requires to produce the current level of output. It measures the strain on facilities: The higher the number, the more robust the pace.

The chart shows us how far we slipped during the recession as well as the substantial ground recovered. We are climbing back to a healthy 80%. March's slight setback follows a healthy run. Let's be patient. Production is growing.

Capacity Utilization
(Click on chart to enlarge)

(Recessions shaded)

The Census Bureau's report on March housing starts is another matter:

They fell to 654,000 from a revised 694,000 in February. That may just be noise in the data, but it also serves to illustrate the predicament in which we find ourselves.

Housing Starts
(Click on chart to enlarge)

(Recessions shaded)

The chart shows just how long we've bumped along at around 600,000 housing starts since the depths of the recession. Now we're up to 700,000 starts. That's a big percentage gain but just a small contribution to where we need to be.

Housing is stuck, and the economy can't get back to full health without a strong housing recovery.

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, April 16, 2012

Inventories: No News Is Good News

The Lehmann Letter (SM)

Here is a, "No news is good news," story for today's letter.

This morning the Census Bureau reported that business inventories and sales kept on doing what they have been doing for months:

Inventories grew by $115.9 billion and sales grew by $105.7 billion so that the inventories/sales ratio remained steady at 1.28.

How's that for a snore!

But why is it good news? Because, as you can see from the charts, both inventories and the inventories/sales ratio have been proceeding at these levels for a while.

(Click on chart to enlarge)

(Recessions shaded)

Inventory/Sales Ratio
(Click on chart to enlarge)

(Recessions shaded)

The inventories/sales ratio spiked during the recession when businesses were caught by surprise and suffered involuntary inventory accumulation. Then, as they liquidated their stocks, inventories plunged. As soon as sales began to recover, however, businesses replenished their inventories. That kick-started the recovery.

Now inventory growth is tootling long at a little over $100 billion and the inventories/sales ratio has returned to its pre-recession 1.28. It looks dull, but it's wonderful. Business sales are strong and businesses are rebuilding their inventories. They clearly believe things are back to normal.

Let's end it right there.

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© 2012 Michael B. Lehmann

Friday, April 13, 2012

CPI: 3.6% Annual Rate

The Lehmann Letter (SM)

This morning's Bureau of Labor Statistics announcement of a 0.3% March increase in the consumer price index is the rough equivalent of a 3.6% increase at an annual rate:

The chart confirms that this inflation number is roughly in line with the low inflation we've experienced over the past 20 years.

Consumer Prices
(Click on chart to enlarge)

(Recessions shaded)

If you take a look at yesterday’s letter and compare the charts' record for producer and consumer prices you will see that they are rough mirror images. That's no surprise because we would expect retail price changes to reflect wholesale price changes.

Either way, inflation remains tame because there is so much slack in our economy. Prices won't surge as long as ample supplies of material and labor are available at current prices.

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© 2012 Michael B. Lehmann

Thursday, April 12, 2012

Inflation Tame

The Lehmann Letter (SM)

As soon as recession gripped the economy in 2008 the Federal Reserve began pursuing a "whatever it takes" expansionary policy. These steps continue to the present day as the Fed has held interest rates near zero in order to drive the recovery forward.

Critics began expressing fears of rising inflation as soon as the Fed embarked on this road. Their theory: A rapid increase in the money supply would generate a rapid rise in prices.

But it hasn't happened, and this morning's report from the Bureau of Labor Statistics confirms that inflation remains tame:

Wholesale prices were unchanged in March.

Producer Prices
(Click on chart to enlarge)

(Recessions shaded)

The chart illustrates the extreme variation in wholesale-price changes from month to month. Recent years are no exception. But you can see that inflation has not surged since the recession.

Why? Because the economy continues to operate with sufficient excess capacity to hold inflation to a minimum. There are so many idle factories, idle machines and idle people - all waiting for the opportunity to get back to work - that business can easily call upon them if it wishes to expand and can do so without offering higher prices for their services. Costs and wages have not risen because there is so much slack in the economy.

The important point: The Fed's expansionary policy did not occur in a vacuum. Monetary stimulus in a time of full employment generates inflation. Monetary stimulus with mass unemployment does not. It's as simple as that.

The Bureau of Labor Statistics releases its report on consumer prices tomorrow. Let's look forward to another acceptable report.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, April 11, 2012

Corporate Earnings: The Best Is Behind Us

The Lehmann Letter (SM)

Standard & Poor's recently completed its earnings summary for the last quarter of 2011 (the most recent quarter for which complete data are available):

(Click on S&P 500 under Categories, then click on Download Index Data and click on Index Earnings and open the spreadsheet to find Actual As Reported Earnings Per Share.)

You will see that earnings have stopped growing. That could be a minor fluctuation, but probably isn't. This letter believes that the best news is behind us.

Corporations have raised their profit margins to record levels by slashing their labor forces. But those gains are no longer available now that hiring has resumed. Sales volume will also grow slowly in this anemic expansion. If margins have peaked and sales volume expands sluggishly, you can't expect robust earnings growth.

Stocks are up this morning, but there has been a broad retreat in the past week. Many eyes are focused on Europe and that continent's travails. It may be that our troubles are domestic, not imported.

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© 2012 Michael B. Lehmann

Tuesday, April 10, 2012

Household Equity Recovery: Waiting for the Paint to Dry

The Lehmann Letter (SM)

This letter has often expressed a "this time it's different" theme when discussing the painfully slow recovery. The reason: The massive asset deflation that instigated the recession and hampers the recovery.

Along these lines, Sunday's New York Times carried an editorial that deserves your attention:

Note especially the two charts accompanying the article.

The first chart shows how difficult it is to restore full employment following a severe recession. Unemployment rose to over 10% in the 1981-82 recession and it took four years to recover from the consequent job loss and keep up with labor-force growth. And that was a classic V-shaped recovery. Unemployment rose far less during the 1991 recession but job recovery took just as long because of a weak post-recession expansion. The article asserts that job recovery remained incomplete after the 2001 recession and estimates it will take 10 years to recoup from the recent recession. This pessimistic assessment fits well with everyday observations of the slow recovery.

But it's the second chart that's an even bigger eye-opener. It shows average home equity per homeowner in 2011 (inflation-adjusted) dollars. Home equity per homeowner doubled from approximately $100,000 to $200,000 from the late 1990s to 2007. Then it collapsed and fell to roughly $80,000: About where it was in the late 1960s. This illustrates the one-two punch of falling home prices and rising mortgage debt. The asset deflation wiped out the previous boom's home-equity gains.

It also illustrates this expansion's key constraint: Households are hampered by balance sheets with diminished equity, excessive debt and inadequate liquidity. How can consumers, under those circumstances, restore and repair their balance sheets by spending and borrowing less AND AT THE SAME TIME stimulate the economy by borrowing and spending more?

That's why the recovery and expansion is so slow. Once you've painted yourself into a corner, it takes a long time for the paint to dry before you can walk away.

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© 2012 Michael B. Lehmann

Friday, April 6, 2012

Off Monday!

The Lehmann Letter (SM)

The blogger will take a day off, Monday April 9.

Thank you.


The Lehmann Letter (SM)

Perhaps it was too much to ask………….. That the economy keep generating over 200,000 jobs a month.

The chart shows we had begun to do it, but last month we slipped.

This morning the Bureau of Labor Statistics reported 120,000 new jobs in March and an unemployment rate - virtually unchanged- of 8.2%:

That's not bad, but it's not good enough. As this letter has said over the last couple of years, we need 200,000+ jobs a month - month after month for several years - to bring the unemployment rate back down to an acceptable level of around 5%.

Job Growth
(Click on chart to enlarge)

(Recessions shaded)

The chart shows that there is a lot of noise in the data and that we can expect month-to-month variation. So this may be no more than a glitch caused by statistical variability. After all, the other news has been good.

Keep in mind, however, for every month under 200,000 we need another month well above 200,000 to remain on the full-employment track.

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© 2012 Michael B. Lehmann

Thursday, April 5, 2012

Stock Market Malaise?

The Lehmann Letter (SM)

The stock market opened lower this morning, continuing the rough patch of the last couple of days. Some observers attribute the difficulty to the European debt crisis and others attribute it to Federal Reserve policy.

Readers know this letter believes that Europe will face its debts and emerge stronger.

With respect to Federal Reserve policy, there are two concerns that revolve around rising interest rates: First, that rising rates will slow economic expansion and second, that rising rates will lure investors away from the stock market.

Rates are now rock-bottom and the recently released minutes of the Federal Reserve's March 13, 2012 open market committee meeting should not be cause for concern:

Here is a key paragraph:

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its 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 ¼ 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.”

Those words are not directed toward long-term markets, but it's hard to believe that the Fed will risk expansion by raising rates.

There is, however, another long-term risk that this letter has articulated more than once: Since profit margins have probably peaked, it is hard to imagine that the economy will grow sufficiently rapidly to sustain rapid earnings growth. Sales will probably not expand quickly enough. That concern should remain in investors’ mind.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, April 4, 2012

Auto Sales: When Less Is More

The Lehmann Letter (SM)

This letter usually relies on the Department of Commerce for its auto-sales data. But those data are not yet available for March. So let's turn to an article in today's New York Times:

“U.S. Car Sales Keep Up Their Firm Growth”

The headline is upbeat and the fifth paragraph is, too:

“Many analysts say they are confident that United States sales for all of 2012 will surpass 14 million vehicles, a target that seemed overly optimistic several months ago. In contrast, industry sales were 12.8 million last year and 10.4 million in 2009.”

While the eighth paragraph reports the latest data:

“The industry’s seasonally adjusted, annualized selling rate increased to 14.4 million in March, from 13.1 million a year ago, according to the industry tracking firm Autodata. The selling rate for the first quarter was 14.5 million, the highest since 2008.”

This is encouraging. But a look at the chart, which puts matters in historical perspective, generates caution.

New-Vehicle Sales
(Click on chart to enlarge)

(Recessions shaded)

You can see that February sales reached 15 million, showing strong growth since the depths of the recession. March sales were 14.4 million, a slight setback to that growth trend that seems insignificant when you notice the many minor fluctuations in the graph.

But the article says many analysts are confident that sales will surpass 14 million for all of 2012. If that means sales will be less than 15 million for 2012, that would definitely interrupt the upward trend.

The chart shows that the industry enjoyed 17 million in sales from 2000 to 2005. The hope had been that we were on our way toward that number. Let's also hope that February's 15 million was part of the trend and not just a fluke.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, April 3, 2012

Europe’s Firewall

The Lehmann Letter (SM)

Over the weekend The New York Times reported that Europe had created a $1 trillion firewall to protect it from future default crises.

It's a fund established to assure investors who hold European government debt that there are ample resources available to bail out any European nation. This will avoid the piecemeal approach that bedeviled the Greek restructuring. The funds are there should Ireland or Spain or Portugal or Italy run into difficulty. More important: It shows, once again, how seriously Europe intends to build a united and successful future.

That does not guarantee the absence of trouble along the way. Today's Wall Street Journal reported that the European economies face slowdown.

They may even face recession. But they are determined to set aside ideological differences in order to confront the future in as united a manner as possible. If only we could do that in this country.

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, April 2, 2012

All Quiet on the Manufacturing Front

The Lehmann Letter (SM)

Today’s leading manufacturing indicator – The Institute for Supply Management’s Purchasing Managers’ Index – was little changed from the previous month:

The chart shows the index hovering just above 50 lately, so March’s 53.4 revealed continued, steady improvement. (Any reading above 50 is expansionary.)

Purchasing Managers’ Index
(Click on chart to enlarge)

(Recessions shaded)

April has begun quietly but well. We’ll stay tuned.

(To be fully informed visit

© 2012 Michael B. Lehmann