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Jewish World Review Dec. 4, 2000/ 7 Kislev 5761

Lawrence Kudlow

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Consumer Reports

Slumbering spirits -- WHILE AL GORE keeps the presidential election process on hold by suing every state, county and local election authority in Florida, stock markets are imploding and the economy is losing ground fast.

The much-heralded prosperity is looking very long in the tooth. Recession talk is in the air. Recent numbers are not good. As someone once put it, "things always look darkest right before they turn completely black."

To wit: in the October durable goods report, new orders for electronic equipment (information technology) continued to drop. Measured over three-month periods this series has lost so much ground that it has shifted from a 40% increase rate last July to a 30% decline rate in October.

The Chicago purchasing managers' index was down big. Consumer confidence is down. Car, computer and home sales are down. Profit expectations have been halved.

Even more to the point, the Nasdaq index of technology stocks is in free-fall. This index is an important measure of market risk-taking, and its clear message is that risk aversion is king. The animal spirits are dead. Uncertainty rules.

I still believe the Nasdaq death-knell was delivered last winter with the Justice Department's over-zealous anti-trust prosecution of Microsoft. That is why I believe the reappearance of evil genius Microsoft-basher David Boies as Al Gore's election-stealing litigator-in-chief has again spooked the Nasdaq market. Investors took one look at Boies and headed for the exits.

If Gore's election grand larceny effort succeeds, might Boies become attorney General? Prosecuting all the successful big-cap technology firms? It's a scary thought that has scared the Nasdaq into a 24% drop since election day (that is, the first election count), and 36% year-to-date.

New Jersey economist David Gitlitz points to a plummeting ratio of the Nasdaq composite to the Dow industrials as another way to gauge the absence of investor risk-taking. This ratio now stands at its lowest point since the 1990 recession.

I have fiddled with some quick and dirty econometrics to show a link between this ratio and future economic growth. With a two-quarter lead, the current Nasdaq underperformance infers a measly 1% real GDP growth rate in the second quarter of 2001. Not a recession, but uncomfortably close to one.

In the midst of all this darkness, there are still a few positive signs out there. Three-month Treasury bills have dropped 20 basis points to 6.22% from 6.44% over the past two weeks. As the bill rate falls below the fed funds rate, the probability of Fed ease grows larger. Treasury bills are sensitive market indicators of inflation and growth.

Bond market rates are also coming down. Ten-year Treasuries have slipped below 5˝% and Baa corporates have dropped under 8.20%. Inflation-adjusted 10-year Treasury TIPS have declined to 3.80% from a 4.25% peak last summer.

And third-quarter inflation measures were actually lower than second-quarter results. Historically, big inflation spikes precede recessions. But inflation looks to be holding around 2% now, not much of a recession-inducer.

Also, Bear Stearns' John Ryding estimates that non-financial corporate output jumped 4.7% annually in the third quarter. Assuming a slight decline in hours worked, this would put productivity growth in the ballpark of 5%. If so, then the new information economy is alive and well.

Hopefully the Fed will follow bond market rates downward by lowering the fed funds rate in December. Waiting until next winter could be fatal. There's an economywide liquidity squeeze developing, and a real credit crunch is occurring in the high yield junk bond area.

Why not give president-elect George W. Bush a Christmas present with a quarter-point easing? It would certainly help to calm investor anxieties and economic worries after this incredible ballot re-count and new-count saga.

It would also set the stage for friendly relations between the central bank and the new administration. Papa Bush still blames Greenspan for his 1992 defeat. Of course if Bush the elder hadn't raised taxes, things might have been different.

But that was then and this is now. Today's Fed could do a good deed for the economy, the markets and the electoral system. The FOMC next meets December 19. The Electoral College convenes December 18. There is a connection. Provided that the Fed connects the dots.

And then W. can transition into his growth package of marginal tax-rate relief and personal retirement account Social Security reform to renew economic incentives and re-ignite the slumbering spirits of capital risk-taking.

Then things will have looked darkest just before the dawn. A much better scenario. Keep the faith. Faith is the spirit.

JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.


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06/21/00: Internet-more-important-than-Fed update
06/14/00: The judicial hacker
05/16/00: Front-View Windshield
05/09/00: Don't Overreact
05/05/00: Give it Back
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04/18/00: Growth, Freedom and the New Investor Class--Stay the course
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03/28/00: Governments roil the Markets
03/28/00: Fed should keep its powder dry
03/14/00: Reduce Debt, Derail Economy
02/17/00: Unsettled
02/10/00: Bush's Footprints
01/25/00: To preserve its standing as the world's number one economic power
01/06/00: It's not the '70s
12/28/99: They missed it
12/23/99: Bonditos
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12/10/99: Y2K-Related Cash
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10/07/99: Clinton's tax-cut veto
10/01/99: What's really bugging the stock market?
09/23/99: Growth Trade
09/09/99: Bad Dollar Logic
09/09/99: Buttered bread
08/31/99: Bull Market Alive and Well
08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth

©1999, Lawrence Kudlow