What gives? The US economy is supposed by many 'unbiased' media commentators to be in rapid decline, yet the highly regarded Automatic Data Processing company reports that job-creation is still steaming ahead with non-farm private employment rising by 189,000 for November, making it "the 51st consecutive month of positive job growth". In addition, the Labor Department reports that productivity has come in at an annualised rate of 6.3 percent in the third quarter. A totally unexpected increase and on par with 2003. While the news on manufacturing appears mixed it is still above the Institute for Supply Management index of 50 which indicates continuing expansion.

At the beginning of November I stated "that there was still steam in the US economy and that the sub-prime fiasco would not sink it". For this I have been taken to task by a number of readers. The above facts strongly suggest that I was right -- and still am.

I am not suggesting that everything is rosy and the US economy has entered a "New Era", only that it still has some way to go before the next downturn. As is always the case, the economic pundits are looking in the wrong direction. Only yesterday they were focusing on consumer spending as the danger sign. Now they have directed their attention to services. There are two fallacies here, both of which should be self-evident. The first is that consumer spending does not drive the economy nor does it account for the largest amount of spending. The second one is the fallacy of seeing the economy as consisting of separate sectors. The economy does not consist of a pile of boxes. It is an integrated whole.

If we look at total spending (not GDP) we may find that it is in the region of $30 trillion, with business spending being by far the largest component. As for services, the economic commentariat overlooks the important fact that the great majority of these are either directly dependent on manufacturing or are derived from it, i.e., they are at the lower stages of production. A simple example should suffice to make my point clear.

Food is manufactured. Just as mining companies extract the ores that find their ways in to buildings, cars, planes, computers, machinery, etc., agriculture produces the raw materials that pass through an astonishing number of incredibly complex stages of production until they reach a supermarket shelf, the backroom of a restaurant or the housewife's kitchen. Lawrence Abbott used the example of a simple cotton shirt to make this very point:

Consider the many items needed for shirt production: plows to prepare the ground for planting cotton; mechanical cotton-pickers to pick the cotton -- or at least sacks to carry the cotton in; locomotives, freight cars and steel rails to move the cotton to the spinning mill -- or else trucks and paved highways or boats and docking facilities; spinning machinery; looms; warehouses; retail stores. The complete list would be staggering. (Lawrence Abbot Economics and the Modern World, Harcourt, Brace & World Inc. 1967, p. 179).

The very notion that manufacturing is now such a small part of the economy it can be ignored when considering the economy's direction is pure balderdash that is largely derived from looking at grossly misleading GDP figures.

The Austrian school is forever stressing this complexity and what it means for economic analysis. For fear of repeating myself, let me emphasise the fact ( hotly denied by partisan Dems and their media lackeys) that the Bush tax cuts gave manufacturing a huge boost by making more savings available for investment. Without a doubt his helped drag the US out of recession. The Fed's loose monetary policy did the rest -- and the damage. By keeping interest artificially low the Fed has created malinvestments that must eventually result in a recession.

However, in my opinion an impending recession has not yet made itself felt, regardless of the sub-prime fiasco. The first reason is that I think the power of the tax cuts have been greatly underestimated by most commentators. Secondly, as I have said before, though the so-called boom-bust cycle is -- irrespective of what Minsky's disciples claim -- driven by credit expansion I think there is a tendency for each boom to have characteristics of its own.

In this case we not only have the cuts in capital gains taxes but the rapid decline in the dollar has given an additional spurt to manufacturing. These two events have not changed the course of the economy but I believe they have helped considerably to extend the boom. We should also bear in mind that Bernanke might decide at a later date to try and postpone an emerging recession by significantly cutting rates.

Given that manufacturing is not suffering from falling productivity, severe bottlenecks and labour shortages, rapidly rising costs of inputs and labour it is unlikely that we will see the economy fall into recession before next June. In fact, if the current indicators remain as they are we might see the boom carry on into 2009. But sooner or later real factors will make an imminent recession unavoidable. As Fritz Machlup stated:

... monetary factors cause the [business] cycle but real phenomena constitute it, Essays on Hayek, Routledge, Kegan Paul 1977, p. 23).

And this will remain the case until the economics profession acquires a vastly better understanding of the nature of money and interest rates.