Auto sales still rebounding nicely

Auto sales were a little weaker than expected in January (Toyota's massive recall was a big factor), but they are still up at a 17% annualized rate from their low of last February. With the U.S. car fleet aging steadily, a sales rate this low (by far the lowest level relative to the size of the population since records were first kept beginning in 1967) is very unlikely to be sustained for much longer, especially if the economy as a whole continues to expand. From my perspective it looks like auto sales are following their typical pattern of rebounding after the end of a recession, and could even enjoy a very strong rebound in the years to come. Even from a pessimist's standpoint, it's clear that autos stopped being a drag on the economy about one year ago.

Credit spread update

The first chart shows spreads on generic 5-year Credit Default Swaps, and the second chart shows the difference between high yield (junk) and investment grade credits. CDS spreads are a nice, liquid proxy for generic credit risk with 5-year maturity. We've seen all three lines wiggle a bit to the upside in recent weeks, and that wiggle has coincided with an uptick in the VIX index, which is shown in the third chart, alongside the S&P 500 index. These wiggles are the market's way of climbing walls of worry. I doubt that they signal the end of the rally in corporate bonds or stocks.

As all three charts show, measures of risk and uncertainty have come down hugely, which is good, but they are still above the levels that tend to prevail during periods of tranquil markets and a healthy economy. No where can I spot any sign of irrational exuberance or a failure to appreciate that there is still plenty of risk and uncertainty out there in the world. Credit spreads are still fairly high relative to historical averages, and the VIX is still quite high as well. These are signs that the market is appropriately cautious, and worried that things might not continue to improve.

The threat of anti-business sentiment and higher-tax policies coming out of Washington seems like the likely catalyst for the market's latest bout of nerves. Bad policies can derail a recovery, so the market is reacting rationally to Obama's populist attacks on banks and big business. But meanwhile, the wheels of recovery continue to turn, and the economy has undergone some tremendous adjustments that open the door to continued improvement. You can't keep the U.S. economy down.

And as Obama is discovering, you can't impose a far-left agenda on the American people. The pushback has been huge. Free markets are not going to disappear anytime soon, and as long as this remains largely a free market economy, growth and rising prosperity are the default option.

Consumption has recovered, jobs will follow

As a supply-sider, I don't believe that consumption drives economic growth. The driver of growth is supply, and supply goes up when people work more, when the factors of production become more productive, when investment goes up, and when risk-taking goes up. I show this chart of real personal consumption expenditures merely to show that what has happened in the economy over the past year is typical of every business cycle recovery. With almost all economic indicators confirming a decent recovery, with productivity up strongly, with business capital spending up strongly, with risk appetites increasing (e.g., the 60% rebound in the S&P 500 and the dramatic narrowing of credit spreads) and with consumption up as well, it is only a matter of time before we see an increase in the number of jobs. Jobs are the last place that a recovery will show up.

Things could have been a lot better, unfortunately, if it weren't for all the government "stimulus" spending. The bulk of that spending consisted of transfer payments which, because they take money from one person and give it to another, do nothing to create new growth. And the massive deficit that resulted from all the "stimulus" spending has sopped up a huge portion of the economy's savings that could have been directed to truly productive activities instead.

The recovery skeptics keep insisting that the economy is on "stimulus life support," and that any move to cut back on fiscal or monetary stimulus would threaten a double-dip recession. I don't believe it for one second. On the contrary, I keep insisting that the economy is recovering despite the government's best efforts to suppress growth. It never pays to underestimate the strength and dynamism of the U.S. economy.