Jul 11 2000 9:37AM ET More on Economic Focus...
Kudlow: Slowdown is Real, Fed is Done
By Lawrence Kudlow
Contributing Editor
The economic slowdown scenario is clearly gathering force, and it's not likely to reverse any time soon. The Fed's campaign against inflationless prosperity is succeeding. The full brunt of the Fed's monetary restraint cycle has yet to take hold. That could take another six to nine months, extending well into 2001.
This will certainly not be a one-quarter growth pause, as was the case in the second quarter of prior years. Those were brief, one-time inventory adjustments, followed by a return to normal 4-percent-plus growth. Now, however, the slowdown will go on for a while.
Importantly, barring the emergence of traditional prosperity-killers such as tax-rate increases, regulatory shocks or protectionist tariffs, the odds of recession are still remote. Actually, the expected FY 2000 budget surplus of $250 billion could generate a tax cut this year, including lower estate taxes, expanded 401(k)s, a diminished marriage penalty and perhaps even some gas tax relief. This would be pro-growth.
The biggest threat to prosperity right now (outside the Fed) is the antitrust regulatory assault on Microsoft by the U.S. Justice Department. More actions like this would surely threaten prosperity and the flow of high-risk capital investment.
The issue will probably not be resolved until the November elections, where Governor Bush favors "entrepreneurial initiative, not litigation," while Vice President Gore has strong pro-regulatory instincts. Recent surveys of likely voters show Bush with roughly a 10-point lead. The Investor Class is likely to tip the balance in favor of Bush. Good idea.
Right now, very strong technology investment and production is carrying the economy. Computer equipment is growing at better than 40 percent, as are factory orders for various electronic and info-tech items. So the economy's potential to grow continues to expand from this supply-side push.
Consumer spending, however, is leading the way toward slower growth. Part of this reflects a reversal of Y2K-linked consumption last year, which was borrowed from this year. Some consumers also accelerated purchases this winter ahead of additional Fed rate hikes. This effect is now wearing off.
And of course, the Fed has drained liquidity and raised financing costs, another deterrent to spending. After years of hefty gains, this year's flat stock market has had little economic effect, but it is pointing to slower future growth.
Harsh rhetoric aimed at the stock market by certain Fed officials may, however, have served to diminish investor risk preferences. So the animal spirits have temporarily lagged. IPOs have slowed markedly. Venture capital could be less of a new-economy funding resource.
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