Tuesday, January 29, 2008

The Natural Truth About The Economy

Democrats won't tell you. And for smart political reasons, Mitt Romney won't tell you. And the mainstream media is NEVER going to tell you, until a Democrat is elected president, at which time this will become front page news:

The Economy Is Fine (Really).

So says economist Brian Wesbury in the Wall Street Journal today.

Now I know some people are going to rush to the partisan ramparts, screaming and yelling that this is Bush propaganda, etc., etc. But may I ask you, before you slam another shot of Kool-Aid, to at least look for a moment at the actual math?

True, retail sales fell 0.4% in December and fourth-quarter real GDP probably grew at only a 1.5% annual rate. It is also true that in the past six months manufacturing production has been flat, new orders for durable goods have fallen at a 0.8% annual rate, and unemployment blipped up to 5%. Soft data for sure, but nowhere near the end of the world.

It is most likely that this recent weakness is a payback for previous strength. Real GDP surged at a 4.9% annual rate in the third quarter, while retail sales jumped 1.1% in November. A one-month drop in retail sales is not unusual. In each of the past five years, retail sales have reported at least three negative months. These declines are part of the normal volatility of the data, caused by wild swings in
oil prices, seasonal adjustments, or weather. Over-reacting is a mistake.

A year ago, most economic data looked much worse than they do today. Industrial production fell 1.1% during the six months ending February 2007, while new orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006. Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year -- real GDP expanded 4.4% at an annual rate between April and September.

With housing so weak, the recent softness in production and durable goods orders is understandable. But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy, and are growing at a 13.6%
The boom in exports is overwhelming the loss from housing.

Personal income is up 6.1% during the year ending in November, while small-business income accelerated in October and November, during the height of the credit crisis. In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September.

These facts aren't politically expedient. They aren't of inter est to the so-called "business reporters" at the Boston Globe-Democrat. But they are the facts. And, though you can't tell it amid the panic, they are good news.