This recovery's not broken

Larry Kudlow
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Posted: Mar 06, 2004 12:00 AM

Following the release of the softer-than-expected February jobs report, the major media outlets would almost have us believe that employment is falling back into recession. It most certainly is not. Though the latest Labor Department release showed a gain of 21,000 non-farm payrolls -- well below expectations -- this honest increase represents the sixth-straight month of gains for a total of 364,000 new jobs. It's not prime rib, but for the newly working it's certainly not chopped liver.

Meanwhile, the important unemployment rate -- almost ignored nowadays -- continues to hold at 5.6 percent, a historically low tally. In fact, the Labor Department's household survey -- which counts the number of all Americans who are actually working -- now stands at 138.3 million, an all-time high. The previous peak came way back in January 2001 at 137.8 million. Since the end of 2002, 1.8 million more people have gone back to work. Another impressive number.

There continues to be much debate and confusion about the importance of this household survey, from which the unemployment rate is determined, and the corporate payroll survey, which is rising, but at a slower-than-hoped-for pace. Economists have traditionally focused on the unemployment rate as a measure of economic health. But in this political season, the softer payroll survey has received the lion's share of coverage.

Virtually no one cites the increase in the entrepreneurial army of self-employed and independent contractors who have gone to work at lower tax rates, enabling them to keep more of what they earn. This is why the unemployment rate quickly fell from 6.3 percent when the Bush tax cuts were implemented last spring to 5.6 percent today. The media are trying to discredit this drop as it is scored in the more promising household survey, rather than the more pessimistic payroll tally.

But what matters is the vast 94.4 percent of the working population who are laboring and prospering. Prospering. Family net worth, according to latest Federal Reserve release, has soared to a record high of $44.4 trillion, driven mainly by rising stock market and home prices. This, of course, represents the investor class -- today's most powerful electoral voting bloc.

One thing's for sure: The U.S. economy is booming. Outsized profit gains at lower investment tax rates have produced a boom in business-capital spending. Consumers are also keeping spending at a relatively steady 3 percent to 4 percent pace. A variety of job-linked variables, such as manufacturing factory orders, work weeks and delivery times are all rising rapidly. All these suggest that new job creation is on the way.

In the hard goods sector, commodity indexes have been white hot. Much of this is commercial-business-driven demand from the China surge and the U.S. recovery. Going forward, rising profits and prices will attract new capital and new investment -- meaning that someone will have to go to work to complete the production process and meet rising world commodity demands.

Wall Street economist Joseph LaVorgna cites the sharp recovery in withheld tax receipts in February to their highest year-over-year gain since July 2001. These daily Treasury reports are "a statistically significant predictor of non-farm payrolls." From a decline rate of 5 percent in early 2002 these receipts climbed to a 3.5 percent growth rate last month.

Job outsourcing continues, as it has for 20 years. But so does job in-sourcing. Putting the two together, net outsourced jobs are actually less than they were in the early 1980s. The outsourcing argument is way overrated.

Rapid productivity gains from greater business efficiency, automation and technology applications have temporarily slowed new job creation. But in the fourth quarter of last year, 4.1 percent real GDP growth finally outpaced 2.6 percent output-per-hour productivity. So non-farm payrolls increased by 179,000. Assuming that productivity levels off around 3 percent to 3.5 percent, with an expected 5 percent GDP gain, new jobs will be in strong demand.

In other words, as the economy hums, new jobs will be created. In the past two decades, while the U.S. economy grew around 3.5 percent annually, a net of 38 million new jobs were created. Comparatively, in Europe, the unemployment rate continues around 9 percent. That's because old Europe doesn't produce much at all anymore. The United States is not Europe.

One thing this economic recovery does not need is a spate of new tax hikes coupled with tall protectionist trade barriers, as proposed by Sen. John Kerry and the Democrats. Penalizing consumers who love high-quality, low-cost imports, and punishing successful earners and investors who are accumulating wealth to fuel new business start-ups and new job creation, will surely sink the economic ship.

As the old saying goes, if it ain't broke don't fix it. No matter what the political spin, this recovery is surely not broken.