Testifying for the economy

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President Bush's bounce from the capture In Iraq of Saddam Hussein has faded. His State of the Union message had clear vision, but it lacked enough rhetorical punch to deliver another bounce. And now the president is taking political hits from all angles, temporarily slowing the stock market advance.

Sen. John Kerry of Massachusetts, on the other hand, is getting a large bounce from his primary victories, with Bush-bashing on the Democratic campaign trail nearing a fever pitch. Heavy coverage by the print and broadcast media is only fueling the charge of the anti-Bush forces.

Missing WMDs have not helped Mr. Bush, either. Nor did his clear but somewhat flat performance on Tim Russert's "Meet the Press." Nor has lower-than-expected job growth -- although a steady-rising household survey, showing more self-employed and private-contract workers, is still the dirty little secret. Big budget deficits are also grabbing the headlines, even though they are vastly overrated in both numerical and economic terms.

What all this says is that the stock market rally has come under some political pressure. Mr. Bush is the pro-investor candidate, but his fortunes have momentarily slumped. Mr. Kerry is the enemy of the investor class, as well as the new Democratic class-warfare hero, but his veneer has only temporarily brightened. Stocks, of course, respond to all these factors, passing though they may be.

Time for investors to worry? Not at all. Liberal Yale economist Ray Fair has a better idea. His economic model projecting the presidential popular vote is strongly favoring Mr. Bush (although the rigorously honest Mr. Fair would have it otherwise). With a 2004 growth economy near 4 percent, low inflation and a rising jobs number, Mr. Fair's model predicts a Bush landslide with 58 percent of the popular vote.

Alan Greenspan's incredibly upbeat testimony before Congress last week was every bit as promising for a Bush re-election as Mr. Fair's conclusions. Mr. Greenspan, of course, as head of the independent central bank, is an objective economic observer. He concludes that the health of the U.S. economy is rapidly improving.

Mr. Greenspan's good-news economic gospel included a rosy-scenario forecast of nearly 5 percent economic growth, with inflation just above 1 percent. Behind that forecast is a pile of positive data:

Household and business balance sheets are in good shape. Spectacular productivity has led to outsized business profits. Business investment and production are rising more rapidly than consumer spending, which still remains strong. With the supply side of the economy so muscular, inflation is in check and interest rates are staying low. While corporate hiring has been slow, it will soon pick up steam, with Mr. Greenspan expecting unemployment to drop to 5.5 percent this year. And finally, the current-account deficit is being comfortably financed by international markets, and an orderly dollar decline may be bottoming out.

Perversely, Mr. Greenspan's benign interest-rate outlook caused some market traders to worry that the economy is not really as strong as publicized. The absence of major interest-rate risk may have even lowered consumer confidence over the jobs outlook. But things are different today. While in the past the Fed has always acted quickly to raise rates in the wake of strong economic readings, Greenspan & Co. will remain patient following a period of intense deflation. Given the fact that core inflation remains less than 1 percent and durable-goods prices continue to fall, the central bank is right to leave interest rates alone.

During Mr. Greenspan's testimony, numerous Democrats tried to bludgeon the Fed chairman with the usual deficit hysteria. But Mr. Greenspan was very clear that the Bush tax cuts should remain in place in order to grow the economy to its fullest potential. Instead of tax increases, he argued strongly for new spending restraint -- including new budget rules to prevent overspending.

The chairman was right again: A combination of strong economic growth and tough budget restraint -- not economy-crippling tax increases -- will eliminate deficits.

With a budget-busting highway bill on the immediate horizon, this is not the message Congress wants to hear. But Mr. Greenspan's firm stand on budget control may embolden the president to veto the highway bill (which will undoubtedly be laden with pork). There are also rumors the president will recruit former-Sen. Phil Gramm of Texas to design new spending-control laws. This would be welcome news to conservatives. It was the Gramm-Rudman approach that held down spending in the Reagan 1980s. And it was Mr. Gramm who almost unilaterally defeated the single-payer universal-health-care plan of President Clinton 10 years ago.

If Mr. Greenspan and Mr. Gramm are successful in bolstering the administration's backbone on spending, business and investor confidence will improve and the economy will strengthen even more.

Lawrence Kudlow is a nationally syndicated columnist and is CEO of Kudlow & Co., LLC, and CNBC's economics commentator.