Monday, March 8, 2010

The New Normal for the US Economy

From Bloomberg:

he “new mix” is out to topple the “new normal” as the paradigm for America’s economic future.

The 5.9 percent annualized surge in fourth-quarter growth -- the fastest since 2003 -- was powered more by exports and business investment than the traditional drivers of consumption and housing. This new mix of demand will boost the economy by 3.7 percent in 2010 and pave the way for 3.5 percent annual average increases thereafter, said Joseph Carson, an economist at AllianceBernstein in New York, who coined the phrase.

His forecast contrasts with the 2 percent rate penciled in for later this year and the longer term by new-normal proponent Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co., who argues that growth will be depressed by consumer retrenchment and financial regulation.

“What’s going to change is how we generate growth, not how fast we can grow,” Carson said in an interview. “That’s how I come up with a new mix rather than a new normal.”

The outcome of the debate has ramifications for policy makers and investors. El-Erian and his colleagues at Pimco predict the Federal Reserve will keep its benchmark interest rate near zero through 2010, and they warn that stock prices may be too high, based on their outlook for the economy. The Standard & Poor’s 500 Index closed at 1,138.70 Friday, up 68 percent since March 9, 2009.\\


Advocates of both camps agree consumption will be restrained as households struggle with an unemployment rate that remained at 9.7 percent in February and a $12.6 trillion reduction in their net worth during the recession. They also agree that emerging markets, not the U.S., will lead the world economy in the recovery. Where they differ is on the extent that U.S. companies can tap into expansion overseas, boosting domestic growth in the process.

Emerging-market and developing economies will expand 6 percent as a group this year, compared with 2.1 percent for developed nations, according to a Jan. 26 report by the Washington-based International Monetary Fund.

“The U.S. is well positioned to take advantage of the strength in the emerging markets because the U.S. manufacturing sector has been generating big productivity gains and improving its competitive position,” Carson said. U.S. employee output per hour grew 3.8 percent last year, the largest gain since 2002, according to the Labor Department.

See this as well.