Monday, October 12, 2009

Brian Wesbury's Punt In Today's Wall Street Journal

Brian Wesbury wrote an almost schizophrenic economic editorial in today's edition of the Wall Street Journal, entitled "The Economic Recovery Is Well Underway." It's curious to me that he has been absent from the usual venues on which I've either seen or read him for about a year. For example, these posts, here and here, date from August and December of last year.

Wesbury states early in his editorial,

"Many fear a W-shaped economy, otherwise known as a double-dip recession. These fears are overblown. The only double-dip recession of recent decades happened in the early 1980s, when the country was in the grip of "stagflation" and the Federal Reserve ran a roller-coaster monetary policy."

I won't go into all the details Wesbury presents, but simply note his high points. First, he notes that the equity market's recovery dates from about the point at which 'mark to market' valuation was suspended/modified, thus setting a floor under many financial instrument and, by extension, financial entity valuations.

He argues that housing, manufacturing, consumer spending, imports and exports are all of their recession lows. Yes, he writes, even consumer spending, excluding automobiles, is up at a 3.9% annual rate. Wesbury converts all of the quarterly or less rates into annualized rates, so the numbers are pretty compelling, if only on that basis.

On the job losses front, Wesbury cites conventional wisdom that jobs data are always lagging recessionary indicators, but he takes heart that the monthly losses have declined from the 700,000 range early in the year to just below 200,000 recently.

As others have claimed, Wesbury, too, now believes that inventory rebuilding will bring about private sector economic growth and job creation.

So far, Wesbury has kept to conventional economic data and indicators, and on these bases, he's now an optimist. It seems odd to me that he is now completely silent on the hyper-inflation which so consumed him only last December. In fact, the editorial notes, after attributing the piece to Wesbury, that he will soon have a book published entitled "It's Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy Will Thrive."

Perhaps the book has consumed Wesbury's time and efforts for most of the past twelve months.

However, he then turns schizophrenic in the editorial, writing,

"The two factors that could undermine growth in the long run are bad government policy combined with global competition."

He then cites something I mentioned to a colleague recently, i.e., most of the S&P500 have significant sales and operations outside the US. Just because their revenues and profits might benefit from global growth doesn't mean jobs will be created in the US. Wesbury then goes on to note the rise in the minimum wage, a possible temporary job creation tax credit, and probable higher tax rates as bad for the US economic recovery.

He concludes his piece with this passage,

"There is no free lunch. If you take a look at the U.S. economy since 1960, the larger the government share of GDP, the higher the unemployment rate. In other words, when it comes to jobs, government spending has a multiplier of less than one- government spending destroys jobs.

Whether or not this recovery continues depends on the course of government policy. If the U.S. passes a costly bill to nationalize the health-care system, a new tax system to reduce carbon emissions, and higher marginal income tax rates, a European sclerosis will settle in with permanently higher unemployment rates. This will not happen because capitalism failed, but because government gave up on it prematurely."

I am left feeling that Wesbury is trying to have it both ways. He forecasts a recovery on existing economic data, but clearly hedges by citing pending administration and Congressional plans to do all the things about which he warns in his last paragraph. I understand why he does this, and he is attempting to convey what he sees now.

That is, an economy that could be recovering, albeit slowly from a fairly deep drop in economic activity. Combined with federal fiscal policies that could cripple the once-vibrant US economy.

It's hardly a prescription for confidence in either fundamental economic performance or the equity markets for the next few months.

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