TCS Daily

Bottoming Signs

By Larry Kudlow - January 6, 2009 12:00 AM

Here and there are some small signs that the economy is at least bottoming — a crucial stepping stone to meaningful recovery.

For example, the ISM non-manufacturing services report released today for December came in at 40.6 on the composite index, compared to 37.3 in November. New orders, employment, backlogs, and exports all ticked higher than the previous month. So did the overall-business-activity index. It's still a recession reading, but a small increase is better than a decline.

The November factory-orders report showed non-defense capex rising at a 3.9 percent annual pace, the first increase in four months and the best gain in 10 months. Computer orders surged 12.5 percent.

Pending home sales — which tracks home re-sales under contract, according to the National Association of Realtors — declined again overall. But out West pending sales continued to increase, and they are up 27 percent since the August 2007 bottom.

Commercial construction rose 0.7 percent annually in November, and is up 12.1 percent over the past three months.

And in the November personal-income report, real disposable income jumped 1 percent for the month and is up 7.1 percent at an annual rate over the past three months. Real consumer spending in that report rose 0.6 percent in November.

These income and spending gains were largely a function of plummeting inflation, where the PCE deflator has fallen 6.1 percent annually over the past three months. That, of course, is largely a function of collapsing oil and retail gas prices. The gasoline drop is probably worth $350 billion as a consumer-purchasing-power tax cut. This is a key recovery mustard seed. So is the outsized growth in the money supply as measured by M1 and M2, fueled by the gigantic increase in the monetary base as the Fed continues to expand its balance sheet.

Additionally, the credit freeze continues to thaw. The three-month LIBOR rate is all the way back to 1.4 percent. And corporate bond rates continue to decline, a signal that private capital markets are starting to function again. The 30-year mortgage rate is holding around 5.3 percent.

At a recent conference in San Francisco, academic economists were very pessimistic, expecting recession to last through the whole year. But easy money and low retail gas prices may be a lot more stimulative than the academics think.

President-elect Obama said today that we should expect trillion dollar budget deficits for the next few years. But do we really need this unbelievable increase in the size and scope of government? Art Laffer is very gloomy about big-government spending and borrowing. He believes deficits of this magnitude and a large increase in the government share of GDP are liens on future tax hikes that will slow the economy's potential to grow.

It was Milton Friedman years ago who taught us that the real tax burden on the economy is best measured as the government spending share of GDP. That measure has been falling for over 20 years, until President Bush's second term. Now Obama's plan will ratchet this tax burden much higher.

My point? We don't need all this. Lower tax rates for large and small businesses along with easier money and lower gasoline prices will get us on the right track to increase the economy's potential to prosper.

Once again, I ask what the Republican party intends to do. Will it be me-tooism? Or will they provide a choice, not an echo?

This article first appeared on Kudlow's Money Politic$.


The end of the tunnel
The surest sign that confidence may be returning to the markets is the rise in gas prices. That twenty cents over the past two weeks is telling us that the oil speculators at least are becoming more bullish about the future. They're bidding up forward contracts again.. so the good times for all could be just over the horizon.

Of course the biggest recovery signs are still sticky. Mass layoffs are very likely to continue in the coming months, and the consumer economy will still continue to offload employees of companies depending on retail sales. Consumer confidence is another way of expressing this inability or unwillingness of people to spend money.

Which means the money will have to come from some other quarter. I like the view expressed by David Walker, a few nights ago, to Gwen Ifill:

"Clearly, some type of stimulus program is called for. We're going to have to deal with some of the immediate crises. Deficit and debt levels are going to go up.

"But we also have to recognize the federal government is living beyond its means. It needs to get its own house in order, as well.

"Gwen, we've got a structural problem. You know, since the 1980s, but for the period of time that we ended up having the statutory budget controls, we were addicted to deficit and debt. We were running deficits in good times and bad, whether we were at war or not. You know, we had a problem before we came into this recession, before these bailouts. We need to do two things. We need to make sure that we do the stimulus, learn the lessons from the recent failures so that we don't repeat them. But we also need to put a process in place so that we can start making tough choices on budget controls, Social Security, health care, and tax reform, so we can avoid a much bigger crisis down the road.We can't just focus on today's economy; we want to also be able to make sure we have a strong economy for the future.

"There's no question that we're going to have to reform Social Security and make it solvent, sustainable, secure, and more savings-oriented. We're going to have to get control of health care costs, because they'll bankrupt us if we don't, Medicare, Medicaid, about the overall health care system.We're going to have to reform our tax system. We're going to have to understand which spending programs and tax policies are working, which ones aren't. This is major heavy lifting.And, in my view, what needs to happen is not only do we pass a stimulus program, but we put some type of process in place, whether it be a fiscal future commission or something, that can put us on a path to be able to make tough budget controls -- Social Security, health care and tax reforms -- in the future, because if we don't -- look, America is being mortgaged. And that mortgage is increasingly held by foreign lenders. That is not in our economic, foreign policy, national security, or domestic tranquility interest."

Pretty good post roy
But the answers on budget constraint, reducing national debt and dealing with issues like health care and social security only go hand-in-hand if you deal with the budget first.

I agree that we have to be solidly out of this present crisis before we look at tightening federal budgets, but we do need to cut, cut, cut before we fix the real problems.

Strong praise leaves me humbled
"I agree that we have to be solidly out of this present crisis before we look at tightening federal budgets, but we do need to cut, cut, cut before we fix the real problems."

I guess those "real" problems must be pretty far down the road. Right now we have the problem that no one's lending and no one's spending.. so business is in a very deep slump.

It's time for a kick start. David Walker rightly points out that the main problem with spending programs is that Congress has shown little taste for the rest of the remedy.. austerity programs once the good times have returned.

So his suggestion is to write something into place, mandating that once the emergency is over we get back to the work of paying down the debt. Seems reasonable to me.

We do have one thing on our side right now. The rest of the world so values the dollar bill that they're willing to loan us all the money we need to spend our way out of trouble, for free. Otherwise that approach would be lost to us, as we couldn't afford to pay the interest on the sum of money we needed to borrow from them.

So let's spend our way to prosperity.. and then use the revenues that result from the increased activity to start paying down the debt. And let's also not forget to increase taxes when the good times return. Otherwise we just dig the hole deeper.

you should be humbled
Not because you're right, but wrong. "no one's spending' as the main problem is only an opinion...of you and Keynsians. It's the old 'aggregate demand' theory, shown to be false by the Austrians ages ago.

Woops! (Oil prices and speculators)
Yahoo finance has a story about oil sliding back under $39.00/barrel today (1/12/09).. so much for that theory.

Interesting thing about the left and oil. Last summer, "speculators" were responsible for bidding up the price of oil. Not that the left will ever drop its economic paranoia, but if "speculayors" had the power to bid UP oil, why couldn't they keep it there.. Or is there some value that I never learned about in being long and deep in an asset that's plummeting in value?

A stampede toward the exits
"..if speculayors" had the power to bid UP oil, why couldn't they keep it there.. Or is there some value that I never learned about in being long and deep in an asset that's plummeting in value?"

These were very large short-term players in the commodities futures market. And they left it very abruptly when they saw the recession becoming entrenched, and demand for all commodities being likely to drop. Those very large players, and those bidding on margin all left the market abruptly to avoid ruinous anticipated losses. Thus oil prices dropped more precipitously then they had gone up earlier in the year.

Unsupported by any further speculation, oil prices fell to a dramatic new floor.. that is, the price it would have been at all along had it not been bid up by spot manipulators and middlemen.

This was eloquently explored last night on television. Too bad you missed it.

The phenomenon is very similar to a stock market plunge. If a speculative frenzy becomes a sufficient cause for a steep market advance, why then would the market ever come down? And especiallt why all of a sudden, as happened in late 1987? Maybe there's material for a thesis in this somewhere.

In either case, a long term investor would ride the market all the way down and stay there until it came back up. And in fact that's what I'm doing. I haven't moved anything since the day this all started.

Good thing I'm dividend oriented instead of price oriented. If I were looking for cash flow I'd be in a spot of trouble right now.

Supply and demand
This is a problem I've found with everyone in the Austrian camp. Austrian theory has the power to overrule any observation. It's like having a theory that predicts it won't rain.. then in a cloudburst, maintains it's not raining, as the theorists have proven.

We are losing jobs due to a steep drop in aggregate demand. Prices are also dropping because of this loss in demand. There is nothing that could be more demonstrable than the reality of what we're now in the midst of. Indeed the major financial markets themselves have been dropping.. because demand has vanished for their shoddy offerings.

But to the Austrians, this can't be happening. Reality is WRONG!

If you want to look at bad theories, take a closer gander at basic Monetarist theory. Over the past thirty years, our good times and bad have occurred pretty much independently from the money supply.

One thing we have found out though, from the experiment we performed in 1981-82: tighten up the money supply too precipitously and you can cure a bad bout of inflation.. at the cost of freezing up the economy totally. So it's a tool of last resort, to be used only rarely and temporarily.

So much from the 'smartest man in the room'
"President-elect Obama said today that we should expect trillion dollar budget deficits for the next few years"

Hey Roy! Weren't you the one posting several times that Obama would mean a return to budget sanity?

Looks like the 'smartest man in the room' just burst your bubble.

In fairness, the real problem is Congress. But regardless, Obama WILL NOT BALANCE the budget or get us even close to matching both sides of the ledger -- contrary to what you've posted would happen should The One get elected.

Austrian economics, at least as I understand it, does not comment on rain too much, but they for sure argue against the the 'aggregate demant' fallacy; that's a keynsian notion; moniterism is what i guess they call milton friedman's.
And austrians don't deny something is going on re anything, but of course will have different reasons for it, and different solutions to it than a big governemnt statist like you. So they say that to propose as a solution to the current problems, they very thing that caused it, is stupid and doomed to failure.

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