August was supposed to be a bad month, but stocks rose anyway. September is supposed to be the worst month of the year, but stocks are surging anyway. When will the bears wake up and smell the coffee? We're in a bull market. It has legs. It also has rising profits and productivity, lower taxes and historically low interest rates. Investors are pouring money into stock prices. Think of it as rational exuberance.
Economic pessimists had better beware -- and that includes Democrats on the presidential campaign trail. Broad, positive economic moves like this tend to last a long time.
The latest statistics show that production and new orders are way up for industrial firms. Retail sales are booming. Housing is at record highs. Companies are beating profit estimates.
Proprietors' income -- which is a proxy for small business -- is up 16 percent annually over the past three months. This is further indication that the recovery cycle has arrived and that business has reawakened. It says that capital expenditure is on the way and that new jobs will soon follow.
Contrary to the demand-side, consumer-spending view that pervades our media, it is supply-side business investment that really drives the economy.
New inventory building by itself could add a percentage point to gross domestic product in each of the next several quarters. GDP growth in the 5 percent range would not be unusual in these improved circumstances, and some economists are predicting 7 percent growth in the third quarter alone.
Is there enough cash in the pipeline to accommodate the acceleration of economic activity? The monetary situation looks good. On the strength of a $300 billion jump since the ground war in Iraq ended, the basic money supply is exploding at a 15 percent annual rate. And the price of gold, a key reflation indicator, is at $375. This tells us the Fed is accommodating the recovery in private money demands, stocks and the economy.
The economic story has quickly gone from blah to rosy, and the Bush tax cuts implemented this past summer provided the turning point. After three years of investment drag, stock market decline, profit downturn and business recession, lower tax rates on high-income earners, dividends and capital gains -- along with faster business depreciation write-offs for the purchase of new equipment -- sparked the growth that is now developing.
For businesses, the after-tax cost of investment in capital goods has fallen significantly with the new round of tax cuts. For investors, the after-tax returns to saving and investing have increased substantially.