Larry Kudlow

Wall Street remains caught in a tizzy over a power outage in the credit markets. But Main Street is in fine economic shape, according to the latest reports out of Washington.

Industrial production -- one of the most important coincident indicators out there -- is steadily rebounding. Overall, it's up 2.9 percent annually over the past three months. Manufacturing is up 4.7 percent. Auto output has increased 19.4 percent. Computers and office equipment are up a whopping 25 percent.

These are big numbers. And Americans are buying what these businesses are producing. Overall retail sales are up 4.8 percent for the past three months at an annual rate.

Sure, housing is still soft. But building-material sales are up 11.4 percent for the past three months. General merchandise and department stores are up roughly 10 percent. Clothing stores are up 12 percent.

Meanwhile, the latest inflation numbers from the consumer price index are tame. Headline inflation is up 2.4 percent over year ago, and core inflation is at 2.2 percent. On a more accurate chain-weighted basis, the overall CPI rose only 2.1 percent with a core increase of 1.8 percent. Gasoline prices have dropped about 50 cents at the pump.

Wall Street is beating up Wal-Mart for expected growth of only 2 percent. But the Democrats' most-hated American company actually posted a 49 percent gain in profits over the past year. As Jimmy Pethokoukis of U.S. News reports, Wal-Mart's $11 billion in profits came with sales of $345 billion -- an 8.8 percent gain over a year ago and nearly twice the growth of U.S. nominal GDP. Over at Costco, profits have gained 14 percent. Target is up 20 percent. Low-end retailers (at least these boys) are doing pretty darn well.

Economists David Malpass and John Ryding at Bear Stearns believe second-quarter GDP will be revised up from 3.4 percent to over 4 percent, while third-quarter GDP will come in at a minimum of 2.5 percent to 3 percent. So, despite the fact that stocks have hit an air pocket and credit markets are suffering a temporary power outage (to borrow a term from economist John Rutledge), the country is not plunging into recession.

That said, the financial liquidity squeeze triggered by the sub-prime virus is a very difficult near-term problem.

Everyone's watching the Fed, and markets are strongly signaling a Fed ease. Supply-sider Paul Hoffmeister, chief economist at Bretton Woods Research and a former staffer to the late Jude Wanniski, believes a Fed ease would help spur economic growth. What's more, he thinks the added liquidity will bring more bidders to the mortgage credit market, while added growth at the margin will mop up some of the inflationary pressures visible in $670 gold.

Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.