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Keep The Prosperous Faith
Hang in there. The economic news is pretty good.


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Larry Kudlow

 If anybody is looking, the recent economic news is pretty good. No — it’s not fabulous. But it’s enough to sustain a decent (if slower) second quarter, perhaps even a 3% rise in the economy following a 6% jump in the first quarter. That will make for a 4.5% first half and should lead to a 4% second half.

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Normally, recoveries grow at 6% to 7% in the first year. But after what’s happened to the stock market, I’ll take 4% in a New York minute.

Still not out of your Wall Street funk? Well, here are the plentiful reasons for you to keep the faith.

June retail sales increased a sizable 1%, offsetting the drop in consumer activity in May. General merchandise (read: Wal-Mart) is growing at 5.1%, and year-to-year retail sales are nearly 3.5%, up from a 0.5% trough last autumn.

Industrial production numbers — the single-best indicator of the economy’s progress — are due out shortly. Judging from prior production increases, as well as recent durable goods and factory shipments, the second quarter should register the first gain in business investment since Hannibal crossed the Alps (219 B.C.).

Commodity indexes are slowly trending higher, implying that money is changing hands faster out there. With the Fed continuing to pump up the monetary base, it’s almost impossible to anticipate less than a 5% spike in nominal GDP this year. And that number could easily be 6%.

Wholesale prices show that inflation is nil, and that we’ve actually been deflating at a 2% annual rate. If you want price increases, you have to look to the steel business where stupid trade tariffs have bloated iron and steel materials by a 130% annual rate over the past three months. This protectionism was a stupid move by the Bushies, but at least it hasn’t produced monetary-driven price hikes.

Energy prices are down 12.5% overall, with gasoline prices declining 18% and natural gas dropping 20% over the past year. Hooray for Vladimir Putin’s OPEC-defying Russia. Meanwhile, consumer goods prices are falling at a 2.6% rate, autos prices by 1.7%, and capital goods by 0.2%. Computer prices, meanwhile, are deflating at a 24% pace. Did someone say the Fed should tighten interest rates because of rising inflation? Oh my gosh.

The stock market’s reaction to President Bush’s corporate responsibility overhaul again proves that no good deed goes unpunished. But we now know that Congress will produce a decent final plan that reverses moral amnesia and restores ethical behavior in corporate America. Incentives such as 10-year jail terms and the fear of having to return fraudulently earned pay packages will concentrate the executive mind. Better disclosure, meanwhile, will be an aid to investors.

While Bush’s plan will improve accounting standards and corporate ethics for the next 50 years — deservedly putting more power in the hands of the investor class — it’s the next 20 days that worries shareholders. August 4 is the executive certification date for all financial documents presented to the SEC, and folks are worried that income statements and balance sheets will be scrubbed to the bone, producing more nasty headlines. So the market is pricing in plenty of corporate-risk blowup. But this too will pass.

For those who still despair at a lack of good news, please read Michael Mandel’s latest Business Week article. It shows that productivity, incomes, wages, and real stock prices are still considerably higher than they were in 1995. The basket of bad corporate apples may be turning into a barrel, but underlying prosperity trends are still in place.

For those who still hold to the longer-term view of personal finance, which is the key to successful investing, today’s market averages look to be nearly 40% undervalued.

For those policy makers among you, a 4% economy could be turned into a 6% economy over the next few years if the government would reliquify the gold price to $350 (or even $400), eliminate the double taxation of dividends, lower the capital gains tax, and accelerate planned income-tax cuts. Add to that the elimination of the steel tariff and a once-and-for-all dead Osama bin Laden, and we’ll be sitting pretty.

For those of you who have faith, now’s the time to rely on it. Faith defeats the forces of darkness. Faith brings on the forces of good. The stock market has survived tough runs before, and it will do so again.



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