Old Normal Returns as Pimco Sees 'New Destination' for U.S. Growth
The “new normal” U.S. economy is starting to look more like a classic expansion.
Signs of a quickening recovery are casting doubt on the notion that lasting stagnation has become the norm for the world’s largest economy, a view advanced by Pacific Investment Management Co.’s Bill Gross, Northwestern University’s Robert Gordon and former Treasury Secretary Lawrence Summers.
Behind the improved outlook: Consumers spending more freely after working down their debts, less drag from government budget restraint, a housing recovery and continued easy monetary policy.
“We are returning to an old normal,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York. “A lot of the headwinds that are holding the economy back are beginning to abate, including local government spending, fiscal tightening and household balance-sheet deleveraging.”
The term “new normal” was popularized in 2009 by Gross, Pimco’s co-founder and chief investment officer, and former Chief Executive Officer Mohamed El-Erian to describe an era of lower returns, heightened government regulation, diminishing U.S. clout in the world economy and a bigger role for developing nations. The term was coined by Bloomberg News reporter Rich Miller.
Gross and El-Erian pegged U.S. growth at about 2 percent for the following three to five years, a period that is drawing to a close.
“What you’ll see in next the few years is we’re going to head back to a new destination,” Scott Mather, one of Pimco’s six deputy chief investment officers, said in an April 25 Bloomberg Radio interview. The firm’s forecast for U.S. growth has increased to the high 2 percent level, “which is better than sub-2 percent level of growth that we’ve experienced for several years,” he said.
The median forecast in a Bloomberg survey of economists this month calls for growth to accelerate to a pace of at least 3 percent for the rest of 2014 and the following two years. Dutta sees an expansion of 3.5 percent for the next three quarters and says 3 percent “seems reasonable” for the subsequent two years.
The forecasts are in line with the 3.1 percent average annual rate per quarter from 1980 until the start of the recession in 2007. Since June 2009, the end of the deepest downturn since the 1930s, quarterly growth has averaged 2.4 percent. That’s slower than the average 3.8 percent rate seen in comparable 18-quarter periods following the previous three recessions.
The pickup would come in the face of persistent slack in the labor market, which is keeping the Federal Reserve committed to accommodative policies to bring about full employment and 2 percent inflation, Chair Janet Yellen said in an April 16 speech. Unemployment of 6.7 percent in March remains above the 5.2 percent to 5.6 percent level that policy makers consider full employment.
“This shortfall remains significant, and in our baseline outlook, it will take more than two years to close,” Yellen, 67, said to the Economic Club of New York.
Federal Open Market Committee participants project gross domestic product growth of 2.8 percent to 3 percent for 2014, 3 percent to 3.2 percent in 2015 and 2.5 percent to 3 percent in 2016.
“We are making considerable progress, and many of the headwinds that came from the crisis, from fiscal policy, from housing, are beginning to dissipate,” former Fed Chairman Ben S. Bernanke said in Toronto on April 22.
While housing has stumbled in recent months, more than 5.5 million new and previously owned homes were sold in 2013, the best year for the industry since 2006, according to data from the Commerce Department and National Association of Realtors.
“Many forecasters, and I would put myself among them, think we’re looking at a very good potential for faster growth in the U.S. and continued progress towards a full recovery from the tremendous impact of the financial crisis,” Bernanke said.
Bernanke, whose term at the Fed expired on Jan. 31 and who joined the Brookings Institution as a distinguished fellow in residence, led unprecedented actions such as cutting the benchmark interest rate to zero and buying bonds to bring down long-term interest rates.
The FOMC said last month that its benchmark rate will probably remain low for a “considerable time” after bond purchases end. The Fed, which holds a two-day policy meeting starting tomorrow, said it will weigh a “wide range of information” in considering when to raise the rate.
“Monetary policy and financial conditions generally are very supportive of growth, and fiscal drag, while still present, is much reduced,” said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York.
Fed officials, in forecasts released last month with the policy statement, upgraded projections for gains in the labor market and predicted the main interest rate will rise to 1 percent by the end of 2015.
“Growth should accelerate in 2014 and 2015 as the housing recovery is gaining traction and household balance sheets are in much better shape,” said Christophe Barraud, chief economist at Market Securities LLP in Paris who has been the top forecaster of the U.S. economy the past two years, according to data compiled by Bloomberg. “Public spending will rebound following the reduction of the federal deficit and significant surpluses at the states’ level.”
Barraud foresees “a sharp rebound” in this year’s second quarter, with “close to 4 percent” growth, followed by a rate “slightly above 3 percent” for the rest of the year. Over the long term, he projects “GDP could return around the level reached during the period 2000-2007, namely 2.7 percent.”
Global growth, including a recovery in Europe from a regional debt crisis, is also aiding the U.S. The world economy may expand at a 3.6 percent rate in 2014, 3.9 percent in 2015 and 4 percent in 2016, the International Monetary Fund said this month. That is up from an estimated 3 percent in 2013.
“Global growth should accelerate,” Barraud said, helped by recovery in Japan, “mini-stimulus measures in China, and fiscal and monetary adjustments in emerging countries.”
The U.S. labor market has shown signs of healing too, with unemployment falling from 10 percent in October 2010. U.S. payrolls have risen an average 187,000 a month the past eight months, Labor Department data show.
Economists with more pessimistic forecasts still think their views will be vindicated.
Growth remains “below the historical trend,” said Gordon, who predicted the expansion may stall over the next century in a paper published by the National Bureau of Economic Research in August 2012. Innovation’s contribution to higher standards of living will slow, and headwinds such as an aging population and increased income inequality will reduce growth, he said.
Just because the economy is expanding doesn’t mean everyone shares in the benefits, he said. GDP figures reflect “the rising incomes of the top 1 percent who are accumulating at least half of annual income growth each year,” he said.
Summers said he remains concerned the U.S. could be in for a “secular stagnation,” in which the Fed can’t provide enough stimulus to deliver full employment without risking financial stability.
“Perhaps growth will accelerate, but if it does with current financial conditions, how long will it be before we start to see substantial emergence of financial excess?” Summers said in a Bloomberg Television interview April 25. “We need more stimulus to growth from someplace other than monetary accommodation.”
Pimco’s Gross, in a Bloomberg Radio interview April 4, said that while the U.S. has “a good 2014 ahead of us,” the country still faces slowing productivity “along with a lot of other structural factors,” such as an aging population.
To Wall Street economists, the recent healing in household and government finances outweighs concerns about a persistent slowdown.
“The headwinds are diminishing,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This could be the year, and our forecast remains a hopeful one.”
Gloomy forecasts stem from an overreaction to a disappointing economic recovery since 2009, added Carl Riccadonna, senior U.S. economist in New York for Deutsche Bank Securities.
“Maybe 2014 is the year we shift back to the old normal, not the new normal, and we’re going to see faster economic growth,” he said. “I think we are done with the new normal phenomenon.”
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