A batch of economy-wide stats was released Friday morning (Sept. 14), covering retail sales, industrial production, import prices, and consumer confidence.
The verdict? It's a 2 percent economy. Call it Goldilocks 2.0.
Might the current financial turmoil throttle back growth a little more in the next six months? Yes, perhaps. Will there be some negative earnings surprises, especially from financial companies? Sure.
But the bears would have us believe the sub-prime credit virus heralds the end of the world. They are wrong. Remember this: Our free-market capitalist economy is resilient and durable. It has proven time and again that it can take a punch.
Sure, recession probabilities have increased. But so what? We've had virtually uninterrupted prosperity for 25 years, going back to the supply-side economy and technological boom launched by President Ronald Reagan. Since then, we've experienced 93 positive GDP quarters and only five negative ones. That makes for a truly phenomenal batting average.
Consider this: Marginal tax rates are low. Inflation is low. Interest rates are low. And the world economy remains strong. The stock market -- which I still believe is the best barometer of the health of business and the economic future -- has behaved surprisingly well during this difficult stretch of turbulence. In fact, the sum total of the so-called "bear assault" is only a 4.5 percent correction from Dow 14,000 and other index peaks registered two months ago.
Yes, profits are getting sloppy. And yes, there are some credit shocks out there yet to be revealed. However, the Federal Reserve will reduce the cost of money by bringing down its basic target rate on Tuesday (Sept. 18). President Bush will veto any Democratic tax hikes. And at the margin, the Iraq War story is taking a turn for the better. Meanwhile, American entrepreneurs are still working hard.
Speaking of next Tuesday, the best thing the Fed can do is deliver a big-bang, shock-and-awe rate cut that would bring the basic fed funds target 50 basis points lower to 4.75 percent. At the same time, it should lob a full percentage point off the discount lending rate, cutting it from 5.75 to 4.75 percent. This would be a confidence-inspiring move for all concerned: borrowers, lenders, businesses, consumers and mortgage holders. Not only will slashing the cost of money add significant new liquidity to the economy, it will raise asset values across the board.
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