Change of Address

The Lehmann Letter (SM)

Dear Reader,

The Lehmann Letter has a new address:

www.beyourowneconomist.com/blog.php

Please go to www.beyourowneconomist.com/blog.php to view the latest post as well as the following posts which you may have missed:


July 26: Business Investment Disappoints


July 25: Real-Estate Rebound?


July 24: Looking for a Silver Lining


Thank you for your patience during this transition and accept my apologies for any inconvenience. 


Please contact me at lehmmanm@usfca.edu if you have any questions.


Yours truly,


Mike Lehmann

Greece’s Grinding Deflation: A Precedent for Spain and Italy?

The Lehmann Letter (SM)

Stocks opened lower today because of fears regarding Spain’s economy.

Will Spain go the way of Greece?

A July 20 article in The Wall Street Journal discusses the circumstances that led to Greece's grinding deflation.

This article serves as an excellent case study of the cost-dilemma facing Europe's southern periphery: Spain, Italy and Greece.

“Greeks Brace for More Pain on Wages”

http://online.wsj.com/article/SB10001424052702303740704577521210205236808.html?KEYWORDS=marcus+walker

Here are some key excerpts, beginning with Greece's entry into the euro zone and the inflationary process that boosted wages to uncompetitive levels.

“Money was flooding into Greece's economy, spurred by European Central Bank interest rates that were suited to a stagnant Germany but were too low for fast-growing parts of the euro-zone periphery. Banks and bond markets lent freely to the periphery, believing the risks were equally low everywhere in the currency zone.

"In Spain, Portugal and Ireland, the private sector went on a borrowing spree. In Greece, a public sector rife with waste and patronage was the main conduit of the credit bubble. The effect was similar: Inflated demand for goods and services sucked in imports while pushing up domestic prices and business costs. The trade deficit soared as the whole country spent more than it earned, requiring more foreign credit to cover the gap.”

The remaining excerpts describe Greece’s struggle to reduce its wages to regain competitiveness with other European economies.

“Greece, like other euro members that now need financial help, struggled to compete in the European and global economies as cheap credit and structural problems inflated prices and wages faster than its palette of products could justify. Now, lacking a national currency that can depreciate to make its goods cheaper in foreign markets, it must embark on a grinding "internal devaluation," pushing down its wages and prices….

“Greece, Spain, Portugal and Italy all face the same arduous route to recovery… They must push down wages and prices at the same time as they labor to pay down heavy public or private debts….

“In February, Greece's main creditors, the International Monetary Fund and the European Union, forced the government to cut the national minimum wage by 22%—32% for young workers—and made sector-specific pay deals between unions and private employers expire faster….

“Wages in much of Greece's economy have already fallen some since the country's recession began in late 2008. But the EU and the IMF say internal devaluation has a long way to go before Greece is competitive enough internationally to begin an export-led recovery.

“Estimates vary on how much prices need to fall in the euro-zone periphery, relative to the core economies. Economists say Greece and Portugal face the biggest challenge, while Spain and Italy need smaller but still painful adjustments.

“The EU-IMF bailout program for Greece seeks to cut labor costs by 15% in the next three years. A recent report by economists at Goldman Sachs says that, without major structural reforms, Greece would need an internal devaluation of nearly 30% to turn around its trade balance and end its dependence on foreign borrowing.”

Greece has a bitter pill to swallow. It may be a foretaste of what awaits Spain and Italy.

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

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

© 2012 Michael B. Lehmann

Business Sales Stall

The Lehmann Letter (SM)

  

Manufacturing and trade sales have stalled according to a recent Census Bureau report:

http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

They had been recovering well from the recession, but then they declined in April and May (the latest available data). Sometimes there’s a hiccup in the data, and that could be the case here.

But it’s not the only evidence of manufacturing weakness. The Purchasing Manager’s Index contracted in June after a couple of years of expansion and this week the Federal Reserve’s measure of industrial capacity utilization remained flat:

http://www.ism.ws/about/MediaRoom/newsreleasedetail.cfm?ItemNumber=22765

http://www.federalreserve.gov/releases/g17/current/

We have a bifurcated economy. There has been recovery from recession, but new areas of weakness may be emerging.

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

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

© 2012 Michael B. Lehmann

Existing Home Sales Remain Weak

The Lehmann Letter (SM)

The National Association of Realtors continues to speak optimistically of a housing recovery because of improved affordability, shrinking inventories and firmer prices:

http://www.realtor.org/news-releases/2012/07/june-existing-home-prices-rise-again-sales-down-with-constrained-supply

But June existing home sales fell to 4.37 million. Place that number on the chart and decide for yourself.

Existing Home Sales

(Click on chart to enlarge)

(Recessions shaded)

What do you think?

A recovery may be imminent. Some of the housing data is up. (Yesterday’s Letter reported a jump in housing starts.) But consistent evidence of strength remains elusive.

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

© 2012 Michael B. Lehmann

Housing Starts: Big Jump

The Lehmann Letter (SM)

Housing starts enjoyed a big jump in June to 760,000 the Census Bureau reported today:

http://www.census.gov/construction/nrc/pdf/newresconst.pdf

Let’s hope that’s the sign of recovery that many optimists have said we would soon see.

Now take a look at the chart and update it with that 760,000 figure (the chart’s scale is in thousands, so just use 760). Then ask yourself how far we have to go before housing starts are anywhere near normal. 

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

It will be a while, won’t it?

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

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

© 2012 Michael B. Lehmann

“We always get the majority we need."

The Lehmann Letter (SM)

“We always get the majority we need."

That’s a quote from German Chancellor Angela Merkel according to a July 15 Wall Street Journal article:

“Merkel Says Future Bailout Liability Is Still Undecided” 

http://online.wsj.com/article/SB10001424052702303612804577528863315549928.html?mod=WSJ__MIDDLENexttoWhatsNewsForth

Many have criticized German Chancellor Angela Merkel for indecision in the face of the euro crisis: Waffling to placate the shifting moods of her electorate. Others have faulted her for doctrinaire fiscal and monetary austerity. Few in America have lauded her for vision, statesmanship and leadership.

But the Wall Street Journal article portrays a leader confident in her role, deliberately putting into place the building blocks of a new European monetary union.

Here are key excerpts.

First, the issue at hand:

“German Chancellor Angela Merkel on Sunday said the question of liability for future bank bailouts in Europe hasn't yet been decided, dismissing criticism that she caved on key positions at a recent summit of European Union leaders.

“Ms. Merkel's comments come just days before Germany's parliament is set to vote on whether to approve up to €100 billion ($122 billion) in loans to refinance weakened Spanish banks. The vote is widely expected to pass, but criticism is growing at home that Ms. Merkel may be allowing European leaders to water down conditions placed on such bailouts in the future…..”

Then the key point:

“"We always get the majority we need," Ms. Merkel said…..

“Ms. Merkel is riding a wave of popularity among German voters. A recent poll put her approval ratings at nearly 70%, largely for her handling of the euro crisis. Ms. Merkel said that her European policies would be the central plank in next year's general election, expected to be held in September 2013.”

That looks like someone who is confident that she can build a united Europe around a strong and stable German economy.

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

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

© 2012 Michael B. Lehmann

Housing Assistance: A Radical Plan

The Lehmann Letter (SM)

Many criticized the 2008 bailout of American banks for failing to also bail out mortgage debtors. Now banks that received public assistance have foreclosed on mortgages owed by those debtors. Large numbers of these homes remain vacant, exacerbating the housing slump.

Other borrowers are under water – owing more on their homes than they are worth – because home values have fallen. They can’t obtain refinancing because the new mortgage would exceed their home’s value. Some borrowers have walked away from their homes and debts, assuming that their homes’ values will never exceed what they owe on them.

As a result many neighborhoods are blighted with vacant homes that depress the value of the housing stock. This contributes to the balance-sheet slump bedeviling American households.

Despite suggestions that federal legislation enable banks and borrowers to write down the value of distressed homes, no national program has emerged.

Now some officials in Fontana, CA are exploring a radical way out.

Read all about it in the July 15 New York Times:

“California County Weighs Drastic Plan to Aid Homeowners”

http://www.nytimes.com/2012/07/15/us/a-county-considers-rescue-of-underwater-homes.html?ref=todayspaper

Here are some key excerpts from the article.

“Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County, where Fontana is one of the largest cities, are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater.

“Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property….

“The idea to use eminent domain to seize mortgages first came from a group of venture capitalists in San Francisco, Mortgage Resolution Partners, who would collect a fee for each of the restructured loans. The firm is also trying to persuade officials in Nevada and Florida to try the idea….

““We have what we regard as a systemic problem, but it’s felt most urgently at the local level,” said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners. “We have all these people who want to be able to stay in their homes and keep that, but it is getting to be impossible. Until you fix this problem, you can’t fix any other problems.”

“As for the group’s eminent domain idea, “if it works, every mayor of every city is going to want to do this,” Mr. Gluckstern said….

Under the current proposal, only homeowners who are current on their payments would be eligible for the program, a policy some have criticized because it does little to help the neediest people.”

Drastic problems elicit drastic solutions.

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

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

© 2012 Michael B. Lehmann

What the Fed Said

The Lehmann Letter (SM)

Yesterday’s Letter featured The New York Times’s assessment of the Federal Reserve’s economic outlook as expressed at the latest meeting of the Federal Open Market Committee. (Minutes released with three-week delay.)

Here’s what the Fed said:

“Minutes of the Federal Open Market Committee

June 19-20, 2012”

http://www.federalreserve.gov/monetarypolicy/fomcminutes20120620.htm

“Staff Economic Outlook

“In the economic projection prepared by the staff for the June FOMC meeting, the forecast for real gross domestic product (GDP) growth in the near term was revised down. The revision reflected data indicating a slower pace of private-sector job gains, more-subdued retail sales, a lower trajectory for personal income, greater restraint in government purchases, and weaker net exports than the staff anticipated at the time of the previous projection. Moreover, recent adverse developments in Europe and tighter domestic financial conditions led the staff to revise down somewhat the medium-term forecast for real GDP growth. With the drag from fiscal policy anticipated to increase next year, the staff projected that the growth rate of real GDP would not materially exceed that of potential output until 2014 when economic activity was expected to accelerate gradually, supported by accommodative monetary policy, further improvements in credit availability, and rising consumer and business sentiment. Increases in economic activity were anticipated to narrow the wide margin of slack in labor and product markets only slowly over the projection period, and the unemployment rate was expected to still be elevated at the end of 2014….”

Once again: There’s little cause for optimism in the Fed’s forecast.

(Summer season: The Lehmann Letter will be in summer-vacation mode during July and August.)

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

© 2012 Michael B. Lehmann

Sad Commentary

The Lehmann Letter (SM)

Yesterday the Fed released the minutes for its most recent Federal Open Market Committee meeting:

http://www.federalreserve.gov/newsevents/press/monetary/20120711b.htm

They elicited a sad commentary in an article in this morning’s New York Times:

“Fed Is Torn on Tipping Point for Action”

http://www.nytimes.com/2012/07/12/business/economy/federal-reserve-officials-show-disappointment-with-growth.html?_r=1&ref=todayspaper

The article begins:

“Federal Reserve officials agreed at a meeting in June that unemployment would remain elevated for another five to six years, but most did not regard that as reason enough to expand the Fed’s efforts to stimulate growth, according to an official account published on Wednesday.

“The American economy is stuck in a new kind of normal, somewhere between crisis and prosperity, and economic policy makers are struggling to define their role. The Fed, which has responded forcefully each time the economy tips back toward recession, remains divided over whether it should try with similar urgency to return the economy to prosperity.”

To repeat: The new normal is five/six years of above-normal unemployment.

That’s a sad commentary.

(Summer season: The Lehmann Letter will be in summer-vacation form during July and August.)

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

© 2012 Michael B. Lehmann

Consumer Credit’s Good Report

The Lehmann Letter (SM)

On Monday the Federal Reserve reported that consumer credit grew by a whopping $205.4 billion in May:

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

Household spending must grow strongly for a robust recovery, and households must borrow to finance it. This shows they are.

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

The chart as well as the latest report, which provides data for the past three quarters, are all upbeat.

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

© 2012 Michael B. Lehmann

Europe: Doubters Take Note

The Lehmann Letter (SM)

  

The euro’s doubters should take note.

Last weekend France and Germany commemorated the fiftieth anniversary of their declaration of friendship, first  announced at a 1962 meeting of President Charles de Gaulle of France and Chancellor Konrad Adenauer of Germany.

According to a July 8 article in The New York Times:

“Germany and France Celebrate Their Bond”

http://www.nytimes.com/2012/07/09/world/europe/germany-and-france-celebrate-their-bond.html?_r=1&ref=todayspaper

Chancellor Angela Merkel of Germany, with French President Francois Hollande by her side, said:

““The European economic and currency union, as founded 20 years ago, has proved itself not strong enough yet,” she said. “Our generation has to draw the right lessons from that.” It is important, she said, to put the “finishing touches on a political level of the economic and monetary union — it’s a herculean task, but Europe is up to it.””

It is significant that the leaders of Europe’s most powerful states publicized their bonding of fifty years ago to declare their vision of where Europe will be fifty years hence: United in both economy and polity.

The euro’s doubters should take note.

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

© 2012 Michael B. Lehmann

Autos: Revising Our Expectations Downward?

The Lehmann Letter (SM)

Is it time to revise our expectations downward?

There was an upbeat reaction at the beginning of the month to motor-vehicle manufacturers’ June sales.

And on July 5 the Commerce Department released its estimate of 14.0 million new-vehicle sales at a seasonally-adjusted annual rate:

http://www.bea.gov/national/index.htm#gdp

The chart tells you that this is a big improvement over the recession lows of less than 10 million. There’s been a big pop up.

But now – it seems – we’ve stalled.

New-Vehicle Sales

(Click on chart to enlarge)

(Recessions shaded)

New-vehicle sales have averaged around 14million for the first-half of the year. The growth trend is over.

Is it time to revise our expectations downward?

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

© 2012 Michael B. Lehmann

Employment: What Can You Say?

The Lehmann Letter (SM)

What can you say when you’ve already said so much?

We need 250,000 more jobs a month – month after month, year after year – to drive down the unemployment rate. It’s just not happening.

And today’s employment report from the Bureau of Labor Statistics did nothing to change that assessment.

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

The report begins:

“Nonfarm payroll employment continued to edge up in June (+80,000), and the unemployment rate was unchanged at 8.2 percent, the U.S. Bureau of Labor Statistics reported today….”

The second number can’t head south until the first number goes north.

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

© 2012 Michael B. Lehmann

Europe: Not Yet Toast

The Lehmann Letter (SM)

The casual observer of European events is tempted to throw up his or her hands in despair and conclude: THEY’RE TOAST!

Not so fast. Don’t be dragged into the details. Keep the big picture in focus. Every crisis has brought new progress. New challenges have brought new solutions.

You needn’t be thoroughly familiar with current events in order to see history, as well as progress, unfolding. A stronger Europe is being forged before our eyes.

See, for instance, this article that appeared in July 3’s New York Times.

“Europe’s Banking Chief Wields New Power in Crisis”

http://www.nytimes.com/2012/07/03/world/europe/european-central-bank-head-draghi-has-new-powers.html?_r=1&ref=nicholaskulish

The article’s opening paragraphs said:

“The spotlight in the European debt crisis has now shifted decisively toward the influential leader of the European Central Bank, Mario Draghi, who emerged from the recent summit meeting in Brussels with new powers and stronger backing to address the Continent’s financial woes.

“Political leaders took significant strides toward making the central bank more like the United States Federal Reserve, giving it authority to oversee the euro zone’s largest banks and, once that new regulator is in place as soon as the end of this year, a likely role in rescuing Spanish banks with capital directly from the European rescue funds.

“Many of the longer-run plans under discussion, like European deposit insurance, would mean shifting further responsibilities toward the bank, arguably giving Mr. Draghi the most influential executive powers in Europe.”

These are just pieces of the final puzzle. But they are falling into place.

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

© 2012 Michael B. Lehmann

Manufacturing Slowdown?

The Lehmann Letter (SM)

  

Yesterday’s report from the Institute of Supply Management that its June Purchasing Managers’ Index (PMI) dipped below 50% is cause for concern:

http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942

Any reading below 50% is a sign of manufacturing contraction, and June’s 49.7% interrupts an expansionary trend. Let’s hope it was a fluke.

Purchasing Managers’ Index

(Click on chart to enlarge)

(Recessions shaded)

But there have been too many signs of softness to remain complacent.

We’ll see.

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

© 2012 Michael B. Lehmann

July Publication Schedule

The Lehmann Letter (SM)

ECONOMIC INDICATOR PUBLICATION SCHEDULE

July 2012

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

Quarterly Data

BEA……..….GDP ..……..…Fri, 27th

Monthly Data

ISM..Purchasing managers’ index…Mon, 2nd  

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

BLS………….Employment…….…   Fri, 6th

Fed. Consumer credit..(Approximate).Mon, 9^th

BLS………...Producer prices……. Fri, 13^th

Census…….......Inventories…..... Mon, 16^th

BLS……….Consumer prices.….... Tue, 17^th

Fed……….Capacity utilization……Tue, 17^th

Census……...Housing starts…….Wed, 18^th

NAR………Existing-home sales….Thu, 19th

Conf Bd…….Leading indicators….Thu, 19th   

Census……..New-home sales…... Wed, 25th

Census……….Capital goods…….. Thu, 26^th

Conf Bd….Consumer confidence.. Tue, 31st

*BEA = Bureau of Economic Analysis of the U.S. Department of Commerce

*BLS = Bureau of Labor Statistics of the U.S. Department of Labor

*Census = U.S. Bureau of the Census

*Conf Bd = Conference Board

*Fed = Federal Reserve System

*ISM = Institute for Supply Management

*NAR = National Association of Realtors

© 2012 Michael B. Lehmann