by Larry Kudlow
August 12, 2006
The great American consumer has been written off so many times in the last couple of years, just like the rest of the economy. But he/she is alive and kicking. Another great story never told.
Retail sales came in at 1.4 percent for July, way above Wall Street expectations, while core sales excluding autos, gas and building materials — a number that feeds directly into GDP — increased 0.6 percent. Over the past three months, core sales rose 6.7 percent at annual rate, and in the past year they’re up 7.4 percent. Excluding autos alone, sales have gained 9.2 percent in the last 12 months. That’s big-time.
Sales of consumer durables also were strong. Some economists sounded the death knell for consumers when durable sales dropped in the second quarter. But in the newly released July report, durable-goods sales rose across the board: 3.1 percent for cars, 1.9 percent for electronics and appliances, 1.8 percent for building materials, and 0.5 percent for furniture. These are fat monthly gains.
Far too many investors, hedge fund managers and economists link the housing slowdown to an imminent consumer collapse. These bears are also quick to add rising gas prices and higher interest rates into their pessimistic outlooks. But they skip two very significant data points: Jobs and incomes are still climbing.
It may well be that Wall Street keeps overestimating the monthly job gains, but the fact remains that jobs are being added at a noteworthy clip of about 125,000 per month and the unemployment rate remains low. Because hours worked and wages continue to rise, incomes are still increasing at a comfortable 6 percent to 6.5 percent yearly pace. If jobs and wages were falling each month, you could write off consumer spending. But that’s simply not happening.
Charles Biderman, of Trim Tabs Investment Research in Santa Rosa, Calif., adds an additional bullish factoid: Individuals now hold $6.3 trillion in savings accounts, money market funds and CDs. In contrast, short-term debt — notably credit card and installment debt — stands at only $2.2 trillion, and is growing slowly. So, despite the housing slump, consumers have an excellent cash position. That is why Biderman is very bullish on the stock market, which he thinks will rise by 15 percent to 20 percent by year-end.
The cult of the bear will also be wrong on business cap-ex spending. American businesses have even more cash on hand than consumers, bolstered by second-quarter profits that came in 4 or 5 percentage points above estimates. Even though business equipment and software investment declined 1 percent at an annual rate in the second quarter, it rose 15.6 percent in the first quarter. Averaging the two gets you 7.3 percent business cap-ex for the first half of the year, and 6.9 percent for the last four quarters. Pretty hefty.
Since low tax rates on capital have rejuvenated investment returns and the overall economy’s animal spirits, this trend will only continue. Today’s low-tax environment is also a job creator, as is the red-hot corporate and commercial real-estate market.
Exactly 25 years ago, Ronald Reagan signed into law the first supply-side tax cuts since the JFK plan of the early 1960s. By reducing high marginal tax rates, Reagan transformed the American economy and opened the door to two-and-half decades of prosperity. Economic behavior responds significantly to the incentive power of low tax rates that raise the after-tax return on work, investment and risk-taking.
Over this time span, the United States has experienced only six quarters of negative GDP — a remarkable performance. Roughly 45 million new jobs have been created, with the economy averaging about 3.5 percent real growth each year. In the 1980s, as the economy supplied more goods to absorb the Fed’s money supply, inflation plunged from the stagflationary 1970s. Meanwhile, entire new technology industries sprung up, forming an information economy that has transformed business and productivity.
Stock markets exploded in the Schumpeterian environment of entrepreneurship that Reagan helped launch. Wealth creation reached unheard of levels among the 100 million investors who were spurred by new incentives to keep more of what they earned, saved and invested. Capitalism was rejuvenated in the United States, and then it spread around the world.
Ankle-biting, demand-side Keynesians (most of whom reside in the Democratic Party) are always looking for blotches, hanging toenails and the occasional scrape on what is today’s muscular and statuesque American economic body. But the genial and optimistic Reagan undoubtedly chuckles from his perch on high, as he watches his critics scramble to come up with a coherent opposing idea. They can’t, and they won’t.
One of Reagan’s big ideas was that tax incentives matter. It has been a blockbuster, runaway success. But even today, 25 years later, it remains the greatest economic story never told.
— Larry Kudlow is host of CNBC’s “Kudlow & Company”, economics editor for National Review Online and a nationally syndicated columnist. He served in the Reagan Administration and on the Bush-Cheney transition team.