Profit Margins

The Lehmann Letter © Why is the stock market climbing although the economy is slack? Record profit margins should be part of any answer. Think of profit margins as the ratio between the price of the product divided by the cost of producing it. If the number rises, profit margins are rising as the gap between price and cost grows. If the number falls, profit margins are falling as the gap shrinks. The chart shows profit margins for the whole economy. You can see that they now stand at a post-World War II high. Chart 2.3 Profit Margins (Click on Continue reading

Weekly Review

The Lehmann Letter (SM) The release of three major indicators made this a big week for real estate: Housing starts, existing-home sales and new-home sales. Today the Census Bureau announced 288,000 new homes sold in August: http://www.census.gov/const/newressales.pdf That number shows no sign of recovery. But it was yesterday’s release by the National Association of Realtors of August’s existing-home data that was a real eye catcher: 4.1 million following 3.8 million in July. Existing Home Sales (Click on chart to enlarge.) Recessions shaded If you plug those numbers into the chart it looks like a double dip. That’s because the tax Continue reading

August Housing Starts

The Lehmann Letter (SM) This morning the Census Bureau reported that construction began on 598,000 new housing units in August and revised July’s starts to 541,000: http://www.census.gov/const/newresconst.pdf The Bureau’s press release said this was a gain of 10.5% and also said that August’s figure was 2.2% ahead of July 2009’s 585,000 level. Housing Starts (Click on chart to enlarge.) Recessions shaded The chart puts these data in perspective. You can see that housing starts have been hanging out at 600,000 (plus or minus) for over a year. That’s lower than any of the brief troughs of earlier post-war recessions. Today’s Continue reading

This Week

The Lehmann Letter (SM) This is a big week for housing data: On Tuesday and Friday the Census Bureau releases its reports on housing starts and new home sales, while on Thursday the National Association of Realtors announces figures for existing-home sales. They are important because residential real estate was the recession’s ground zero. We can’t have a robust recovery and expansion until residential real estate returns to health. But the building and bursting of the recent real-estate bubble created a new kind of recession. This recession did not flow from rising inflation and rising interest rates. Those past recessions Continue reading

Payments Deficit

The Lehmann Letter (SM) In a further endorsement of the economic recovery, yesterday the Commerce Department announced that the U.S. International deficit on current account had risen from $109.2 billion in the first quarter to $123.3 billion in the second quarter: http://www.bea.gov/international/bp_web/simple.cfm?anon=71&table_id=1&area_id=3 This may seem paradoxical: How can a growing balance of payments deficit signal a growing economy? The chart serves to deepen the mystery: Each recession (gray vertical bar) appears to have reduced the deficit (the line climbs back up), while expansions have grown the deficit (the line continues south). That’s because the balance of trade drives our balance Continue reading

Industrial Production Grows

The Lehmann Letter (SM) Today’s Federal Reserve report on industrial production and capacity utilization was encouraging: http://www.federalreserve.gov/releases/g17/Current/default.htm Both continued to grow in August, building on a year of recovery and improvement for manufacturing, mining and public utilities. That’s good news. Capacity Utilization (Click on chart to enlarge.) Recessions shaded Capacity utilization stands at 74.7%. That means that industry now produces 74.7% of the maximum it could produce. Round that number to 75% and plug it into the chart, and you could say that industry is making a snappy recovery. Capacity utilization has improved by over 5% from its recent trough Continue reading

This Week

The Lehmann Letter (SM) On Wednesday the Federal Reserve will release this week’s most important economic data: August industrial production and capacity utilization figures. Much hope for the recovery relies upon an industrial rebound. Businesses have improved their profit margins, but sales must also grow for earnings.’ continued expansion. Rising capacity utilization signals that industry is using a greater share of its plant and equipment in order to meet a larger volume of orders. This is good news by itself, but also may signal industry’s need to invest in additional plant and equipment if capacity utilization rises steeply. That would Continue reading

Strong Sales

The Lehmann Letter (SM) Today the Census Bureau reported strong sales gains across a broad swath of American industries: http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf That’s good news for our economy’s recovery. Businesses also continued to rebuild inventories while they maintained a low inventory/sales ratio. That’s also encouraging because it reverses a development that dragged us into recession. Here’s why. Manufacturers’ sales collapsed as the recession took hold. To make matters worse, inventories of unsold goods piled up on their shelves. The inventories/sales ratio climbed as sales plunged and inventories rose. Manufacturers brought the situation under control by slashing production by an amount greater than Continue reading

No Double Dip Yet

The Lehmann Letter (SM) Last week this letter urged readers to follow residential construction and auto sales for a clue on the economy’s direction. You already know about the weakness in housing. So let’s examine new-vehicle sales. The Commerce Department reports 11.4 million new-vehicle sales in August at a seasonally-adjusted annual rate. (See the end of this letter for instructions on retrieving the data.) The report also reveals that sales have been flat in the 11-million range for about half a year. Much has been said about the auto industry’s rebound. Profits have recovered and General Motors will soon return Continue reading

Not Yet Robust

The Lehmann Letter (SM) Today the Bureau of Labor Statistics reported that the economy lost 54,000 jobs in August: http://stats.bls.gov/news.release/empsit.b.htm The stock market interpreted the report as good news because the private sector gained 67,000 jobs while government jobs fell by 121,000. The reasoning went like this: It’s good that the private economy is gaining jobs, even while the Census continues to shed jobs, because it’s the private sector that must recover. True enough. But keep in mind that we want the economy to truly recover, not merely avoid another recession. Job Growth (Click on chart to enlarge.) Recessions shaded Continue reading