Tuesday, February 12, 2008

Kudlow 101: Recession Watch

With as much objectivity as I can muster (yes, I still look at the facts), we are teetering very close to a recession. A case could be made that we are in one right now.

Here are the four top National Bureau of Economic Research indicators.

First one, employment:



It looks like the peak was in December. It’s a very small peak. But the peak was in December. January, as you know, delivered a small jobs loss.

Next up, manufacturing and trade sales:


This is probably the toughest one. It looks like it peaked several months ago, in October. We’ve got a pretty good decline cooking here. That is not a healthy signal at all.

Up next, personal income:


This one too, I find very troubling. We’re looking at income adjusted for inflation, taking out transfer payments. We’ve got some new information and revised old information here. The peak goes all the way back to September. It shows a gradual decline. Over the last three months, real disposable income is down 0.5 percent at an annual rate. This is a tough one.

And finally, industrial production:


Same story. The peak there could have been in September. Yes, the losses are very small. But it’s still not a good sign.

All this points to the increasing likelihood that Q1 GDP is going to be in negative territory.

It’s not the end of the world, however.

Here’s an interesting picture showing that while a free market economy is not always recession-free, it's nothing to get up in arms about. We do go through periodic corrections from time to time.


Take a good look at those numbers. Now, even if I assume that we are headed into a recession, over the last 60 years, post WWII, real GDP has increased a whopping $10 trillion dollars. That's 634 percent. That comes to 3.4 percent growth a year after inflation. And that covers ten recessions.

Now look at the stock market. The S&P 500 percentage return has been nothing short of incredible. Almost 87,000 percent. That comes to 12 percent a year, or 9 percent after inflation.

Look, we’ve had 10 recessions between 1947 & 2007. The average length is ten months. The last two were eight months. But because of our economic freedom (particularly in the last 25 years since Ronald Reagan helped transform the economy) none of this has impeded our prosperity. None of this has stopped output or employment. None of this has stopped the robust U.S. stock market expansion.

Our Goldilocks free market economy is not recession-free. We do have corrections in business cycles. I don’t deny that. But look at those numbers again. They are spectacular. This could very well be an extraordinary time to buy stocks for the long run.