McCain's Right: The Economy is 'Fundamentally Sound'

John McCain has taken a lot of grief for repeatedly saying "the fundamentals of the economy are strong," including yesterday, on Meltdown Monday. (Of course, McCain has also said the economy's "in a shambles.") So, what's the reality here?

1) Wall Street is in a recession (autos and housing, too), but the overall U.S. economy is not. The economy probably grew at close to 4 percent in the second quarter and is expanding at near 2 percent in the third quarter.

2) Worker productivity, the single best measure of the intrinsic strength of an economy, is booming. It was up 3.4 percent from a year ago in the second quarter. As market guru Ed Yardeni notes, "It is up by another percentage point, excluding the depressed residential construction industry. Economic growth is shifting from low productivity home construction to high productivity capital goods exports manufacturing." This is good.

3) In its 2007 ranking of global competitiveness, the World Economic Forum ranked America first. Among its strengths: Higher education, labor markets, and innovation. The credit crisis hasn't changed any of that. (The 2008 ranking comes out next month.)

4) Consumer confidence has actually been rising all summer. No doubt the upturn is linked to the 40 percent drop in prices. The "energy tax cut" will help real working incomes.

Bottom line: What's not fundamentally sound is the U.S. government. For starters, it has huge long-term liabilities. What's more, it pushed a pro-housing agenda (Fannie/Freddie, subsidies) that when combined with absurdly low interest rates earlier this decade (via the Fed) created the environment for the housing bubble and implosion and now rising unemployment. Michael Bloomberg nailed it yesterday when he said in an interview, "I do agree that fundamentally America has an economy that is strong. America's great strength is its diversity, its hard work, its good financial statements, its broad capital markets, its enormous natural resources.... I'd rather play America's hand than any other country. Without problems? No."