The world economy has once again dodged Armageddon. The European Union finally forged a Greek bond deal, and a rescue fund big enough to ring-fence banks and sovereign debt, in order to avoid a catastrophic, Lehman-like contagion event. At the same time, the U.S. economy moved away from the threat of recession with a third-quarter real gross domestic product report of 2.5 percent. In response, stocks are soaring. We'll live to see another day.
First, the American economy. Led by surging business investment of highly profitable corporations and a modest gain in consumer spending, the new GDP report says "no" to a double-dip recession. As the economy stalled out in the first half of the year -- with 0.4 percent GDP growth in the winter quarter, 1.3 percent growth in the spring, and August data showing zero jobs and retail sales -- I warned nearly two months ago that we were on the front end of recession. Turns out I was too pessimistic.
Profits-rich business is the savior. It's really too bad that President Obama is out on the campaign trail beating up on millionaires, billionaires, oil and gas, and other companies. Because in the third-quarter report, it was business equipment and software investment, with 17.4 percent annual growth, that led the charge. Additionally, the building of plants, factories, office buildings and private infrastructure helped save the faltering economy with 13.3 percent annual growth in Q3.
Incidentally, a large chunk of this is coming from the often-attacked energy sector. Think oil-and-gas shale revolution, which single-handedly may be propping up the economy outside of the high-tech sector.
And by the way, while profit is often a dirty word in Washington, the S&P 500 companies are reporting roughly 16 percent profit gains, which is better than expected. Profits are the mother's milk of stocks, business and the economy, and they are sustaining even this subpar recovery. They are the only real form of stimulus. Profits are keeping us out of recession.
But just think of how much more stimulus would come with tax reform that permitted a penalty-free repatriation of roughly $1 trillion in foreign profits of U.S companies. And while left-wing politicians rail against corporations that allegedly don't pay their taxes, the fact is that full-scale business tax reform that lowers the marginal rate and broadens the base would end uncertainty and unlock a couple of trillion dollars of corporate cash. That money would invest so heavily we'd finally get some serious job creation.
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