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Bush Boom Continues
You can call it Goldilocks 2.0. But you can't call it a recession.


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Larry Kudlow

Following last week’s solid jobs report, the New York Times got back to its Bush-bashing recession mantra with the front-page headline: “Slowing Growth and Jobs Seen as Ominous Sign for the Economy.”

This chant has been going on for quite some time. Doom and gloom from the economic pessimists has been political sport for seven years, even though the Bush boom just celebrated its sixth anniversary. The current expansion is now in its 74th month — 17 months longer than the average 57-month business cycle since World War II.

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Jobs are an “ominous sign for the economy”? The latest jobs report says America is still working, with 94,000 new corporate payrolls in November and a rolling average of 103,000 job increases for the past three months. Along with a 4.7 percent unemployment rate, there is no evidence of a recessionary collapse in jobs. Even the household job count, which picks up small businesses, surged 696,000 in November, with a 303,000 average gain over the past three months.

Jobs are paying more, too. Worker wages are rising 3.8 percent over the past year, a full percentage point ahead of inflation. In fact, growth in total compensation for the entire workforce is rising at a 3.3 percent pace after inflation. University of Michigan Professor Mark Perry, writing in his Carpe Diem blog, says this is the best performance in seven years.

But wait, there’s more. U.S. productivity surged 6.3 percent in the third quarter, its best pace in four years. A big rise in output per person is good for profits, growth, and low inflation. Business inflation has come down from 3.5 percent a year ago to 1.5 percent today. U.S. household net worth just scored a new record high of $58.6 trillion, with financial asset gains outpacing the drop in real estate values.

According to Prof. Perry, household wealth has increased 43 percent in just the past five years, despite $100 oil, $3 gas, and the sub-prime infection. The stock market, which is probably the best leading indicator of the future economy, appears just as resilient. Despite these same challenges, it is overcoming a brief correction and looks set to rise by roughly 10 percent this year.

Yes, economic growth may indeed pause to roughly 2 percent in the next couple of quarters, the result of two years of overly tight money from the Federal Reserve and the ensuing upturn in sub-prime defaults and foreclosures. You can call it Goldilocks 2.0. But you can’t call it a recession.

Even the housing market has its share of positive developments. Mortgage refinancings are up nearly 70 percent as mortgage rates on fifteen- and thirty-year loans are down nearly 100 basis points. Such events may help cushion the plunge in home sales and will eventually stabilize prices.

Meanwhile, Treasury Secretary Paulson has put together a modest refinancing safety net that grants poorer homeowners some breathing room in which to modify and work-out jumps in low teaser rates. The Paulson plan would shift borrowers into FHA-insured refinancings, which can be packaged by Ginnie Mae (the Government National Mortgage Association) into new loan pools that will be bought and sold by investors. It’s a relatively small plan that could help a half-million borrowers, and it will preempt Democratic efforts to spend billions on direct subsidies or bailouts.

The Fed can aid this plan on Tuesday by getting its target fed funds rate down by 50 basis points. This will take the pressure off adjustable-rate-mortgage increases. What’s more, the central bank can help unclog frozen short-term financing problems in the commercial paper market in New York and the interbank LIBOR markets in London. If businesses can’t get short-term loans, the economic expansion will be seriously threatened.

The Fed also must undo the inverted Treasury yield curve whereby the 4.5 percent fed funds rate remains well above the 4 percent ten-year Treasury rate. This situation has prevailed for 18 months; unless it’s fixed immediately it represents an illiquidity threat that increases the odds of recession. A 3-month Treasury bill around 3 percent is pointing the way for the fed funds rate.

Righting the yield curve and expanding the monetary base by at least twice its current 2 percent growth rate would also provide new oxygen for the low tax rates on investment put in place over four years ago. The incentive effect of these supply-side tax cuts has been smothered by an overly tight Fed. But if Bernanke & Co. move aggressively, business investment and capital formation will soon pick up speed.

This sort of fiscal and monetary coordination will continue the Bush boom for years to come. Though mainstream media outlets will never admit it, President Bush has kept America safe and prosperous. But history will eventually judge him in a more kindly light.



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