Sunday, April 26, 2015

There's No Recession in Sight

In the below column, Kudlow is correct in stating that the economy is in an uptrend. although he fails to emphasize that it is a Fed manipulated boom, and that it will end badly.He is dead wrong, though, that there is no inflation in sight. It is right around the corner. But what economic observers need to take away from this Kudlow column is the fact that it is a boom-bust cycle and that not every day is going to be a down day for the economy.  -RW

By Larry Kudlow

The economy has been in a tepid, soft, slow recovery for the past five-and-a-half years. It's the weakest rebound in generations. The Commerce Department's revision of fourth-quarter GDP shows that nothing much has changed. Over the past year, real economic growth registered 2.4 percent, slightly higher than the recovery average. It ain't much.

Meanwhile, winter economic reports for retail sales, manufacturing and capital investment point to a weaker first quarter, perhaps around 1 percent. And Wall Street is talking about a possible profits recession, with expectations of a 2 or 3 percent drop in corporate earnings for the first half of 2015. So the market bears are out in full force.

Now, let's acknowledge that coming off a deep recession, the rebound should have been 4 or 5 percent, not 2 percent. By some calculations, GDP is 10 percent — or nearly $2 trillion — below its long-term trend, and jobs may be lagging by 8 to 10 million.

Government entitlement transfers pay people not to work. Family breakdown has created a poverty trap for the lowest economic groups. Upward mobility is lagging. And the government has attacked the high-end movers and shakers with tax hikes and overregulation.

And unfortunately, a damaging business psychology prevails. It says that success must be punished and that redistribution is the way to solve inadequate growth, inequality and unhappiness.

But ... all this said ... it's possible to be too pessimistic.

Let's start with profits, the mother's milk of stocks and lifeblood of the economy. The recent GDP report shows a slight profits decline in 2014, the first in years. But this is misleading.

More important, the core measure of earnings, domestic nonfinancial profits, increased 1.4 percent in the fourth quarter and 7.8 percent for 2014. On an annual basis these profits increased $262 billion and were widespread across industries.

The big problem is not the U.S., but the rest of the world, which is mostly in recession and saw profits drop $36 billion in the fourth quarter. At roughly 18 percent, profits from the rest of the world account for the smallest share of corporate earnings since 2006.

By the way, GDP profits from the National Income Accounts are far larger, and therefore more telling, than S&P 500 profits. Initial quarterly estimates from GDP cover about 9,000 companies. Over time, annual revisions will cover roughly 4 million companies. And GDP profits are benchmarked to IRS tax filings, with no accounting shenanigans.

Another economic positive is the rise of the consumer. Rex Nutting of MarketWatch reminds us that consumers got a big windfall from plunging energy prices. So far they've saved it, but that may change. Real incomes adjusted for taxes and inflation jumped at a 7.7 percent annual rate over the past three months. This could set the stage for a big boost in consumer spending.

The terrible winter has taken its toll in Q1. But family spending may jump come spring and summer. Along with this, the basic core of the private economy (consumption plus investment), which rose over 4 percent in the fourth quarter and 3.3 percent for 2014, will continue to advance.

Did somebody say King Dollar? It's holding down consumer prices and business costs (including energy). Even with a lousy world economy, U.S. exports increased 4.5 percent annually in the fourth quarter, while imports jumped 10.4 percent. So U.S. businesses are very competitive regarding export sales, and the rise in American imports from overseas will bolster the international economy.

One last encouraging point: C&I business loans have increased over 15 percent annually in the last three months and about 12.5 percent in the past year. That's a good sign, especially for Main Street business activity, which has been lagging for years.

The Fed will probably raise its target rate later rather than sooner, smaller rather than larger. I'm betting on October and December for some quarter-point rate hikes. That's consistent with high dollar and low commodity prices. I doubt long-term rates will change much at all.

So moderate growth, rising core profits and a still-accommodative Fed set the stage for a better stock market as the year goes on. I'm still in the "buy the dip" camp. We're not going to get the kind of growth that America is capable of producing until we get tax and regulatory relief and a better attitude about free-market capitalism. But I wouldn't get too pessimistic.

There's no recession or inflation in sight, and America is a very resilient place.

Don't bet against it.

Larry Kudlow is CNBC's Senior Contributor and author of American Abundance: The New Economic & Moral Prosperity.


1 comment:

  1. Larry meet Doug....


    After failing to heed the lessons from 1994 and 2000 experiences, we shouldn’t have been surprised by another failure. The number one lesson global policymakers gleaned from the 2008 debacle: Lehman Brothers should never have been allowed to fail. Somehow, Trillions of high-risk loans, Trillions of leverage, Trillions of fraud/corruption, Trillions of mispriced securities, and resulting unprecedented economic maladjustment could have been sustained had Lehman been bailed out (a modern version of “the Great Depression could have been avoided had the Fed recapitalized the banking system.”). Given determination and some time, it’s always possible to inflate out of debt troubles. Really Dangerous Thinking.

    So global policymakers have come to believe that Bubbles can be accommodated – even used as a policy tool. Market perceptions can be readily manipulated – and the Fed has a role, a moral obligation to do so. Market risk aversion, liquidity and tumult can be expertly managed. Do whatever it takes to assure the markets that crisis will not be tolerated. Act with sufficient resolve to ensure the speculator community bets with policy and not against it. Above all, guarantee abundant, uninterrupted cheap marketplace liquidity. And this all goes directly counter to what I believe is the critically important analysis of our times: There is no alternative but to develop a systematic approach to suppressing Bubbles – and the earlier the better.

    Here in the U.S., there’s been zero effort to downsize the GSEs. Despite the Trillions that have flowed into “bond” funds, ETFs and risk assets more generally, the Fed has made no attempt to extricate itself from crisis-period market manipulations and move toward a more normalized risk market backdrop. Leveraged speculation has never been so popular. The marketplace for Credit and market derivative “insurance” poses as big a systemic risk as ever. Arguably, securities markets have never been so distorted.

    Today’s policy debate centers on when to commence transparent, slow-motion little baby step rate increases – and on the eventual pace of reducing the Fed’s bloated balance sheet. It’s all Pro-Bubble. The critical issue is the market perception that the Fed will immediately reemploy QE at the first sign of market tumult. This is the fundamental Pro-Bubble Market Distortion that desperately needs to be addressed and rectified (reminiscent of the Pro-Bubble market perception that the Treasury and Fed would back GSE obligations that was at the heart of mortgage finance Bubble excesses). Why would market participant fret inflating Bubbles when they only increase the probabilities of additional QE?

    Central to Credit Bubble Theory is the view that systemic risk rises exponentially during the “Terminal Phase” period of Bubble excess. Policymakers are on a fool’s errand when they set a policy course to patiently and innocuously deflate a Bubble. After all, bailing out Lehman would have only led to a bigger Bubble. “Kicking the can” on an insolvent Greece has only worsened a really bad situation. Draghi’s QE is Pro-securities Bubbles and is only worsening systemic fragility. Reckless BOJ QE is setting the stage for collapse. Meanwhile, no one is working more diligently to manage a runaway Bubble than the Chinese.

    The aged global Bubble is in a precarious late-phase dynamic (that somehow passes for financial nirvana). Having survived previous scares, close calls, panics and even deep crises, the world has grown convinced that policymakers now have everything under control. “Money” printing works. Manipulating securities markets (for the greater good) has become adeptly refined. Moreover, when it comes to China and the Chinese Bubble, they have $3.7 Trillion of reserves – a horde easily capable of stimulating the economy, recapitalizing its banking system and accommodating financial outflows as necessary.