I know that Senator Manchin has pulled his punches slightly by suggesting that he won't make a final decision on Senator Chuck Schumer's trillion-dollar tax and spend bill until he gets a look at the August inflation and economic story, but frankly I think the West Virginian has in fact pulled the plug and is saying no tax hikes or climate spending, which brings to mind this passage from one of my favorite movies, The Godfather Part II:
"My offer is this: nothing. Not even the fee for the gaming license, which I would appreciate if you would put up personally."
In other words, Manchin's offer is this: nothing. You could look at the calendar, because Chuck Schumer wants the Senate’s August recess to begin Friday, August 5th. You will get the July jobs number that day, but you're not going to get any of the July inflation reports that Manchin is focused on until a week later, when the July CPI comes out on Friday, August 12th and really you won't know the whole July inflation story until the middle of August.
So, I think Senator Manchin's being pretty crafty here. I think Mr. Manchin heard the conversations we've been having on the show with Congressman Kevin Brady, and Steve Moore, and Senator Dan Sullivan and myself—that there is no FICA tax loophole for small passthrough businesses, and that imposing a 3.8% investment tax on their income and limiting their loan loss provisions would have a devastating effect on the economy's most important sector, which is already showing signs of a significant slump.
In other words, I think Senator Manchin heard us and that is to his credit. He listens to reason and facts. It's why I respect him so much and I have to tell you folks, I think one of the reasons the stock market bumped up so much today is feeling of relief that taxes are not going up. Betting on Manchin, the market is joining me in taking the over.
Not only would that mean no 3.8% tax on small business owners, but it would mean no surtaxes on high income earners, no 15% minimum corporate tax rate on book profits, and no higher taxes on U.S. multi-nationals and as Dan Clifton points out in his cult-following newsletter today, Congress can't enact $500 billion of renewable energy tax credits unless they're paid for with direct tax increases. Dan concludes: "no tax increase, no tax credits.'"
Of course, even without tax hikes the GDP tracker from the Atlanta Fed today moved to -1.5% for the second quarter, following the official -1.6% in Q1. So, at a minimum we're on the front end of a recession. Meanwhile manufacturing output fell for the second straight month in June.
Retail sales were up 1% in June, but the consumer price index was up 1.3%. Over the past year, retail sales up 8.4%, but the CPI's up 9.1%.
So, declining real wages seem to be leading to falling real consumer spending. The Michigan sentiment index is still rock bottom, down nearly 50% from a year ago and as Jason Trennert noted last night: business producer prices are rising faster than consumer prices, which over time will lead to lower profits, the mother's milk of stocks.
Try as he might, President Biden is still unable to overturn the highly successful Trump tax cuts that are frankly the only source of prosperity left in this economy, which brings me to this thought. While the Fed's going to be banging interest rates higher and higher and presumably shrinking the amount of excess cash in the economy, wouldn't it be great if Congress took steps to mitigate the slump through some supply-side growth measures like tax cuts and deregulation of energy and all business?
Supply-side growth would also bring inflation down faster. That's what Reagan did 40 years ago. Now, speaking of Joe Biden, in Saudi Arabia he just threw a temper-tantrum about Joe Manchin. He said: "If the Senate will not move to tackle the climate crisis... I will take strong executive action to meet this moment."
Well, Uncle Joe, the Supreme Court just said you can't do that. Without a clear law, your executive actions are null and void. Just saying folks, the cavalry is coming and, in the meantime, save America, kill the bill.
This article is adapted from Larry Kudlow's opening commentary on the July 15, 2022, edition of "Kudlow."