A Grim Jobs Report

After nine months of explosive monetary and fiscal stimulus, you’d think economic recovery would be upon us. But the June jobs report tells a much different story.

Non-farm payrolls fell by 467,000 as the unemployment rate edged up to 9.5 percent. This isn’t nearly as bad as the 700,000 monthly job losses of last winter, but it’s still a rough number. Equally disappointing is the household survey -- often a key turning-point signal since it captures the health of small businesses -- which has dropped 811,000 in the past two months.

Donald Marron, a former senior economist with the Council of Economic Advisors and the CBO, calls it “a grim jobs report.” Marron, digging deep into the Labor Department Statistics, says the continued decline in hours worked by private-sector employees, now 7 percent over the past year, is especially troublesome. He writes, “The economy is thus losing jobs and, for the jobs that remain, is losing hours worked. That double-whammy is bad news for the economy.”

I would add that along with manufacturing and construction, the service sector continues to shed jobs, with a 244,000 drop in June. Inside that category, the important professional-and-business-services sector lost 118,000 jobs. The wage data is equally disconcerting. Over the past three months, average hourly earnings barely rose at 0.7 percent annually.

There are still some bright spots that strongly suggest the recession has bottomed. The ISM manufacturing report for June held a number of positives. Auto sales, retail sales, and home sales look to be bottoming. And May factory orders climbed as inventories crashed. So businesses, including automakers, may be increasing production in the months ahead.

In fact, even while second-quarter real GDP is expected to fall by 1 to 2 percent annually -- much better than the 6 percent declines of recent quarters -- the third quarter could show a small positive GDP score. Much smaller GDP subtraction from inventories, housing, and business cap-ex bodes statistically well for growth.

But there won’t be a real recovery until jobs start rising. The unemployment rate is a lagging indicator. But jobs are the most important coincident indicator of the economy. Until they turn around, nobody should expect anything resembling real economic growth.

Leading indicators -- especially monetary, financial, and credit-market signals -- are flashing “go” for future growth. The Fed has pumped roughly $1 trillion into the economy since last August. Key money-supply measures are growing at 10 to 15 percent annually. Short-term rates are near zero. The Treasury curve is steeply upward-sloping. Corporate-bond-market spreads have declined significantly. And commodity prices are off their lows. This is all good.

But for all the Fed’s stimulus, which has had a salutary effect on the banking crisis, the lags are long and variable. And as former Dallas Fed head Robert McTeer has written, much of the central bank’s balance-sheet expansion is being hoarded by commercial banks, with banks holding about $800 billion more than what they’re required to hold. Until these excess reserves come way down, the impact of the Fed’s monetary stimulus will be more muted than has traditionally been the case in Milton Freidman’s monetarist model.

And as Washington economist Bruce Bartlett has written, Obama’s $800 billion fiscal-stimulus package has yet to stimulate. Bartlett notes that 60 percent of the stimulus package goes to transfer payments and tax credits with no incentive effects. Meanwhile, the rest of the package, aimed at public works that might produce growth, is spending out at a snail’s pace.

As an old-fashioned supply-side guy who is out of date with contemporary Washington policies, I would add that Obama’s biggest mistake was not cutting marginal tax rates for individuals, businesses, and investors. Instead of the fiscal profligacy that is driving spending and borrowing sky-high, lower tax rates with true incentive-reward effects would have reignited the animal spirits that are sagging so badly.

But Obama’s temporary tax credits and social spending offer no growth effects. At the same time, the government’s fiscal nymphomania has scared everyone into thinking the U.S. is going bankrupt. The president himself has said there’s no money left. It’s scary enough to keep your savings under the mattress.

And if you add all the talk of nationalizing health care and energy (cap-and-trade) to the rest of Bailout Nation, it’s not hard to understand why people are shying from risk.

Stocks are the single-best barometer of our nation’s future economic health, and the stock market began to rise in early March. But over the past month, with all these new big-government tax-and-regulatory threats, the stock rally has stalled. And the June jobs report caused an immediate 2 percent sell-off for equities.

I do the best I can to be optimistic about our nation’s future. But realistically, the current picture is not particularly good.

Governor Jenny Sanford? It's Got a Nice Ring to It

The Business & Media Institute picked up my conversation with the WSJ's Steve Moore last night about Jenny Sanford, South Carolina Gov. Mark Sanford's wife, being a possible replacement for her husband in the governor’s mansion. Both Steve and I agreed that Jenny Sanford has the credentials and would make an excellent governor.

Here's the video of our exchange:

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

IS CALIFORNIA GOING BANKRUPT?
Are Municipal Bonds Safe?

CNBC’s Jane Wells reports.

STATES IN CRISIS: AMERICA'S BIG BET ON BONDS

The Wall Street Journal’s Steve Moore and CNBC’s Jane Wells will discuss.

WASHINGTON TO WALL STREET
-VAT tax cometh?
-The Al Franken factor: A filibuster-proof senate
-Is Gov. Sanford toast?

On to debate:

*Julian Epstein, LMG CEO Fmr. Democratic Chief Counsel
*Steve Moore, WSJ senior economics writer

DRILL! DRILL! DRILL!
Winners & Losers in the Climate Bill

Devon Energy CEO Larry Nichols will join us.

THE MARKET

-How to survive & thrive
-Fortune's 10 Best Stocks For 2009
-Consumer confidence
-Fiscal nymphomania: winners & losers
-AIG is Amtrak

Panel:

*Randy Bateman, Huntington Asset Advisors President & Chief Investment Officer
*Peter Boovkvar, Miller Tabak Market Strategist
*Sean Tully, Fortune Sr. Editor-at-Large

Please join us. The Kudlow Report. 7pm ET. CNBC.

Madoff Sentenced, But He Didn’t Sing

So Bernie Madoff was sentenced to 150 years in the slammer today. He also delivered one of his now-patented non-repentant repentance speeches in the courtroom. Oh, by the way, his wife Ruth also issued a statement, and she threw him under the bus.

Yet while everyone can now cheer that the greatest crook in financial history will die in jail, Madoff also may die keeping his secrets with him. So far, prosecutors have come up with very little about this case. And under the tutelage of the clever lawyer Ike Sorkin, Madoff has given almost nothing up. No singing in jail. (Maybe he should have been waterboarded.) We don’t know if his wife or two sons were part of the scam. Nor do we know where most of the money -- estimated up to $65 billion -- has gone. There’s a number being used that bankruptcy trustee Irving Picard has recovered $1.2 billion of the $13.2 billion in estimated net losses. But the strength of those numbers is somewhat in doubt.

Where’s the money? Who are the accomplices? And what about some of these big-time fat cats who invested with Madoff, people we thought were victims but may turn out to be the real winners in the story?

There are several reports about Jeffry Picower and Stanley Chais, two rich businessmen who may have taken $6.1 billion in returns from the Madoff fraudulent funds -- more than they put in. There’s also businessman Carl Shapiro, a close Madoff pal. And while there is yet no number as to what he took out of the funds, years ago the guy sold his garment business for $20 million and grew that sum to nearly $1 billion -- most of it from investing with Madoff.

I’m using reports from the Wall Street Journal and the liberal investigative group ProPublica. I’m also using first-hand accounts from friends of mine who are circulating these rumors down in Palm Beach, Fla. They’re very close to the Madoffs, their funds, and their investors.

The point is, it’s been six months since Madoff was first arrested, and the actual case against him has progressed very little from his own self-confession right at the start. Neither his wife nor his two sons have been deposed. Nor have these other characters who probable looted the funds.

The thing about a Ponzi scheme is others besides Ponzi can get rich. And there are names in circulation of people who may also have gotten rich. But where’s the money? When will these people be brought in to testify under oath? The thousands of other smaller investors and charities who were totally ripped off by Madoff could recover a lot more if these big shots are finally hammered.

Madoff will die in jail. And he deserves it. But the justice system has much more work to do following today’s sentencing.

*Madoff Special Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

MADOFF GETS 150 YEARS…

Our stable of CNBC reporters will report all of the latest Madoff news and developments.

Panel:

*Joe diGenova, former US Attorney
*Paul Callan, former NY prosecutor
*Tom Curran, criminal defense Attorney
*Pat Brosnin, Brosnan Risk Consultants

Also...Madoff victim Sharon Lissauer will join us with her story.

Dow 10,000?
Robert Prechter, founder & CEO of Elliot Wave International will offer his take.

Please join us. The Kudlow Report. 7pm ET. CNBC.

A Heavyweight Inflation Debate

Last night we welcomed two highly distinguished economists to debate their opposing outlooks on inflation on The Kudlow Report. Joining me were former Federal Reserve vice chairman & Princeton economics professor Alan Blinder, along with my mentor, former Reagan advisor Arthur Laffer.

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

MADOFF SENTENCING

On to debate:


*Ann Coulter, conservative author & syndicated columnist
*Anthony Salerno, criminal defense attorney

BULL V. BEAR MARKET DEBATE

(BEAR) Joe Battipaglia, Stifel Nicolaus Market Strategist
(BULL) Ned Riley, Investment Strategist, Riley Asset Management

THE MICHAEL JACKSON MONEY TRAIL
MSNBC’s Miguel Almageur will report.

HOUSE CLIMATE BILL VOTE
CNBC’s Hampton Pearson reports.

WHO ARE THE WINNERS & LOSERS OF THE CLIMATE BILL?

ENERGY CEOs:

*Robert Murray, Murray Energy Corp. CEO
*Joe Petrowski, Gulf Oil President & CEO
*Kevin Book, Clearview Energy Partners Energy Analyst

Also… Rochdale Securities analyst Dick Bove will join us with his investment ideas.

Please join us. The Kudlow Report. 7pm ET. CNBC.

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

ISSA TALKS BERNANKE...

Rep. Darrell Issa (R-CA) of the House Oversight and Government Reform Committee will join us once again this evening to discuss today's heated congressional hearing with Fed chair Ben Bernanke over the Bank of America-Merrill Lynch controversy.

THE STOCK MARKET & ECONOMY

*Bill Fleckenstein, president of Fleckenstein Capital
*Jeremy Siegel, Wharton finance professor & author of "Stocks for the Long Run"
*Quentin Hardy, Forbes National Editor

INFLATION DEBATE

*Alan Blinder, Princeton University Professor of Economics & former Federal Reserve Vice Chairman
*Art Laffer, chief investment officer at Laffer Investments, author & former Reagan Economic Advisor

Please join us. The Kudlow Report. 7pm ET. CNBC.

King Dollar Liked the FOMC Statement

The Federal Reserve’s policy statement yesterday elicited a strong King Dollar reaction with its mild dose of hawkishness, which I applaud. I’m reading the Fed positively here. There was no announcement of any new debt monetization via Treasury purchases, a slightly more positive economic view, and an end to deflation worries. This all to the good.

The result was a stronger dollar in world currency markets. King Dollar. This is very good.

I was encouraged that the Fed cited rising commodity and energy prices. It is another nod to a market-price rule. That is clearly the best way to conduct policy, rather than the goofy Philips Curve tradeoff between inflation and unemployment.

Now, the Fed is going to keep the target rate near zero for the foreseeable future. But remember, the Fed’s balance sheet has flat-lined over the last six months as it has slowed down the overworked printing presses. So, while the Fed didn’t mention an exit strategy, it may already be building one.

The markets basically voted in favor of the Fed. While the Dow was off slightly on the news, the S&P gained almost 1 percent, with the NASDAQ finishing up a solid 27 points. As you know, markets conduct an up-or-down election vote every single day on the economy, Washington, and policy. It remains the most important opinion poll there is.

Finally, I think this sideways market correction we’re in is nearing an end. As a result, I think this could be a strong buying opportunity for investors, who can put some of their sidelined cash back into stocks.

Tonight on The Kudlow Report

On tonight's show at 7pm ET on CNBC:

DID THE FED ENGAGE IN A COVER-UP IN THE BANK OF AMERICA-MERRILL DEAL?

Rep. Darrell Issa of the House Oversight and Government Reform Committee will join us to discuss.

According to a statement released by Rep. Issa: "The committee has already learned that Ben Bernanke and the Federal Reserve made inappropriate threats to fire Bank of America management unless they went ahead with the 'shotgun wedding' that was the Merrill Lynch acquisition. The Federal Reserve also engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies."

Please join us. The Kudlow Report. 7pm ET. CNBC.

Biden’s Snares and Delusions

President Obama said at his press conference yesterday that no second stimulus package is being contemplated right now. Well, I sincerely hope that’s the case, because the current package is a disaster. It spends far too much for far too little in return. All of this frenzied fiscal nymphomania is placing a tremendous burden on Treasury-bond rates and the U.S. dollar. It is undermining the confidence of key foreign investors like China, Brazil, Russia, and others who have to buy our bonds.

But the worst thing I heard yesterday was the snare-and-delusion proposal announced by Vice President Biden. Apparently, Joe Biden wants to create a new government council to help laid-off autoworkers who are supposed to transition to solar, wind, and biotech industries. Huh? Are you kidding me?

Look, if you really want to help manufacturing workers everywhere, then cut that ridiculously high business-tax rate by 15 to 20 percentage points. Then allow full cash expensing for immediate tax write-offs for new business investment. Heavy industries will soar. This is FedEx CEO Fred Smith’s idea, and I totally agree with it. It would boost the manufacturing, auto, and transportation sectors.

And by the way, let’s move forward and deregulate the energy industry so we can drill, drill, drill and nuke, nuke, nuke. We’re talking about an enormous potential job-creator here. The fact of the matter is that alternative energy will be a tiny part of the energy calculus for many years to come. That’s just the reality. So let’s get real and eliminate all these ridiculous regulatory roadblocks standing in the way of American job-creation and energy independence.

And what’s this about a sub-czar for cars? Talk about a sub-par idea. I’m sorry Mr. Biden. Personally, you’re a good man. But economically, this is a terrible idea. Tax incentives are what will help the blue-collar middle class rise out of the doldrums.