So Much Good Economic News, So Little Cheer

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So Much Economic Good News Amid So Little Cheer

Commentary by Kevin Hassett

Dec. 31 (Bloomberg) -- The U.S. is ending 2007 with a whine rather than a whimper. It is tough to keep track of what's collapsing faster, home prices or the dollar, and the financial market crisis caused by it has many seers talking recession as we enter 2008.

As always, that delicious negativity receives the lion's share of media attention. But, in many ways, this past year was a pretty good one, and no, I am not just a talking about Boston's sports fans. Thus, to ring in the New Year, I present the Top 10 pieces of happy economic news in 2007.

1) Equity markets posted solid gains and price multiples are still low. As of last Friday morning, the Dow Jones Industrial Average had gained about 7 percent for the year, while yielding about 2.25 percent, providing investors with a total return of more than 9 percent. The Nasdaq Composite Index had climbed more than 10 percent, while the Standard & Poor's 500 Index had provided a total return in the 5.5 percent range. There are no signs of irrational exuberance. The price-to- earnings ratio for the S&P 500, for example, finished the year at less than 19, safely nestled in the historical comfort range.

2) Households are wealthier. In part because of rising equity markets, household net worth increased in 2007, according to the latest numbers from the Federal Reserve. At the start of the year, net worth was $56.1 trillion. By the third quarter, this climbed to $58.6 trillion and probably rose again in the fourth quarter. If changes in wealth affect the economy through consumption, then the affect will be favorable.

3) Congress did nothing. Gridlock has historically been good for the U.S. economy for a simple reason: New laws are invariably worse than the ones they replace. Witness Sarbanes- Oxley. With the Democrats taking control of Congress, there was a real risk that taxes, in particular, would be increased. With the economy softening already, it is great news that this didn't happen.

4) The Federal Reserve did something. From interest rate reductions to the introduction of a new auction mechanism to get needed reserves to struggling banks, the Fed has responded to the weakening economy with multiple policy moves. Thus, we have learned that Ben Bernanke's Fed will likely be a competent actor should things get worse. This is good news for nervous markets, though there was no guarantee this would be the case. The Fed did, after all, aggravate -- and may have caused -- the Great Depression.

5) The world economy had another blow-out year. According to the latest Moody's Economy.com forecast, world gross domestic product grew by 3.9 percent in 2007 after rising 3.6 percent in 2006. In spite of the gloom in the headlines, the most important news in 2007 was that economic freedom is spreading, and the benefits to the world's citizens of this are skyrocketing.

6) The trade deficit declined. As our trading partners become wealthier, they demand more of our products. At the same time, the weaker dollar has made U.S. exports cheaper. Exports have boomed, and the real trade deficit has narrowed, from $624.4 billion in 2006 to an estimated $562.4 billion in 2007.

7) Even in the face of the housing-market bust, economic growth was solid. If someone told me last December that construction of single-family homes would drop in 2007 by 27 percent, about the current estimate from Economy.com, then I would have expected the economy to be in recession. But a collapse of that scale did occur, and annual GDP growth, according to the latest Economy.com estimate, was about 2.5 percent. There are plenty of developed countries that would take that type of growth every year.

8) Job creation was robust. According to the latest jobs report, which covers data through November, the U.S. economy added 1.3 million jobs on net in 2007. The unemployment rate was 4.6 percent in January, and finished the year a smidgen higher at 4.7 percent. Both levels are very low by historical standards.

9) The federal budget deficit declined. According to the Congressional Budget Office's monthly budget review, the federal budget deficit was only $163 billion for fiscal 2007, a large decline from the $248 billion deficit in 2006. This decline was actually bigger than had been forecast by the CBO last January.

10) Inflation risk is low. Although energy prices surged, core inflation was up only 2.3 percent for the year ended in November, about half a percentage point lower than it was in late 2006. This is great news, making it relatively riskless for the Fed to cut interest rates next year if there are more signs of trouble.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in his bid for the 2008 presidential nomination. The opinions expressed are his own.)

To contact the writer of this column: Kevin Hassett at khassett@aei.org

Last Updated: December 31, 2007 00:04 EST

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[otterinbham 0]

A sunny little article. However, it is backwards looking. Economists should always look ahead, and be skeptical.

I personally think the odds are not for a recession, but we're on thin ice. As little as I like the idea of propping up bankers who made bad loans, the very last thing we need is a total credit meltdown. Right now, the central banks are pumping money into the economic system as fast as they can, and the banks are still reeling. If the money supply continues to expand, look for a realistic possibility of inflation in the near future.

Oddly enough, the economies that will be hurt the worst by our economic problems will be overseas economies who depend on importing to the US. While the lower US dollar helps our balance of trade and overseas investments in our domestic economy, it could also wreak havoc with foreign economies. Stay tuned.