Larry Kudlow: Economic storm clouds are gathering

Economic storm clouds are gathering and that's the subject of the riff.  Yesterday, Fed head Jay Powell issued pretty clear forward guidance that the central bank will start cutting its policy rate in September, and additional rate cuts might well occur in November and December.

Wall Street has been whining and panting for these rate cuts for about two years. So, what does the stock market do today? As Gerri Willis just reported, it got slammed down. Especially the high-tech Nasdaq, which lost almost 3% of its value, but the S&P 500 and the Dow got whacked hard as well. So, what's going on here? 

Well, as I've often suggested, market bond yields are frequently more important than the Fed's target rate and, while the Fed has done nothing yet, most Treasury yields are down 100 basis points in recent months.  

WSJ REPORTER EVAN GERSHKOVICH RELEASED: READ LETTER FROM THE EDITOR IN CHIEF 

In other words, markets are leading the Fed and here's another point: lower market interest rates are surely a welcome development, but history shows that declining interest rates are also a recession indicator. 

Even though GDP has been growing at a semi-stagnant 2%, a bunch of other indicators are flashing much bigger warning signs about the economic outlook. 

Today, for example, the reliable manufacturing report from the Institute of Supply Managers registered another deep dive and has dropped seven out of the last ten months. Meanwhile, inside the index, new orders, production and employment all registered major declines. 

Plus, initial unemployment claims are now working their way up and hit nearly 250,000 for the most recent week.  Don't forget the unemployment rate has gone from 3.4% to 4.1% and may be headed higher in tomorrow’s jobs report. 

Consumer sentiment has been consistently poor. All matter of housing starts and sales have been in recession territory for a while and the mediocre 2% GDP has been held aloft by huge injections of government spending.  

So, is there a recession in the outlook? Well, that recession forecast was very wrong in 2023, but at the moment, the data suggests a much greater probability in the next twelve months.  

Yes, interest rates are likely to fall some more, but be careful what you wish for, because that could foreshadow a big economic slump -- which brings me to election politics and policy. This is no time to raise taxes. Joe Biden, and now Kamala Harris, have both been talking about enormous tax hikes, totaling as much as $4-5 trillion. 

That would be sheer folly.  Here's where Donald Trump has another major advantage. He's consistently talked about extending all of the Trump tax cuts launched in 2017. Lately, he has added to that by proposing tax-free tips for millions of waitresses, part-time workers, people in the gig economy, etc and, just yesterday, he proposed to end the Social Security tax on retirees. 

CLICK HERE TO GET THE FOX NEWS APP        

Take a close look at these proposals. They all reduce the tax on work and employment. Also, they reduce the tax on business investment and productivity.  Instead of spending a fortune on government deficits and borrowing, Trump is creating incentives to produce and innovate more.  

As economic storm clouds begin to gather, it is Mr. Trump who has the common-sense solution to reduce taxes and let people spend and invest more of their own money. Once again, advantage Trump. That's the riff.  

This article is adapted from Larry Kudlow’s opening commentary on the August 1, 2024, edition of "Kudlow."