Larry Kudlow: America's economy is in jeopardy

So, I know we're coming into Thanksgiving — and it's truly one of my favorite holidays — and Thanksgiving is the quintessential American history story celebrating the first harvest of our earliest settlers. It's a very inspiring and optimistic tale. One of the reasons I love it, is that history is so optimistic, and I am an optimistic person who always believes in the greatest of the soul of the founding of the United States of America.  

But I have to depart from this optimistic script for just a little bit. I’m talking about the economy. I got to tell you, I see a number of important indicators that are all pointing to recession. I don’t like this, but that’s what I'm looking at. We may already be in a recession, but next year looks like an even deeper downturn.  

Now, there's a way out of this mess, and I'm going to get to that in a few moments, but first some straightforward empirical factoids. I begin with a huge drop in the conference board's leading economic indicator. 

This is a very old-fashioned series, but it is a highly accurate forecasting tool. It’s got interest rate spreads, consumer expectations, manufacturing, stock prices, building permits for new homes and other measures. There are 10 in all and, as you can see by the chart, the rate of change is absolutely plunging.  

GROCERY INFLATION PUSHES AMERICANS TO RESTAURANTS ON THANKSGIVING

Second, maybe a more controversial indicator, called M2 — which is an inadequate measure of the nation's money supply, but still something to pay attention to. It was pioneered by the great Nobel Prize winner Milton Friedman. This is a monetary interpretation of the economy and it tells us about future inflation and growth.  

You can see by this chart that, for 20 years, M2 was basically growing modestly, that had something to do with a 2% average inflation. Not everything, but something to do with low inflation. Then we come to the craziness of the last two years, with a massive increase in federal spending that led to an equally massive money printing by the Federal Reserve. 

This was the single biggest mistake by Joe Biden. It moved the inflation rate up from about 1% to nearly 10%, because of that, real wages have fallen 18 consecutive months. That is the soft underbelly of the Biden economy and now, as the Fed makes its belated correction for its own prior mistakes, the American economy is in great jeopardy.  

This all could've been avoided, but it wasn't avoided and now here we are, with the threat of a difficult downturn next year. One that probably began this year, but Milton Friedman argued that inflation is too much money chasing too few goods — and, oversimplifying a bit, Uncle Sam created the money and then overregulation, tax increases and of course the war against fossil fuel production all created tall barriers to the production of goods. 

Yes, we had a COVID supply-chain hangover, yes, there's Vladimir Putin invading Ukraine, but the bulk of this economic mess is homegrown based on the policies of big government socialism and central planning on a grand scale. Besides the leading indicators and the money supply, just to add one more: The bond market has turned upside-down on its head with short-term rates now much higher than long-term rates.  

A very useful recession forecasting model that was developed years ago at the New York Fed and has a very high degree of accuracy. Basically, when the three-month T- bill exceeds the yield on the 10-year Treasury bond, the probability of recession one year hence goes higher and higher. Right now, the three-month bill is now 4.30, and the 10-year is 3.80. This is a very alarming sign.    

Now, there are a lot of other indicators I could point to: big housing downturn, a major slowdown in manufacturing, I don't want to get any deeper in the weeds than I have to. No model is perfect, but I will suggest that keeping an eye on the leading economic indicators and M2 and the Treasury yield curve gives everyone a pretty decent sense of where we're headed. So, inflation will come down slowly, but the recession may be very difficult.  

Again, ever the optimist we should be able to do a lot better in the future regarding economic policies than we have done in the last two years. You've heard this before from me, but first, we should immediately open the spigots to produce more oil and gas, allow permitting, pipelining, refining. All that would reduce prices, promote jobs and economic growth.  

John Kerry's COP-27 Green New Deal, socialist, redistribution, climate reparation scheme — he’s trying to bribe poor countries not to use oil and gas is just dumber than dumb. Joe Biden closing down coal plants all across America — dumber than dumb. New EPA regs and taxes on clean-burning natural gas is even dumber than dumb, if such a dumbness is possible.  

Then, we need to re-impose workfare and work requirements on able-bodied people receiving government assistance. Okay? This succeeded 25 years ago in reducing welfare spending and ultimately lead to a balanced budget.  

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Also, we need to make Donald Trump's supply-side business tax cuts permanent. Then we need to rein in the Biden regulatory assault on all businesses — a policy that has literally strangled the economy.  

At the end of the day, we've had less money chasing more goods under those policies. Less money chasing more goods. Inflation would crash, the economy would soar. We've done this in the past and we can do it in the future. It's time to act like stewards of economic prosperity. Let us replace utopian socialist schemes that always cause recession and impoverishment wherever they are implemented. I know we can right this ship and I will say, Happy Thanksgiving — gobble, gobble, gobble — and that's my riff. 

This article is adapted from Larry Kudlow's opening commentary on the November 22, 2022, edition of "Kudlow."