The Dollar

The Lehmann Letter ©

There’s been much discussion of the dollar’s value lately. Two charts might help put matters in perspective.

Exchange Value of the U.S. Dollar

(Click on chart to enlarge)



(Recessions shaded)

U.S. Balance on Current Account

(Click on chart to enlarge)



(Recessions shaded)

You can see both the dollar’s and the balance on current account’s downward trend over the past 25 years. There are interruptions in those trends, and neither series is at its historic low. Nevertheless the trend is clear.

We borrow more and more from the rest of the world in order to buy more and more from the rest of the world. But the rest of the world lends us those funds reluctantly. Consequently the dollar’s value falls as the rest of the world demands more and more dollars for each unit of its own currency that the rest of the world lends to us.

How long can anyone keep borrowing in order to buy? How long will anyone lend in order to sell? Forever, if the parties are pleased with the arrangement. But the dollar’s fall indicates the lenders are not completely happy. If the lenders balk, the dollar will fall even more quickly. That will make it even more difficult for the U.S. to borrow. If the creditors wish to gain power over the U.S., they may continue to lend for quite a while.

(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.)

© 2009 Michael B. Lehmann

10.2%

The Lehmann Letter ©

Today the Bureau of Labor Statistics announced that the unemployment rate rose to 10.2% and that the economy lost 190,000 jobs in October: http://stats.bls.gov/news.release/empsit.nr0.htm

But there was some good news: Manufacturing overtime, which had been 2.8 hours per week in the second quarter and 3.0 hours/week in the third quarter, rose to 3.2 hours/week in October. That’s a sign of growing strength in a leading sector and, although manufacturing continues to lose jobs, provides a ray of hope.

Yet 10.2% is a big number and it may grow larger. We haven’t had 10+% unemployment since the 1981-82 recession. Some may recall that we popped quickly out of that trough and may hope for a repeat performance this time. It may not happen.

Recall that the Fed’s tight-money policy instigated the 1981-82 recession. Spiraling interest rates dragged the economy down. As soon as the Fed let interest rates fall, the economy bounded forward and began soaking up the unemployed. By 1984 the economy was hot and job-growth was strong.

The real-estate collapse, not high interest rates, instigated the 2008-09 recession. Interest rates have been rock-bottom for some time and the economy is only beginning to stir. We can’t rely on low interest rates to haul us out of the ditch. Today’s circumstances are very different from the 1983-84 recovery.

We can’t count on a swift rebound to absorb the unemployed.

© 2009 Michael B. Lehmann

The Fed Holds Steady

The Lehmann Letter ©

The Federal Reserve’s Federal Open Market Committee (that sets the rate at which banks lend reserves to each other) met today and said:

“….economic activity has continued to pick up….. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period…. “

The Fed expects the economy to remain weak and inflation to remain moderate for the foreseeable future: So weak that the Fed anticipates “….exceptionally low levels of the federal funds rate for an extended period…. “

Summing up: Weak growth + low inflation.

© 2009 Michael B. Lehmann

10,000 Tops?

The Lehmann Letter ©

The stock market had a nasty setback today as it struggles to break clear of the 10,000-on-the-Dow benchmark.

It’s an important struggle for two reasons.

First, we made our initial visit to Dow-10,000 a decade ago – at the end of the 1990s. Today the stock market is no higher than it was then. In the meantime there have been two peaks well over 10,000 and two troughs well under 10,000, but no upward trend. Are we stuck in a range?

Second, the September 17th posting of this blog discussed the favorable impact of – and the reasons for - today’s high profit margins. That posting went on to say: “Improved profit margins will be very good for earnings when sales volume recovers. It appears that investors have bid up stock prices in anticipation of this event.”

But robust profit margins are only half the story. Sales volume must also recover strongly for the stock market to hit new highs. (Recall that total profits = Profit margins X sales volume.) Investors have clearly become concerned that an anemic economic recovery will deprive the stock market of that necessary prerequisite.

© 2009 Michael B. Lehmann

3.5 Percent

The Lehmann Letter ©

Today the Commerce Department announced (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm) that GDP snapped its downward spiral by growing 3.5 percent in the third quarter.

That was good news and the stock market rallied in response.

Close examination of the underlying data, however, provides cause for concern. The GDP grew by roughly $112 billion. Durable goods expenditures, at $55 billion, represented almost half the increase. Most of that was the federal government’s cash-for-clunkers program. It’s over and motor-vehicle sales have consequently fallen. This quarter’s GDP will reflect that decline.

Inventories represented $30 billion of the gain, but in a strange way. They fell by $30 billion less than in the previous quarter, so that’s a smaller negative number rather than a positive gain. It all counts, but we’re not yet at the point where business firms are building inventory in the expectation of rising sales. They’re still cutting back – although by a smaller amount – because their inventories are excessive.

Residential construction, services expenditures, business equipment expenditures and federal expenditures accounted for the remaining gains. If we keep in mind that federal housing assistance underwrote the residential-construction improvement, it’s clear that the federal government played a big role in GDP’s rebound.

The private sector remains anemic.

© 2009 Michael B. Lehmann

On Vacation

The Lehmann Letter ©

The blogger will be on vacation until Monday, October 26.

Thank you for your interest.

© 2009 Michael B. Lehmann

263,000

The Lehmann Letter ©

Today the Bureau of Labor Statistics announced that the economy lost 263,000 jobs in September and that the unemployment rate rose to 9.8%: http://stats.bls.gov/news.release/empsit.nr0.htm

Job Growth

(Click on chart to enlarge)



Recessions shaded

You can observe this recession’s brutal impact on employment. You have to go back more than 30 years to find another recession in which monthly job losses exceeded 500,000. At least employment snapped back quickly from those recessions. If this recovery is a slow as the recoveries from the 1991 and 2001 recessions, we can expect serious unemployment through 1910.

(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.)

© 2009 Michael B. Lehmann