Autos Stalled?

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?

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

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?

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?

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

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

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