Housing Recovery: Where Are the Numbers?

The Lehmann Letter (SM)

  

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

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

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

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

Existing Home Sales

(Click on chart to enlarge)

(Recessions shaded)

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

http://www.realtor.org/news-releases/2012/05/april-existing-home-sales-up-prices-rise-again

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

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

© 2012 Michael B. Lehmann

Germany May Be Tired of Other People Playing With Its Money

The Lehmann Letter (SM)

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

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

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

The New York Times:

Greek Crisis Poses Unwanted Choices for Western Leaders

http://www.nytimes.com/2012/05/21/world/europe/greek-crisis-poses-hard-choices-for-western-leaders.html?_r=1&ref=todayspaper  

The Wall Street Journal:

Growth Dilemma Dogs G-8

http://online.wsj.com/article/SB10001424052702304019404577416541585297280.html?mod=ITP_pageone_2

Greece's Conservatives Gain Ground

http://online.wsj.com/article/SB10001424052702304791704577416292049867840.html?mod=ITP_pageone_2

The arguments regarding Europe may be summarized as follows-

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

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

But bargaining is more than just issues.

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

© 2012 Michael B. Lehmann

Europe: Rupture Increasingly Likely

The Lehmann Letter (SM)

  

If Alexis Tsipras heads the next Greek government, a rupture with Europe seems increasingly likely.

Will Europe survive?

Consider two stories in today’s press.

Begin with this headline in The Wall Street Journal:

Defiant Message From Greece

http://online.wsj.com/article/SB10001424052702303879604577410301931020894.html?mod=ITP_pageone_0

The important passages are:

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

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

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

Go to this headline in The New York Times:

A Greek Exit? Euro Zone May Be Ready

http://www.nytimes.com/2012/05/18/business/global/chance-of-greece-exiting-euro-grows.html?_r=1&ref=todayspaper

Here are the key excerpts:

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

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

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

The article makes clear that not everyone is optimistic about the consequences of a Greek departure, but you get the gist.

So the key question is not: Will Greece leave? It seems to be: Will Europe survive Greece’s exit?

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

© 2012 Michael B. Lehmann

Greek Kamikaze Pilots?

The Lehmann Letter (SM)

  

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

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

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

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

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

http://www.nytimes.com/2012/05/17/world/europe/greek-stimulus-is-an-option-merkel-says.html?_r=1&ref=todayspaper

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

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

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

But:

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

http://online.wsj.com/article/SB10001424052702303448404577407813536988138.html?mod=ITP_pageone_2

Wow! Fighting words…….

We’ll see.

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

© 2012 Michael B. Lehmann

Autos and Housing Divorce

The Lehmann Letter (SM)

  

Autos and housing once lived in the same world. Now they don’t. They used to move together. Not anymore.

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

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

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

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

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

Capacity Utilization

(Click on chart to enlarge)

(Recessions shaded)

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

Housing Starts

(Click on chart to enlarge)

(Recessions shaded)

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

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

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

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

© 2012 Michael B. Lehmann

Inflation Flat

The Lehmann Letter (SM)

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

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

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

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

Consumer Prices
(Recessions shaded)

(Recessions shaded)

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

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

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

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

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

© 2012 Michael B. Lehmann

Monday Off

The letter will resume on Tuesday, May 15.