Wednesday, January 02, 2008

So How's The Economy?

At Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, says:

The U.S. is ending 2007 with a whine rather than a whimper. It is tough to keep track of what's collapsing faster, home prices or the dollar, and the financial market crisis caused by it has many seers talking recession as we enter 2008.
But Hassett really doesn’t see the economy as in bad shape. He’s just engaging in a little ridicule of the doom-and-gloomers.

He devotes the rest of his column to what he calls “the Top 10 pieces of happy economic news in 2007. “ Excerpts follow after which below the star line I offer a few comments.

Now Hassett - - -

1) Equity markets posted solid gains and price multiples are still low. As of last Friday morning, the Dow Jones Industrial Average had gained about 7 percent for the year, while yielding about 2.25 percent, providing investors with a total return of more than 9 percent.

The Nasdaq Composite Index had climbed more than 10 percent, while the Standard & Poor's 500 Index had provided a total return in the 5.5 percent range.

There are no signs of irrational exuberance. The price-to- earnings ratio for the S&P 500, for example, finished the year at less than 19, safely nestled in the historical comfort range.

2) Households are wealthier. In part because of rising equity markets, household net worth increased in 2007, according to the latest numbers from the Federal Reserve. At the start of the year, net worth was $56.1 trillion. By the third quarter, this climbed to $58.6 trillion and probably rose again in the fourth quarter.

If changes in wealth affect the economy through consumption, then the affect will be favorable.

3) Congress did nothing. Gridlock has historically been good for the U.S. economy for a simple reason: New laws are invariably worse than the ones they replace. Witness Sarbanes- Oxley.

With the Democrats taking control of Congress, there was a real risk that taxes, in particular, would be increased. With the economy softening already, it is great news that this didn't happen.

4) The Federal Reserve did something. From interest rate reductions to the introduction of a new auction mechanism to get needed reserves to struggling banks, the Fed has responded to the weakening economy with multiple policy moves.

Thus, we have learned that Ben Bernanke's Fed will likely be a competent actor should things get worse. This is good news for nervous markets, though there was no guarantee this would be the case. The Fed did, after all, aggravate -- and may have caused -- the Great Depression.

5) The world economy had another blow-out year. According to the latest Moody's forecast, world gross domestic product grew by 3.9 percent in 2007 after rising 3.6 percent in 2006.

In spite of the gloom in the headlines, the most important news in 2007 was that economic freedom is spreading, and the benefits to the world's citizens of this are skyrocketing.

6) The trade deficit declined. As our trading partners become wealthier, they demand more of our products. At the same time, the weaker dollar has made U.S. exports cheaper. ...

7) Even in the face of the housing-market bust, economic growth was solid...[A]nnual GDP growth, according to the latest estimate, was about 2.5 percent. There are plenty of developed countries that would take that type of growth every year.

8) Job creation was robust. According to the latest jobs report, which covers data through November, the U.S. economy added 1.3 million jobs on net in 2007.

The unemployment rate was 4.6 percent in January, and finished the year a smidgen higher at 4.7 percent. Both levels are very low by historical standards.

9) The federal budget deficit declined. ...

10) Inflation risk is low. Although energy prices surged, core inflation was up only 2.3 percent for the year ended in November, about half a percentage point lower than it was in late 2006.

This is great news, making it relatively riskless for the Fed to cut interest rates next year if there are more signs of trouble.

Hassett's entire column is here.


Folks, we know there are no guarntees of what the future economies of America and the world will be like. But Hassett gives us plenty of cause to be optimistic.

Sure, there will be some downturns; there always are in the business cycle. But the long-term economic trends have been positive - and dramatically so, even as almost all MSM reporting has missed that story.

For example, we're still reminded of October 19, 1987 and "the crash" that day.

Yes, it was pretty scary; and if you were a short-term trader you might have been hurt very badly.

But if you were a long-term investor who diversified and engaged in income averaging, you may remember 1987 began with the Dow Jones Industrial Average just a little under 1900 and ended the year with the DJIA just above 1900.

Now fast forward 20 years and the DJIA ending 2007 above 13,000.

Just for ease of calculating let's round that 1987 DJIA ending up to 2,000 and drop that 2007 ending to 12,000 and look at what we have: a 500% increase in value.

Not too bad, is it?

If the market continues to climb during the next 20 years as it has in the last 20, by 2027 we'll have a DJIA of over 60,000.

I hope you have a wonderful 2008.


Anonymous said...


I agree its better to be optimistic about the economy. Its one of the great benefits about capitalism.

However, relying on the price of the DOW from 1987 can be a bit misleading. A better measure would be the increase in real family wages adjusted for inflation. The story is not quite as bright for the US middle class:

On a more ominous note, the personal savings rate has gone negative.

I think I'll keeep myself very liquid for 2008.


JWM said...

Dear Ken,

Later this week I'll look for some Thomas Sowell columns that speak to real family wages.

IMO economic living standards for all classes have risen during the past 20 years.

On the other hand, there's nothing wrong with having some liquidity.

I continue to appreciate your comments.



JWM said...


On the subject of real family wages
would you accept the following from George Will's Jan. 6 column as on point?

Edwards and Huckabee lament a shrinking middle class. Well.

Economist Stephen Rose, defining the middle class as households with annual incomes between $30,000 and $100,000, says a smaller percentage of Americans are in that category than in 1979 — because the percentage of Americans earning more than $100,000 has doubled, from 12 to 24, while the percentage earning less than $30,000 is unchanged.

"So," Rose says, "the entire 'decline' of the middle class came from people moving up the income ladder."