Kudlow’s Money Politics

The V-Shaped Recovery Boom: More Evidence, Continued Threats

On the heels of the Dow crossing 11,000 for the first time since September 2008, I’d like to update my V-shaped recovery scenario with three new charts on lumber, aluminum, and business inventories. Ladies and gentlemen, the signs are there for a stronger rebound than many folks think. But first I’d like to raise this sobering point: Longer term, if this country of ours fails to stop its massive federal-spending-and-borrowing ways, we face an incredibly soaring tax-hike problem.

Last night I had the pleasure of speaking with Orrin Hatch, the top Republican on the tax-writing Senate Finance Committee. (He may be chairman after November’s election.) Hatch says we could go all the way back to a 90 percent tax rate if we don’t stop all this spending. Meanwhile, the well-respected, non-partisan Tax Policy Center says the top rate could get to 77 percent and that would only get us to a 3 percent deficit share of GDP. That’s nowhere near a balanced budget.

As a supply-sider, I’ll say this: Reversing the 50 years of lower-tax-rate progress that started under Pres. John F. Kennedy would deliver a brutal body blow to our long-run economic prosperity and stock market. This is exactly why my V-shaped recovery-boom scenario can take us to year-end 2010, but not beyond that — unless and until we see some wholesale changes to Washington money-politics and policy.

Incidentally, on tonight’s program we’re going to welcome supply-side godfathers Art Laffer and Robert Mundell to talk about taxes, spending, borrowing, and growth. We will discuss the gathering high-tax storm clouds that will derail U.S. economic growth if Washington doesn’t quit spending so much. You won’t want to miss it.

But let’s enjoy the here and now, one day at a time.

Lately, I’ve been talking a lot about the V-shaped recovery in profits, ISMs, household employment, commodity indexes, and railroad freight-car loading. These are significant indicators of a stronger-than-expected economy in the quarters ahead. Now I’d like to add three more indicators.

First up is aluminum:

You can see the nice upward move. It’s really beginning to show a V-shaped trajectory. Now, Alcoa reported better-than-expected profits, but it didn’t make it on top-line revenues. Nonetheless, I’ve been talking about the commodity boom, and aluminum adds to the evidence.

Next up, lumber prices:

It’s the same story, really. You’re getting a V-shaped upward move. This is interesting. Part of this can be attributed to cutbacks in production — I’m the first to acknowledge that. But another part of the lumber-price-hike story is China and the global boom from the emerging economies that need lumber, paper, pulp, and processing.

And here’s a look at inventories:

Business inventories are beginning to re-accumulate after many, many quarters of decline. This is a key point for the stock market and economy going forward.

Finally, I’d like to remind you of retail chain-store sales:

Retail chain-store sales were very strong, up basically 10 percent. This one truly is a V. And tomorrow we get a new report on overall retail sales. Most folks are optimistic about the retail-sales outlook.

In summary, I am sticking with my V-shaped recovery-boom scenario. The data coming in show that the economy is probably stronger than most people think. Profits are strong. The Federal Reserve is still ultra-easy. Inventories are building. Commodities are strong. And as my friend Michael Darda reminds me, credit-market spreads against the Treasury curve — the so-called risk spreads — are very narrow. All of this suggests stronger economic growth.

Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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