Larry Kudlow

Believe it or not, sometimes good news on the economy can be bad news for stocks.

It’s a distant point, but one worth considering in view of conservative pessimism over Obama’s plans to spend, tax, borrow, and control the economy. I share these worries. But the U.S. is still a free-market economy, and it will be so at least until the health-care and energy sectors are nationalized. And free-market economies are resilient and self-correcting.

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While so-called spending-and-deficit stimulus may be an economic depressant, Friedmanite monetary stimulus -- which has been substantial -- is gradually exerting a powerful impact on economic growth. At the same time, businesses have become lean and mean, with radical cost-cutting of inventories, employment, and hours worked. That’s setting up a big profits surge, which is the biggest economic stimulus of all.

Consumers also have retrenched, as is appropriate with falling home prices, a rough stock market correction, and a slowdown of incomes. But from the ashes of recession, these corrective forces lead to the next recovery.

In Hayekian and von Misean terms, bad investment and spending decisions are being remedied through the free-market corrective process. And greased by easy money, today’s market correctives may produce a much stronger V-shaped recovery than the stock market consensus expects.

That’s the message of this week’s blowout manufacturing report from the Institute of Supply Management. The ISM index rose for the eighth-straight month, climbing to 52.9 in August from 48.9 in July, with 11 of 18 industries reporting growth. (Anything over 50 is a clear recovery sign, meaning the recession almost certainly ended in June.) At this pace, there could be 4 percent growth in real GDP for the third quarter.

Within the index, new business orders soared to 64.9 (the highest level since December 2004), production jumped to 61.9, and vendor performance improved to 57.1. This last statistic is important since vendor performance tracks supplier deliveries. When economic conditions heat up, deliveries tend to slow down. Think of Amazon delivering books a day or two later when orders are rapidly rising. And with inventories now at rock-bottom levels, businesses are going to have to rehire workers in order to reignite the production process and meet new demand.


Larry Kudlow

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