9000, 2000, 1000

The Lehmann Letter ©

The stock market retreated slightly today, but all the major indexes have passed milestones lately: The Dow 9000, NASDAQ 2000 and the S&P 1000. We’re far ahead of recent bottoms.

But that doesn’t guarantee continued steep and strong gains. The economy and corporate earnings must improve dramatically, and that’s linked to residential real estate’s recovery. Remember that housing led us into the morass. It’s hard to envision a strong recovery while real estate remains weak.

The Federal Reserve has a role to play. The Fed promotes economic expansion by reducing interest rates, thereby stimulating borrowing and spending. If as a result prices rise too rapidly due to excess demand, the Fed raises interest rates to choke off borrowing and surplus spending. The Fed has a difficult job: Trying to promote growth without instigating inflation and trying to prevent inflation without binging on recession.

Think of the economy the way you’d think of a frisky horse. The economy breaks into a gallop (boom) as soon as the rider (the Fed) lets the reins dangle (low interest rates). But the economy comes to a halt (recession) when the Fed pulls back on the reins (high interest rates). The skilled equestrian knows how to handle those reins.

The Fed has obliged today’s optimists by pushing rates into the sub-basement. Since the Fed’s policy proved successful in the past, what imperils it today?

The answer lies in the consequences of the 2001 through 2003 rate cuts that rescued us from the 2001 recession. In past recoveries the Fed depressed rates briefly and raised them as soon as inflation threatened. Since inflation – as conventionally measured – did not threaten in 2002 through 2004, the Fed held rates down even though home prices rose rapidly. The consequence was the record real-estate boom that peaked in 2006. Recession began in 2007 when the boom collapsed under its own weight.

Low interest rates won’t prompt recovery today because high interest rates did not instigate recession in 2007. The Fed let the boom run from 2004 through 2007 until it collapsed from exhaustion. (That is, until home prices rose beyond any reasonable relation to rental values.) Since high interest rates did not instigate recession, low rates will have limited effectiveness in spurring recovery.

Returning to the earlier analogy, it was as if the Fed let rates dangle for so long (in 2002 – 2005) that the horse ran until it could go no further. Now the horse must remain in the barn for a good rest and some water and oats. Dangling the interest-rate reins won’t get him to move for quite some time.

That is, building won’t recover strongly until the foreclosures cease and home prices stabilize. When the number of vacant homes begins to dwindle, builders’ confidence will return and construction will recuperate in earnest. Then, and only then, will the private sector commence a true recovery.

For the time being, the horse is in the barn.


© 2009 Michael B. Lehmann

Are We Feeling Better?

The Lehmann Letter ©

Today the Census Bureau announced 384,000 new homes sold in June. That’s the best report since last November and was greeted as good news.

But look at the chart.

New Home Sales

(Click on image to enlarge.)



Recessions shaded

New home sales remain mired in a deep slump. We’ve got to climb well past 400,000 before rejoicing. Half-a-million would help.

(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

On Vacation

The Lehmann Letter ©

The blogger is going on vacation and will blog (even more) intermittently. There will be occasional posts between now and Labor Day.

Have a good summer

© 2009 Michael B. Lehmann

Inventory/Sales Ratio Keeps Falling

The Lehmann Letter ©

Today’s Census Bureau sales and inventory report for May reveals more good news:

http://www.census.gov/mtis/www/mtis_current.html

(Click on image to enlarge.)



This blog has been upbeat about these data because the inventory/sales ratio has fallen throughout the year. Businesses are liquidating their inventories faster than their sales have fallen. Eventually inventories will have declined sufficiently that businesses can begin to restock their shelves. At that point production should revive.


© 2009 Michael B. Lehmann

Consumer Credit

The Lehmann Letter ©

Today the Federal Reserve released May’s consumer-credit report:

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

Consumer credit shrank by $39.6 billion at a seasonally adjusted annual rate.


Consumer Credit

(Click on chart to enlarge)




(Recessions shaded)


When people feel good, they borrow and spend. When they feel lousy, they repay. Consumers are now repaying their debts.

The table below reports consumer credit at the end of the month. You can derive the monthly change by subtracting one month from the next and multiplying by 12.

Jan 2008 2,526.0
Feb 2008 2,536.9
Mar 2008 2,549.0
Apr 2008 2,555.8
May 2008 2,565.5
Jun 2008 2,574.1
Jul 2008 2,581.8
Aug 2008 2,575.8
Sep 2008 2,582.8
Oct 2008 2,578.1
Nov 2008 2,568.8
Dec 2008 2,562.0
Jan 2009 2,566.2
Feb 2009 2,555.0
Mar 2009 2,539.4
Apr 2009 2,522.9
May 2009 2,519.6

Consumer credit outstanding is now less than it was 18 months ago.

The economy won’t rebound until this number grows 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.)

© 2009 Michael B. Lehmann

First Week

The Lehmann Letter ©

The Bureau of Labor Statistics’ employment report was a bad start for July’s first week: http://stats.bls.gov/news.release/empsit.nr0.htm

The economy lost 467,000 jobs in June, substantially more than May’s 345,000 loss. You can see from the chart that’s better than the early months of the year, but a disappointment for hopes that strong recovery would rapidly shrink this number.

Job Growth

(Click on chart to enlarge)



Recessions shaded

As this blog has consistently stated, the economy can not pop back as long as the foreclosure crisis continues. As foreclosed properties are relentlessly dumped on the market, home prices keep heading south. Without a recovery in home prices, don’t expect an upsurge in residential building. And as long as residential construction remains in the doldrums, the economy and employment will languish. Residential real estate got us into this mess, and we can’t get out until it begins to recover.

(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

July Publication Schedule

The Lehmann Letter ©

Here’s the publication schedule for some of July 2009’s most important economic indicators.

PUBLICATION SCHEDULE

July 2009

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

Quarterly Data

BEA…………………………GDP………...……Fri, 31st

Monthly Data

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

BLS…………….Employment………… Thu, 2nd
Fed…………Consumer credit…..(Approximate).Tue, 7th
Censu……...Balance of trade………………Fri, 10th
Census……...Retail trade…………………….Tue, 14th
Census……...Inventories……………………..Tue, 14th
BLS………….Producer prices……………….Tue, 14th
Fed………..Industrial production………….Wed, 15th
Fed……….Capacity utilization…………….Wed, 15th
BL………….Consumer prices……………...Wed, 15th
Census……..Housing starts………………….Fri, 17th
Conf Bd…….Leading indicators…………….Mon, 20th

NAR…………Existing-home sales…….…….Thu, 23rd
Census……..New-home sales……………….Mon, 27th
Conf Bd…….Consumer confidence…………Tue, 28th

Census…….Capital goods……………….…..Wed, 29th


* 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

© 2009 Michael B. Lehmann