Bottoming Signs

Here and there are some small signs that the economy is at least bottoming — a crucial stepping stone to meaningful recovery.

For example, the ISM non-manufacturing services report released today for December came in at 40.6 on the composite index, compared to 37.3 in November. New orders, employment, backlogs, and exports all ticked higher than the previous month. So did the overall-business-activity index. It’s still a recession reading, but a small increase is better than a decline.

The November factory-orders report showed non-defense capex rising at a 3.9 percent annual pace, the first increase in four months and the best gain in 10 months. Computer orders surged 12.5 percent.

Pending home sales — which tracks home re-sales under contract, according to the National Association of Realtors — declined again overall. But out West pending sales continued to increase, and they are up 27 percent since the August 2007 bottom.

Commercial construction rose 0.7 percent annually in November, and is up 12.1 percent over the past three months.

And in the November personal-income report, real disposable income jumped 1 percent for the month and is up 7.1 percent at an annual rate over the past three months. Real consumer spending in that report rose 0.6 percent in November.

These income and spending gains were largely a function of plummeting inflation, where the PCE deflator has fallen 6.1 percent annually over the past three months. That, of course, is largely a function of collapsing oil and retail gas prices. The gasoline drop is probably worth $350 billion as a consumer-purchasing-power tax cut. This is a key recovery mustard seed. So is the outsized growth in the money supply as measured by M1 and M2, fueled by the gigantic increase in the monetary base as the Fed continues to expand its balance sheet.

Additionally, the credit freeze continues to thaw. The three-month LIBOR rate is all the way back to 1.4 percent. And corporate bond rates continue to decline, a signal that private capital markets are starting to function again. The 30-year mortgage rate is holding around 5.3 percent.

At a recent conference in San Francisco, academic economists were very pessimistic, expecting recession to last through the whole year. But easy money and low retail gas prices may be a lot more stimulative than the academics think.

President-elect Obama said today that we should expect trillion dollar budget deficits for the next few years. But do we really need this unbelievable increase in the size and scope of government? Art Laffer is very gloomy about big-government spending and borrowing. He believes deficits of this magnitude and a large increase in the government share of GDP are liens on future tax hikes that will slow the economy’s potential to grow.

It was Milton Friedman years ago who taught us that the real tax burden on the economy is best measured as the government spending share of GDP. That measure has been falling for over 20 years, until President Bush’s second term. Now Obama’s plan will ratchet this tax burden much higher.

My point? We don’t need all this. Lower tax rates for large and small businesses along with easier money and lower gasoline prices will get us on the right track to increase the economy’s potential to prosper.

Once again, I ask what the Republican party intends to do. Will it be me-tooism? Or will they provide a choice, not an echo?