Friday, June 29, 2012

Germany Budges

The Lehmann Letter (SM)
Once again the European nations have decided to hang together rather than hang separately. Their efforts to save the Euro appear to bring them more rapidly together rather than drive them apart.

Chancellor Angela Merkel said it wouldn’t happen, but…….

Yesterday Germany made major concessions to support the Euro.

As The New York Times reported in today’s edition:

“European Leaders Agree to Use Bailout Fund to Aid Banks”

“Mr. Van Rompuy (president of the European Council) called the agreement a “breakthrough that banks can be recapitalized directly,” which represents a concession by northern European countries, including Germany. The leaders agreed that the euro zone’s permanent bailout fund, the 500 billion euro European Stability Mechanism, due to come into being next month, could recapitalize banks directly once a banking supervisory body overseen by the European Central Bank has been set up. That should happen by the end of the year, he said. The joint banking supervisory body is also a breakthrough, an effort to ensure the future health of the area’s banks, but details about that component of the agreement were scarce….

“Italy and Spain were supported in their efforts by the new French president, Fran├žois Hollande, who arrived here on Thursday demanding “rapid solutions” to the euro’s problems. But Chancellor Angela Merkel of Germany gave little sign of budging on any quick fixes, arguing that existing mechanisms could be used, illustrating some of the deep divisions as European leaders try to restore faith in the single currency….”

Then the article goes on to say that Germany did budge

“…Mr. Monti told the other leaders that Italy would not agree to any other issue here until there was serious discussion of how the union could help bring down interest rates on Italian bonds, and Mr. Rajoy, under even more pressure from the markets, joined him….

“In a speech on Wednesday to German lawmakers, Ms. Merkel argued that short-term solutions like pooled debt would be counterproductive without the construction, first, of a political and economic union among the member states in the euro zone. Without mutual responsibility and control over national budgets, she argued, there could not be mutual liabilities that can turn into blank checks….”

Although Germany’s insistence on long-term integration has born fruit.

“The European Union gathering has goals for both the short and longer term — to ease the pressure on Spain and Italy, but also to lay the ground for increased integration of the euro zone.…
“The leaders will also discuss proposals for the future of the euro drafted by the heads of the major European institutions and released Tuesday, plans that could lead to the creation of a euro zone finance ministry and — eventually — greater sharing of debt burdens.”
An article that appeared several days ago in the Times anticipated these developments:

“Why Germany Will Pay Up to Save the Euro” 

“Yet it would be wrong to kiss the euro goodbye just yet. For all of Berlin’s neins, shooting down every serious proposal to address its woes, the German government knows it must ultimately cave and open its wallet to save the single currency…..

“But Ms. Merkel knows that Germany must ultimately underwrite the euro’s rescue, pretty much regardless of whether its conditions are satisfied. There are three good reasons. First, the euro has been very good to Germany. Second, the bailout costs are likely to be much lower than most Germans believe. Third, and perhaps most important, the cost to Germany of euro dismemberment would be incalculably high — far more than that of keeping the currency together…..

“Let’s take the reasons in turn…..

“Since the advent of the single currency, Germany’s labor costs have fallen more than 15 percent against the average labor costs of all the countries using the euro, and about 25 percent against those of the troubled nations on the periphery. If it dumped the euro for a new deutsche mark, its exchange rate would surge to make up for the difference, potentially crippling its exports, which have fed most of its economic growth over the last decade….”

The article points out why the financial burden on Germany will not be large, and then goes on to say:

“Rather than spending so much effort discussing the cost of bailing out Europe, Germany might do better by opening a public debate about the costs of letting the euro start to fall apart. Those are likely to be much less manageable….

“But given the stakes, it is hard not to conclude that Germany will ultimately pay whatever it takes. It’s not that difficult a call. On one hand, there are manageable costs and clear benefits. On the other, there is a decent chance of unmitigated disaster.”

Once again the European nations have decided to hang together rather than hang separately. Their efforts to save the Euro appear to bring them more rapidly together rather than drive them apart.

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, June 28, 2012

GDP and the Bifurcated Economy

The Lehmann Letter (SM)
Today’s GDP report reconfirms our bifurcated economy. Throughout the recovery some data has been strong while other data has been weak.

Sad news first: GDP grew by 1.9% in the first quarter.

The really sad news: GDP growth would have been higher had it not been for government’s continued contraction.

Government spending has fallen since the beginning of 2010. That's too bad because government spending is within our direct control and could have grown had we desired that. We can't do much about housing or business investment, but we can and could have seen to it that government expanded. Government could have been the balloon that lifted us higher. Instead it has been the anchor that has held us back.

The good news: This report reconfirms the significant increase in corporate profits to $1,644.9 billion. Take a look at the chart and you will see that this is a big jump. It appeared that earnings had stalled at $1,500 billion or less. Now they are off the chart.


(Click on chart to enlarge)

(Recessions shaded)

Once again we have a bifurcated economy: Some reports have been strong, others weak. That's not good enough, but it certainly could have been worse.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, June 27, 2012

Business Investment: Gloom Sets In

The Lehmann Letter (SM)
Lately there have been too many signs of sluggish or nonexistent growth: Home building, new-vehicle sales, consumer confidence. We need exuberance to herald robust recovery. It’s not there.

Are we locked in a range? Eventually we will no longer be able to say, “It’s too soon to tell.”

Business investment in new equipment had been a rosy exception to households’ reluctance to purchase tangible assets.

This morning the Census Bureau reported approximately $70 billion in new orders for nondefense capital goods for May.

New orders have been stuck at around $70 billion for several months. The chart tells you we should be breaking through $80 billion, on our way to $100 billion. Instead – as is true for so many household reports – we’re resting on a plateau.

New Orders for Nondefense Capital Goods

(Click on chart to enlarge)

(Recessions shaded)

This is a bad omen. Where is the growth we’ve come to expect and rely upon? Are we locked in a range? Eventually we will no longer be able to say, “It’s too soon to tell.”

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, June 26, 2012

Consumer Confidence: From Sizzle to Fizzle

The Lehmann Letter (SM)

When you look at the chart you can see that consumer confidence popped back nicely from recession’s deep trough. That sizzle is now fizzle. Economic expansion can’t proceed with exuberance while consumer confidence is mired in the doldrums.

Consumer confidence has stalled. The long climb out of recession’s trough has reached a plateau, and that’s bad for consumer demand.

This morning the Conference board reported “…the fourth consecutive moderate decline…” June’s index-value was 62.0

The problem is not so much decline. The index is essentially flat. But there’s no need to quibble. The index has to rise through 100 to prove we have a robust recovery. Just rising through 80 would be welcome.

Consumer Confidence

(Click on chart to enlarge)

(Recessions shaded)

What’s wrong? Household balance sheets (as this letter believes)? Unemployment, the euro, the stock market, etc. (as others believe)? Why argue? We can probably all agree that we have a problem.

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, June 25, 2012

New-Home Sales Uptick: Another Mirage?

The Lehmann Letter (SM)

We’ve been crawling for so long in the housing-rebound desert that any sign of an oasis raises suspicions of another mirage.

For instance……….

This morning the Census Bureau announced 369,000 new-home sales in May.

Take a look at the chart and the latest report seems unremarkable. New-home sales have stagnated under 400,000 since the depths of the recession. We will have cause to cheer when sales break through 400,000 and then 600,000 and maybe even 800,000. But sales under 400,000 hardly seem cause for celebration.

New Home Sales

(Click on chart to enlarge)

(Recessions shaded)

But there were other (optimistic) data in the report. The supply of new homes for sale fell from 6.6 months to 4.7 months over the past year, while the number of new homes for sale fell from 169,000 145,000. Let's hope the glut of homes on the market has shrunk to a level that will spur new building.

We're weary of mirages.

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, June 22, 2012

Balance-Sheet Crisis

The Lehmann Letter (SM)
You can't simultaneously cut back and spend more. Cutting back will ease the balance-sheet crisis and spending more will speed recovery. But you can't cut back and spend more at the same time.

Much of the United States and Europe – households, banks and governments - faces a balance sheet crisis: Shaky assets, depleted liquidity, too much debt and too little net worth. The evidence is all around us: Homes underwater, credit-rating downgrades and insolvent governments.

We all know the solution: Pay your debts, tighten your belt, spend less, be frugal, curtail borrowing, blah blah blah. OK, suppose we do that. Then what?

Private Borrowing

(Click on chart to enlarge)

(Recessions shaded)

Let's begin with the United States. As you can see from the chart, the private sector - households and businesses - cut back sharply as recession unfolded. Borrowing plunged until the private sector began repaying its debts rather than borrowing more. That was the first time this has occurred since World War II.

Looks good - and it is - until you begin contemplating the consequences. In a report released this month, the Federal Reserve reported that private sector borrowing (households and business) had fallen from $574.4 billion in 2011's fourth-quarter to $564.6 billion in 2012's first quarter.

“D.2 Credit Market Borrowing by Sector”

Now that private-sector borrowing is only one fourth of what it was before recession hit (see chart), ask yourself: "How are households going to buy all the homes and cars required to hasten economic expansion?" They can't do it without borrowing and they can't repair their balance sheets if they do borrow. We're in a jam.

There is no easy exit from this predicament. Cutting back will ease the balance-sheet crisis and spending more will speed recovery. But you can't cut back and spend more at the same time.

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, June 21, 2012

Home Sales Remain Weak

The Lehmann Letter (SM)

Today's announcement from the National Association of Realtors blames supply constraints for last month's weak sales.

Supply constraints may limit recent sales in some markets, but it is difficult to reconcile the chart with a chronic supply-side problem. If a true, overall supply-side problem really does exist, then new construction should recover quickly.

Let's hope so. If the economic recovery is like a ship trying to get underway, then housing is the anchor that prevents it from doing so.

Take a look at the chart. Home sales over the past five years look like an “L” not a “V.” Past recoveries were V-shaped because homeowners and potential homeowners had the wherewithal to get in the market as soon as interest rates fell. Now homeowners and potential homeowners can't get in the market because their balance sheets are compromised. Lenders want strong balance sheets and strong evidence of credit worthiness.

Existing Home Sales

(Click on chart to enlarge)

(Recessions shaded)

Today's announcement from the National Association of Realtors (NAR) provides little solace: Existing home sales fell from 4.6 million in April to 4.5 million in May.

The NAR’s accompanying announcement said, in part:

Lawrence Yun, NAR chief economist, said inventory shortages in certain areas have been building all year. ‘The slight pullback in monthly home sales is more likely due to supply constraints rather than softening demand. The normal seasonal upturn in inventory did not occur this spring,’ he said. ‘Even with the monthly decline, home sales have moved markedly higher with 11 consecutive months of gains over the same month a year earlier.’”

"Supply constraints" may limit recent sales in some markets, but it is difficult to reconcile the chart with a chronic supply-side problem. If a true, overall supply-side problem really does exist, then new construction should recover quickly.

We'll see.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, June 20, 2012

Why the Fed Can't Help

The Lehmann Letter (SM)

The Federal Reserve's Federal Open Market Committee reports today. Hopes and expectations are high that the Fed will reduce long-term interest rates to further stimulate the economy.

Problem is: Temporary additional borrowing and spending by the federal government would probably be more effective at boosting the economy than whatever rate reductions the Federal Reserve announces today.

We are in a liquidity trap and lower rates won't help much. In 1936 John Maynard Keynes publicized the liquidity trap in "The General Theory of Employment Interest and Money." According to Lord Keynes, reducing interest rates is not effective once they have fallen below a certain low level. In a climate of generally weak aggregate demand, in which interest rates are already depressed, further rate reductions do not stimulate additional borrowing and spending. Those who won't - or can't - borrow and spend confront obstacles other than borrowing costs.

For instance: Households' current balance-sheet difficulties prevent them from borrowing and spending to purchase new housing. Their limited liquidity, high debt and reduced net worth - not high interest rates - impede the recovery in residential real estate. And that sits like a boulder in the road, forestalling robust economic expansion.

Meanwhile we abandoned prematurely the direct stimulus that could have prevented additional job loss. If the federal government had borrowed more and provided additional funding to local governments, that could have prevented mass layoffs of local-government workers. While many of us believe that government employment has recently grown, an article in today's New York Times says that it has fallen by over half a million jobs.,

“Public Workers Face Continued Layoffs, Hurting the Recovery”

Here are some excerpts from the article:

“Government payrolls grew in the early part of the recovery, largely because of federal stimulus measures. But since its postrecession peak in April 2009 (not counting temporary Census hiring), the public sector has shrunk by 657,000 jobs. The losses appeared to be tapering off earlier this year, but have accelerated for the last three months, creating the single biggest drag on the recovery in many areas…….

“So while the federal government has grown a little since the recession, and many states have recently begun to add a few jobs, local governments are making new cuts that outweigh those gains……..

“If governments still employed the same percentage of the work force as they did in 2009, the unemployment rate would be a percentage point lower, according to an analysis by Moody’s Analytics. At the pace so far this year, layoffs will siphon off $15 billion in spending power. Yale economists have said that if state and local governments had followed the pattern of previous recessions, they would have added at least 1.4 million jobs.”

It is probably true that, for political and ideological reasons, the federal economic stimulus went as far as it could go. But that does not mean that it would not have been effective. It probably would have been far more effective at boosting the economy than whatever rate reductions the Federal Reserve announces today.

(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, June 19, 2012

Balance Sheet Crisis Grips America and Europe

The Lehmann Letter (SM)

America and Europe find themselves in a balance-sheet crisis.

Here at home households have too little cash, too much debt and too little net worth. They can't do the borrowing and spending required to adequately stimulate national economic recovery.

Today's Census Bureau report on May residential construction provides evidence:

New building permits were up but starts were down. Either way recovery has been sluggish: Insufficient to provide oomph for the rest of the economy.

Some of Europe's households also find themselves with too little cash, too much debt and too little net worth. They, too, can't do the borrowing and spending required to adequately stimulate recovery.

But it’s southern Europe's nations and banks, in addition to its households, that grab the headlines. They can't do the borrowing and spending required to adequately stimulate recovery because they also have too little cash, too much debt and too little net worth.

Southern Europe requires a balance-sheet infusion, but northern Europe remains reluctant. Southern Europe needs cash, but Northern Europe wants strings attached. Southern Europe says, "Trust us." Northern Europe says, "Not any more."

See, for instance, this article in today's New York Times.

“Greek Voting Past, Europe Returns to Fiscal Rescue”

“German hard-liners were emboldened by the victory, viewing it as an endorsement of the drive for structural adjustment in Greece and elsewhere in Southern Europe through further austerity. As a result, the vote may delay concerted pro-growth steps by central banks and governments around the world, as well as the hard choices within Europe over deeper integration that are likely to prove necessary in the long run….

“Ms. Merkel has called for deeper fiscal and political integration to improve the functioning of the currency union. While leaders in Paris, Rome and elsewhere would like to tap Germany’s top credit rating through jointly issued debt, they are not as ready to give up more powers to central authorities in Brussels.”

These difficulties - as well as the underlying balance-sheet issue - are examined in another article in today's Times.

“Investors in Search of Bigger Fix to Euro Crisis”

“The most pressing problem is the bad loans that are sitting on the books of European banks, particularly in Spain, where rising real estate losses have called into question the viability of the country’s largest banks. Two weeks ago the European Union provided Spain with up to 100 billion euros to prop up its banks, but investors have so far judged that to be yet another partial solution, because they fear banks in other countries may eventually need help as well.
“More recently, several European financial leaders have said that when they meet next week they will unveil a road map for a so-called banking union. This is expected to include a form of deposit insurance for European banks to ensure that banks maintain responsible lending standards.
“But support for Europe’s banks is viewed by many investors as insufficient, given the rising borrowing costs facing a growing number of European governments. If any of the Continent’s larger economies find themselves unable to borrow money through the bond markets, they will have trouble paying their bills and could be forced to leave the euro.
“Douglas Elliott, a fellow at the Brookings Institution, said that at some point Europe’s stronger economies, most of all Germany, would need to provide some form of shared guarantee for the bonds issued by its weaker neighbors. One approach would involve issuing so-called euro bonds that are backed by the entire Continent. Germany’s opposition to this has generated discussion of shorter-dated euro bills that would involve less long-term commitment. Even that would be unlikely to win support from Germany unless other European nations agree to give up some of their sovereignty.”
In Europe question is: Will the North rescue the South? Here the question is: Who will restore households' balance sheet?

(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, June 18, 2012

Europe's Struggle

The Lehmann Letter (SM)
It appears that Greek voters have chosen to remain in the euro zone.

But that does not mean that Europe's struggle has ended.

There are alternative visions on how to go forward. Some say austerity: Balanced budgets - with their spending cuts and tax increases - so that debtor nations can repay their bills. Others say stimulus: Temporary deficits - with their spending increases and tax reductions - so that debtor economies can grow sufficiently to repay their bills.

There are also longer-term concerns. Germany wants to be sure that everybody understands that all nations must be prepared to meet their own obligations. This means a closer and more integrated fiscal and monetary union - with strong, centralized political control - to avoid a repeat of the current crisis.

Then there is Germany's overriding goal, which is also France's, Italy's and most of the other European nations’ overriding goal, to fashion a United States of Europe. This is Europe's grand project, its single most important objective. This was the prize that the leading European statesmen sought after World War II, and it continues to be the prize that Europe seeks today.

There has been much struggle on the way; there is struggle today and there will be much struggle in the future. But the optimists believe when today's issues are successfully resolved, Europe will emerge stronger and continue its march forward towards full integration.

See, for instance, the article in yesterday's New York Times. Europe's planners were taking no chances in the event that the Greek election had a different outcome:

“European Leaders to Present Plan to Quell the Crisis Quickly”

The article's opening paragraphs said:

“The head of the European Central Bank and other euro zone leaders worked on Saturday on a grand vision for the euro zone meant to reassure investors and allies that flaws in the currency union will be addressed quickly.

“The plan will include measures to prevent bank runs and reduce what has become a vicious cycle of government debt problems turning into banking crises, as has happened in the past two years. In addition, the plan will push for countries to remove the regulations and layers of bureaucracy that inhibit competition, keep young people out of the work force or make it difficult to start a new business.

“The goal would be to make the euro zone less vulnerable to crises and better able to grow its way out of the current debt crisis. But it is unclear whether yet more pledges of reform, which would face significant hurdles, will calm financial markets.”

The skeptics will remark: Easy to say but difficult to accomplish. True. Thus far, however, history appears to be on Europe's side.

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, June 15, 2012

Housing: The Harvard Report

The Lehmann Letter (SM)
Yesterday The Joint Center for Housing Studies of Harvard University issued its report on “The State of the Nation’s Housing 2012”

Several news reports remarked on its favorable tone. And the executive summary leads with a good quote:

“After several false starts, there is reason to believe that 2012 will mark the beginning of a true housing market recovery….”

But further examination reveals the report’s rosy assessment of the rental-housing market does not apply to the ownership market: What most of us refer to as “housing.” The rental market has been strong and is getting stronger, partly because those driven from home ownership must rent. Housing (ownership) is a different matter.

Here are some closing lines from the report’s executive summary:

“With moderate gains in multifamily construction, improving sales of existing homes, and modest increases in single-family starts, housing should make a stronger contribution to economic growth in 2012 than it has in years. But while the rental market rebound is on track, the owner-occupied market still faces a number of pressures that may make the turnaround more muted than in recent cycles.

“In particular, sales of distressed properties are holding down home prices, and millions of owners are unable to sell because they are underwater on their mortgages. These conditions are impeding a more robust recovery in existing home sales as well as in improvements spending, which usually increases right after a home purchase……

“The greatest potential for recovery in the for-sale market lies in its historic affordability for well-positioned homebuyers. The dive in home prices and record-low mortgage rates have made owning more attractive than in years. But the availability of mortgage financing for young buyers with limited cash, other debts, and less than stellar credit is far from certain. Since the market meltdown, underwriting has become much more restrictive……”

Or, as this letter has put it, housing is up against a balance-sheet crisis: Low liquidity, depleted assets, excessive debt and reduced net worth. That’s what impedes home-purchase for too many families. Their balance sheet can’t afford the acquisition of this most important asset. It’s not an income-statement problem; it’s a balance-sheet problem.

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, June 14, 2012

Inflation: No Fear

The Lehmann Letter (SM)
Weak demand = Weak economy = No fear of inflation.

That was illustrated, once again, this morning with the Bureau of Labor Statistics’ (BLS) announcement that:

“The Consumer Price Index for All Urban Consumers (CPI-U) decreased
0.3 percent in May on a seasonally adjusted basis….”

That translates into a 3.6% drop on an annual basis.

The reduction reflects falling fuel prices. Removing the volatile food and energy components leaves an annual increase of 2.4%.

But the important point remains: Inflation has not been, is not and will not be a concern for the foreseeable future.

Here’s what the BLS said about inflation over the past year:

“The 12-month change in the index for all items was 1.7 percent in
May; this figure has been declining steadily since its 3.9 percent
recent peak in September 2011. The decline has been driven mostly by
the energy index, which decreased 3.9 percent over the last 12
months. This was its first 12-month decline since October 2009. The
12-month change in the food index, which was 4.7 percent as recently
as December, fell to 2.8 percent in May. The 12-month change in the
index for all items less food and energy was 2.3 percent in May, the
same figure as in April and March.”

That’s a tale of small numbers becoming smaller.

Consumer Prices

(Click on chart to enlarge)

(Recessions shaded)

The chart shows that inflation can be volatile, but it’s averaged less than 5% for two decades. The recent numbers are even smaller.

The Fed is trying to reflate the economy, with limited success. Until demand surges, inflation will remain moderate.

(To be fully informed visit

© 2012 Michael B. Lehmann

Wednesday, June 13, 2012

Europe: Finding the Road Map

The Lehmann Letter (SM)

The news from Europe – and around the world - is so gloomy that it’s difficult to find an upbeat article in the morning newspapers.
One problem: The roadmaps showing the way out of crisis are long term, while there is no clear short-term route.
See, for instance, the following story in today’s New York Times:
“European Central Bank Endorses a Banking Union”
Here are the opening paragraphs:
“The European Central Bank called on Tuesday for euro zone leaders to form a “banking union” to oversee its big banks, a move that would help shield countries and their taxpayers from the misfortunes of their troubled lenders.
“A banking union might address one of the causes of the euro crisis: the tendency for sick banks to undermine entire countries. The costs of taxpayer-financed bailouts in Ireland and Spain, among other countries, were so large that they raised questions about the creditworthiness of national governments.
“Such a union would also allow euro zone countries to share the financial burden of banking crises, perhaps avoiding a repeat of Spain’s woes caused by Bankia and other ailing lenders.
“In a report issued Tuesday, the central bank said it envisioned that euro zone countries would share responsibility for regulating big banks and for managing a common deposit insurance fund. Countries would also create procedures for winding down terminally ill banks so taxpayers would not have to bear the cost, the bank said.”
That looks so good it raises the key question: “When?”
The article continues by saying that such a union must await the future and would require several years to implement. But it does tie in well with German Chancellor Angela Merkel’s insistence that the solution for Europe is, “More Europe.” By that she means that Europe must bind itself more closely together, going beyond a common currency and a common banking system. Europe must create a fiscal union with central authority over government taxing and spending decisions. In other words: A United States of Europe.
If that is the long-run solution – and this letter believes it is – then how does Europe survive the short-term crises now confronting it? What is - where is - the roadmap? There was, unfortunately, nothing in today’s paper that made this clear.
(To be fully informed visit

© 2012 Michael B. Lehmann

Tuesday, June 12, 2012

Household Balance Sheets: Surveying the Damage

The Lehmann Letter (SM)
Households face a balance-sheet crisis: Asset-values (especially home values) have plunged while debt has barely shrunk, leaving households with substantially less wealth (net worth).

Here's the key question: How can households simultaneously repair this damage, i.e. reduce debt, rebuild net worth and restore liquidity, while at the same time resurrecting the borrowing and spending required to drive the recovery?

Answer: They can't. It's impossible to save and borrow at the same time.

Here are some key reports on the crisis.

Yesterday the Fed released:

“Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances”

It’s a long report. These are the key sentences from its summary:

“Overall, both median and mean net worth also fell dramatically over this period—38.8 percent and 14.7 percent, respectively. Changes in housing wealth and business equity were key drivers in those wealth changes…..

“Debt fell more slowly than assets over the recent three-year period. Thus, overall indebtedness as a share of assets rose markedly. Home-secured debt fell slightly as a share of total family debt, but in 2010 it remained by far the largest component of family debt…..”

To summarize the summary: Debt rose as assets and wealth fell.

For a less intimidating read, see today’s New York Times for an excellent abstract of the report:

“Family Net Worth Drops to Level of Early ’90s, Fed Says”

On Saturday, June 9, an earlier story in the Times – that also relied on Fed data - anticipated yesterday’s Fed report:

“Income and Wealth Are Down in U.S.”

The article’s second and third paragraphs said:

“Now, however, is the first time in more than half a century that the average American is both earning less and worth less than four years earlier, at least after inflation is factored in.
“The genesis of that fall was, of course, the financial crisis and the sharp decline in the value of homes, the principal asset of most Americans, followed by the sharp drop in stock prices. The crisis led to stubbornly high unemployment that cut income for many Americans and made wage increases harder to obtain for those who did hold on to their jobs.”
This time it really was different, and destruction of balance-sheet values was the difference.
(To be fully informed visit

© 2012 Michael B. Lehmann

Monday, June 11, 2012

Manufacturing Omen? Profits and Profitability Flat

The Lehmann Letter (SM)
This letter believes that profits and profit margins (profitability) remain the stock market's greatest challenge for further appreciation. The June 7 edition reported strong growth for profits and a high plateau for profit margins at all corporations in the first quarter. The challenge: Will profits continue growing and margins remain high?

This morning the Census Bureau reported FLAT first-quarter manufacturers' profits and profit margins:

Is this an omen for all corporations and the stock market? Have profits and profitability reached a ceiling? Take a look at the charts to put the following data in historical perspective.

Manufacturers’ Profits

(Click on chart to enlarge)

(Recessions shaded)

Manufacturers’ Profit Margins

(Click on chart to enlarge)

(Recessions shaded)

Profits hovered at about $150 billion throughout 2011 and this morning's report places them at $148.0 billion in this year's first quarter. Profit margins were 8.7 cents per dollar of sales in the first quarter, also about where they were in 2011. Sales continue to grow, but profits and profitability do not.

That's worth repeating: Sales revenue grew but total profits and profit margins did not. Let's hope manufacturers break out of this range and that manufacturers' latest report is not an omen for all business.

(To be fully informed visit

© 2012 Michael B. Lehmann

Friday, June 8, 2012

Consumer Credit Continues Climb

The Lehmann Letter (SM)

Consumer credit continues to climb out of its recession trough::

The Fed reported consumer credit grew by $78.2 billion in April. (This includes credit cards, auto loans, home-appliance and home-furnishing financing, student loans, etc., but excludes real-estate financing.) That’s consistent with the progress evident in the chart.

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

Households had retreated into a protective crouch: Conserving liquid assets, shedding debt and reducing large, postponable purchases. Now consumers are taking the first tentative steps out of that crouch. They are doing some borrowing and buying.

If only that extended to housing………

(To be fully informed visit

© 2012 Michael B. Lehmann

Thursday, June 7, 2012

Productivity and Profitability

The Lehmann Letter (SM)
Corporate profits have had an extraordinary run in the past decade. The dot-com bust of 2001, which many thought would be the demise of corporate earnings, quickly became the launching pad for a record climb.

Growth in profit margins (Profits = Profit margins X Sales volume) enabled this increase in total profits. The chart reveals that profit margins began to rise above their historic range during the dot-com boom of the 1990s, and then reached all-time highs from 2002 to 2012.

Corporations had two factors on their side: Rising productivity (efficiency) and meager wage gains. The 2008 - 2009 recession aided profit margins when workforces shrank more than output and wages consequently lagged. You can see from the chart that profit margins are at their peak.

Profit Margins

(Click on chart to enlarge)

(Recessions shaded)

Yesterday the Bureau of Labor Statistics reported that productivity (efficiency) fell in the first quarter but employees' real compensation fell even more rapidly. As a result the cost of producing a unit of output grew less rapidly than the price businesses received for that output. The result: Profit margins remain at historic highs.

In Sum: Falling compensation more than offset falling productivity (efficiency), maintaining profit margins at record levels. Business continues to enjoy an extraordinary era.
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© 2012 Michael B. Lehmann