The greener picture

Larry Kudlow
Posted: May 02, 2002 12:00 AM
From the money perspective, there is very little chance of a so-called double-dip recession -- meaning this recovery is for real. The new report on the gross domestic product for the first quarter shows a large, 6.7 percent annual rate of gain for GDP, and a rise in the speed at which new money from the Federal Reserve is penetrating the market (the first rise in seven quarters). This indicates the existence of a considerable monetary stimulus, which will help drive the economy forward. Moderate increases in commodities and gold confirm this view. The velocity of money -- or the speed at which money changes hands in the economy -- is in some sense more important than the money itself. With velocity trending up lately, it's apparent that consumers and investors are wisely choosing spending and investing over more play-it-safe scenarios, such as investing in money markets. In the first quarter, for example, consumer spending contributed 43 percent to the 5.8 percent rise in real (or inflation-adjusted) GDP. The information-technology sector, which gains when companies spend on new business equipment and software, contributed nearly 8 percent to that growth -- its best showing in six quarters. And with companies spending, inventories are declining, leaving room for the creation of more new products and a busier, wealthier American workforce. All this means that productivity is on the rise, and that money is going to keep changing hands, as more Americans invest and spend as they desire. In supply-side terms, you can think of productivity as a tax cut -- and nothing that will lead to an economy overheating. Now, if the Fed were to look at it this way, it wouldn't hesitate to inject more high-powered cash in the economy in order to accommodate productivity-driven increases in output and investment. However, if it's not going to put any more money in, it certainly shouldn't take any out. Nor should it rush to raise interest rates. The Fed's demeanor should be gradualist -- wait-and-see. Why? Well for one thing, we still don't have any inflation to worry about. This is huge. First-quarter inflation came in very low and permitted virtually all of the increase in spending to be reflected in the rise of real GDP. Some of this is normal for a recovery. But a chunk of it may be traced back to the productivity theme. Moreover, for the second quarter we may even see a slower rate of consumer spending as a result of higher gasoline prices and lower confidence related to the Middle East conflict. However, with personal income adjusted for taxes and inflation increasing a huge 11 percent annually over the past three months, the indication is that plenty of spending power will eventually be coming on-stream. So again, the Fed shouldn't jump the gun with any policy actions that they -- and we -- might regret. These days, most every economist, investor and working American is straining to understand the direction of this recovery. But to do so accurately, we have to take a good look at what made us. Technology was a huge part of the '90s boom, and it's going to remain an integral part of this economy. Part of the technology boom is reflected in innovations, and part of it occurs from a natural spillover. Today, it's a good guess that the innovation rate is slowing, but the spillover rate may be accelerating. Harvard economist Dale Jorgenson has recently done a study showing that technology benefits are pouring into the service areas of the economy, particularly financial services. The other night, I was discussing all this with Joseph Schumpeter, who believes that entrepreneurs, not governments, create the innovative advances that transform and propel economies forward. I was telling him how we could be in store for an unusually strong, V-shaped recovery that is characterized by price stability. This runs counter to consensus thinking, of course, but it is a scenario worth considering. And Schumpeter confirmed my thesis. Sure, the economist has been dead for five decades. But that doesn't mean we can't commune, at least in a spiritual sense.