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Stocks Say We’re Healing; Prices Say Look Out

A Commentary By Lawrence Kudlow

Tuesday, January 18, 2011

U.S. economic recovery continues to look better, according to the stock market and a boatload of economic stats last week. Stocks jumped 133 points on the Dow, which hit a 30-month high following its seventh straight weekly rise. Early fourth-quarter profit reports from Alcoa, Intel, and JPMorgan all beat expectations. Share prices are back to June 2008 levels, before the financial meltdown.

Interesting factoid: The mid-cap S&P 400 is now a half percent above the October 9, 2007, all-time stock market peak. Small-cap indexes are about 4 percent below that peak. The NASDAQ is just 2 percent below that peak, while the S&P 500 and the Dow are 17 percent below. I note this because what seemed to be unattainable now looks to be more attainable.

Stocks are a pretty good leading indicator of the economy. A message here is that we are healing.

Last week’s flurry of economic reports send the same message. The index of industrial production continues to rise, and is now 6 percent above year-ago levels. While we’re not getting any help from the housing sector, one positive surprise in this new recovery cycle is that manufacturing is leading the way. That’s good. People are still making things -- including, by the way, business equipment. That sector is up 17 percent from year-ago, showing that profitable businesses are putting money to work in the supply side of the economy.

On the demand side, retail sales continue to rise, and are 8 percent above year-ago. And total sales throughout the economy -- retail and wholesale -- are running 8.5 percent above year-ago. Inventory-to-sales ratios are very low.

The glitches? Early inflation pressures continue. The producer price index jumped over 1 percent in December and is 4 percent above year-ago. Where’s Ben Bernanke’s deflation? Energy and food prices are soaring. The CRB food commodity index is up 35 percent over the past year. Crude oil is drifting toward $100. Raw industrials are up near 20 percent. Energy-price increases are spilling over into the CPI, with gasoline nearly 14 percent above December 2009.

Inflation is a tax on the economy: a tax on business profits and a tax on consumer incomes. This could be the biggest surprise of the new year. Far too much Fed pump priming and a shaky dollar could undermine the recovering economy.

COPYRIGHT 2011 CREATORS SYNDICATE INC.

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