Be Your Own Economist ®

GDP OK

2012-01-27T06:48:00.000-08:00

The Lehmann Letter (SM)

The gross domestic product rose by 2.8% in 2011's fourth-quarter according to this morning's Commerce Department bulletin:

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

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

Households purchased more durable goods, such as autos, and homebuilding accelerated. Businesses added to their inventories, but plant and equipment expenditures sagged.

A noteworthy disappointment: Government expenditures lagged. At this point in a weak recovery, government spending should accelerate in order to make up for the slack in private expenditures. Later in the expansion, when private spending recovers, government spending can taper off. But military spending and state and local government spending fell, pulling down the government total. If government spending had risen, GDP growth would have been notably higher.

Nonetheless these numbers are an overall positive sign. The economy shows no sign of falling back into recession, although it will be a long, slow slog back to a conventional notion of prosperity. Unemployment will fall slowly; full employment is still a long way off.

And don't expect further strong gains in corporate earnings. The big bounce back in profits is behind us. Business has boosted its profit margins to record levels. Now sales volume must grow. That will happen, but it will happen slowly.

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

© 2012 Michael B. Lehmann

The Fed Speaks

2012-01-25T11:00:00.000-08:00

The Lehmann Letter (SM)

Today the Federal Reserve released its latest statement from the Federal Open Market Committee (FOMC). This is the Fed’s key policy-setting body.

The FOMC said:

“… the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the 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 1/4 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 ….”

There you have it: Sluggish growth, high unemployment, negligible inflation.

The Fed will maintain low interest rates for the foreseeable future. But, as the January 2 edition of this letter said, the Fed’s control over interest rates is like the reins on a horse. Pulling back has been more effective than letting go. Right now the horse is exhausted, and those dangling reins aren’t motivating him to run.

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

© 2012 Michael B. Lehmann

Full Steam Ahead?

2012-01-24T14:02:00.000-08:00

The Lehmann Letter (SM)

Some observers are moving from deep gloom to a sunnier prognosis for the economy.

This letter has long believed that expansion will be slow, tenuous and a struggle.

Let’s examine two charts to see where we are.

Purchasing Managers’ Index

(Click on chart to enlarge)

(Recessions shaded)

Capacity Utilization

(Click on chart to enlarge)

(Recessions shaded)

The purchasing managers’ index provides purchasing managers’ view of the industrial scene, and capacity utilization informs us of how heavily industry is using its plant and equipment. You can see that the former is below 55 and the latter is below 80.

The historical record makes clear that these are not robust numbers. Each of these indexes must consistently exceed each of these signposts before industrial expansion deserves the “robust” label.

The expansion is not yet in high gear.

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

© 2012 Michael B. Lehmann

Home Sales: No True Recovery Yet

2012-01-20T07:52:00.000-08:00

The Lehmann Letter (SM)

Take a look at today’s bulletin on existing-home sales from the National Association of Realtors:

http://www.realtor.org/press_room/news_releases/2012/01/ehs_dec

It begins:

“Existing-home sales continued on an uptrend in December, rising for three consecutive months and remaining above a year ago, according to the National Association of Realtors®.

“The latest monthly data shows total existing-home sales1 rose 5.0 percent to a seasonally adjusted annual rate of 4.61 million in December from a downwardly revised 4.39 million in November, and are 3.6 percent higher than the 4.45 million-unit level in December 2010. The estimates are based on completed transactions from multiple listing services that include single-family homes, townhomes, condominiums and co-ops.

“Lawrence Yun, NAR chief economist, said these are early signs of what may be a sustained recovery. “The pattern of home sales in recent months demonstrates a market in recovery,” he said. “Record low mortgage interest rates, job growth and bargain home prices are giving more consumers the confidence they need to enter the market.”

“For all of 2011, existing-home sales rose 1.7 percent to 4.26 million from 4.19 million in 2010.”

Now take a look at the historical data.

Existing Home Sales

(Click on chart to enlarge)

(Recessions shaded)

The realtors’ bulletin speaks of home sales that have fluctuated in the 4 to 5 million range for two years. The most recent data may be part of an upward trend that has unfolded over the past several months, but sales remain weak when compared to the 6+ million level enjoyed during the boom of several years ago.

December’s rate was 4.6 million. The data need to break through 5 million and continue rising before home sales are well on their way to real recovery.

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

© 2012 Michael B. Lehmann

Housing: Frame of Reference Important

2012-01-19T10:12:00.000-08:00

The Lehmann Letter (SM)

This morning the Census Bureau issued this report on new residential construction (http://www.census.gov/construction/nrc/pdf/newresconst.pdf):

“Privately-owned housing starts in December were at a seasonally adjusted annual rate of 657,000. This is 4.1 percent (±11.6%)* below the revised November estimate of 685,000, but is 24.9 percent (±18.3%) above the December 2010 rate of 526,000.”

Although there was a decline from November to December, starts are up by one-fourth from a year ago. Looks good until you examine the chart.

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

Housing starts have hovered around 600,000 for so long that a move up to the neighborhood of 700,000 seems great. But the chart reveals how far we have to go.

This illustrates the importance of the historical or long view.

Since housing was ground-zero in the recent bust, the chart also illustrates how much improvement is needed before we can declare victory over the slump.

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

© 2012 Michael B. Lehmann

Good News!

2012-01-09T20:33:00.000-08:00

The Lehmann Letter (SM)

Today the Federal Reserve reported that consumer credit rose by $244.8 billion at a seasonally adjusted annual rate in November:

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

You can see from the chart that this is a healthy jump, much stronger than any recent month and historically stronger than most months. Be cautious, however, because you can also see that there is a great deal of noise in the data. Monthly readings vary greatly.

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

Consumer credit outstanding remains lower than it was in 2008 at the economy’s peak just before recession. You can see that years of negative reports have shrunk the total. November’s strong, positive reading is welcome.

Why? Because households rely upon consumer credit to purchase autos and other durable goods such as furniture and home appliances. During recession households desperately tried to shore up their balance sheets by maintaining liquidity and reducing debt. The expenditures required to rebuild the economy consequently suffered. Big borrowing may be a sign of renewed spending.

We’ll see.

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

© 2012 Michael B. Lehmann

200,000 and 8.5%

2012-01-06T08:25:00.000-08:00

The Lehmann Letter (SM)

This morning's Bureau of Labor Statistics report on December employment began with great news. The unemployment rate fell to 8.5% and the economy created 200,000 new jobs:

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

Some details in the report were especially pleasing. The private sector created 212,000 jobs and construction employment increased for the first time in months. Government, unfortunately, continued to shed workers. This is an unfortunate irony of current conditions. Government usually adds workers during slack times as a matter of policy priority. The current political climate has prevented that.

Job Growth

(Click on chart to enlarge)

(Recessions shaded)

The chart shows that monthly job growth of 200,000 or more is typical for a robust economy. See the years 1995 to 2000 and 2004 to 2007 for an example. Employment gains of this magnitude must become the rule rather than the exception for the unemployment rate to fall to an acceptably low level of 5% or less.

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

© 2012 Michael B. Lehmann

2012 Outlook

2012-01-02T13:35:00.001-08:00

The Lehmann Letter (SM)

The economy will improve gradually in 2012, much as it did in 2011. Even employment will make slow gains, and the unemployment rate will gradually decline. The economy won't rebound sharply, as it did following the 1981-82 recession and earlier recessions, because the recent recession, unlike those earlier recessions, followed on the heels of an asset bubble and bust.

Those earlier recessions followed a simple course: The economy expanded rapidly due to easy-credit conditions and then lurched into recession as the Fed boosted interest rates to restrain inflation. Then, as soon as higher rates dampened inflation, the Fed shifted back to an expansionary low-interest-rate policy and the economy snapped back.

Think of the Fed as a rider on a frisky horse. The horse galloped (economic expansion) when the Fed relaxed the reins (low interest rates), but slowed to a walk (recession) when the Fed pulled back on the reins (high interest rates). As soon as inflation came under control, the Fed relaxed the reins again and the economy popped up.

In that old economy, with its stop-start characteristic, cyclical industries like home-construction and auto-production and their attendant industries accounted for most unemployment. But these were layoffs, not long-term job loss. Builders, lumber mills, carpet mills, automakers and tire makers quickly recalled employees as soon as orders improved. Layoffs occurred when the Fed pulled back on the reins, and employees were quickly brought back as soon as the Fed let the reins dangle.

But the recent recession followed a different course. Low interest rates helped generate a residential-real-estate asset-bubble from 2002 through 2007. Since overall inflation remained low, the Fed did not pull back on the reins. Rising home prices encouraged, rather than discouraged, growing demand. Homes were an asset, not a perishable commodity. They could always be resold for a gain. Or so investors thought. The bubble burst in 2008 when home prices rose beyond any reasonable relationship to rents. Buyers stepped aside once home prices began to fall, and they have not returned.

The old horse and rider metaphor no longer applied. The Fed relaxed the reins until interest rates were in the basement. But the horse had run himself into exhaustion. He needed a rest, water and some oats, and It will be a while before the horse can run again. Since high interest rates and Fed restraint had not burst the bubble, low rates could not initiate rapid recovery. Household balance sheets remained in a state of disrepair: Shrunken asset values, inadequate liquidity and excess debt.

This time there will be no quick employee recall. Since the economy won't spring back, neither will employment. Those jobs have been lost for a long time.

That's why the economy will expand slowly and employment will gradually recover in 2012. Neither will improve rapidly.

© 2012 Michael B. Lehmann

January Publication Schedule

2012-01-02T10:52:00.000-08:00

The Lehmann Letter (SM)

Here are the January indicators that we will follow.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

January 2012

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

Quarterly Data

BEA……….GDP & Profits…..……Fri, 27th

Monthly Data

ISM..Purchasing managers’ index…Tue, 3rd
BEA.New-vehicle sales.(Approximate).Thu, 5th
BLS………….Employment………… Fri, 6th
Fed. Consumer credit..(Approximate).Mon, 9th
Census…….......Inventories…….... Thu, 12th
Conf Bd…….Leading indicators….Tue, 17th
BLS………...Producer prices……. Wed, 18th
Fed……….Capacity utilization……Wed, 18th
BLS……….Consumer prices.….. Thu, 19th
Census……...Housing starts…….Thu, 19th
NAR………Existing-home sales….Fri, 20th
Census……..New-home sales…... Thu, 26th
Census……….Capital goods…….. Thu, 26th
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

False Straws?

2011-12-21T08:57:00.000-08:00

The Lehmann Letter (SM)

The Census Bureau and the National Association of Realtors reported slightly stronger housing starts and existing-home sales for November. Is this the start of an upward trend? We’ll see. There have been many false dawns.

The problem is: We’ve been down so long we grasp at false straws of hope. That’s a consequence of settling into a new regime of reduced circumstances and expectations. Small improvements are overblown.

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

© 2011 Michael B. Lehmann

Consumer Spending

2011-12-08T09:40:00.000-08:00

The Lehmann Letter (SM)

Take a look at two leading indicators recently released by the Federal Reserve and the Department of Commerce.

The Fed reported that consumer credit (excluding mortgage borrowing) had risen by $92.4 billion, at a seasonally adjusted annual rate, in October. The chart shows that a strong economy depends upon around $100 billion monthly in new consumer credit. The chart also shows that households desperately reduced outstanding debt during and immediately following the recession. Now they are beginning to borrow once again. We will see whether or not consumer credit rises to the $100 billion level required to generate strong growth in aggregate demand.

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

The Commerce Department reported new-vehicle sales of 13.6 million, seasonally adjusted annual rate, in November. The chart reveals that this continues the upward trend, climbing out of the bottom of the recession. Will it continue rising to the 17-million annual rate that signals a vibrant auto industry? We'll see.

Auto sales

(Click on chart to enlarge)

(Recessions shaded)

This letter will return to these indicators regularly. The economy can't fully recover unless they fully recover.

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

© 2011 Michael B. Lehmann

It’s Housing

2011-12-05T19:48:00.000-08:00

The Lehmann Letter (SM)

This letter has emphasized housing’s importance. Residential construction is flat. The economy won’t grow strongly until home building rebounds.

For validation of this view see Floyd Norris’s December 1 posting on The New York Times site:

http://www.nytimes.com/2011/12/02/business/time-to-accelerate-the-housing-recovery-floyd-norris.html?scp=3&sq=Floyd%20Norris&st=cse

Sad to say: It doesn’t look like any policy initiative will be successfully applied. That means the needed rebound will not occur.

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

© 2011 Michael B. Lehmann

Good News, Bad News

2011-12-02T09:21:00.000-08:00

The Lehmann Letter (SM)

“The unemployment rate fell by 0.4 percentage point to 8.6 percent in November, and nonfarm payroll employment rose by 120,000, the U.S. Bureau of Labor Statistics reported today.”

That’s the first sentence from today’s Bureau of Labor Statistics employment report:

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

The unemployment rate fell as discouraged workers left the labor force, even though employment grew by 120,000. As this letter has said many times: Job growth must be twice as great, month after month for several years, before full-employment is restored. How will that happen?

Job Growth

(Click on chart to enlarge)

(Recessions shaded)

The chart illustrates current events as well as past success. Notice today’s plateau forming around 100,000 and earlier periods growing at over 200,000. This is just another inadequate plateau, similar to others we have seen develop across the data: Residential construction, auto sales, industrial activity and so on. We need a boost. From where will it arise?

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

© 2011 Michael B. Lehmann

PMI Remains Anemic

2011-12-01T10:27:00.000-08:00

The Lehmann Letter (SM)

This morning the Institute for Supply Management announced that the Purchasing Managers Index (PMI) had risen to 52.7 in November from 50.8 in October:

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

The PMI measures purchasing managers' impressions of the economy's strength based on their experience buying inputs for their firms. A number below 50 indicates a contracting economy; a number above 50 indicates an expanding economy.

Purchasing Managers' Index

(Click on chart to enlarge)

(Recessions shaded)

Inventories

(Click on chart to enlarge)

(Recessions shaded)

The charts indicate the correlation between inventory expansion and the PMI. Manufacturing production slumped during the recession as businesses sold goods out of inventory and cut production. That is, businesses liquidated their stocks on hand as sales slowed. Consequently production fell faster than sales and the PMI slumped as purchasing managers reduced their orders for inputs.

Businesses rebuilt their inventories as the recession ended. Production recovered as a result and the PMI bounced back strongly. Now, however, inventory buildup is over and manufacturing production no longer has that additional boost. The PMI has been hovering at just above 50, and November's 52.7 is no cause for elation.

We can't reasonably expect a jump in production and the PMI until demand improves significantly.

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

© 2011 Michael B. Lehmann

December Publication Schedule

2011-11-30T12:29:00.000-08:00

The Lehmann Letter (SM)

Stocks rallied today on word that key central banks launched a coordinated effort to shore up the euro. This is further evidence that European leaders will do what is necessary to prevent a crisis.

But that doesn’t ensure a robust economy here at home. Here’s a list of indicators that we will follow.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

December 2011

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

Quarterly Data

BEA...US International Transacs…Thu, 15th

BEA……….GDP & Profits…..……Thu, 22nd

Monthly Data

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

BLS………….Employment………… Fri, 2nd
BEA.New-vehicle sales.(Approximate).Mon, 5th

Fed. Consumer credit..(Approximate).Wed, 7th
Census…….......Inventories…….... Tue, 13th
BLS………...Producer prices……. Thu, 15th
Fed……….Capacity utilization……Thu, 15th
BLS……….Consumer prices.….. Fri, 16th
Census……...Housing starts…….Tue, 20th
NAR………Existing-home sales….Wed, 21st
Conf Bd…….Leading indicators….Thu, 22nd

Census……..New-home sales…... Fri, 23rd
Census……….Capital goods…….. Fri, 23rd

Conf Bd….Consumer confidence.. Tue, 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

© 2011 Michael B. Lehmann

Capital Expenditures

2011-11-25T06:49:00.000-08:00

The Lehmann Letter (SM)

This week the Census Bureau reported $71.6 in October new orders for nondefense capital goods:

http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

These include all kinds of business purchases of nonmilitary machinery and equipment, from trucks and trains to backhoes and bake ovens,

Nondefense Capital Goods

(Click on chart to enlarge)

(Recessions shaded)

By placing the latest number on the chart you can see that new orders have reached a plateau in the mid-to-low 70s. New orders have not returned to the 80+ level that prevailed before the recession.

You may recall from earlier editions of this letter that this is typical of so many economic indicators: They have recovered from their recession lows, but are no longer advancing toward pre-recession levels. That’s not necessarily an omen of double-dip, but neither is it a signal of strong recovery.

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

© 2011 Michael B. Lehmann

Buying and Borrowing

2011-11-21T07:19:00.000-08:00

The Lehmann Letter (SM)

Earlier this month the Commerce Department and the Federal Reserve reported 13.2 million October new-vehicle sales and an $88.8 billion September increase in consumer credit.

New Vehicle Sales

(Click on chart to enlarge)

(Recessions shaded)

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

These numbers appear to be healthy when placed in the context of the charts: New vehicle sales have grown since their recession bottom and so has consumer credit. But there is a real danger that they will now stall, creating a plateau that is inadequate to sustain a healthy economy.

New vehicle sales and consumer credit move in tandem because auto buyers rely on consumer credit to finance their purchases. The charts inform us that new-vehicle sales were in the 16 to 17 million range from 2002 to 2007 and that consumer credit grew by about $100 billion monthly - at a seasonally adjusted annual rate - in those years. Will they return to those robust levels?

Consider consumer confidence.

Consumer Confidence

(Click on chart to enlarge)

(Recessions shaded)

Consumer confidence hovered around 100 during the 2002 to 2007 boom years. The chart reveals that consumer confidence has been fluctuating around 50 since the depths of the recession and has now dropped to around 40. The Conference Board is scheduled to release its latest data on November 29.

Unless consumer confidence pops upward to start a new climb, it's difficult to imagine that households will be sufficiently optimistic to begin a new auto-buying and borrowing binge. Gloomy consumers scale back; they don't push forward. Why should they? Their balance sheets remain compromised and good news has been scarce lately. Households have every reason to exercise restraint.

That's why it's hard to imagine a healthy level of auto buying and financing and a return to a robust economy.

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

© 2011 Michael B. Lehmann

Housing Starts

2011-11-17T06:21:00.000-08:00

The Lehmann Letter (SM)

Last month this letter reported that September housing starts had increased by 15% to 658,000. That was good news.

Unfortunately this morning's Census Bureau release says that figure was revised downward to 630,000 and that October starts were 628,000:

http://www.census.gov/const/newresconst.pdf

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

In any event the chart makes clear that housing starts have been hanging out at around 600,000 for some time. You can see where we have to go in order to return to a sense of normal.

And there is no sign that will happen anytime soon.

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

© 2011 Michael B. Lehmann

Strong Production

2011-11-16T10:52:00.000-08:00

The Lehmann Letter (SM)

Today the Federal Reserve reported solid growth in its October index of industrial production:

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

Capacity utilization measures current production as a percentage of maximum output. You can see from the chart that capacity utilization dipped below 70% in the depths of recession. That was the worst performance since World War II. More than 30% of America's industrial capacity went unused.

Capacity Utilization

(Click on chart to enlarge)

(Recessions shaded)

Capacity utilization rose to 77.8% in October. That signals continued expansion after a sharp bounce-back followed by a spell of stagnation in the summer. It would be nice to see the upward trend resume.

Inventory restocking generated the strong post-recession bounce. Now the core question is: Will aggregate demand grow quickly enough to send capacity utilization through 80% anytime soon. That depends to a large extent on household demand for new residential construction and motor vehicles.

At least there is no sign of a double dip.

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

© 2011 Michael B. Lehmann

No Sign of Double Dip

2011-11-15T08:08:00.000-08:00

The Lehmann Letter (SM)

This morning the Commerce Department released its September report on business sales and inventories:

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

Sales grew slightly while inventories hardly changed. Consequently the inventory/sales ratio remained unchanged at 1.27.

Inventory/Sales Ratio

(Click on chart to enlarge)

(Recessions shaded)

You can see the spike in the inventories/sales ratio during the recent recession. When a sales decline surprises businesses, unsold goods pile up in inventories. As sales drop and inventories climb, the inventory/sales ratio rises.

No business wants inventories to rise as sales fall. Businesses sell goods out of inventories in order to deplete stocks they no longer need. Production drops and the economy is gripped by recession.

You can see from the chart that the crisis is well behind us. The inventories/sales ratio has fallen back to normal as businesses liquidated their inventories and sales began to recover. Once sales growth resumed, businesses could begin to replenish their inventories.

Now both inventories and sales are back to where they were before recession hit, and both continue to grow. That's a good sign and can be taken as an omen that a new recession is not around the corner.

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

© 2011 Michael B. Lehmann

Good News From Europe

2011-11-11T08:45:00.000-08:00

The Lehmann Letter (SM)

Markets are rallying on the good news from Europe. It appears that Greece and Italy will install new governments to deal with their fiscal crises. There’s no sign yet that nations are abandoning Europe or the euro.

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

© 2011 Michael B. Lehmann

Europe

2011-11-09T10:00:00.000-08:00

The Lehmann Letter (SM)

The stock market is down 2% today because of the Italian crisis. How matters will be resolved remains to be seen.

But readers of this letter know that its author remains upbeat. Europe has faced many crises over the past 65 years and emerged stronger with each. Step-by-step Europe has knit itself into a powerful and successful economic entity. Challenges remain, and Europe will meet them. Europe will emerge stronger from this challenge just as it has from past challenges.

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

© 2011 Michael B. Lehmann

Not Enough

2011-11-07T11:03:00.000-08:00

The Lehmann Letter (SM)

A certain amount of cheer greeted the Commerce Department's recent announcement that October new-vehicle sales had risen to 13.2 million:

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

If you inspect the data, however, you will notice the recent plateau at about 13 million. We are inching upward, not climbing upward. The chart reveals that auto sales must return to 16 or 17 million to reach full production. We are nowhere near that level.

Job Growth

(Click on chart to enlarge)

(Recessions shaded)

This report further reinforces the impression that we are not falling into another recession, but we are in a period of slack performance and inadequate progress.

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

© 2011 Michael B. Lehmann

Luke Warm

2011-11-04T10:36:00.000-07:00

The Lehmann Letter (SM)

The problem with today's economy is not that we are headed back toward recession. The problem is that the economy continues to grow at such a tepid pace that we are unable to deal with some of our severe problems.

This morning's October jobs report from the Bureau of Labor Statistics is an example:

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

Employment did grow by 80,000. As the chart indicates this is much better than the horrific declines of the recession. But it's far less than the 200,000 to 300,000 pace of job growth required to restore full employment. The unemployment rate is now 9% and will remain at that troublesome level until job growth accelerates.

Job Growth

(Click on chart to enlarge)

(Recessions shaded)

If you examine the detail in the link above you will notice that government jobs declined by 24,000. This is tragic because severe unemployment should generate a federal effort to stimulate hiring. Government employment should be growing not shrinking. But government efforts to stimulate employment are now bogged down in controversy over the federal deficit. It would be helpful to boost employment now and deal with the deficit later.

Some may take solace that our government problems don't seem as pressing as those in Europe. But Europe has a long post-World War II history of going to the brink, muddling through and then finding a solution that creates a stronger Europe. There is every reason to believe that Europe will pull the rabbit out of the hat once again, strengthening the euro and knitting a stronger continent.

There is less reason for optimism on this side of the Atlantic Ocean.

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

© 2011 Michael B. Lehmann

November Publication Schedule

2011-10-29T11:46:00.000-07:00

The Lehmann Letter (SM)

ECONOMIC INDICATOR PUBLICATION SCHEDULE

November 2011

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

Quarterly Data

BLS……….Productivity………….Thu, 3rd

BEA……….GDP & Profits…..……Tue, 22nd

Monthly Data

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

BEA.New-vehicle sales.(Approximate).Fr1, 4th

BLS………….Employment………… Fri, 4th
Fed. Consumer credit..(Approximate).Mon, 7th
Census…….......Inventories…….... Tue, 15th
BLS………...Producer prices……. Tue, 15th
Fed……….Capacity utilization……Wed, 16th
BLS……….Consumer prices.….. Wed, 16th
Census……...Housing starts…….Thu, 17th
Conf Bd…….Leading indicators….Fri, 18th

NAR………Existing-home sales….Mon, 21st
Census……….Capital goods…….. Wed, 23rd

Conf Bd….Consumer confidence.. Tue, 29th

Census……..New-home sales…...Mon, 28th

*BEA = Bureau of Economic Analysis of the U.S. Department of Commerce
*BLS = Bureau of Labor Statistics of the U.S. Department of Labor
*Census = U.S. Bureau of the Census
*Conf Bd = Conference Board
*Fed = Federal Reserve System
*ISM = Institute for Supply Management
*NAR = National Association of Realtors

© 2011 Michael B. Lehmann

Still No Sign of Recession

2011-10-28T06:58:00.000-07:00

The Lehmann Letter (SM)

Yesterday the Commerce Department reported 2.5% third-quarter GDP growth:

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Some fear that we are slipping into or will soon slip into recession. But recession has not begun as long as GDP – the total output of goods and services - continues to advance.

This letter believes we will avoid recession as the economy continues to slowly improve. Unfortunately “slowly” is the key word. Rapid progress can’t occur until residential construction, motor vehicles and other durables hasten their improvement. And that won’t happen until household balance sheets recover: Liquidity rises, asset prices grow, debt falls and net worth improves. So far no one has explained how all that will happen.

© 2011 Michael B. Lehmann

Wish We Could Do The Same

2011-10-27T16:25:00.000-07:00

The Lehmann Letter (SM)

Investors around the world celebrated Europe's plan to resolve its debt crisis. The details must be arranged and the plan implemented, but a good start has been made.

Meanwhile consider the irony. Here we have a continent of disparate peoples, cultures, history and nations that has fought like cats and dogs for centuries. But over the past 65 years Europe has slowly knit itself into a coherent and cohesive economic union. The job is not finished and pitfalls remain, but at the end of World War II most would have thought this kind of progress to be impossible.

Now consider us: One nation that seems to increasingly take its cue from the years preceding the Civil War. One-hundred-fifty years ago compromise was an alien concept. So it seems today, despite the obvious fact that the issues that divide us are not nearly as serious as the issue of slavery. So why can't we reach a compromise on economic matters such as federal spending and taxes? We send delegations to Northern Ireland and the Middle East in order to effect compromise, yet compromise remains elusive at home. We ask others to find the middle ground, to be reasonable, to be statesmen. Yet we cannot practice what we preach. Strange.

© 2011 Michael B. Lehmann

While The World Waits

2011-10-26T07:27:00.000-07:00

The Lehmann Letter (SM)

While the world waits for news from Europe, the American economy proceeds in low gear.

This morning the Census Bureau released reports on September capital-goods expenditures and new home sales.

New orders for nondefense capital goods (nonmilitary machinery and equipment) held steady at $76.0 billion:

http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

Place this number on the chart and you'll see that new orders for capital goods have snapped back sharply from their recession lows. But they have not yet returned to the peak levels they enjoyed before the recession.

Nondefense Capital Goods

(Click on chart to enlarge)

(Recessions shaded)

New home sales are in far worse shape. The chart reveals that they continue to scrape along the bottom. September's 313,000 confirms the trend:

http://www.census.gov/const/newressales.pdf

New Home Sales

(Click on chart to enlarge)

(Recessions shaded)

Today's data do not offer any kind of breakthrough. Neither business capital expenditures nor household purchases of new homes are strong enough to significantly boost the economy or substantially reduce unemployment.

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

© 2011 Michael B. Lehmann

Bad News

2011-10-25T08:33:00.000-07:00

The Lehmann Letter (SM)

This morning the Conference Board released its October consumer confidence survey:

http://www.conference-board.org/press/pressdetail.cfm?pressid=4321

You can evaluate the 39.8 figure, following September's 46.4 reading, by putting them in context on the chart.

Consumer Confidence

(Click on chart to enlarge)

(Recessions shaded)

Not only is the index heading south, it's back to recession levels. Households are gloomy and that is a bad sign for future expenditures on homes, cars, other durables and discretionary items in general. It does not necessarily mean that we are headed back into recession. But it is further confirmation that the economy will remain sluggish.

It's also a bad sign for President Obama's reelection prospects. Consumer confidence had been falling and was at recession levels when Ronald Reagan asked the nation in 1980, "Are you better off today than you were four years ago?" Low consumer confidence hurt President George H. W. Bush in 1992 and also hurt the Republicans in 2008. When households are gloomy, they want a change in Washington. It doesn't matter who's to blame.

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

© 2011 Michael B. Lehmann

Worth Reading

2011-10-24T10:53:00.000-07:00

The Lehmann Letter (SM)

The world is waiting for Europe’s response to its sovereign-debt (what government’s owe) crisis, while we worry about the impact of households’ debt upon household spending.

Here are two recent articles worth reading.
On today’s New York Times op-ed page, Paul Krugman is pessimistic:

http://www.nytimes.com/2011/10/24/opinion/the-hole-in-europes-bucket.html?_r=1&ref=todayspaper

Prof. Krugman believes that Europe’s opportunity to act has passed. He believes Europe’s post-WWII string of successes is now be over.

This letter is not so gloomy. Let’s wait and see.

Regarding domestic developments, Saturday’s Wall Street Journal had an excellent account describing the debilitating impact of household debt on consumer expenditures:

http://online.wsj.com/article/SB10001424052970204294504576614942937855646.html?KEYWORDS=jon+hilsenrath+++ruth+simon

As this letter has stated many times: We’re in a balance-sheet crisis. Too much debt, too little liquidity and shrinking net worth have hobbled households. They’ve reduced their key purchases (homes, autos, durables and other discretionary items) that drive our economy.

© 2011 Michael B. Lehmann

Residential Real Estate and Consumer Confidence

2011-10-19T12:17:00.000-07:00

The Lehmann Letter (SM)

At first glance the Census Bureau's latest housing starts report looks good:

http://www.census.gov/const/newresconst.pdf

September starts were up by 15% to 658,000.

If you study the chart, however, you will receive a little lesson on the use of statistics.

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

The 15% increase seems good until you notice that 658,000 starts still leaves us in the doldrums. It will take many months of 15% increases, without any backsliding, before we reach the 1 million total that will truly signal a breakthrough.

That's too bad because the real-estate malaise holds everything back. See, for instance, the following article in today's New York Times:

http://www.nytimes.com/2011/10/19/business/economic-outlook-in-us-follows-home-prices-downhill.html?_r=1&ref=todayspaper

Millions of consumers have lost confidence in their prospects because of the deterioration in their homes' values. Their balance sheets have shrunk and equity contracted. Liquidity is in short supply. They can’t spend like they used to.

This is a sharp reversal from the decades leading up to the recent crisis. Most households borrowed and bought, confident that rising asset values (homes and stock market) would make everything possible. Liquidity was not a priority.

How that has changed. Spending on autos and other durable goods has suffered as well as real-estate purchases. We’re in a funk and the way out has not yet become apparent.

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

© 2011 Michael B. Lehmann

Uh Oh!

2011-10-12T12:10:00.000-07:00

The Lehmann Letter (SM)

So many eyes are turned to Europe, sometimes a domestic statistic escapes widespread attention.

The Federal Reserve recently reported that consumer credit fell by $114.0 billion in August (the latest available month) on a seasonally-adjusted annual basis:

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

(Subtract the August level from the July level and multiply by 12.)

You can see from the chart that these data display considerable volatility, so one month’s drop may not signal anything significant. But you can also see that, after many months of decline, consumer credit began growing once again. Now we must be on the alert: Is the August report a statistical vagary, or does it signal a downturn?

Consumer Credit

(Click on chart to enlarge)

(Recessions shaded)

Everyone knows the economy is weak and the recovery anemic. This could be an early signal that households intend to further reduce their expenditures.

Stay tuned.

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

© 2011 Michael B. Lehmann

Recession?

2011-10-05T12:53:00.000-07:00

The Lehmann Letter (SM)

Today’s New York Times carried a grim front-page article on Europe’s prospects:

http://www.nytimes.com/2011/10/05/business/global/europe-finds-slope-ahead-is-growing-ever-steeper.html?ref=todayspaper

Entitled, “In Europe, Signs of 2nd Recession With Wide Reach,” its key paragraph said:

“Greece, Ireland, Portugal and Spain are already in downturns or fighting to avoid them, as high unemployment and austerity belt-tightening take their toll. But in the last few weeks, even prosperous Germany and France, the Continent’s powerhouses, have started to be dragged down, hurt by the ebbing of business orders from indebted countries in the rest of Europe.”

In other words: Greece, Ireland, Portugal and Spain are cutting their spending and raising their taxes to reduce their debts and meet European demands for austerity (as the price for receiving assistance from Europe). But these actions have depressed their economies, making them poor markets for European goods. This raises the likelihood of recession throughout Europe.

Meanwhile Fed chairman Ben Bernanke testified before the Joint Economic Committee of Congress yesterday:

http://www.federalreserve.gov/newsevents/testimony/bernanke20111004a.htm

Here are some of his key comments:

“Nevertheless, it is clear that, overall, the recovery from the crisis has been much less robust than we had hoped….
“The pattern of sluggish growth was particularly evident in the first half of this year, with real gross domestic product (GDP) estimated to have increased at an average annual rate of less than 1 percent…..
“Consumer behavior has both reflected and contributed to the slow pace of recovery. Households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit…..”

This letter continues to believe that we’re in for a period of sluggish growth, not recession. Europe, however, may be a different matter.

© 2011 Michael B. Lehmann

October’s Economic Indicators

2011-10-01T08:25:00.000-07:00

The Lehmann Letter (SM)

ECONOMIC INDICATOR PUBLICATION SCHEDULE

October 2011

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

Quarterly Data

BEA……….GDP & Profits…..……Thu, 27th

Monthly Data

ISM..Purchasing managers’ index…Mon, 3rd

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

BLS………….Employment………… Fri, 7th
Fed. Consumer credit..(Approximate).Fri, 7th
Census…….......Inventories…….... Fri, 14th
Fed……….Capacity utilization……Mon, 17th
BLS………...Producer prices……. Tue, 18th
BLS……….Consumer prices.….. Wed, 19th
Census……...Housing starts…….Wed, 19th
NAR………Existing-home sales….Thu, 20th
Conf Bd…….Leading indicators….Thu, 20th

Conf Bd….Consumer confidence.. Tue, 25th

Census……..New-home sales…...Wed, 26th
Census……….Capital goods…….. Wed, 26th

*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

© 2011 Michael B. Lehmann

Out of the Office

2011-09-21T20:59:00.000-07:00

The Lehmann Letter (SM)

The Lehmann Letter will be out of the office and plans to return on October 5.

© 2011 Michael B. Lehmann

The Fed’s Program

2011-09-21T20:43:00.000-07:00

The Lehmann Letter (SM)

Today the Federal Reserve announced that it would, “… put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.” This was not good enough for stock-market investors, and share prices plunged.

But what can the Fed do? Interest rates are at historic lows. The Fed can’t push them any lower: At least not enough to make a difference. So we’re stuck. And so is the Fed.

The problem lies in the wreckage of the recent credit-excess and the consequent recession. Household balance sheets are in weak condition, limiting household borrowing and spending. And banks are reluctant to lend, setting stringent conditions to accompany low rates. Result: Weak demand and a stagnant economy.

There’s little the Fed can do.

© 2011 Michael B. Lehmann

Europe

2011-09-19T10:38:00.000-07:00

The Lehmann Letter (SM)

The stock market is down today because of continuing concerns over the euro's fate and Greece's ability to avoid default.

It is difficult to sort through each nation's statements and interests regarding these events. But it is not difficult to put current developments in historical perspective.

The European nations were at each other's throats for over 500 years, going back to when the modern nation-state was born. World War II brought a cataclysmic end to that approach. For the past 65 years Europe has knit itself into an organization that would have been difficult to imagine 100 years ago. The European nations have renounced war and accepted their current frontiers while forging a customs union that goes well beyond internal tariff elimination. They succeeded in establishing a unified market.

Europe also, throughout most of its domain, installed a common currency. Now that currency faces its greatest challenge: A challenge associated with the lack of a central European government. Will Europe go forward and establish the new governance institutions necessary to stabilize the euro or will Europe go backward and permit the euro's collapse?

History indicates the Europeans will go forward. With every crisis since World War II Europe has forged stronger bonds rather than dismantle progress and its benefits. Let's hope Europe does so again.

© 2011 Michael B. Lehmann

The President’s Plan: By the Numbers

2011-09-15T05:06:00.000-07:00

The Lehmann Letter (SM)

Here is how the president's recent jobs bill breaks out: Extend payroll-tax cuts - $250 billion, extend unemployment benefits - $50 billion, hire more teachers, police and firefighters - $35 billion, infrastructure projects - $105 billion.

This is to be paid by a $400 billion increase in taxes on upper-income earners and a $40 billion increase in oil-industry taxes.

So $440 billion in tax-cut extensions and additional expenditures are to be paid by $440 billion in additional taxes.

If you look at these numbers, it seems that a $300 billion tax-cut extension and unemployment-benefit extension for low-income folks plus $140 billion of infrastructure spending and public-servant hiring will be funded by higher taxes on upper-income folks and the oil industry.

What impact will this have on the economy? To begin with, it's clear that not extending payroll-tax cuts and unemployment benefits would have a depressing effect. These measures enable more spending by those who have a high propensity to consume.

Keep in mind, however, that these cuts will be paid for by higher taxes on top-income earners. It is true that this will be expansionary to the extent that low-income taxpayers spend more of their income than high-income taxpayers. But there will be arguments about the net benefit.

Even the additional $140 billion of expenditures on hiring and infrastructure will be paid for by additional taxes. There will be arguments about the net benefit of that, too. Nonetheless, there is no doubt about that expenditure increase.

Will all this be sufficient to substantially reduce unemployment? The answer has to be "No." The current situation is too dismal to hope for that. But taxing the well-off to extend tax cuts and benefits for the not-well-off will have its appeal over and above any net employment gains, as will the hiring and infrastructure provisions.

© 2011 Michael B. Lehmann

The President’s Plan

2011-09-09T06:39:00.000-07:00

The Lehmann Letter (SM)

The president challenged Congress to pass his jobs-creation plan forthwith.

The president also said that his plan created no new spending, and that other and future spending reductions would offset any present increase. The plan also extended the payroll-tax reduction.

An increase in public-works spending and public-employee hiring coupled with a tax-increase postponement should help the economy. And it makes sense to permit the deficit’s expansion now, to be offset by a sharper reduction later when the economy is more robust. Keep in mind, however, that even if the president gets his entire package it can’t by itself restore full employment. It’s just not large enough.

But the president has challenged Congress to pass his plan, and by doing so has begun his re-election campaign in earnest.

© 2011 Michael B. Lehmann

The President’s Speech

2011-09-08T08:23:00.000-07:00

The Lehmann Letter (SM)

The economy suffers from weak demand. Additional purchases would provide business with the incentive to boost production and hiring.

The president’s challenge: Stimulate expenditures to promote employment.

Cut taxes? Maybe…. But people may just save the additional funds to bolster their liquidity.

Increase spending on public works? That would provide direct employment gains, and newly hired employees would spend their earnings - promoting business production and private job gains.

If the increase in public-works expenditures is accompanied by reductions in federal spending elsewhere, the impact will be muted. The economy requires a net gain in spending rather than a reallocation.

A net gain in federal spending without a tax increase will swell the deficit. That may not be politically palatable, but someone must begin borrowing and spending because private purchases are stalled.

New-Vehicle Sales

(Click on chart to enlarge)

(Recessions shaded)

New-vehicle sales illustrate the problem. Most consumers finance their auto purchases. The Commerce Department recently reported 12.1 million sales in August. That’s well below pre-recession levels of 16 and 17 million. And the trend is flat. Sales have been around 12 or 13 million all year.

If the president’s plan is big and bold enough to help auto sales recover, it will be a success. But that’s asking a lot.

(The chart was taken from http://www.beyourowneconomist.com. Enroll for additional charts on the economy and a list and calendar of economic indicators.)

© 2011 Michael B. Lehmann

Europe Is Not The Problem

2011-09-06T09:25:00.000-07:00

The Lehmann Letter (SM)

The stock market tumbled this morning following sell offs around the globe.

But Europe’s fiscal crisis and sovereign debt problems and questions about the Euro’s longevity are not the problem. See the front page article in today’s New York Times that discusses Europe’s efforts to forge a united front to deal with these issues:

http://www.nytimes.com/2011/09/06/business/global/reluctantly-europe-inches-closer-to-a-fiscal-union.html?_r=1&ref=todayspaper

Europe will probably succeed, salvage the Euro and grow stronger for the effort.

Today’s stock market woes are tied to the prospect of weak earnings here at home stemming from inadequate growth in aggregate demand. Sales volume can’t recover until households and businesses are willing to borrow and spend at a more expansive pace. But why should they? How can they? Household balance sheets remain impaired and business won’t aggressively invest in new plant and equipment until households lead the way.

Investors are concerned.

© 2011 Michael B. Lehmann

Employment Report Disappoints

2011-09-02T07:53:00.000-07:00

The Lehmann Letter (SM)

This morning the Bureau of Labor Statistics reported that health care added jobs in August while all other sectors shed workers or showed virtually no change:

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

The consequence: No job growth last month.

Job Growth
(Click on chart to enlarge.)

Recessions shaded

As this letter has reported in the past, and the chart above makes clear, the economy must consistently add several hundred thousand jobs a month to provide evidence of robust and growing conditions. That hasn't happened during the recovery from the recent recession. Some months have attained that goal, but consistent job growth has eluded us.

That doesn't mean we're headed into a new recession: The feared double dip. But it does mean that high unemployment will linger, economic growth will be weak instead of robust and the stock market will not break through its pre--recession peak.

(The chart was taken from http://www.beyourowneconomist.com. Enroll for additional charts on the economy and a list and calendar of economic indicators.)

© 2011 Michael B. Lehmann

September's Economic Indicators

2011-08-31T11:47:00.000-07:00

The Lehmann Letter (SM)

Here are September’s economic indicators. We’ll track these for signs of a Double Dip. Things are not that grim now, but growth is slow.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

September 2011

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

Quarterly Data

BLS……………Productivity …..……Thu, 1st

BEA..International Transactions…Thu, 15th

BEA……….GDP & Profits…..……Thu, 29th

Monthly Data

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

BLS………….Employment………… Fri, 2nd
BEA.New-vehicle sales.(Approximate).Tue, 6th

Fed. Consumer credit..(Approximate).Wed, 7th
Census…….......Inventories…….... Wed, 14th
BLS………...Producer prices……. Wed, 14th
BLS………….Consumer prices.….. Thu, 15th
Fed……….Capacity utilization……Thu, 15th
Census……...Housing starts…….Tue, 20th
NAR………Existing-home sales….Wed, 21st
Conf Bd…….Leading indicators….Thu, 22nd

Census……..New-home sales…...Mon, 26th
Census……….Capital goods…….. Wed, 28th

Conf Bd….Consumer confidence.. Tue, 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

© 2011 Michael B. Lehmann

Drastic Drop

2011-08-30T09:07:00.000-07:00

The Lehmann Letter (SM)

This morning The Conference Board reported that its index of consumer confidence fell to 44.5 in August from 59.2 in July:

http://www.conference-board.org/press/pressdetail.cfm?pressid=4276

It could be that August's debt-ceiling imbroglio was a major factor and that confidence will bounce back up in September with the settlement of that issue. We'll see.

Consumer Confidence

(Click on chart to enlarge.)

Recessions shaded

But you can see for yourself that the latest reading presents a sharp setback. Consumer confidence is not growing.

It's true that there is noise in the data. Consumer confidence can vary sharply from month to month. That reduces its accuracy as a short-term forecast of economic conditions.

By taking another look at the chart, however, you can also see that the general direction of consumer confidence has been a good leading indicator for many recessions. It's hard to imagine a robust economy if this important indicator remains in the doldrums.

(The chart was taken from http://www.beyourowneconomist.com. Enroll for additional charts on the economy and a list and calendar of economic indicators.)

© 2011 Michael B. Lehmann

No Double Dip

2011-08-29T10:50:00.001-07:00

The Lehmann Letter (SM)

The stock market rallied today on word from the Commerce Department that personal consumption expenditures had risen strongly (0.8%) in August by considerably more than income (0.3%):

http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

This encouraged those who fear a double-dip recession. If households increase their spending by more than their income, that means they are borrowing once again. Perhaps household balance sheets are repaired sufficiently to permit strong consumer spending.

We'll see.

Just keep in mind the Commerce Department's Friday GDP report: Second-quarter GDP rose by 1% after a first-quarter increase of 0.4%. That's no sign of double-dip either, but it does keep us focused on the real risk: That the economy will expand sluggishly, impeding profit and employment growth.

© 2011 Michael B. Lehman

Waiting for the Fed

2011-08-25T11:58:00.000-07:00

The Lehmann Letter (SM)

Some folks are waiting for a pronouncement from Fed Chairman Ben Bernanke that will rescue the stock market: Something about expansionary monetary policy and low interest rates.

They shouldn’t set their hopes too high.

It’s true that low interest rates are good for the stock market, other things being equal. Interest-earning assets are an alternative to stocks. During the late 1970s, when inflation and interest rates were double-digit, investors abandoned stocks in favor of money-market funds. Today’s low interest rates promote stock-market investment. Low interest rates also promote borrowing and spending by households and businesses, stimulating economic activity and boosting profits. That’s why investors love low rates.

Trouble is: Rates are already low and monetary policy is expansionary. It’s true that lenders are leery of making the same errors that led to the 2008 debacle. Now borrowers must be credit-worthy, not risky. But there’s not much the Fed can do about that. After all, the Fed can’t appear to support the lax standards of 2003 – 2007.

In any event, neither high interest rates nor tightened loan standards are today’s principal impediment to robust borrowing and a booming economy. Household’s weakened balance sheet stands like a boulder in the road, preventing the rapid economic expansion required to restore full production, full employment, earnings growth and a rising stock market. Households have too few liquid assets, too much debt and too little net worth. That’s why they’re not borrowing and spending and businesses, in turn, aren’t investing in the plant and equipment required to make the goods that households are not buying. The Fed can’t fix that.

© 2011 Michael B. Lehman

The Root of the Problem

2011-08-19T10:17:00.000-07:00

The Lehmann Letter (SM)

Yesterday the National Association of Realtors reported 4.67 million existing homes sold in July:

http://www.realtor.org/press_room/news_releases/2011/08/july_ehs

Past issues of this letter have focused on new home sales and new construction. But the Realtors' report gets to the heart of the current economic problem.

The latest data coupled with the chart don't indicate a slump and don't indicate growth. We see fluctuation in a range that is too high to bring on recession but not high enough to spark full employment.

Existing Home Sales

(Click on chart to enlarge)

(Recessions shaded)

We remain somewhere in between: Neither bust nor boom. The chart illustrates the problem. We had a terrific run for over a decade. Now we want to retake those heights. But that desire conflicts with what happened to household balance sheets during the fat years. We stretched thin both liquidity and equity while piling on debt. It is true that households are making a valiant effort to unring that bell, and many bad debts are being written off. But that doesn't mean that household balance sheets are in good shape or that the good old days have returned.

Lenders are picky and have escalated standards. Home prices have fallen and remain in the doldrums, removing a key incentive to buy. And households are far more protective of their liquidity and reluctant to take on debt than they once were. It's not enough to generate a slump, but it is enough to inhibit robust growth.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Stocks Down

2011-08-08T10:03:00.000-07:00

The Lehmann Letter (SM)

Stocks are down again this morning.

Lately the stock market has fallen to a level below its 2000 peak: The market has fluctuated in a range for the past decade. There’s been no progress.

S&P’s downgrade of U.S. debt is the proximate cause of this morning’s rout. But keep the big picture in mind: Stocks rode margins upward since the trough of the 2008 recession, and are now suffering because there’s little hope of rising sales volume.

© 2011 Michael B. Lehman

Employment Report

2011-08-05T09:49:00.000-07:00

The Lehmann Letter (SM)

Stocks stabilized this morning as the Bureau of Labor Statistics reported that July’s unemployment rate remained virtually unchanged at 9.1% and that nonfarm employment grew by 117,000:

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

We’ll see if stocks hold steady through the close.

Job growth

(Click on chart to enlarge.)

Recessions shaded

A glance at the chart reveals that 117,000 new jobs, while better than some recent reports, is not up to the 200,000 – 300,000 usually associated with periods of expansion. The economy remains weak.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Doom & Gloom

2011-08-04T10:30:00.000-07:00

The Lehmann Letter (SM)

The chickens are coming home to roost.

As this blog has stated, rising profit margins have buoyed earnings. Now we need growing sales volume to carry earnings forward. But sales volume can’t grow in a weak economy. Residential construction must expand to transform weakness into strength. And that won’t happen until household balance sheets recover. Which won’t be soon…………

© 2011 Michael B. Lehman

August Economic Indicators

2011-08-03T11:23:00.000-07:00

The Lehmann Letter (SM)

The blogger is on vacation, returning to the office on August 15.

But he’s not too far away to escape the news. Now that the debt increase has been resolved for the moment, some are making dire forecasts that reflect their view of the settlement.

As this letter has observed throughout the year, the economy is in a fragile state. It is hard to imagine that – under the current political circumstances – we could have reasonably expected an outcome sufficiently expansionary to overcome the economy’s inherent weakness. Growth will be weak until household balance sheets are repaired. That will take a while.

Here are August’s economic indicators.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

August 2011

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

Quarterly Data

BLS……………Productivity …..……Tue, 9th

BEA…………………….GDP …..……Fri, 26th

Monthly Data

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

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

BLS………….Employment………… Fri, 5th
Fed Consumer credit..(Approximate).Fri, 5th
Census…….......Inventories…….... Fri, 12th
Fed……….Capacity utilization……Tue, 16th
Census……...Housing starts…….Tue, 16th
BLS………...Producer prices……. Wed, 17th
BLS………….Consumer prices.….. Thu, 18th
NAR………Existing-home sales….Thu, 18th
Conf Bd…….Leading indicators….Thu, 18th

Census……..New-home sales…...Tue, 23rd
Census……….Capital goods…….. Wed, 24th

Conf Bd….Consumer confidence.. Tue, 30th

*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

© 2011 Michael B. Lehman

Month’s End

2011-07-29T12:00:00.000-07:00

The Lehmann Letter SM

July concluded on dismal notes.

Default talks in Washington are not resolved and the Commerce Department reported that second-quarter GDP grew at a puny 1.3%.

Today’s New York Times carried a good article on the slow recovery. It finds that weak household balance sheets have impeded the recovery:

http://www.nytimes.com/2011/07/29/business/economy/as-growth-slows-us-recovery-seems-to-repeat-a-pattern.html?_r=1&ref=todayspaper

We may avoid default in the coming days, but household balance sheets will require more time to repair.

© 2011 Michael B. Lehmann

Housing Starts

2011-07-27T14:05:00.000-07:00

The Lehmann Letter SM

A flurry of excitement accompanied the Census Bureau's announcement last week that June housing starts had risen to 629,000. The Bureau's bulletin reported that this was a 14.6% improvement over May’s figure.

By now, however, readers of this letter know that they must examine the chart to put recent data in perspective.

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

And the chart clearly shows that housing starts remain in the doldrums. June's reading remains too small to generate lasting excitement. If it's the beginning of a trend, housing starts will commence rising toward 1 million. We must wait and see.

(The chart was taken from http://www.beyourowneconomist.com.
[Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Production Stalls

2011-07-15T07:33:00.000-07:00

The Lehmann Letter SM

Go to http://www.federalreserve.gov/releases/g17/current/ to view this morning's Federal Reserve report on June industrial production and capacity utilization.

At year's mid-point industrial production is barely higher than it was at the start of the year. Capacity utilization, which measures current output as a percentage of the maximum, is actually lower.

Capacity Utilization

(Click on chart to enlarge)

(Recessions shaded)

The chart reveals a good bounce since recession's bottom. But capacity utilization has leveled off at about 77% since the beginning of the year. This seems to be further evidence that the economy's expansion has stalled.

The big question: When will these events begin to affect earnings and the stock market? So far both have been riding high on improved profit margins. But that can't last indefinitely. Production must grow for profits and the stock market to maintain their upward trend.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Auto Sales Slump

2011-07-14T09:04:00.000-07:00

The Lehmann Letter SM

Readers of this letter are familiar with its focus on residential real estate and its view that the economy won't be back to full speed until real estate recovers.

But new-vehicle sales are also symptomatic of the economy's ills. Households' impaired balance sheets limit their ability to buy new cars by borrowing more. Earlier this month the Commerce Department reported June auto sales of 11.4 million at a seasonally-adjusted annual rate.

New-Vehicle Sales

(Click on chart to enlarge)

(Recessions shaded)

The chart makes clear that recovery has stalled: 11.4 million is not part of an upward trend. A close examination of the data only exacerbates concern. New-vehicle sales peaked at 13.4 million in February and have been heading south ever since. Sales haven't been this low since an identical 11.4 million reading in August of 2010. There's been no progress over the last year.

It is possible that temporary factors such as the Japanese earthquake and tsunami have skewed the data. Time will tell. But all of us should be concerned that weak auto sales only confirm the economy's slack state.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

July Economic Indicators

2011-06-25T09:43:00.000-07:00

The Lehmann Letter (SM)

I’ll be away on vacation, returning the week of July 11th.

Here are July’s economic indicators.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

July 2011

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

Quarterly Data

BEA…………………….GDP …..……Fri, 29th

Monthly Data

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

BEA.New-vehicle sales.(Approx).Wed, 6th
BLS………….Employment………… Fri, 8th
Fed Consumer credit..(Approx).Fri, 8th
Census……...Inventories…….... Thu, 14th
BLS………….Producer prices……. Thu, 14th
BLS………….Consumer prices.….. Fri, 15th
Fed……….Capacity utilization……Fri, 15th
Census……...Housing starts…….Tue, 19th
NAR………Existing-home sales….Wed, 20th
Conf Bd…….Leading indicators….Thu, 21st
Census……..New-home sales…...Tue, 26th
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

© 2011 Michael B. Lehmann

Home Sales: Bumping Along the Bottom

2011-06-23T08:50:00.000-07:00

The Lehmann Letter (SM)

Today’s new-home sales report from the Census Bureau is as depressing as the last report:

http://www.census.gov/const/newressales.pdf

319,000 new homes were sold in May. Take a look at the chart and you can see we’re bumping along the bottom.

New Home Sales

(Click on chart to enlarge.)

Recessions shaded

Here’s the deal: No construction recovery = No prosperity.

Slack home sales = Slack recovery.

It’s as simple as that.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Foreclosure Slowdown: What Does It Mean?

2011-06-20T08:46:00.000-07:00

The Lehmann Letter (SM)

Foreclosure Slowdown: What Does It Mean?

Take a look at Sunday's front-page New York Times article on foreclosures:

http://www.nytimes.com/2011/06/19/business/19foreclosure.html?_r=1&ref=davidstreitfeld

The pace of foreclosures has slowed dramatically, especially in those states (roughly half) where foreclosure involves a court procedure.

How will this affect residential construction's recovery? We all know that dumping foreclosed properties on the market depresses real-estate prices and dampens residential construction. But……….. Does dumping foreclosed properties on the market all at once, and sharply depressing home prices, speed recovery? Or is recovery best served when foreclosed properties are offered for sale over a longer period of time, thereby mitigating the effect in any single year?

And that's not all. Will the slowdown, whether or not the courts are involved, compel banks to renegotiate a larger share of loans and thus reduce foreclosures and more swiftly stabilize the market? If that's the case, the foreclosure slowdown will aid market-price recovery and ultimately boost residential construction.

There is one thing we do know: These questions increase rather than reduce uncertainty, and that can't be good for any market.

© 2011 Michael B. Lehmann

Housing Starts Remain Dismal

2011-06-16T09:43:00.000-07:00

The Lehmann Letter (SM)

Take a look at this morning’s Census Bureau report on May housing starts:

http://www.census.gov/const/newresconst.pdf

Then place the 560,000 figure in the chart.

Housing Starts

(Click on chart to enlarge.)

Recessions shaded

See any reason to cheer?

There isn’t any. And the economy can’t do what we want – prosper and provide jobs for all who seek them – until we do begin cheering about housing starts. But that won’t happen until we are on a solid trajectory to a report double that of today’s. And that won’t happen any time soon.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Lukewarm

2011-06-10T08:17:00.000-07:00

The Lehmann Letter (SM)

Two reports in the past week illustrate the lukewarm pace of this recovery.

The Commerce Department announced that May new-vehicle sales fell to 11.8 million at a seasonally-adjusted annual rate from 13.1 million in April. This may be due to the effect of the Japanese earthquake and tsunami upon sales and production in this country.

But the slowdown could be due to households' unwillingness to compromise their balance sheets with fewer liquid assets and more debt. After all, the old car may last a little longer or a used car may do just as well.

You can see from the chart that new-vehicle sales were well over 15 million annually for a decade before they collapsed in the recent recession. They must climb back to 15 million or higher before the economy becomes sufficiently robust to return to full employment.

New-Vehicle Sales

(Click on chart to enlarge.)

Recessions shaded

The Federal Reserve announced that April consumer credit grew by $75.6 billion at a seasonally adjusted annual rate. That continues a string of positive reports since the beginning of the year.

But you'll notice that, in the decade prior to the recent recession, consumer credit’s monthly advance was about $100 billion. Balance-sheet concerns now prevent consumers from undertaking the larger debt-levels consistent with strong economic expansion.

Consumer Credit

(Click on chart to enlarge.)

Recessions shaded

These reports are critical in understanding the economy's strength. If new-vehicle sales and growth in consumer credit have reached a plateau, the economy cannot return to full employment. Only by breaking out into the higher ranges of yesteryear can do the economy achieve robust conditions.

(The charts were taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

54,000

2011-06-03T08:53:00.000-07:00

The Lehmann Letter (SM)

The Bureau of Labor Statistics reported the economy added 54,000 jobs in May:

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

There were 83,000 private-sector gains and 29,000 public-sector losses.

The chart indicates that month-to-month data vary. But the chart also shows increases averaging around a quarter-million during periods of robust economic expansion. We can continue to hope for the best.

Job growth

(Click on chart to enlarge.)

But it will take more than hope to bring the unemployment rate down from 9.1% to an acceptable 5% level. The economy requires consistent monthly job growth between 200,000 and 300,000 over the next several years to achieve that acceptable level.

Success of this sort requires robust improvement in all major areas. As long as housing remains in the doldrums, anemic homebuilding will be an anchor holding back all other sectors. That's why the foreclosure crisis affects all of us, even if we dwell in residences that are secure from financial difficulty.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Housing: Conflicting Views

2011-06-01T14:43:00.000-07:00

The Lehmann Letter (SM)

Today’s stock market rout focused on the weak labor market.

In this letter’s view, the housing slump lies at the center of the economy’s problems. But some believe a turn-around is imminent.

A front-page story in today’s Wall Street Journal presented the problem:

http://online.wsj.com/article/SB10001424052702303657404576357170425058088.html?mod=ITP_pageone_0

A front-page story in the NY Times’s business section shared the views of those who think housing is about to break out of its slump:

http://www.nytimes.com/2011/06/01/business/01housing.html?_r=1&ref=todayspaper

We’ll see.

© 2011 Michael B. Lehmann

June Economic Indicators

2011-05-31T10:47:00.000-07:00

The Lehmann Letter (SM)

This morning CNN/Money aired a report confirming the double-dip in home prices:

http://money.cnn.com/2011/05/31/real_estate/march_home_prices/index.htm

The story began: “Home prices hit another new low in the first quarter, down 5.1% from a year ago to levels not reached since 2002.”

The article went on to state that there is no end in sight to the decline and that falling prices depress home building because developers can’t compete with low-price existing homes.

No doubt buyers and builders have pulled back, waiting to see where and when the market stabilizes.

As this letter has said more than once, economic expansion can’t go forward at a healthy pace until residential construction turns around.

We’ll stay abreast of developments in June by watching the following.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

June 2011

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

Quarterly Data

BLS….Productivity & Costs…………Thu, 2nd
BEA…International Transactions…Thu, 16th
BEA…….GDP & Corp. Profits…..……Fri, 24th

Monthly Data

ISM..Purchasing managers’ index…Wed, 1st
BLS………….Employment………… Fri, 3rd
BEA.New-vehicle sales.(Approximate).Mon, 6th
Fed…Consumer credit..(Approximate).Tue, 7th
Census…….......Inventories…….... Tue, 14th
BLS………….Producer prices……. Tue, 14th
BLS………….Consumer prices.….. Wed, 15th
Fed……….Capacity utilization……….Wed, 15th
Census…….…..Housing starts…….Thu, 16th
Conf Bd…….Leading indicators….Fri, 17th
NAR………Existing-home sales….Tue, 21st
Census……..New-home sales…...Thu, 23rd
Census……….Capital goods…….. Fri, 24th
Conf Bd….Consumer confidence.. Tue, 28th

*BEA = Bureau of Economic Analysis of the U.S. Department of Commerce
*BLS = Bureau of Labor Statistics of the U.S. Department of Labor
*Census = U.S. Bureau of the Census
*Conf Bd = Conference Board
*Fed = Federal Reserve System
*ISM = Institute for Supply Management
*NAR = National Association of Realtors

© 2011 Michael B. Lehmann

End of Month Wrapup

2011-05-27T10:58:00.000-07:00

The Lehmann Letter (SM)

The Commerce Department's recent report that first-quarter GDP grew by a meager 1.8% focused our attention, once again, on the economy's prospects:

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Aggregate demand's growth has been weak. At this stage in the recovery household expenditures on residential construction and durable goods as well as business expenditures on plant and equipment should be surging forward. But they're not.

At the same time, government expenditures are shrinking. The federal government's stimulus plan worked to boost the economy out of the depths of recession. But it's over now and federal expenditures are no longer growing. Meanwhile state and local governments have been faced with shrinking tax revenues and have also reduced their expenditures in response to this shortfall. As a result total government spending has become an anchor holding the economy down rather than a balloon hoisting the economy upward.

There is no dot-com boom à la the 1990s, and there is no real-estate boom à la the 2000s. Household balance sheets are compromised and gasoline prices are high. But most importantly, residential real estate remains in the doldrums. The economy can't and won't achieve prosperity until residential real estate emerges from hibernation. There is no sign that will happen soon.

© 2011 Michael B. Lehmann

Home-Sales Disaster

2011-05-24T10:29:00.000-07:00

The Lehmann Letter (SM)

This morning's Bureau of the Census release of April's new-home sales data (http://www.census.gov/const/newressales.pdf) began with this paragraph:

“Sales of new one-family houses in April 2011 were at a seasonally adjusted annual rate of 323,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.3 percent (±16.6%)* above the revised March rate of 301,000, but is 23.1 percent (±9.7%) below the April 2010 estimate of 420,000.”

It appears that building activity improved in the latest month but is down from a year ago. But that obscures the big picture. The chart shows that new-home sales have fluctuated under 400,000 in most months for the past several years. Residential construction is mired in a deep slump.

New Home Sales

(Click on chart to enlarge.)

Recessions shaded

New-home sales must double before we declare that the slump is over. And that still won’t provide robust conditions.

We have a problem.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Foreclosure Overhang: The Distressed Property Glut

2011-05-23T10:08:00.000-07:00

The Lehmann Letter (SM)

Take a look at this morning's New York Times article by Eric Dash entitled, "As Lenders Hold Homes in Foreclosure, Sales Are Hurt:"

http://www.nytimes.com/2011/05/23/business/economy/23glut.html?_r=1&ref=todayspaper

It begins by saying:

“The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.”

And then goes on to observe:

“Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.”

The article reports that banks have not been able to deal with the surge in distressed properties arising from the foreclosure crisis. More homes have piled up in banks' inventory than they have been ready, willing and able to sell. That supply overhang delays a home-price recovery.

It also discourages new-home construction by providing potential buyers with a surfeit of foreclosed properties that competes with newly built homes. Unfortunately the absence of new construction dampens economic expansion.

© 2011 Michael B. Lehmann

Housing Starts Unchanged: Gaining Historical Perspective

2011-05-17T09:31:00.000-07:00

The Lehmann Letter (SM)

This morning the Census Bureau included the following in its report on new residential construction

(http://www.census.gov/const/newresconst.pdf):

“Privately-owned housing starts in April were at a seasonally adjusted annual rate of 523,000. This is 10.6 percent (±13.0%)* below the revised March estimate of 585 000 and is 23 9 percent (±7 0%) below the revised April 2010 rate of 687 000.”

Housing Starts

(Click on chart to enlarge.)

Recessions shaded

At first glance that seems to contradict this letter's heading, which announces that housing starts are unchanged. But if you look at the chart, you'll see that housing starts have limped along at about 600,000 for the past two years. The Census Bureau's announcement that housing starts fell by 10.6% from March's level and by 23.9% from the year-ago level creates the impression of a recent and sharp downturn. These numbers are misleading because they refer to a low base and because there has been so much fluctuation around that base. Similarly, a one-month increase of 10% would not signal a recovery.

Truth be told: Residential construction is stuck at a dismally low level and has been fluctuating around that level for some time. Month after month of improvement, leading into years of improvement, are required. Housing starts must double (that's right, double) before this leading sector resumes its positive role.

This is a good illustration of historical perspective's importance and the distortion created by short-run focus.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Foreclosures Down: Is the Glass Half-Full or Half-Empty?

2011-05-12T10:52:00.000-07:00

The Lehmann Letter (SM)

Two articles on the real-estate crisis appeared on CNN's website this morning:

“Foreclosures Down for Seventh Straight Month"

http://money.cnn.com/2011/05/12/real_estate/foreclosures_fell_again/index.htm?iid=HP_River

and “Obama: Homeowners Need More Help"

http://money.cnn.com/2011/05/12/news/economy/obama_housing/index.htm?iid=HP_LN

The first article reported a drop in foreclosure filings and bank repossessions of foreclosed properties. That looks good, BUT……..

The article makes clear that banks have NOT slowed foreclosures because fewer homeowners are in trouble. Rather, banks have slowed foreclosures because they are double-checking their paperwork and because many markets already have a glut of foreclosed homes. The banks know that too many foreclosed homes mean a lower price for the property that they wish to sell. Consequently banks have slowed foreclosures in order to help markets absorb distressed properties. That way the banks receive a better price for the homes on which they have foreclosed and will foreclose.

Unfortunately that does not guarantee a reduction in future foreclosures. One-quarter of American mortgages are underwater. Many homeowners cannot or will not pay their mortgages. Their payments are in arrears even if the banks have not begun foreclosure proceedings. That means a longer stretch out of distressed homes going on the market in the years to come. It does not mean an overall reduction in distressed properties. True: The slowdown in foreclosures may help home prices, but it may not. The slowdown may only serve to lengthen the period of distress.

As for the President’s observation that homeowners need help…….. Who can argue? But the President has no new, viable plan. Indeed, House Republicans have just finished voting to discontinue the President's old plan. And the banks will not voluntarily agree to write down loan amounts, which is the only meaningful relief that would assist distressed homeowners. The President's moral suasion will fall on deaf ears.

"Foreclosures Down" looks like the glass is half-full. But in truth it serves to highlight the fact that the glass is half empty.

© 2011 Michael B. Lehmann

Double Dip: Home Prices Sink Again

2011-05-09T10:19:00.000-07:00

The Lehmann Letter (SM)

Take a look at this front-page article in today's Wall Street Journal:

http://online.wsj.com/article/SB10001424052748704810504576309532810406782.html?mod=WSJ_hp_LEFTTopStories

It's entitled "Home Market Takes a Tumble." The chart accompanying the article illustrates a five-year drop in home prices. The rate of decline fell recently, but lately began to accelerate again. The article indicates that experts expect home prices will continue falling until 2012. The reason? Expiration of the homebuyers tax credit has dampened demand while foreclosures have boosted supply. Demand down + Supply up = Prices down.

These developments can't be good for homebuilding, and that's why this letter has doubts about the economic expansion's strength. It's not just that homebuilding is hobbled. These developments illustrate the weakness in households' balance sheets. Consumers believe they must conserve cash and limit debt. It's difficult for them to buy homes and autos under these circumstances. And it's hard to imagine a strong expansion while homebuilding and auto production remain depressed.

In addition, it's also hard to imagine a surge in inflation as home prices decline. That has not happened before.

© 2011 Michael B. Lehmann

Great Jobs Report

2011-05-06T09:53:00.000-07:00

The Lehmann Letter (SM)

The stock market rallied strongly this morning following a great jobs report from the Bureau of Labor Statistics:

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

Employment grew by over 200,000 in February, March and April. That's good news.

Job growth

(Click on chart to enlarge.)

Recessions shaded

The chart makes clear that job growth has to be that strong, month after month and year after year, to achieve and maintain full employment. Let's hope the good news continues.

The stock market had trouble earlier this week because of weakness in the commodity markets. Prices for oil, gold and silver fell. Indexes for a broad range of primary products tumbled. That sent a signal that commodity speculators questioned the strength of the economic expansion. They thought stagnating demand would inevitably limit price inflation. Stock-market investors prefer mild inflation but not weak demand. They dumped stocks in response.

Commodity prices stabilized today because the strong employment report signaled robust demand and contradicted earlier fears that the economy is stalling. That's why oil and stocks are up.

But the jury remains out. Demand has recovered sufficiently to boost employment. It must keep growing for both jobs and the stock market to keep gaining.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Autos Stalled?

2011-05-05T09:22:00.000-07:00

The Lehmann Letter (SM)

Yesterday the Bureau of Economic Analysis of the US Department of Commerce released its April estimate of new-vehicle sales:

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

(Scroll down to "Motor vehicles," open Excel spreadsheet and go to “Table 6” at the bottom.)

New-vehicle sales have grown strongly over the past year, breaking out of the 11 million range and climbing to 13 million. The chart shows that these figures continue the strong upward trend from less than 10 million in the depths of the recession.

New-Vehicle Sales

(Click on chart to enlarge.)

Recessions shaded

But the latest numbers provide cause for concern. Sales were 13.4 million at a seasonally-adjusted annual rate in February, 13.1 million in March and 13.1 million in April. That's a break in the upward trend.

It's tempting to ascribe the halt to lack of product from Japan due to the recent earthquake and tsunami. But the data don't bear this out. Both domestics and imports have been flat since February. (See Tables 1 and 4 in the source.)

Several more months of data are required before we can determine if we have reached a plateau or a temporary halt in an upward trend. If this truly is a plateau we are in trouble. The economy's continued advance depends upon strong gains in residential construction and new-vehicle sales.

Residential building has been flat and shown no signs of recovery. New-vehicle sales were a bright spot, part of manufacturing's uptrend. If auto sales stall now and don't reach the 15-million line in the chart, the economic expansion is in deep trouble. The economy can't keep growing at an adequate pace without a strong performance by residential building and autos.

What could be wrong? In a word: Households' balance sheets remain in a state of disrepair. The recession's wounds have not healed. Consumers have too much debt and too little liquidity. Their net worth has shrunk. Those who own stocks have had a good bounce over the past couple of years, but millions of homes remain underwater and weak home prices prevent many from purchasing a new car.

Households must reduce their debt and build their liquidity in order to repair their balance sheets. But borrowing and spending to buy a car reduces liquidity and boosts debt. That illustrates the great tension in our economy today: We must reduce our debts to repair our balance sheets, but we have to borrow and spend in order to stimulate the economy. Clearly we can't do both at the same time.

That's why auto sales remain an important indicator of the economy's direction. They tell us how consumers feel about their financial strength. If auto sales have reached a plateau and homebuilding remains flat, the economy cannot expand at an adequate rate.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Profit-Margin Squeeze?

2011-05-04T08:43:00.000-07:00

The Lehmann Letter (SM)

Yesterday's Wall Street Journal carried an article on the profit-margin squeeze generated by world-wide price increases:

http://online.wsj.com/article/SB10001424052748704436004576298912487327374.html?KEYWORDS=materials+costs

Manufacturing continues to grow while facing the following question: Can it raise prices in order to pass on cost -- especially fuel cost -- increases?

The chart indicates that this is an important question because business has benefited mightily from a 10-year surge in margins. Profit margins did not fall during the recent recession and now stand at an all-time high.

Profit Margins

(Click on chart to enlarge.)

Recessions shaded

Rising productivity is largely responsible for this trend. Management has boosted output while restraining input costs. During the recent recession and recovery businesses cut employment more than output, and then increased output more than employment, raising output per worker and profit margins.

But how long can this continue and how far can margins climb? If weak demand here at home restraints price increases while strong demand overseas raises input costs -- especially fuel costs -- then producers are in trouble. Profit margins, and eventually corporate earnings, will stop growing.

The stock market has run ahead of the overall economy, fueled by encouraging earnings reports. Those earnings and the market may hit a wall if management can't raise prices while paying more for inputs. Most of the earnings growth may very well be behind us.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

May Economic Indicators: Looking for Strength

2011-04-30T14:55:00.000-07:00

The Lehmann Letter (SM)

On Thursday the Bureau of Economic Analysis reported a meager 1.8% (adjusted for inflation) increase in first-quarter Gross Domestic Product (GDP). That’s not good enough to take us where we want to go. Corporate earnings and the stock market have recovered nicely, but that’s not the entire economy. And earnings and stocks can’t keep going north unless the remainder of the economy does well, too.

Residential construction must emerge from the doldrums for that to occur. Unfortunately home prices continue to decline under the weight of excess housing inventories exacerbated by mass foreclosures. When existing-home sales begin showing strength, that should begin clearing the way for new-home sales and new construction.

Here are the May indicators we’ll follow.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

May 2011

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

Quarterly Data

BLS….Productivity & Costs…………Thu, 5th

BEA…….GDP& Corp. Profits…..……Thu, 26th

Monthly Data

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

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

BLS…………….Employment………… Fri, 6th

Fed…..Consumer credit..(Approximate).Fri, 6th

Census…………...Inventories…….. Thu, 12th
BLS…………….Producer prices……. Thu, 12th
BLS…………….Consumer prices.….. Fri, 13th
Fed………..Industrial production…….Tue, 17th
Fed……….Capacity utilization……….Tue, 17th
Census…….……..Housing starts…….Tue, 17th
NAR………Existing-home sales….Thu, 19th
Conf Bd…….Leading indicators….Thu, 19th
Census……..New-home sales…...Tue, 24th
Census……….Capital goods…….. Wed, 25th
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

© 2011 Michael B. Lehmann

Sour Mood: Is Consumer Confidence Deteriorating?

2011-04-22T12:06:00.000-07:00

The Lehmann Letter (SM)

The Conference Board's index of consumer confidence won't be out till next Tuesday, April 26. It fell last month.

And this morning's New York Times may provide an hors d'oeuvre of what to expect:

http://www.nytimes.com/2011/04/22/us/22poll.html?_r=1&ref=todayspaper

A front-page article entitled "Nation's Mood at Lowest Level in Two Years” begins by saying:

“Americans are more pessimistic about the nation’s economic outlook and overall direction than they have been at any time since President Obama’s first two months in office, when the country was still officially ensnared in the Great Recession, according to the latest New York Times/CBS News poll.

“Amid rising gas prices, stubborn unemployment and a cacophonous debate in Washington over the federal government’s ability to meet its future obligations, the poll presents stark evidence that the slow, if unsteady, gains in public confidence earlier this year that a recovery was under way are now all but gone.

“Capturing what appears to be an abrupt change in attitude, the survey shows that the number of Americans who think the economy is getting worse has jumped 13 percentage points in just one month. Though there have been encouraging signs of renewed growth since last fall, many economists are having second thoughts, warning that the pace of expansion might not be fast enough to create significant numbers of new jobs.”

Those sentiments are consistent with the drop in consumer confidence recorded by the Conference Board's last poll. It's a bad sign and runs counter to some recent good news: Job growth, corporate earnings gains and stock market advances. And the sour mood reflects more than just rising gasoline prices. The recession dealt a blow to one area of the economy that has shown no sign of recovery: Residential real estate. Nothing effective has been accomplished there, and that morass is part of the disillusionment.

The economic expansion remains fragile and worth watching closely.

© 2011 Michael B. Lehmann

Housing Starts: Uptick or Trend?

2011-04-19T07:23:00.000-07:00

The Lehmann Letter (SM)

CNN issued an encouraging report on housing starts this morning:

http://money.cnn.com/2011/04/19/news/economy/housing_starts_building_permits/index.htm

It's true that March starts at 549,000, and building permits of 594,000, are up sharply from February.

But you should take a look at the full Census Bureau report to gain perspective:

http://www.census.gov/const/newresconst.pdf

If you examine monthly data over the past two years you will see that housing starts have fluctuated around 600,000: Sometimes more, sometimes less. The chart confirms this.

Housing Starts

(Click on chart to enlarge.)

Recessions shaded

We need an upward trend, and we don't have it yet. Optimistic reports, such as this morning's CNN piece, draw attention to the occasional spikes. Pessimistic reports focus on the plunges. The trend: Flat.

It's too soon to paint a happy face on the building data. And, as this letter has said before, the economy can't recover fully without a strong revival in homebuilding.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Going Broke? This Morning's Federal Debt Scare

2011-04-18T11:58:00.000-07:00

The Lehmann Letter (SM)

The stock market slumped this morning after Standard & Poor's presented its warning regarding US government deficits and debt. But the price of U.S. Treasury securities hardly fell.

Apparently bondholders are not overly concerned. The federal government will curtail spending and raise tax revenues in order to deal with the problem. We'll muddle through.

Private borrowing, however, is another matter. During the recession it shrank and then disappeared as households and businesses began to repay their debts rather than initiate new borrowing. The problem is: Spending -- financed by borrowing -- must grow for the economy to adequately expand. Moreover, reducing federal borrowing and curtailing federal spending only serves to magnify the need for additional private borrowing and spending.

And there is an additional difficultly: We used to borrow from ourselves, but now we borrow from the rest of the world. If the American economy spends its way to expansion by borrowing from overseas, our debt to the rest of the world will grow. But foreign lenders to the US often prefer to hold their dollar assets in the form of U.S. Treasury securities because U.S. Treasury securities are safe and readily marketable in massive quantities. Foreign holders of US private debt will exchange those private debts for U.S. Treasury securities.

That's where this morning's S&P report enters the picture. Investors fear a downgrade of U.S. Treasury securities because their price will fall and interest rates rise. No one wants to see a jump in interest rates. But what about a revival of private borrowing from the rest of the world? That, too, will ultimately oblige the rest of the world to increase its holdings of U.S. Treasury securities. If foreign investors become reluctant to hold any kind of American debt -- public or private -- that could compound any increase in interest rates.

© 2011 Michael B. Lehmann

Inflation: Gaining Perspective

2011-04-15T11:49:00.000-07:00

The Lehmann Letter (SM)

Today's report by the Bureau of Labor Statistics on March's CPI increase -- at a 6% seasonally-adjusted annual rate -- rekindled fear of surging inflation:

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

Take a look at the chart to put matters in perspective. You will see that in the 1970s inflation grew from 5% at the beginning of the decade to 15% at the end. That's surging inflation. We are nowhere near those conditions now.

CPI

(Click on chart to enlarge)

(Recessions shaded)

What happened in the 1970s and what would have to happen today to reintroduce an inflationary increase of that magnitude? The answer: In the 1970s runaway gains in household borrowing fueled double-digit price growth. In addition the economy periodically bumped up against full-capacity utilization, depressing productivity and boosting costs. That is, as consumers deficit-financed rising expenditures on homes and autos, production climbed beyond the point of diminishing returns -- raising costs and prices.

Today's economy is very different. We have slack borrowing, slack demand and plenty of slack in our productive capacity. It is true that rapidly rising overseas demand has escalated our cost of imports, especially primary products such as fuel. Unless domestic demand grows rapidly, however, there is a good chance that rising fuel prices will drain purchasing power away from other areas. When households spend more on gasoline, they have fewer resources available to purchase everything else. That depresses inflation in those areas as fuel prices rise.

If private-sector demand grows rapidly, made possible by steep gains in private-sector borrowing, that would bump inflation upward because consumers could spend more on fuel and everything else. (Just as they did in the 1970s.) But, once again, that has not yet happened. And it will take a great deal of borrowing and spending to reintroduce the inflationary climate from which we suffered decades ago.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Low-Wage America?

2011-04-07T04:48:00.000-07:00

The Lehmann Letter (SM)

Last week this letter reported a solid improvement in March job gains, but also warned that those improvements must be replicated month after month for several years to restore full employment.

That wait will have consequences:

http://www.nytimes.com/2011/04/01/business/economy/01jobs.html?_r=1&scp=2&sq=motoko%20rich&st=cse

http://online.wsj.com/article/SB10001424052748704530204576237081117462892.html?KEYWORDS=sudeep+reddy

These New York Times and Wall Street Journal articles point out that high unemployment generates stagnant and even falling wages and salaries. That decline may be necessary to clear the labor market and restore full employment, but it does have consequences.

As they exhaust their unemployment insurance, many of the unemployed must take pay cuts in order to return to their old line of work. Others are forced to abandon careers and accept work in any job they can get, usually requiring less skill and offering reduced remuneration.

The upshot: Households with impaired purchasing power. These consumers will not wish to or be able to borrow and spend as they once did. And, as previous issues of this letter have pointed out, increased borrowing and spending are vital for a strong and sustained expansion.

© 2011 Michael B. Lehmann

At Last: Solid Job Growth Numbers

2011-04-01T10:05:00.000-07:00

The Lehmann Letter (SM)

216,000: That's the March job-growth number. And the private-sector figure was even larger: 230,000.

You can see for yourself by going to the Bureau of Labor Statistics website:

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

This is the second month of solid employment gains. These figures are preliminary and subject to revision, but the trend so far is certainly positive.
You can see from the chart that a robust economy brings job gains of between 200,000 and 300,000 per month. We enjoyed that kind of growth from 1995 to 2000 (dot-com boom) and in the middle of the last decade (real-estate boom).

Job Growth

(Click on chart to enlarge.)

Recessions shaded

But the unemployment rate remains high at 8.8%. We can't say we've reached full employment until that rate drops below 5%.

That means the economy must grow swiftly enough to provide between 200,000 and 300,000 new jobs each and every month for several years into the future. This letter has expressed doubt that the task can be accomplished without the revival of the residential real-estate industry.

Unfortunately homebuilding remains in the doldrums. We will have to wait and see whether or not the economy can return to full employment without a strong contribution from one of its most important sectors.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

April Indicators: Focus on Construction

2011-03-31T10:31:00.000-07:00

The Lehmann Letter (SM)

Everybody is waiting for tomorrow's employment report to gain insight into the expansion’s strength.

But April’s economic indicator publication schedule reveals that employment is only one measure among many. This letter has argued that residential construction is key to the speed and strength of the economy's advance. Housing starts and home sales are critical. If residential construction remains in the doldrums the economy's progress will disappoint.

We'll see.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

April 2011

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

Quarterly Data

BEA…………………GDP…………..……Thu, 28th

Monthly Data

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

BLS…………….Employment………… Fri, 1st

BEA..New-vehicle sales.(Approximate).Thu, 7th

Fed…..Consumer credit..(Approximate).Thu, 7th

Census……………...Inventories…….. Wed, 13th
BLS…………….Producer prices……. Thu, 14th
BLS…………….Consumer prices.….. Fri, 15th
Fed………..Industrial production…….Fri, 15th
Fed……….Capacity utilization……….Fri, 15th
Census…….……..Housing starts…….Tue, 19th
NAR………Existing-home sales….Wed, 20th
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

© 2011 Michael B. Lehmann

Home Sales Down: What Will Drive the Economy?

2011-03-23T09:30:00.000-07:00

The Lehmann Letter (SM)

Yesterday's letter reported that February housing starts and existing-home sales fell. This morning the Census Bureau announced that February new-home sales dropped to 284,000:

http://www.census.gov/const/newressales.pdf

Place this number on the chart to gain perspective. You can see that new-home sales have fluctuated below 400,000 since they crashed in 2007 -- 2009. This is further confirmation that residential construction remains in a rut.

New-Home Sales

(Click on chart to enlarge.)

Recessions shaded

That bears directly on the recovery's strength. The key issue remains: Will the economy gain sufficient momentum to provide full employment? Put differently: Will we return to the robust conditions that prevailed in the late 1990s or in the years 2003 -- 2007?

Probably not. Unusually high business capital expenditures - accompanying the introduction of a new technology - drove the economy forward during the 1990s dot-com years. Think of it as akin to the railway boom of the 19th century. Residential real estate sparked the economy during the early years of this century. Take another look at the chart and you'll see that we had a 100-year flood of residential building.

There is no sign that a new technological age, reminiscent of the dot-com boom, is about to bolster business capital expenditures. That's why residential construction is so important. If home-building stays in the doldrums, there is no other sector to carry us forward.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Housing: A Drag on the Economy

2011-03-22T09:53:00.000-07:00

The Lehmann Letter (SM)

There are three key reports on housing released each month: the Census Bureau's estimate of housing starts, the National Association of Realtor's bulletin on existing-home sales and the Census Bureau's figure for new-home sales.

The housing starts and existing-home numbers are out, and they are terrible:

http://www.census.gov/const/newresconst.pdf

http://www.realtor.org/press_room/news_releases/2011/03/feb_decline

February housing starts fell to 479,000 and February existing-home sales fell to 4.88 million. Both are seasonally adjusted annual rates.

These are clear setbacks, and the housing starts number is reminiscent of the depths of the recent recession.

New-home sales will be out tomorrow, and this letter will report on those. There is a good chance they will reinforce the dismal impression created by the earlier reports.

What's wrong?

The problem is that the federal government has not dealt adequately with the housing crisis. That crisis has been permitted to fester since residential real estate began its long slide into oblivion several years ago. The nation has allowed the market to find its own bottom without sufficient remediation from the effects of that bottom. Now we have the consequences: Widespread foreclosure, depressed home prices and rock-bottom construction activity.

The economy can't become robust until this problem is behind us. And at this rate the problem will be with us for a while.

More tomorrow.

© 2011 Michael B. Lehmann

More Debt: Good News

2011-03-18T08:22:00.000-07:00

The Lehmann Letter (SM)

There is great concern about debt, both public and private. Most of us have borrowed at some time in our life, and most of us instinctively know that too much debt is dangerous. So it is no surprise when analysts point to high debt levels as a cause of the recent recession and anemic recovery.

Ironically and paradoxically it is also true that we must borrow more to finance the growth in spending needed to speed economic expansion. We may dislike debt, but right now we need more of it.

That's why a recent report by the Federal Reserve brings good news:

http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf

The report states that household and business debt grew $319.3 billion in 2010's fourth quarter.

Private Borrowing
(Click on chart to enlarge.)

Recessions shaded

The chart shows the massive drop in borrowing (i.e. new debt) that accompanied the recession's decline in spending. You can see that borrowing has been negative for over a year: Households and businesses have been repaying their debts rather than incurring new debt. When debt slumps, so does spending and the economy.

Now we have the first report that borrowing is positive and debt is growing once again. If you place $319.3 billion on the chart, you will see that this expansion remains in its early stages. Borrowing must increase at a good pace for several years before it returns to a robust level.

We may distrust debt, but right now we could use more of it.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Japan: Other Points of View

2011-03-17T09:41:00.000-07:00

The Lehmann Letter (SM)

There has been so much doom and gloom accompanying events in Japan, it is refreshing to see other points of view.

Two Japanese, writing on the op-ed page of this morning's New York Times, expressed pride and hope in their country. They not only wish Japan well, they also expect better days ahead:

http://www.nytimes.com/2011/03/17/opinion/17azuma.html?_r=1&ref=todayspaper

http://www.nytimes.com/2011/03/17/opinion/17Murakami.html?ref=todayspaper

These views point out how difficult it is to forecast a nation's ability to deal with setbacks and adversity. So many crosscurrents come into play. For each cause for pessimism one can find a countervailing reason for optimism.

Stock markets suffered in Japan and abroad, and no one can be blamed for moving their funds out of equities into a safer haven. But that retreat is not necessarily a sign of things to come.

Japan may very well return to the regime of lackluster performance that prevailed before the disaster. That could not, however, be blamed on recent events. To the contrary, it would highlight the importance of circumstances prevailing before the earthquake and tsunami struck.

The American stock market also suffered. But Japan's crisis may have instigated an overdue selloff. After two years of strong performance fundamental questions prevail: Will the economy grow rapidly and will profits grow with the economy? Most of the answers to those questions are here at home, not abroad.

So, as Jesse Jackson says, "Keep hope alive!"

© 2011 Michael B. Lehmann

Meltdown?

2011-03-15T11:17:00.000-07:00

The Lehmann Letter (SM)

Events in Japan have troubled stock markets around the world.

Are this morning's downturns an omen of things to come?

Pessimism is called for if one judges by the impact of Hurricane Katrina on New Orleans. It's been years since that disaster struck, and New Orleans has not recovered. Both the economy and the population have shrunk.

But San Francisco rebounded swiftly from the 1906 earthquake and fire. It was not long before the city rebuilt and the economy was humming again.

San Francisco's experience reminds us that disaster often provide stimulus. Government, business and households borrow and spend in order to rebuild. Reconstruction provides jobs. A sense of optimism returns and folks get on with their lives.

On a grander scale, World War II devastated Germany and Japan. Yet, within a decade of war's end, observers spoke of Germany's and Japan's "economic miracles" and marveled at the swift pace of their reconstruction and recovery. Both nations went on to prosper mightily in the ensuing decades.

Returning to New Orleans, however, we are reminded that rebounding from disaster is not a snap. Think about Iraq. That nation is receiving, and will receive, massive assistance. But it's not at all clear that Iraq's economic prospects are good.

Then what will determine Japan's ability to bounce back? It's useful to look beyond the immediate circumstances and consider the background. Keep in mind that Japan's economy has struggled over the past two decades. The collapse of the stock-market and real-estate bubbles - 20 years ago - cast an evil spell. That meltdown's damage to household, business and banking balance sheets haunts the economy today. When Japan returns from rebuilding it will continue to face the conditions that prevailed before the earthquake and tsunami: Stagnant demand, weak growth and the threat of deflation.

But that does not mean that this morning's stock-market swoons are an omen of things to come. The world-wide declines reflect investors’ fears and their ability to dump stocks and move funds into safe havens such as U.S. Treasury securities. As fear subsides they will move their funds back into equities and markets will rebound.

Long-run conditions and fundamentals will guide the stock-markets’ long-run progress. These include the health of household, business and banking balance sheets, the ability of businesses to generate earnings now and in the future, and the price/earnings ratio.

© 2011 Michael B. Lehmann

What Now?

2011-03-11T10:49:00.000-08:00

The Lehmann Letter (SM)

Tsunamis! Oil! Revolution!

What now?

Many are wondering if this economic expansion has legs and wondering whether or not the two-year bull market has run its course.

On Wednesday David Leonhardt published an article in The New York Times, discussing the impediments to continued economic expansion:

http://www.nytimes.com/2011/03/09/business/economy/09leonhardt.html?scp=2&sq=david%20leonhardt&st=cse

In yesterday's Wall Street Journal, David Wessel did the same:

http://online.wsj.com/article/SB10001424052748704629104576190491020327586.html

But today's Wall Street Journal carried an optimistic article about households paying down their debts and thereby improving their ability to spend:

http://online.wsj.com/article/SB10001424052748704823004576192602754071800.html?mod=ITP_pageone_0

Yet Floyd Norris of The New York Times wrote pessimistically today about squandered opportunities for financial reform:
http://www.nytimes.com/2011/03/11/business/economy/11norris.html?_r=1&ref=todayspaper

Don't worry about who is correct, just read these articles for a good cross-section of opinions on today's most important economic issues.

But it's also important not to get one's nose too close to the bark of the tree. Step back and get a glimpse of the grove and, perhaps, a peak at the forest.

This recovery and expansion is different. Here's how it worked in the past:

Before the 1991 Gulf War, recessions were V-shaped: Inflation surged, interest rates followed prices upward, recession hit, and the economy snapped back quickly as soon as interest rates fell.

In the early 1990s a malaise hung over the economy after the Gulf War recession. Then the dot-com boom brought bubble conditions by the end of the decade.

The 2001dot-com bust came to a quick end as rock-bottom interest rates initiated the real-estate bubble. The economy surged forward until the bubble collapsed in 2008.

Today the economy is recovering and expanding, so why are smart people so nervous? For a number of reasons that refer back to earlier successes: (1) Since high interest rates didn't cause the recent bust, low interest rates won't drive today's expansion in the same manner as they drove past expansions; (2) The dot-com boom and real-estate boom were isolated events and therefore unlikely to repeat; (3) It is now hard to believe that the forces that created strong conditions in the past are with us again today. In short: Where is the source of the next boom?

That's why there is so much doubt and uncertainty as to whether or not the current expansion and bull market have legs.

© 2011 Michael B. Lehmann

Consumer Credit Grows

2011-03-08T07:44:00.000-08:00

The Lehmann Letter (SM)

The Middle Eastern and North African rebellions have generated $100-oil and fears of its potential impact on the economy.

This letter has expressed the view that a slowdown in the economic recovery and economic expansion is a greater risk than soaring consumer prices.

Thus far, however, oil's impact on consumer demand is not evident.

The Commerce Department reported February automobile sales of 13.4 million at a seasonally-adjusted annual rate. That's a nice bump upward from January's 12.6 million figure. New-vehicle sales have grown strongly throughout the winter.

Yesterday the Federal Reserve announced that consumer credit rose at a $60 billion annual rate in January. (Consumer credit measures automobile-borrowing and credit-card borrowing and other kinds of household indebtedness other than mortgage or real-estate borrowing.)

Consumer Credit

Recessions shaded

The chart clearly illustrates the unprecedented decline in consumer credit associated with the recent recession. Households stopped borrowing in order to repair their balance sheets by conserving cash and reducing debt. That, of course, crippled household spending and was an important ingredient in the slump.

Now, however, the strong auto-sales (13.4 million) and consumer-credit ($60 billion) data confirm that the worst is behind us. Monthly increases of $100 billion at a seasonally-adjusted rate, such as those we saw during the recent boom, may still elude us. But there is cause for optimism.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Employment: Good News at Last

2011-03-04T06:38:00.000-08:00

The Lehmann Letter (SM)

This morning's February employment report from the Bureau of Labor Statistics should bring smiles all around:

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

Employers added 192,000 jobs in February. As you can see from the chart, that's the biggest gain since the initial bounce back from the depths of the recession. Private employment grew even more strongly, adding 222,000 jobs, while government employment fell by 30,000.

The unemployment rate, at 8.9%, was virtually unchanged from January's 9.0%. This disconnect, between the large number of new jobs added and the stubbornly high unemployment rate, illuminates the rough road ahead. The economy requires 200,000 to 300,000 new jobs each month to reduce the unemployment rate to an acceptable level: Somewhere around 5%. Keep in mind that population growth brings new workers into the labor force each month. Moreover, as the employment situation improves, discouraged workers -- who had dropped out of the labor force -- will return to look for work. This means that new jobs must be found for all three populations: The unemployed, new entrants into the labor force and the return of discouraged workers.

The change in the political climate presents an additional challenge. During the depths of the recession, when the private sector lost millions of jobs, the federal government's stimulus program added government workers to payrolls. The transition to fiscal restraint puts the job-growth burden entirely on the private sector. Private job growth must be especially strong to offset the expected decline in government payrolls.

Job Growth

(Click on chart to enlarge.)

Recessions shaded

But let us rejoice in today's good news and let's hope it's an omen of more good news ahead.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

March Is Off To A Strong Start

2011-03-01T07:35:00.000-08:00

The Lehmann Letter (SM)

This morning the Institute for Supply Management reported that its Purchasing Managers' Index increased to 61.4% in February from 60.8% in January:

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

This is a strong sign that manufacturing activity is growing and is a good omen for the overall economy.

Purchasing Managers’ Index

(Click on chart to enlarge.)

Recessions shaded

All readings over 50% indicate expansion. Those under 50% signal contraction. The chart shows that the index has been over 50% for some time. Today's 61.4% report confirms continued robust activity. The index reflects a manufacturing sector that has put recession behind it.

Keep in mind, however, that this letter has also tracked the Federal Reserve's releases on industrial production and capacity utilization. They indicated that industrial activity reached a plateau this winter and has not expanded lately. The Fed releases its March data on the 17th and this letter will examine those numbers to determine whether or not they confirm today's strong report. We can't put all our faith on one statistic.

Nonetheless this is a strong start for the new month.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

March Economic Indicators: Tracking the Recovery

2011-02-28T10:38:00.000-08:00

The Lehmann Letter (SM)

There’s no doubt the economy is recovering.

But some measures are recovering more rapidly than others.

Earnings are back to where they were before the recession and the stock market is chugging along. Consumer confidence and consumer credit are rising and firms are rebuilding inventories.

Examine the March indicators below, however, and you’ll see that most indicators have not returned to pre-recession levels. They are improving, but they’re not where they were. Employment is the most notorious. Yet housing, autos, industrial production, capacity utilization and capital expenditures also remain far from their earlier tops.

This letter will keep you posted.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

March 2011

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

Quarterly Data

BEA…………………GDP…………..……Fri, 25th

BLS………….Productivity……………Thu, 3rd

Monthly Data

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

BLS…………….Employment………… Fri, 4th

BEA..New-vehicle sales.(Approximate).Mon, 7th

Fed…...Consumer credit..(Approximate).Mon, 7th
Census…….……..Housing starts…….Wed, 16th
BLS…………….Producer prices……. Wed, 16th
Census……………...Inventories…….. Fri, 11th
BLS…………….Consumer prices.….. Thu, 17th
Fed………..Industrial production…….Thu, 17th
Fed……….Capacity utilization……….Thu, 17th
Conf Bd……….Leading indicators….Thu, 17th

NAR………Existing-home sales….Mon, 21st
Conf Bd….Consumer confidence….. Tue, 29th

Census………..New-home sales……...Wed, 23rd
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

© 2011 Michael B. Lehmann

Consumer Confidence: Strong Finish for Month

2011-02-25T09:29:00.000-08:00

The Lehmann Letter (SM)

All eyes this week have been on Libya and the price of oil. But that should not distract our attention from a strong report that appeared a few days ago.

The Conference Board announced that its index of consumer confidence had popped up to 70.4 in February:

http://www.conference-board.org/data/consumerconfidence.cfm

If you examine the chart you will see that consumer confidence plunged to the high 20s in the depths of the recession and has struggled to recover more normal levels. The reading of 70.4 is a solid advance and tells us that households are markedly more upbeat than they have been.

Consumer Confidence

(Click on chart to enlarge.)

Recessions shaded

As we move into the month of March the following question becomes paramount: Will households’ confidence continue its upward trajectory and ignite spending despite any surge in fuel prices?

Stay tuned.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

$100 Oil: Inflationary Omen?

2011-02-24T11:43:00.000-08:00

The Lehmann Letter (SM)

With oil at $100 a barrel, can inflation be far behind?

We hope not. No one wants another inflationary surge. But are there credible grounds for optimism?

And, after all, didn't a spike in oil prices send inflation surging twice in the 1970s? Once, when OPEC pushed oil from $3 a barrel to $10 a barrel in 1973, and again when OPEC raised its price from $10 a barrel to $30 a barrel in 1979. The CPI climbed by 12% after the first episode and by 16% after the second. Is that an omen for today?

Probably not. Keep in mind that OPEC piled on in the 1970s. It did not lead the inflationary charge. In 1972-73 and in 1978-79 consumer borrowing and spending rose massively, generating a surge in demand for residential construction, automobiles and everything else. Rapidly rising demand pushed capacity utilization toward 90%, raising costs throughout the economy. Inflation began to rise sharply before OPEC contributed to the spike in prices.

Today's background is very different. Household demand, especially for homes and autos, is stuck in neutral. Consumers have been repairing their balance sheets, and are now only timidly borrowing and spending. Capacity utilization remains below 80%, so rising costs don't threaten. Finally, oil is a less important ingredient in today's economy. So we shouldn't be prematurely alarmed that inflation is about to repeat its 1970s climb.

But we should be afraid of what rising gasoline prices might do to still-fragile household spending. When consumers pay more for fuel, less is available for everything else. Moreover, they know that, and gasoline's bump might cool consumer confidence. That would be too bad, because consumer confidence is only now climbing out of the doldrums.

Let's stay tuned and hope that oil heads south soon.

© 2011 Michael B. Lehmann

Is Good News Cause for Concern?

2011-02-17T09:01:00.000-08:00

The Lehmann Letter (SM)

There was more good economic news today.

The Conference Board reported that its Leading Economic Indicators rose again in January:

http://www.conference-board.org/press/pressdetail.cfm?pressid=4131

Although January’s gain was small, it follows upon strong increases in November and December. Taken together these improvements are part of a continuing pattern of economic expansion.

A growing economy always raises the question: Will rising demand generate inflation? That is especially relevant because of recent commodity-price increases.

Yesterday the Bureau of Labor Statistics (BLS) reported that wholesale prices grew by 9.6% annually in January:

http://stats.bls.gov/news.release/pdf/ppi.pdf

And today the BLS reported that January consumer prices rose 4.8% annually:

http://stats.bls.gov/news.release/pdf/cpi.pdf

Those numbers are higher than we’ve experienced lately but are still not cause for concern because borrowing and spending remain weak despite the economy’s recovery. Robust inflation requires robust borrowing and robust demand to bid prices rapidly upward.

But even if escalating inflation is not yet upon us, rising commodity-input prices could pose a threat for US businesses. They may have to pay more for the raw materials they purchase without being able to pass on the increased costs to their customers. Why? Because weak demand may exacerbate competitive pressures that prevent businesses from raising prices. That would squeeze their profit margins and their earnings.

© 2011 Michael B. Lehmann

Households Borrow More: A Good Beginning

2011-02-09T11:20:00.000-08:00

The Lehmann Letter (SM)

Residential real estate was ground zero for the recent recession. When the housing bubble burst, everything else imploded with it.

But the implosion affected more than housing. It also hobbled household balance sheets: Liquid assets were down, home values plunged, debt was up and net worth fell. These reversals motivated households to limit borrowing and buying order to conserve cash and repay debt. That inhibited household spending which, in turn, delayed economic recovery and expansion.

That's why this letter has focused on consumer credit. Although consumer credit excludes mortgages, consumer credit is an important measure of household borrowing. As you can see in the chart, consumer credit turned negative during the recession as households desperately tried to repay their debts in order to resuscitate their balance sheets.

Consumer Credit

Recessions shaded

Lately there have been small increases in consumer borrowing. This week's report from the Federal Reserve is most encouraging:

http://www.federalreserve.gov/releases/g19/Current/

Consumer credit grew by $73.2 billion in December: Its best gain in a long time. If this encouraging trend has legs, we can be optimistic that households are borrowing and spending again.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

No Happy Face: Anemic Job Growth

2011-02-04T11:01:00.000-08:00

The Lehmann Letter (SM)

There's no way to paint a happy face on the January employment report released this morning by the Bureau of Labor Statistics:

http://stats.bls.gov/news.release/pdf/empsit.pdf

Job growth, at 36,000, was essentially flat. The unemployment rate fell to 9.0% from 9.4%, repeating December's large drop. Yet that begs the unanswered question: Is the decline in the unemployment rate due to an improvement in the employment picture, or is it due to discouraged workers dropping out of the labor force? Since these numbers are based on surveys that are subject to large subsequent revisions, we will have to wait for the answer. But the fact remains: Today's job-growth report is week.

Take a look at the chart and you'll see that an expanding economy, such as the one we enjoyed from 2003 to 2007, generates 200,000 new jobs a month. That indicates how far we have to go before we can say that we have a strong and healthy economy.

Job Growth

(Click on chart to enlarge.)

Recessions shaded

And that's not all. The average workweek fell slightly. A longer workweek typically precedes employment gains because employers usually ask their current employees to work longer hours before hiring new workers. We need to see a longer workweek, not a stagnant work week.

The stock market is up because corporate earnings are strong. But employment has not kept pace.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

February Economic Indicator Publication Schedule

2011-01-31T09:52:00.000-08:00

The Lehmann Letter (SM)

Attitudes about the economy are upbeat.

Last Friday the Bureau of Economic Analysis released its advance estimate for 2010 fourth-quarter GDP growth:

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The number looked good: A 3.2% gain at an annual rate.

But signs of weakness remain, especially in residential real estate.

A list of important economic indicators and their February publication schedules appears below. The Lehmann Letter will review those that merit particular attention.

ECONOMIC INDICATOR PUBLICATION SCHEDULE

February 2011

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

Quarterly Data

BEA…………………GDP…………..……Fri, 25th

BLS………….Productivity……………Thu, 3rd

Monthly Data

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

BLS…………….Employment………… Fri, 4th

BEA..New-vehicle sales.(Approximate).Mon, 7th

Fed…...Consumer credit..(Approximate).Mon, 7th
BLS…………….Producer prices……. Wed, 16th
Census……………...Inventories…….. Tue, 15th
BLS…………….Consumer prices.….. Thu, 17th
Fed………..Industrial production…….Wed, 16th
Fed……….Capacity utilization……….Wed, 16th
Census…….……..Housing starts…….Wed, 16th
Conf Bd……….Leading indicators….Thu, 17th

NAR………Existing-home sales….Wed, 23rd
Conf Bd….Consumer confidence….. Tue, 22nd

Census………..New-home sales……...Thu, 24th
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

© 2011 Michael B. Lehmann

Capital Goods: Pause or Stall?

2011-01-27T08:50:00.000-08:00

The Lehmann Letter (SM)

Is the economic recovery on track for rapid expansion, or is the good news just a head feint?

This letter has noted that some of the most important indicators are still in the doldrums. There are encouraging signs, yet they remain too few to indicate a trend. Yesterday's letter featured an example: New-home sales are up, but have not broken into optimistic territory.

This morning's Census Bureau report on durable goods further illustrates the problem:

http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

Here are December, November and October 2010 data on new orders for nondefense capital goods (machinery and equipment): $61.4 billion, $65.5 billion and $71.3 billion. Since the most recent month is presented first, these figures are not encouraging.

Removing volatile orders for aircraft smoothes the numbers: $65.0 billion, $64.1 billion and $62.2 billion.

That's better: It looks like a slight upward trend. (Remember: Most recent data first.)

Now place these numbers in historical perspective by using your mind’s eye to update the chart.

New Orders for Nondefense Capital Goods

(Click on chart to enlarge.)

Recessions shaded

There is no doubt the situation has improved. Yet it's also apparent that it's too early to call a positive trend. For that to happen there has to be clear movement up from $60 billion toward $80 billion.

It's not that we're stuck in a rut. It's just too early to proclaim that the expansion is proceeding at a robust pace.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Home Sales Up: But Is It a Trend?

2011-01-26T08:58:00.000-08:00

The Lehmann Letter (SM)

This morning the Census Bureau announced in December new-home sales of 329,000:

http://www.census.gov/const/newressales.pdf

That was a 17.5% improvement over November's 280,000. Good news.

New Home Sales

(Click on chart to enlarge.)

Recessions shaded

But the chart, once again, illustrates the problem of dealing with percentages when starting from a small base. The 17.5% gain sounds impressive until you post 329,000 on the chart. Then it doesn't seem like much.

The trend line has to surge well above 400,000, heading toward 600,000, before we can say that new-home sales have left the bad news behind them.

It's symptomatic of residential real estate's depressed condition that observers are willing to focus so easily on any scrap of good news.

(The chart was taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

Dow Milestone

2011-01-25T11:36:00.000-08:00

The Lehmann Letter (SM)

The stock market was down in mid-session-trading today, but the Dow recently passed an important milestone. It's now higher than the peak reached 11 years ago.

The Dow closed above 11,700 in 2000 at the height of the dot-com boom, and went on to close over 14,000 in 2007 with the peak of the real-estate bubble. The Dow has been trading in a range for over a decade, and must rise another 25% to break out of that range.

The NASDAQ's story is different. It's at 2,700, about half of where it was at the dot-com peak, and has not done as well as the blue-chip Dow. The NASDAQ is heavily weighted by technology and small-capitalization firms that suffered severely in the dot-com collapse. More than a decade has gone by, yet they still show the damage.

The S&P 500, which most observers believe to be the stock market's best representative, is still about 25% below both its 2000 and 2007 peaks. Think of the S&P as lying between the blue-chip Dow and the small-cap NASDAQ. Its 500 stocks represent the market's spectrum from small to large firms.

What does this mean? It demonstrates the damage done by the dot-com boom of over a decade ago. Stock market valuations raced ahead of earnings (the P/E soared) and then crashed back to earth. Investors curbed their enthusiasm in the ensuing decade, returning P/E valuations and the stock market to more modest levels. Then the Great Recession crushed the stock market once again.

Investors have been - and remain - cautious, and rightfully so. Fool me once, shame on you. Fool me twice, shame on me. That's why it will take a while for the stock market to break out of its range.

© 2011 Michael B. Lehmann

Inflation: Don't Worry Yet

2011-01-20T08:27:00.000-08:00

The Lehmann Letter (SM)

Rapidly rising commodity prices have generated concern that economic recovery will bring escalating inflation.

Last week the Bureau of Labor Statistics announced that consumer prices rose at a 6% annual rate in December, although they increased by only 1.2% when food and energy are excluded:

http://stats.bls.gov/news.release/pdf/cpi.pdf

That highlights commodities' role. Primary products such as raw materials, foodstuffs and fuels have accounted for most of the gains.

The developing worlds' rapid economic recovery is responsible for the surge in primary-product prices. As the Chinese economy expands it gobbles up minerals (iron ore, bauxite), fuels (oil, coal) and food (wheat, corn). Consequently world primary-product prices have risen swiftly despite slower recovery in the developed economies of Europe and the United States.

That raises the question: Will these price increases kindle inflation here at home? After all, rapidly rising food, energy and raw-material prices accompanied swiftly rising inflation in the 1970s.

But the 1970s do not serve as a precedent. Rapidly rising demand, stoked by runaway private borrowing, bid prices upward in that decade. Today's economy is beset by weak, not strong, demand. It's hard to see how prices can shoot upward while demand remains stagnant. The depressed residential construction and automobile industries, for instance, provide weak markets for building materials, steel, glass and a host of other inputs. That will restrain those prices.

Also keep in mind that consumer prices include services, such as rent, as well as commodities. Prices of these services respond to changes in demand here at home, and that demand remains flat.

It's difficult to contemplate severe domestic inflation without stronger growth in domestic demand.

© 2011 Michael B. Lehmann