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
Friday, October 30, 2009
Thursday, October 29, 2009
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
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
Thursday, October 8, 2009
On Vacation
The Lehmann Letter ©
The blogger will be on vacation until Monday, October 26.
Thank you for your interest.
© 2009 Michael B. Lehmann
The blogger will be on vacation until Monday, October 26.
Thank you for your interest.
© 2009 Michael B. Lehmann
Friday, October 2, 2009
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
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
Friday, September 25, 2009
Rocky Road
The Lehmann Letter ©
Today the Census Bureau released two reports that illustrate how rough this recovery will be.
August new home sales (http://www.census.gov/const/newressales.pdf) of 429,000 were about one-third greater than their January trough of 329,000. But look at the following chart for perspective. We remain two-thirds below the peak of several years ago. It will be a long, hard slog back to robust growth.
Chart 5.9 New Home Sales
(Click on image to enlarge)
Recessions shaded
New orders for nondefense capital goods tell essentially the same story (http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf). August’s $52.7 billion remains in the trough. And the following chart makes clear that this trough is as bad as the 2001 dot-com bust and that today’s report is hardly better than readings from 15 years earlier.
Chart 4.1 New Orders for Nondefense Capital Goods
(Click on image to enlarge)
Recessions shaded
Finally, yesterday the National Association of Realtors reported August home sales of 5.1 million. A glance at the chart below only reinforces the impression created by today’s data releases. We have a long ways to go.
Chart 5.8 Existing Home Sales
(Click on image to enlarge)
Recessions shaded
(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
Today the Census Bureau released two reports that illustrate how rough this recovery will be.
August new home sales (http://www.census.gov/const/newressales.pdf) of 429,000 were about one-third greater than their January trough of 329,000. But look at the following chart for perspective. We remain two-thirds below the peak of several years ago. It will be a long, hard slog back to robust growth.
Chart 5.9 New Home Sales
(Click on image to enlarge)
Recessions shaded
New orders for nondefense capital goods tell essentially the same story (http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf). August’s $52.7 billion remains in the trough. And the following chart makes clear that this trough is as bad as the 2001 dot-com bust and that today’s report is hardly better than readings from 15 years earlier.
Chart 4.1 New Orders for Nondefense Capital Goods
(Click on image to enlarge)
Recessions shaded
Finally, yesterday the National Association of Realtors reported August home sales of 5.1 million. A glance at the chart below only reinforces the impression created by today’s data releases. We have a long ways to go.
Chart 5.8 Existing Home Sales
(Click on image to enlarge)
Recessions shaded
(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
Monday, September 21, 2009
Five in a Row
The Lehmann Letter ©
Today The Conference Board released its Leading Economic Index (LEI): http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1
The index gained in August, the fifth consecutive monthly improvement following a 20-month losing streak. Ken Goldstein, a Conference Board economist said, “These numbers are consistent with the view that after a very severe downturn, a recovery is very near. But, the intensity and pattern of that recovery is more uncertain."
That says it all. The recession is over, but we can’t gauge the strength of the recovery. Keep in mind: Just because we’re no longer going south doesn’t mean we’re speeding north. This could take a while.
© 2009 Michael B. Lehmann
Today The Conference Board released its Leading Economic Index (LEI): http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1
The index gained in August, the fifth consecutive monthly improvement following a 20-month losing streak. Ken Goldstein, a Conference Board economist said, “These numbers are consistent with the view that after a very severe downturn, a recovery is very near. But, the intensity and pattern of that recovery is more uncertain."
That says it all. The recession is over, but we can’t gauge the strength of the recovery. Keep in mind: Just because we’re no longer going south doesn’t mean we’re speeding north. This could take a while.
© 2009 Michael B. Lehmann
Thursday, September 17, 2009
Profits & Profit Margins
The Lehmann Letter ©
The stock market has done well over the past half year despite a limited recovery in corporate profits.
Chart 2.1 Profits
(Click on image to enlarge)
Recessions shaded
Perhaps investors’ enthusiasm has something to do with a much stronger performance by profit margins.
Chart 2.3 Profit Margins
(Click on image to enlarge)
Recessions shaded
You can see that profit margins continued to grow throughout the recession even as total profits fell. Recall that total profits = Profit margins X sales volume. If sales volume plunges by more than margins improve, total profits will fall. That’s what happened in 2008 – 2009.
It’s easy to understand why sales volume fell. But why did margins improve? The chart measures profit margins by dividing the change in prices business receives (numerator) by the labor cost per unit of output that business sells (denominator). Remember: Price = Revenue per unit of output sold. Examining the chart once more, it’s clear that revenue per unit of output sold (numerator) grew more rapidly than cost per unit of output sold (denominator). That is, margins (price/cost) rose.
But let’s not beg the question. Why did costs rise less than prices? Credit the New Economy. Business continues to improve its productivity (efficiency) by mobilizing technology to raise output per worker. More output per hour of work = Less time required to produce a unit of output. If it takes less time to produce a unit of output, that unit of output will cost less provided wages have risen slowly.
That’s key. If wages rise less rapidly than output per worker (productivity), unit labor costs (the cost of producing an additional unit of output) will fall. And, since wages have risen slowly lately, unit labor costs have indeed risen less rapidly than prices. The bottom Line = Profit margins (prices/costs) have grown.
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.
(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
The stock market has done well over the past half year despite a limited recovery in corporate profits.
Chart 2.1 Profits
(Click on image to enlarge)
Recessions shaded
Perhaps investors’ enthusiasm has something to do with a much stronger performance by profit margins.
Chart 2.3 Profit Margins
(Click on image to enlarge)
Recessions shaded
You can see that profit margins continued to grow throughout the recession even as total profits fell. Recall that total profits = Profit margins X sales volume. If sales volume plunges by more than margins improve, total profits will fall. That’s what happened in 2008 – 2009.
It’s easy to understand why sales volume fell. But why did margins improve? The chart measures profit margins by dividing the change in prices business receives (numerator) by the labor cost per unit of output that business sells (denominator). Remember: Price = Revenue per unit of output sold. Examining the chart once more, it’s clear that revenue per unit of output sold (numerator) grew more rapidly than cost per unit of output sold (denominator). That is, margins (price/cost) rose.
But let’s not beg the question. Why did costs rise less than prices? Credit the New Economy. Business continues to improve its productivity (efficiency) by mobilizing technology to raise output per worker. More output per hour of work = Less time required to produce a unit of output. If it takes less time to produce a unit of output, that unit of output will cost less provided wages have risen slowly.
That’s key. If wages rise less rapidly than output per worker (productivity), unit labor costs (the cost of producing an additional unit of output) will fall. And, since wages have risen slowly lately, unit labor costs have indeed risen less rapidly than prices. The bottom Line = Profit margins (prices/costs) have grown.
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.
(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
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