Thursday, May 31, 2012

Big Jump in Profits

The Lehmann Letter (SM)
This morning’s GDP report included good news on profits.

After-tax corporate profits surged to $1,669.3 billion in this year’s first quarter, rising substantially from last quarter’s $1,493.9 billion. Look at the chart to put it in perspective. The new reading is off the top of the chart, breaking away from an earlier plateau of around $1,400.0 billion.

That’s bullish for the stock market and, we hope, an omen of future good news. This letter has been skeptical: Seeing a top in profit margins and leery of future sales-volume gains. Perhaps that skepticism was unwarranted.   


(Click on chart to enlarge)

(Recessions shaded)

Meanwhile, the remainder of the GDP report was ho-hum:

GDP grew by only 1.9% in the first quarter, down slightly from last month’s preliminary report of a 2.2% gain. Government spending remained a drag as it contracted. That’s too bad, because it could be growing absent concerns about deficits. Consumption and business capital expenditures continued to improve.

But – once again – the profits report was good. Let’s hope it was an omen of future good tidings.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, May 30, 2012

June Publication Schedule

The Lehmann Letter (SM)
Let’s watch these as June unfolds. The profits data should be important for the stock market. We’ll also keep our eyes on inflation and housing. Let’s hope the former remains mild and the latter picks up pace.


June 2012

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

Quarterly Data

BLS………Productivity…………..Wed, 6th

BEA….US Internat’l Transacs…...Thu, 14th

BEA……….GDP & Profits..…..…Thu, 28th

Monthly Data

BLS………….Employment…….…   Fri, 1st
ISM..Purchasing managers’ index…Fri, 1st 

BEA.New-vehicle sales.(Approximate).Tue, 5th

Fed. Consumer credit..(Approximate).Thu, 7th
Census…….......Inventories…..... Wed, 13th
BLS………...Producer prices……. Wed, 13th
BLS……….Consumer prices.….... Thu, 14th
Fed……….Capacity utilization……Fri, 15th
Census……...Housing starts…….Tue, 19th
NAR………Existing-home sales….Thu, 21st
Conf Bd…….Leading indicators….Thu, 21st  

Census……..New-home sales…... Mon, 25th
Conf Bd….Consumer confidence.. Tue, 26th

Census……….Capital goods…….. Wed, 27th

*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

Tuesday, May 29, 2012

Consumer Confidence: Has It Hit A Plateau?

The Lehmann Letter (SM)
Uh Oh……..

This letter has remarked on consumer confidence’s rise from recession’s trough. And it had. But now matters are not so clear.

This morning The Conference Board announced that consumer confidence, ”,,, declined slightly in April, (and) fell further in May. The Index now stands at 64.9 (1985=100), down from 68.7 in April.”

That wouldn’t be too bad except that April’s reading was about the same as March’s. The chart reveals that we haven’t been able to break through 70 when we should be heading toward 100.

Consumer Confidence
(Click on chart to enlarge)

(Recessions shaded)

Household spending can’t recover strongly If consumer confidence remains in the doldrums.

What’s wrong? Let’s round up the usual suspects: Slow job growth & high unemployment, stagnant wages, the jump in fuel prices.

This letter would like to beat its habitual drum: Weak consumer balance sheets and (therefore) moribund housing and (therefore) it's hard to be confident.

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, May 25, 2012

Greece: What Leaving Means

The Lehmann Letter (SM)
Greece may no longer have the economic base to remain viable under any circumstance.

Although economic doctrine decrees: Devalue you currency to stimulate your economy. If your money costs less, your goods will be cheaper for the rest of the world. As your exports surge, so will production. Economic problem solved.

“Not so fast,” say many Greeks.

See two excellent New York Times articles to understand the practical pitfalls for Greece of exiting the euro.

Begin with today’s:

Facing a Teetering Greece, Europe Plans for the Worst

Here’s a key paragraph that describes another consequence of devaluation:

“But there would also be grave side effects. Economists at Citigroup estimate that the new drachma would plunge 60 percent against the euro as soon as currency markets opened. The prices of imported oil and other commodities would soar in drachmas, potentially canceling out the benefits of devaluation.”

The point: Soaring import prices would generate cost-push Greek inflation, and rising costs for Greek exports would offset any price-reduction benefit of devaluation. Consequence: No export surge and no economic recovery.

Finish with this article that appeared Wednesday:

Greek Businesses Fear Possible Return to Drachma

Here’s what the president of the Athens chamber of commerce thinks as he reflects upon Greece’s skimpy industrial infrastructure:

“…hopes of a broader export-led recovery may be little more than a chimera, said Mr. Mihalos, the chamber of commerce president.
“Aside from shipbuilding, most of Greece’s industrial base has eroded in the 30 years since the government nationalized large areas of industry. Wealth-generating businesses diminished, and tens of thousands of laid-off workers were absorbed by the state to reduce unemployment.
“Today, Greek exports of manufactured products account for only 10 percent of gross domestic product, compared with a 30 percent average for the rest of the euro zone. In addition, Greece’s adoption of the euro hastened a steady shift away from agricultural production. Today, Greece imports nearly 40 percent of its food, most of its medicine and almost all of its oil and natural gas, a situation that may lead to shortages if international suppliers halt business for a period.”
It doesn’t look good.
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© 2012 Michael B. Lehmann

Thursday, May 24, 2012

Business Investment: Trouble Brewing?

The Lehmann Letter (SM)
Business new orders for machinery and equipment fell in April and have not grown in the last three months. It's a bad sign if that plateau extends through the summer.

This letter has spoken of a bifurcated economy: Housing flat while everything else expands. If business investment in plant and equipment also flattens, that would reinforce housing's drag on the economy.

Look at the chart and you will see a great deal of noise in the data. Business's new orders for machinery and equipment are volatile because they include aircraft orders which fluctuate sharply from month to month. But you can see that new orders must break through the $80 billion ceiling to exceed the pre--recession peak. Only then will we know that business capital expenditures are leading the economic expansion.

Today's bulletin from the Census Bureau reported $70 billion in new-equipment orders for April:

That's not encouraging, but could be attributed to the noise in the data mentioned above.

New Orders for Nondefense Capital Goods

(Click on chart to enlarge)

(Recessions shaded)

This statistic is worth following. It doubled in the 1980s and doubled again in the 1990s. It failed to do that from 2000 to 2010. We can breathe much easier when it passes $80 billion and then climbs through $100 billion.

We will closely follow this report in the remainder of the year.

CORRECTION:  Thanks to John Pak for pointing out that that sentence above link should refer to $billions, not $millions.

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© 2012 Michael B. Lehmann

Wednesday, May 23, 2012

New Home Sales: L-Shaped Not V-Shaped

The Lehmann Letter (SM)
All past housing recoveries have been V-shaped not L-shaped. The current recovery is L-shaped rather than V-shaped. That's because the Fed contributed to past downturns by raising rates and sparked recoveries by reducing rates. This time we had an asset-bubble that popped and the Fed can't stimulate expansion by lowering rates.

Yesterday's letter pointed out that optimism accompanying April's increase in existing-home sales should be tempered by placing recent data in historical context. That context shows how weak existing-home sales are compared to past performance and how anemic this recovery remains when compared to past recoveries from recession.

New Home Sales

(Click on chart to enlarge)

(Recessions shaded)

Today's Census Bureau report on April new-home sales strengthens that observation:

The report says:

“Sales of new single-family houses in April 2012 were at a seasonally adjusted annual rate of 343,000. This is 3.3 percent (+/- 12.3%)* above the revised March 2012 estimate of 332,000.”

Sales continue to bump along the bottom with no V in sight.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, May 22, 2012

Housing Recovery: Where Are the Numbers?

The Lehmann Letter (SM)
Housing has not snapped back as it did following past recessions. In those cases the Fed contributed to the downturn when it raised interest rates to ward off inflation. The Fed let interest rates fall as soon as inflation eased, and housing swiftly recovered.

Think of the Fed as a rider on a frisky horse: Pulling back on the reins whenever inflation threatened and letting the reins dangle when the inflationary threat passed. The housing horse would gallop and stop, then gallop and stop.

In the chart you can see home sales plunge and surge with each recession and recovery. (The 2001 dot-com bust was the exception: Home sales did not plunge during the recession but definitely surged with recovery.) You can also see that home sales have fluctuated in a low range since the 2009 recession.

There has been no snap-back in sales because the popping of an asset-bubble generated the recent debacle. The horse ran and ran until he collapsed. Now the Fed lets the interest-rate-reins dangle, but the horse needs a long rest before he will run again.

Existing Home Sales
(Click on chart to enlarge)

(Recessions shaded)

Today the National Association of Realtors announced that existing home sales rose “…to a seasonally adjusted annual rate of 4.62 million in April from a downwardly revised 4.47 million in March…”

Pin those numbers on the chart. Does it look like a recovery to you?

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, May 21, 2012

Germany May Be Tired of Other People Playing With Its Money

The Lehmann Letter (SM)

As the G-8 nations met this weekend it seemed as if the tide was turning from austerity to stimulus. But there may be more to Germany's demand for repayment than a simple, "You borrowed the money, now pay it back." Germany and its electorate want a deterrent. They want to punish Greece and create an object lesson that will be long remembered.

Germans see the Greek electorate favoring the left-wing parties who advocate renegotiation, default and even repudiation. The Greek left-wingers believe that Germany will relent under pressure and provide an even larger bailout, permitting additional stimulus. If these parties succeed, then the Germans feel that they will have rewarded bad behavior and left themselves open to continual extortion.

This morning’s newspapers carried several stories on the G-8 meeting at Camp David. At issue: Whether Europe should pursue austerity or stimulus and the consequences of a Greek departure from the euro that don’t quite capture the spirit of negotiations.

The New York Times:

Greek Crisis Poses Unwanted Choices for Western Leaders

The Wall Street Journal:

Growth Dilemma Dogs G-8

Greece's Conservatives Gain Ground

The arguments regarding Europe may be summarized as follows-

Austerity: The fringe nations, such as Greece and Portugal, borrowed the money, so they should repay it. Why should a core nation, such as Germany, assume the debts of the profligate?

Stimulus: The fringe nations' pursuit of austerity – as they attempt to repay their debts - has generated recession. Government reductions in spending combined with tax increases have reduced aggregate demand. Recession deepens as aggregate demand shrinks, constricting the tax base and lifting the need for social-welfare expenditures. This makes austerity self-defeating as it reduces nations’ ability to balance their budgets and repay their debts. Since austerity is self-defeating, the fringe governments should embark on stimulus by spending more and taxing less. They can resume austerity and repay their debts with the return of prosperity.

But bargaining is more than just issues.

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, May 18, 2012

Europe: Rupture Increasingly Likely

The Lehmann Letter (SM)
If Alexis Tsipras heads the next Greek government, a rupture with Europe seems increasingly likely.

Will Europe survive?

Consider two stories in today’s press.

Begin with this headline in The Wall Street Journal:
Defiant Message From Greece

The important passages are:

“The head of Greece's radical left party—throwing down a gauntlet that could increase tensions between Greece and its frustrated European creditors—said he sees little chance Europe will cut off funding to the country but that if it does, Athens will stop paying its debts……

“Our first choice is to convince our European partners that, in their own interest, financing must not be stopped," Mr. Tsipras said in an interview with The Wall Street Journal. He said Greece doesn't intend to take any unilateral action, "but if they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors."

Looks like he means business. But so do the other European leaders.

Go to this headline in The New York Times:

A Greek Exit? Euro Zone May Be Ready

Here are the key excerpts:

“It is increasingly conceivable that Greece may leave the euro zone, not just because of its own political dysfunction but also because the consequences of such an exit for the rest of the Europe and the global economy no longer seem quite so scary.

“The foot-dragging and brinkmanship of the last few years have won the other members of the currency union valuable time to prepare for life without Greece. Banks have recorded losses on Greek investments, companies are making contingency plans and Europe has bolstered rescue funds for other vulnerable nations like Portugal, Ireland and Spain…..

“.....European leaders are increasingly willing — even eager — to comment publicly on the possibility that Greece will leave, something they long refused to countenance, not just because relations with Greece continue to deteriorate but also as a result of their own preparations.”

The article makes clear that not everyone is optimistic about the consequences of a Greek departure, but you get the gist.
So the key question is not: Will Greece leave? It seems to be: Will Europe survive Greece’s exit?

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, May 17, 2012

Greek Kamikaze Pilots?

The Lehmann Letter (SM)
Is Europe’s drama just high-stakes bluffing? Or do these folks mean what they say? Is it possible that the situation is so fluid that the authorities’ positions are evolving? More darkly, are some Greek politicians “kamikaze pilots” (as a recent New York Times article put it), bent on self-destruction for the nation they seek to lead?

Stock markets began today with losses stemming from continued concerns over Greece’s struggles and their impact on Europe.

This letter believes that Europe will, once again, muddle through. But today’s news reports are so contradictory it is difficult to get a grip on events.

For instance, The New York Times began an article with the title, “Softening, Merkel Says She Is Open to Stimulus for Greece,” with this paragraph:

“Chancellor Angela Merkel of Germany said Wednesday that she was ready to discuss stimulus programs to get the Greek economy growing again and that she was committed to keeping Greece in the euro zone, signaling a softer approach toward the struggling country.”

Consider, however, these words in a Wall Street Journal article captioned, “Greece Sets Showdown Vote Over Euro:”

“Officials from Germany and European Union authorities reiterated Wednesday that Greece needs wrenching economic overhauls to stay inside the common currency…..

“German and European Central Bank officials have suggested in recent days that the euro zone would be able to deal with the financial fallout from a Greek exit, and that contagion in other struggling euro members would be manageable…..”


“Syriza's popular leader Alexis Tsipras dismisses the threats to force Greece's return to the drachma if the country abandons austerity, calling it a "caramel that has already melted," and saying Greeks, having "already been so sorely tested, cannot be blackmailed further."

Wow! Fighting words…….

We’ll see.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, May 16, 2012

Autos and Housing Divorce

The Lehmann Letter (SM)
Autos and housing once lived in the same world. Now they don’t. They used to move together. Not anymore.

Households can purchase new vehicles with consumer credit, which has rebounded strongly. But it takes mortgage credit on top of a healthy credit score and a sound balance sheet to acquire a new home. That’s a different matter and highlights the peculiar nature of this recovery.

The April reports on industrial production and housing starts, from the Federal Reserve and the Census Bureau, confirms the dichotomy:

Capacity utilization at the nation’s factories, mines and public utilities jumped from 78.4% to 79.2%. Look at the chart and you’ll see we’re swiftly approaching the 80% considered within the normal (80% - 85%) range. Soon we’ll be able to say: Industry is back!

Capacity Utilization

(Click on chart to enlarge)

(Recessions shaded)

But we won’t say that anytime soon for housing. April’s 717000 is a nice bump up from March’s revised 699,000. Look at the chart, however, and you’ll say: Housing is not back yet.

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

These data reflect market realities: Autos are selling, but homes aren’t moving.

There’s more to industrial production than autos. But new-vehicle sales provide a clue to manufacturing, and they are both gaining.

Too bad the garages are filling up but the homes aren’t.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, May 15, 2012

Inflation Flat

The Lehmann Letter (SM)

The last letter reported that wholesale prices – depressed by falling fuel prices – fell last month. Today’s report from the Bureau of Labor Statistics confirms the spillover into retail prices: The consumer price index (CPI) did not budge in April, although it would have grown absent the dip in fuel prices:

To repeat: Do not fear surging inflation, no matter how much the Fed eases monetary policy and no matter how low interest rates remain. Weak demand = Weak inflation. That’s the equation.

Want proof? Examine the chart below. Inflation has remained mild since the last recession, despite the most expansionary monetary policy since the end of WWII. (Contrary to conventional wisdom, this letter believes that exuberant borrowing and spending generated the 1970s inflationary spikes. Rising oil prices were a consequence, not a cause.)

Consumer Prices
(Recessions shaded)

(Recessions shaded)

Meanwhile, the Census Bureau today also released its report on March inventory growth ($65.0 billion) and the inventory/sales ratio (1.27):

That’s a good report because sales are growing more rapidly than inventories despite robust inventory growth. Put differently (and exaggerating): Sales are so strong that businesses can’t restock their shelves quickly enough.

The reports on prices and inventories are good reports. Now, if only housing could perk up…………….

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, May 11, 2012

Fuel Prices Fall & Inflation Retreats

The Lehmann Letter (SM)
Most of us know that gasoline prices have fallen recently. The consumer price index should reflect that when it’s released next week. Falling fuel prices have already affected the producer (wholesale) price index, out today:

The Bureau of Labor Statistics reported that April prices fell 0.2%, or 2.4% at a seasonally-adjusted annual rate. Wholesale prices were flat in March, and also benefitted from falling fuel prices.

Producer Prices 
(Click on chart to enlarge)

(Recessions shaded)

As last month’s letter on this topic said:

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.

As soon as recession gripped the economy in 2008 the Federal Reserve began pursuing a "whatever it takes" expansionary policy. These steps continued and 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.

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 economy remains weak, and we suffer because of that. But tame inflation is a benefit.

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, May 10, 2012

Europe's Citizens

The Lehmann Letter (SM)
Today's Wall Street Journal has a number of worthwhile articles on the European financial crisis.

Begin with, “How a Radical Greek Rescue Plan Fell Short,” for a historical description of those events:

Greek voters rebelled against their government and austerity in last Sunday's election. The electorate said “Enough; we can't meet Europe's demands."

Europe’s response has been stern: No money without reform. See, “Europe Delays Bailout Payment:”

Spain, on the other hand, has been working with Europe: Trying to convince Germany to give the leash a little slack. ”Spain to Get Room on Deficit Rules” details how Spain will have a little more time to reduce its budget deficit:

Finally, "Euro in the Eye of Continental Storm,” provides reasons why the euro has held up well despite all the turmoil:

But let's not forget that there are voters in Germany as well as Greece and Spain. German citizens are tired of giving, and Chancellor Angela Merkel must give credence to their views if her government is to survive. So there is a tug-of-war going on among Europe's citizens, not just its governments and their leaders. Germans demand austerity because they are tired of paying, while Greeks and Spaniards insist that they need more assistance because they can't live with continued austerity.

These are huge challenges for Europe's leaders and Europe's citizens. Since they have met such challenges before, there is optimism they will meet them again.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, May 9, 2012

New-Vehicle Sales Strong

The Lehmann Letter (SM)

The stock market is down this morning because eyes are on Europe and its debt crisis: How will the European nations pay their debts? What do the recent elections mean? What will happen to Greece? Will Europe survive austerity? How will Europe deal with weak economic growth? Will the euro survive? These are legitimate questions that require answers.

This letter remains optimistic, but many events have yet to unfold.

Meanwhile, except for housing, there is strength in the American economy. Recently the Department of Commerce announced 14.4 million new-vehicle sales in April at a seasonally-adjusted annual rate.

This year has been running strong, with monthly auto sales over 14 million. The chart reveals good progress from recession's depths when sales fell below 10 million.

New-Vehicle Sales

(Click on chart to enlarge)

(Recessions shaded)

But the key question remains: Without a robust housing recovery can auto sales break through 15 million and recover the 16 - 17 million pace they enjoyed before the recession?

Vehicle sales are linked to housing sales because housing is our barometer on the strength of consumer balance sheets. Housing can't recover until consumers, and the banks that lend to them, have regained confidence in household balance sheets: That net worth is adequate, debt is manageable and liquidity sufficient. When that occurs household exuberance will spill over into new-vehicle sales and restore autos' past strength. And strength in housing and autos would return the economy to full employment.

Housing is key.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, May 8, 2012

Household Debt Pops Up

The Lehmann Letter (SM)
Yesterday the Federal Reserve released a very encouraging report on consumer borrowing:

Consumer credit grew by $255.6 billion in March at a seasonally adjusted annual rate. Take a look at the chart: This is far above the typical increase of approximately $100 billion. You will also notice considerable noise in the data. The numbers fluctuate sharply from month to month. But this is a good, strong report that should encourage optimism about consumer spending.

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

Tomorrow's letter will look at new-vehicle sales. They rely heavily on consumer credit for their financing.

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, May 7, 2012

European Elections and the Euro

The Lehmann Letter (SM)
France and Greece voted out their governments because of disillusionment with austerity and their weak economies. This disillusionment is also apparent in Spain, Italy and other nations on Europe's fringe that are struggling with high debt and high unemployment. Mighty Germany, with relatively low unemployment and low debt, wanted them to abide by the rules of the game: Higher taxes, lower spending and contracting economies. They rebelled.

Now Europe must re-examine how it will deal with weaker nations' government debt. New French and Greek governments will turn away from austerity while Germany will continue to advocate for austerity. Thus far, however, the newly elected are not advocating the abandonment of the euro. The European project - an ever more integrated continent - remains intact.

We will see whether or not the continued drive toward European integration - Europe's goal since the end of World War II - will survive this latest upheaval. The European project has survived past challenges: Compromise has prevailed. This letter believes compromise will prevail once more and the euro will survive.

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, May 4, 2012


The Lehmann Letter (SM)

This morning the Bureau of Labor Statistics (BLS) reported that the economy added 115,000 jobs in April:

Last month BLS reported a gain of 120,000. That has now been revised upward to 154,000.

This is not good enough to restore full employment.

Job Growth 
(Click on chart to enlarge)

(Recessions shaded)

You can see from the chart that a strong economy provides monthly gains of 250,000. We had that in February, and need to get back on track.

Unfortunately government has been shedding jobs, so that private-sector gains are somewhat offset by government losses. (In April the private sector added 130,000 jobs while government employment fell by 15,000.) That’s too bad because government employment is within the reach of policy control. But fiscal stringency has forced government cutbacks.

So the private sector must work that much harder. Our eyes turn once again to housing, the big laggard. We’ll see what this month has in store.

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, May 3, 2012

Profit Margins Stall

The Lehmann Letter (SM)

The Bureau of Labor Statistics announced this morning that labor productivity had fallen by 0.5% in the first quarter because hours worked had increased more than output.

This is understandable at this stage of the economic expansion: Employers typically have resumed hiring and there is the risk that they will add labor more rapidly than output grows.

If you dig deeper into the report you will also discover evidence that the growth in profit margins has stalled.

Profit Margins 
(Click on chart to enlarge)

(Recessions shaded)

The chart vividly portrays profit margins' long-term growth since 1990. After a setback at the end of the dot-com boom in the late 1990s, profit margins have expanded especially rapidly since 2000. Now they are at an all-time high.

Can we expect them to grow to the sky like Jack's beanstalk? No, we can't. For a decade, from 2000 to 2010, employers boosted output more rapidly than they hired labor. This was especially true during and in the aftermath of the recent recession. Businesses had reduced employment by more than output had fallen. Output per hour grew, swelling profit margins. Today profit margins stand at the record levels mentioned above.

Meanwhile total corporate earnings (the product of profit margins multiplied by sales volume) more than doubled since 2000 and have recovered all of their recession losses. This was largely due to the sharp jump in profit margins analyzed in the paragraph above. If the growth in profit margins has now stalled, growing sales volume must drive all future gains in total earnings. That is not likely to occur as the economy recovers slowly.

We should therefore expect a slowdown in earnings growth. That doesn't augur well for the stock market.

(Correction: Yesterday's post mistakenly referred to "unemployment" when it should have referred to "employment." That error has been corrected.)

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© 2012 Michael B. Lehmann

Wednesday, May 2, 2012

Europe's May Day

The Lehmann Letter (SM)
Take a look at today's New York Times article about May Day rallies across Europe protesting that continent's austerity policies:

Nations across Europe have been tightening their fiscal belts: Reducing expenditures and raising taxes. These policies have shrunk aggregate demand, contracting output, employment and income. It is a classic "rules of the game" policy, designed to maintain uniform currency levels - i.e. preserve the euro - in the face of investor skepticism. Nations hope that investors won't dump their bonds if they are confident that budgets will be balanced.

The consequences are clear. Today's New York Times carries a story about the recession in Holland:

Yesterday's Wall Street Journal published a story about recession in Spain:

French presidential elections, concluding soon, will determine France's willingness to maintain austerity. Irish voters will also have their say.

Germany, Europe's principal austerity advocate, continues scolding its weaker compatriots. Chancellor Angela Merkel must respect the wishes of her own citizens: They are tired of bailing out the profligate nations on Europe's fringe. Perhaps Chancellor Merkel can convince her electorate to feel the rest of Europe's pain and ease demands for austerity.

But no one in a position of leadership is suggesting that Europe forsake its long-run project and abandon the euro.

(To be fully informed visit

© 2012 Michael B. Lehmann