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A Slight September Improvement

A Commentary by Lawrence Kudlow

Wednesday, October 19, 2011

While investors wait to see if the Europeans will agree to a major boost in their rescue fund to backstop sovereign debt and the banks who own it, here at home the economic news has turned slightly more positive.

A month ago, significant coincident economic indicators for August for nonfarm payrolls, retail sales, and industrial production all registered zero. It was a bizarre and pessimistic coincidence.  Now, a month later, the September figures are coming in better. Not fabulous, but better.

Jobs were revised up 57,000 for August and scored 103,000 in September. That’s way below what’s necessary to make a serious dent in unemployment, but at least it’s moving away from recession.

Retail sales in September gained 1.1 percent while August’s zero number was revised to a three-tenths-of-a-percent increase. Over the past three months, retails sales are rising 7.6 percent at an annual rate, a very decent number that reflects improving car and weekly chain-store sales. As a result, consumer spending after inflation in Q3 will come in at least 2 percent annually. Again, not fabulous, but certainly moving away from recession.

On the supply-side, industrial production came in at only 0.2 percent, with August remaining flat at zero. However, manufacturing increased 0.4 percent after a three-tenths rise in August. Additionally, the production of business equipment surged 1 percent in September after a 1.4 percent August gain, making for a hefty 15.3 percent annual increase over the past three months. That means businesses are investing their profits in new capital equipment.

The bottom line is that the September data could be signaling we’re not on the front end of recession. But the monthly numbers are volatile, and I’m not quite ready to remove the danger sign -- especially since consumer incomes are barely rising, and any increases are coming in below the inflation rate.

And speaking of inflation, producer prices surged 0.8 percent in September and are up 6.9 percent over the past year. All that easy money from the Fed, producing an overly cheap dollar, is still circulating enough to keep inflation concerns on the front burner -- despite the sluggish economy.

Inside the PPI, consumer goods -- a proxy for the CPI -- gained 1 percent in September for an 8.8 percent yearly jump. Even taking out food and energy (a silly thing to do), core consumer-goods prices are up 3.6 percent annually over the past three months.

And then of course the Washington message on the left hasn’t changed. Obama and the Democrats are continuing their populist left-wing campaign to tax millionaires and billionaires, beat up on banks and bank profits, and attack the oil-, gas-, shale-, and energy-production miracles that could lift the whole economy if government would only keep out of the way.

It’s not an encouraging sign for animal spirits. Rather, it’s a demoralizing message from the top. Without any serious policy change toward pro-growth tax and energy-regulation reform (or other regulatory barriers for that manner), it’s hard to get excited about the outlook for the economy.

But at least on the tippy-tip margin, the economic numbers are getting a bit better.

Larry Kudlow, National Review Online's Economics Editor, is host of CNBC's "The Kudlow Report" and author of the daily web blog Kudlow's Money Politic$.

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