Entries for April 2008

Out: Recession. In: Expansion. That's my quick take on today's first-quarter gross domestic product number, which showed that the economy grew 0.6 percent in the first quarter. Now that's not a robust number by any means, but it's not so bad given all the worry out there that the economy is headed off a cliff. Before you declare a recession, as many economic pundits have, shouldn't the economy, well, actually recess a bit—if only for a quarter?

Remember, the shorthand rule for declaring a recession is back-to-back quarters of negative growth. The semiofficial recession judge, the National Bureau of Economic Research, has a more complex formula, but I am not sure it has ever declared a recession when the economy never actually shrank. And consider this: The Intrade online betting market now says there is a meager 25 percent chance of a recession—using the negative-back-to-back-quarters definition—in 2008.

Uncle Sam has plenty of dough. That's the core belief at the center of McCainomics. Or maybe we should call it "maverick economics," since John McCain's approach toward taxes and government spending has the potential to change the rules of the Washington budget game. Actually, it has the potential to change the game itself and perhaps create a long-term solution to America's fiscal problem—with trillions left over. See, that's what the Wall Street Journal didn't seem to understand when one of its reporters wrote the following last week:

Sen. John McCain is proposing tax cuts that would either cause the federal deficit to explode or would require unprecedented spending cuts equal to one-third of federal spending on domestic programs.

John McCain's top economic adviser, Douglas Holtz-Eakin, didn't much like Wall Street Journal reporter Laura Meckler's recent analysis of his boss's economic plan. Meckler's lede: "Sen. John McCain is proposing tax cuts that would either cause the federal deficit to explode or would require unprecedented spending cuts equal to one third of federal spending on domestic programs." In a response he wrote at National Review Online, Holtz-Eakin outlines a number of problems, including this one:

Meckler presents "independent" sources to back up basic assumptions that are not really independent or relevant at all. The Center for Budget and Policy Priorities is liberal-leaning and the Concord Coalition has largely lost relevancy. Yet, these are the only two sources quoted. Why didn't Meckler reach out to the Heritage Foundation, Cato Institute, or the American Enterprise Institute for a more balanced piece?

Dan Clifton over at Strategas Research crunches the numbers on the Clinton and Obama economic and budget plans and squeezes out a lot of red ink:

Our review of spending and tax proposals show Democratic candidates are seeking to make their proposals "paid for" in a budget neutral manner. Hence, the candidates are ignoring the fact that they will be facing possibly a $500bn budget deficit upon entering office. The net effect of this is that most of the spending plans being promised will be scuttled for only the highest priorities.... We pulled the major tax proposals and matched the number to the proposed spending. If Clinton was able to enact all of her promises, the deficit would increase by more than $100bn and Obama by $175bn. We were generous by assuming troop withdrawal will occur immediately, the tax cut repeal is retroactive, [ignoring] automatic entitlement spending, and the AMT and the spending proposals were not even close. Governing will be very different than campaigning.

My take: The news could be even worse since the higher tax rates could retard economic growth and lead to lower government revenues. This could be 1993 all over again, where Bill Clinton scrapped his Putting People First agenda in favor of budget cutting.

Brian Wesbury and Bob Stein of First Trust Advisors still see better days ahead—and soon!:

In our view, the economy has been slow in the first half of 2008 due to an almost irrational level of fear and risk aversion. This risk aversion can be seen in very rapid growth in money market mutual fund assets—from $2.4 trillion a year ago to roughly $3.5 trillion today. ed rate cuts, which are likely to end this week, have temporarily created a self-fulfilling prophecy of economic slowness, as some businesses and consumers postpone activity until they are confident rates have hit bottom. But that scenario makes us confident in a sharp rebound in the second half of the year. With rates days away from their bottom, the full force of the Fed's loose monetary policy is about to be unleashed. Faster growth is just around the corner.

Here is something to keep in mind concerning the sudden Soylent Green hysteria about rising food prices: Resources are limited only by the imagination and creativity of people operating in a free marketplace. Peak oil? Maybe. Peak energy? No way. Likewise, I don't think that McDonald's selling vat-grown burgers and algae fries is in our future. And neither does University of Chicago economist and Nobel laureate Gary Becker, who makes some sensible points in his blog (boldface by me):

An analogy is often drawn with oil prices since both have risen rapidly during past couple of years, and there is much fear by oil importing countries that oil prices will continue to go up during the next few years.... However, the analogy to oil is seriously flawed. Whatever happens to oil prices, there are grounds for much greater optimism about food prices. Any increase in the production of oil is limited by its fixed availability at different locations on earth. The supply responses to higher prices of agricultural production will be much greater than that of oil production for two fundamental reasons. The first is that only a small fraction of potential arable land is used for farming because the growth of cities and suburbia has led to mass conversions to other purposes of land formerly used to grow foods. Persistent high and climbing prices of grains and other foods will induce conversion of some of this land back to farming.

The second reason for optimism relates to the lower productivity of food production in the poorer parts of the world relative to the United States and other developed countries. Higher food prices will induce an increase in productivity in developing nations by encouraging greater use of machinery, fertilizers, and other forms of capital. It will also encourage consolidation of some agricultural holdings into the hands of more efficient farmers. Efficiency in oil production is more uniform in different parts of the world than is food production since the major energy international conglomerates produce all over the globe, including many poorer nations.

Is this as good as it gets for John McCain? The latest from political analyst Alec Phillips at Goldman Sachs:

Recent polling indicates a tighter general election than many observers would have expected. This is largely because McCain has greater support in head-to-head polls against Obama than against Clinton in key swing states like Florida and Ohio. The general election may indeed be close, but it is likely that these polls will begin to change as the contest moves from a three-candidate race to a true head-to-head contest later this year.... These polls imply a close race at the moment, although Democratic performance may improve once the nomination is decided. Taking poll results for the states named above at face value and plugging in the 2004 election results into the rest, Obama would win 268 electoral votes to McCain's 270, while Clinton would win 289 to McCain's 249. Notwithstanding these implications, political prediction markets continue to imply a 60% probability that the Democratic candidate will win the election this fall.

Is the economy weak? You betcha. Is it falling off a cliff? Doesn't seem to be. According to new data today, weekly initial jobless claims fell from 375,000 to 342,000, the lowest level in two months. And outside of the transportation sector, durable-goods orders rose 1.5 percent. From these numbers, the folks at Action Economics conclude the following:

Both the U.S. durable goods and initial claims reports this morning bucked the path that seemed likely following the last round of weak payroll figures, and further truncated downside risks to growth as we enter Q2. Though we will keep our -0.5% GDP forecast intact until we get next week's April jobs report, we have now revised up our Q1 estimate to 0.8%, and there remains little evidence in the available equipment figures that businesses are pulling back on equipment spending beyond simply sustaining the sluggish sideways path of the last two years. The new home sales report for March squelched any hope for good news from this sector, however, as it's clear that if the economy is going to avoid outright declines in the first half of the year, it won't be because of a change in the trajectory for new home construction.

My pal Dan Clifton over at Strategas Research has the skinny on John McCain's upcoming energy proposal. "The major trade on McCain's energy proposals is long nuclear and short ethanol," he says. Among the details:

1. Nuclear Energy. We believe McCain will address these issues comprehensively focusing on how the US can build more nuclear plants.... 2. Increasing Refinery Capacity. We believe McCain will propose a new method for refining capacity, either through new construction or upgrades, while balancing environment, regulatory, and cost concerns.... 3. Ending Ethanol Subsidies. McCain will adamantly campaign to end ethanol subsidies, even despite the fact that Iowa is a key swing state in this election.

Austan Goolsbee, an economics professor at the University of Chicago and Barack Obama's affable top economic adviser, takes issue with my recent post "Obama and (Even) Higher Capital-Gains Taxes." In an E-mail I got last night, Goolsbee writes: "Jimmy, You know I love reading your posts—you keep us on our toes. One objection, though, on factual grounds with this one."

This is the offending passage that Goolsbee goes on to cite:

In a recent chat, Austan Goolsbee, Obama's economic adviser, told me that the candidate was not in favor of equalizing income and capital-gains rates. Yet consider this: Obama says he intends to, at minimum, make the budget deficit no worse. But in my conversation with Goolsbee, it was clear that the campaign is underestimating the size of the 2009 budget deficit by $100 billion or more.

Barack Obama intends, if elected, to nearly double the capital-gains-tax rate to 28 percent—higher than the 20 percent rate when President Clinton left office—from its current rate of 15 percent. But capital-gains taxes may be going even higher. Consider this: There are plenty of Democrats, such as failed White House contender John Edwards, who want capital to be taxed at the same rate as income. And since they tend to be the same folks who want to repeal the Bush cut in the top marginal income tax rate, such a move would push rates for capital-gains taxes to a sky-high 40 percent. That would be as high as they have been since before the landmark 1978 cut in the capital-gains tax.

In a recent chat, Austan Goolsbee, Obama's economic adviser, told me that the candidate was not in favor of equalizing income and capital-gains rates. Yet consider this: Obama says he intends to, at minimum, make the budget deficit no worse. But in my conversation with Goolsbee, it was clear that the campaign is underestimating the size of the 2009 budget deficit by $100 billion or more. Goolsbee was unaware of private-sector estimates putting the deficit at half a trillion dollars and climbing, thanks to the weak economy.

To have a revenue-neutral budget under that scenario, Obama will have to either cut back on his spending plans or raise taxes even higher. And given that a President Obama would be dealing with even larger Democratic majorities in Congress, it would seem logical that higher capital-gains and/or higher income-tax rates would be a definite possibility.

I was a guest for the full hour on CNBC's The Call this morning, a show hosted by Trish Regan. When introducing one of the segments, Regan actually hedged on whether the economy is in recession. That's right, she actually had the temerity to suggest that maybe, just maybe, the economy still has a smidgen of growth rattling around in it. That sort of mildly contrarian economic take is heresy on Wall Street these days, where recession is thought to be a done deal.

Well, good for her. Such optimism is not only a welcome change but one rooted in the economic data. Consider the following:

It's been a long time since the dollar was a big presidential campaign issue. Probably not since Bryan vs. McKinley in 1896. And I've noticed that whenever CNBC's Larry Kudlow brings up the possibility that the tumbling greenback—or the "U.S. peso," as he likes to call it—may return to political prominence in 2008, the political smarties on his show always scoff, like Americans are rubes or something and don't "get" the fact that their national currency has become a global joke.

But who can forget TV images of celebrating Canadians when their "loonie" hit parity with the dollar last year? And guess what, Americans make some 30 million trips out of the country every year. Those folks sure know what the dollar is doing. The state of the dollar has even invaded popular culture. Comedians are making jokes about it, like this one from Stephen Colbert:

My pal John Tamny edits the wonderful RealClearMarkets site, my first read every morning. He writes for it as well and just turned out a great piece of commentary on why we should dump the sacred mortgage interest deduction. The money graf:

Perhaps worst of all for our economic health, the mortgage-interest deduction drives capital away from the productive sector of the economy, and into the ground. Nineteenth century economist John Stuart Mill called the latter "unproductive investment," whereby capital is consumed rather than offered up as investment. This should concern all Americans, because to the extent that tax incentives create individual preference for consumption over savings, investment lags, and with lower investment comes lower wages.

Please, read the whole thing.

Economist Mike Darda over at MKM Partners sees some light at the end of the tunnel:

The current credit crisis looks to be about as bad as anything we've seen in the last two decades—but not worse. Various measures of financial system risk were far higher during the downturns of the 1970s and 1980s. Market price indicators suggest the Fed is easy, not tight, which means the economy should be in better shape a year from now. Moreover, the Fed's more aggressive discount window policy seems to have created a financial market inflection point around March 18, which we believe will continue to mark the low point for stocks.... The S&P 500 is now 9% above the March low. The two-year Treasury note yield has risen to 2.24% from a low of 1.34% on March 17. These are positive signs that risk aversion is beginning to ebb. While credit strains will be a headwind for some time, we believe there is substantial upside in risk assets such as equities and corporate bonds and significant downside risk in Treasuries.