Consumer Spending or Business Investment?

Tune in to CNBC's "Kudlow and Company" on Monday night (7 p.m. EST) for an economic smackdown between Robert Reich, former labor secretary under Clinton, and free-market Austrian economist Mark Skousen, on the question, "What drives the economy--consumer spending or business investment?" It should be an interesting debate between a demand-side Keynesian and a supply-side Austrian.

The graph above shows that retail sales is not a leading indicator of the economy, does not predict recessions (shaded areas) and is probably one of the most stable and boring economic variables. Notice in the graph above that retail sales almost never decline, even during recessions (shaded areas). Industrial production, on the other hand, is an excellent indicator of the business cycle. Notice the significant decline in industrial output in each of the last four recessions.

Conclusion: According to Skousen, "Productivity and investment are driving forces in the economy; consumer spending is the effect, not the cause, of prosperity. Say's law (supply creates demand) trumps Keynes's law (demand creates supply)!"

For more information check out Mark Skousen's book "The Structure of Production."