Be Very Afraid

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good evening, i'm larry kudlow. this is the kudlow report. the top story tonight is the economy. retail sales are down for three straight months. normally that's a recession signal. for the sake of the country, i hope i'm wrong about the recession. our experts will weigh in and we'll preview ben bernanke's critical mid-year testimony coming tomorrow on the state of the economy and fed policy. also this evening, instead of trying to anti-depressant off for a session the president is in full election mode, once again demonizing business. take a listen. if you've got a business, you didn't build that. somebody else made that happen. well, economic -- kelly, too. the dow closed down on the lousy economic news. it's the 7th down day in the past eight. the new york times article alleging analysts with ethically dubious behavior once again suggesting the stock market may be rigged against the little guy in favor of the big guys who get the key research first. gretchen morgenson is my exclusive special guest. the big news today, the drop in retail sales, the third consecutive drop caused major recession fears. i think the drop in sales is closely related to the slow down of jobs. lononfarm employment. you will see the same decline down to 75,000 a month. fewer incomes. lower incomes. you will have people spending less. now what does it mean to gdp which is the ultimate recession indicator? take a look. hold onto your hats. a simple formula. gdp equals consumption, c, investment, i, that's housing and business investment. the g is government spending which has been faltering and x minus m is trade. that means we import more than we export. the proportions, consumption is 70% of the demand side, 15% investment. 18% is government spending and minus 3% for the trade sector. add them up to 100%. retail sales are about 40% of the c, that's a big number. in fact, retail sales overall are about 28% of gdp. so you have more than a quarter of the economy falling for the third consecutive month. that gets everybody worried. people are talking about 1% growth in the second quarter ending in june. that's less than half of the first quarter which is 1.9%. the question is are we going into recession and is this a trend for the rest of the year? now we bring in our distinguished panel to discuss. joining us now we have macro strategy president dave goldman, joe lafornia and cnbc contributor, diane swonk from mesirow financial. i don't want a recession. let me say it off the top. the numbers worry me. i hope i have the analysis remotely right. what's your take? will it be worse? what happens in the third and fourth quarter? i hope it's not a recession as well. we are close to a stall speed. the risk of recession is the highest since the on set of the financial crisis because of what's going on in europe and the fiscal cliff in the u.s. clearly the jobs picture is back from the unseasonably. you still didn't have people on discretionary spending. food and drink con tracked which is important because many people were hoping lower energy prices would allow people to spend a little more on discretionary things. that didn't happen. that could be the only saving grace. that's a very important point. you have the big tax hike staring us in the face. what about retail gasoline? it's gone nationwide from about $4 a gallon down to $3.40. de facto tax cut. that's helping us. it is one of the automatic stabilizers out there. you're right. employment numbers have been lousy. that's a generous number for the employment numbers. uh'm looking for 2 to 2.25% in the second part of the year. that's becoming my optimistic forecast with a lot of down side risk. it's muddling along at best. dave, uh want to ask you about q-2. will it be a negative number, positive, 1% number? then i want to go to the third and fourth quarters. i think we squeak by at 1%. we kind of have a digital outcome with the selection. as we have discussed we saw in the first quarter a breakdown in the investment machine. we have more profits than ever, but the profits are going into mattresses, not into the kind of things that create jobs. no investment, no jobs. no jobs or retail spending. we have seen under obama's watch the average family has lost about 40% of net worth. so the incentive to save and rebuild net worth is powerful. with those huge headwinds we barely squeak by. if obama is re-elected we have recession in 2013. joe, i interviewed alan greenspan last week. an interesting point. he was not predicting recession. but he said because of the massive deficits we are facing for a variety of reasons, health care entitlements, you name it. people worry we can't pay our bills, that we have to jack up taxes. joe, greenspan said people aren't making long-term investments in structures, factories. they are not buying homes for the long run. this is holding back employment and this is why sales are slumping as we see today. is greenspan right? how big a problem is this going to be? certainly he's onto something if you talk to business people. they say the same thing. they say the fiscal cliff is an inhibitor to hire. if we look at the university of michigan consumer sentiment data we see the very weak readings on sentiment largely reflect a lack of confidence in government policies as they are generally defined. i think he's onto something. it's hard to quantify. diane is right. we have a muddling through environment. because the corporate sector is healthy enough, i don't think we'll have a recession. we'll muddle through, get 2% growth. hopefully some clarity after the election will give us activity. i don't see the 2% growth. larry, at one -- 1.9% growth in the first quarter. you may have mentioned it, diane. a lot of people are marking down second quarter growth to 1%. you know better than i know 1%? heck. that's just above the tree line. barely above water. it's a stall rate. anything goes wrong, inventory correction, a weird thing in europe or china could sink us. i spent the last week with 25 economists from around the world representing much of the world economy. all of us were more scared than we have been since 2008. that said, it does look like china will jack up growth by buildingot l a of bridges to nowhere. not the most productive way to do it but they can generate gdp. that's important. i think we are going to see -- we have seen investment revised in the first quarter. investment isn't near where it should be but i see the economy as the flip side of the 1990s. ironic for greenspan. we had a period of irrational exuberance, quoting alan. robust growth. so much certainty about the future we were willing to invest in companies without revenue let alone profits and throwing all caution to the wind. we have the flip side of that y. we have subdued growth and uncertainty regarding policies in europe, in the u.s. both parties are guilty on this. last year at this time we grew under 1% with a 20% contraction in the second part of the year. we had to down grade and the economy accelerated to above 2%. the notion that we can't get above 2% is mistake. that's still possible. i'd like to see it. i'm waiting. david, one thing that's good. banks are making loans. that's from your own last report. ben bernanke urged the banks to loosen the strings more. why does he have to keep paying 25 basis points on the excess reserve bank deposits sitting lying at the fed. why not do what the european central bank does and stop paying 25 basis points and maybe get banks to push the money out more throughout the economy. people aren't short of money to invest. when greenspan. they revised it. it's now 1.7. well. investment was three times profits. now it's around one times profits. lowest level of profit since 1947. that's lack of spirits, and a hostile environment. i think we are stuck at 1%. i want to sell this and i'm not having luck. i don't think the fed should pay interest on the unused bank deposits. there is one and a half trillion dollars worth. let them stop it. maybe they will push out the money. the european central banks stopped paying money on unused deposits. why doesn't the fed? the pro with the banks is you have a regulatory onslaught. the fed of course taking volatility out of the market, lower the long end hurts net interest margins. a lot of things are just beyond the rate of excess interest paid on reserves holding us back. it's really much more regulatory than anything on the monetary policy front which i wish the fed appreciated more. it's not as much of ap issue. talking to my european banking friends they are envious because they think it is a good deal on regulation which is scary. bank loans are growing. most are student loans. i hear that we are not going into recession by the skinny skin skin of our teeth. david goldman, joe lavornia and diane swonk, thank you. coming up, is the stock market