Monday, March 17, 2008


In times of trouble, we seem to be like the cowboy that knows there must be an Indian behind every rock. The question, since industrial production declined last month, does that not prove a recession is starting. NO, NOT NECESSARILY.

Brian Wesbury has answered this very question on his web site today. He notes that the 6 month change in production has dropped to a negative number 4 times since the last recession. The current decline is accompanied by a very low inventory to sales ratio. While it is clear that business managers are being very cautious, it is also clear that it would not take much of an attitude or much of a sales increase to cause businesses to attempt to crank up inventories. Once the turn is here, businesses might have to work hard just to stock up.

High tech equipment production grew by 17% last month! Many a business is spending to cut costs. Again, we come full circle to oil demand. In the USA, oil demand is off more than a million barrels per day from the peak in 2005. Companies and individuals are finding ways to reduce consumption. There are literally millions of projects underway in the USA to reduce consumption. There are millions of more projects underway in China, etc. Goods production is soaring if you focus on those goods that serve as substitutes for oil consumption.


The question remains as to what strategy will be used by the republican administration to hold the presidency. Success in Iraq could be the welcome advantage. Should the economy improve as a result of a settlement with Iran, the advantage would go to the republicans. In regard to the pressure from democrats to raise taxes, they will face an uphill fight if the economy stays weak. The fear of higher taxes is a part of the reason the economy is weak. We have a chicken or egg problem to solve.

The political bottom line is that citizens "vote their pocketbook". Therefore, it is in the administrations best interest for a clear turn to happen. One more big cut in interest rates, tomorrow, may be all that is needed to kill a few birds with one stone.