Why We Are on the Front End of a Recession

Inflation up and GDP down: This is not a good combination. No, it’s not yet a recession, but the soaring inflation — 8 percent in the first quarter, from a broad-based measure of prices — does raise the question of whether we are on the front end of a recession.Here’s what President Biden tried to say about it today: “I’m not concerned about recession. And I mean, you’re always concerned about a recession.”Got that? So let’s be a little more specific than the president.Real GDP fell 1.4 percent in the first quarter ending March. That is the first decline since the pandemic output loss in the second quarter of 2020, almost two years ago.Looking underneath the hood, consumer spending did rise 2.7 percent, housing investment was up 2.1 percent, and business investment increased 9.2 percent. Those are decent numbers.That could be why stocks went up 600 points today.What some people call core GDP, which is consumption plus investment (C+I), rose 3.7 percent at an annual rate. Also very decent.The formal definition of recession is six to nine consecutive months of declining sales, employment, production, and income. We’re not there yet.It was a big trade deficit that chopped off more than 3 percentage points from the topline number and a slowdown in inventory accumulation that took out almost 1 percent. One reason for the big trade deficit is overstimulated demand from the $2 trillion spending bill more than a year ago that launched inflation.Let me add that monthly job gains are still good, though it should be noted that contra Joe Biden, new jobs are not being created — the monthly gains are merely a return to work from pandemic job losses. Right now, the civilian labor force is still 1.6 million jobs below the pre-pandemic peak.If the Trump job creation trend-line were in place, the labor force would be 6 million jobs higher than it is today. So Mr. Biden boasting about new jobs is simply wrong. During his tenure we’re just treading water. Are we at the front end of a recession? Is there a recession risk? Yes and yes. Whenever inflation is significantly above GDP growth, that’s one definition of stagflation. And that’s where we are today. Stagflation. History shows stagflations usually lead to recessions. Or, to be more direct, high inflation usually leads to recession. Remember, the Fed has not yet taken the punch bowl away. They’re talking the talk, but not yet walking the walk.That’s why recession is a significant threat.Then there are the Biden policies. Today he prattled on and on again about how Republicans don’t pay their fair share. That’s kind of a new wrinkle. He usually attacks billionaires, millionaires, and corporations. Today he just attacked Republicans.He probably didn’t mention Democrats because there are so few who will fess up to being Biden Democrats anymore, but I digress.Elon Musk is a libertarian, not a Republican, but he paid $11 billion in taxes last year. The largest single tax collection in American history. Is that fair enough?The absolute dumbest thing the Bidens could do is follow the advice of Senator Schumer, who said, “If you want to get rid of inflation, the only way to do it is to undo a lot of the Trump tax cuts and raise rates.” Go ahead: Raise taxes. That will guarantee a recession and skyrocketing unemployment. That’s how dumb that idea is.The Trump tax cuts, especially the corporate tax cuts, are not only responsible for the limited prosperity we have — note the increase in business investment and equipment in today’s GDP report — but they also paid for themselves with a gusher of record revenues, according to the IRS.The Laffer curve worked again. Lower tax rates, more people working, higher incomes, more tax collections, less tax avoidance — all equals more tax revenues at lower tax rates. The best way to deal with skyrocketing inflation is to stop federal spending, stop deficit finance, stop money-printing. Stop choking off the supply side of the economy with overregulation, and the attack on fossil fuels. Forty years ago, Art Laffer and Robert Mundell argued the best fix for inflationary recession was tighter money to vanquish inflation and tax cuts to rejuvenate the economy. That was the policy backbone of the Reagan boom that lasted more than two decades.The Trump tax cuts accompanied by a strong dollar worked wonders during his brief tenure. Strong growth, low inflation. But if Democrats and/or Republicans are going to keep spending and taxing and printing, then they will guarantee even higher inflation, and ultimately a very deep and painful recession. Food for thought. The cavalry’s coming. Hope they get it right.From Mr. Kudlow’s broadcast on Fox Business News.

Why We Are on the Front End of a Recession

Why We Are on the Front End of a Recession

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