Larry Kudlow

If things are so bad, why are they so good?

With all the gloom coming out of Wall Street, the Democrats on the campaign trail and the mainstream media, a remarkable thing just happened: Real gross domestic product, the best summary report of the American economy, came in at a breathtaking 3.9 percent annual rate for the third quarter. In fact, following the 3.8 percent growth rate for the second quarter, the U.S. economy has posted its strongest quarterly growth in four years. The economy actually appears to be speeding up,  following the relatively sluggish performance of the prior 18 months.

On top of this, the inflation rate is actually slowing down.  The consumer spending deflator is reading 2.1 percent for the past year, compared to over 3 percent six quarters ago. The core inflation rate is down to 1.9 percent, below  the Fed's 2 percent target.

Even employment is holding its own. According to Automatic Data Processing's private employment survey, which showed its strongest gain in four months, October looks like it will produce about 125,000 new jobs.

Meanwhile, rising exports of American goods and services are booming to such an extent that the deep housing recession is being cancelled out. And while many continue to predict a consumer collapse because of falling home prices and tighter credit, after-tax inflation-adjusted income is 4.1 percent ahead  of last year, for a $344 billion gain, while the purchase cost of energy prices are flat. The little noticed factoid is that consumer energy use per unit of GDP has actually fallen by more than 50 percent in recent decades.

Again: If things are so bad, why are they so good?

The stock market roared after the Federal Reserve cut its target rate on Wednesday by 25 basis points to 4.5 percent. The rate cut was a small insurance policy, just in case the subprime credit crunch and the housing downturn take a larger toll on the economy.

But listening to the Democratic presidential debate on Tuesday, you'd think it was 1929 all over again. The litany of scare-talk complaints includes China trade unfairness, globalization, immigration, income inequality, stagnant wages, a shrinking middle class, the sinking dollar and high oil prices.

Yes, there is home deflation on Main Street and loan deflation on Wall Street. It will continue. But what about the rest of the story? When you listen to the hedge-fund short-sellers and the liberal politicians as they attempt to discredit the Bush economic boom, you could almost fall for their bear-market seduction. But the seductress turns out to be an economic harlot -- not a beautiful woman.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.
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