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Never Mind The Gloomsayers
This economy is getting back into swing.


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Larry Kudlow

Ronald Reagan once asked: “Okay, you’ve shown me the manure, now where’s the pony?” At a pivotal moment in history, the nation’s CEOs — who are always the most lagging indicators of business conditions — are in economic distress. Okay, so show us the pony.

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If our CEOs took the time to look closely at the latest batch of economic data, they’d see green fields rather than manure — and they’d quit their handwringing.

Core retail sales, including merchandise and department stores and excluding autos, are much stronger than expected. With cooler fall weather, even apparel was up 4% in October alone.

If the government statistical machines were any good, they would have published a dockworker-strike-adjusted version of wholesale prices and industrial production. Because of the strike, shortages temporarily jacked up prices and bottlenecks held down production. In other words, the October numbers that have CEOs down in the dumps are completely distorted — and should have been banned from investor consumption.

As for production, the big positives are computers and office equipment, and the high-tech composite of computers, communications equipment, and semi-conductors. Over the past 12 months the former is up 18% and the latter is up 15%. While capital spending is still soft, unemployment insurance claims have come in below 400,000 for several weeks now, a sign that labor markets may be strengthening.

Deflation, as tracked by the producer price index, may also be over. Finished goods registered a slight increase over the last twelve-months, the first such non-deflationary reading since September 2001. This could mean that price stability is replacing deflation.

On this monetary theme, the Federal Reserve’s balance sheet continues to grow at an 8% yearly rate, while M2 (a conventional measure of money and credit) has accelerated to 10.2% annually over the latest six-month period, compared with only 4.2% during the prior period. These expansive liquidity conditions will not only lead to stronger top-line sales revenues, but they are helping solve the corporate credit crunch.

Finally, on Wall Street the growth-sensitive tech and telecom sectors have led the rebound parade since the market’s low on October 9, and the tech-heavy Nasdaq is outperforming the S&P 500.

It’s hard enough to find manure in this data, let alone the pony that’s making it.

Former GE chairman Jack Welch is exhorting big company CEOs to get moving and stop whining. “Wall Street is dry as a bone right now but there are more deals out there than we’ve ever seen,” Welch told a conference of CEOs. “There is too much hunkering down.” Right on, Jack.

Productivity, which is now growing at a 5% pace, is probably the most significant number in the whole economic batch. It shows that the benefits of the technology revolution are still matriculating throughout the economy and that more output is being produced with fewer resources. This is a sure sign of future economic-growth potential. And to think American workers pulled this off despite terrorist bombings, war anxieties, corporate corruption, and accounting fraud. That’s a job well done.

Change — for the better — is in the air. In the months ahead, there will be plenty of takeovers and consolidations and plenty of management changes as our free-market capitalist system reinvents itself. Michael Capellas is taking over the disgraced Worldcom, and Barry Diller will run Vivendi Entertainment. These are two very smart CEOs moving to resurrect old franchises that are badly in need of an electric jolt. Reinvention is good.

Unlike the sclerotic European and Japanese economies — who’d just love to have our 3% growth over the past four recovery quarters — the U.S. economy is dynamic. Gales of creative destruction are constantly blowing through every nook and cranny of our economy. In fact, the destruction part is now ending — and the creative part is resuming.

Sure, the 4th quarter will be soft. But that’s mainly because everyone is waiting for President Bush to slash tax-rates on investment, dividends, and supersaver accounts. Any temporary softness in this fourth quarter could give way to a big-bang recovery next year as high-powered tax cuts arrive and investors get busy again.

After a dreary couple of years, this economy is getting back into swing. Don’t let the gloomy CEOs convince you otherwise.



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