Is the U.S. headed for a "new normal" -- a slow-growth economy that lasts perhaps for as long as a decade? The evidence supporting the new-normal argument, predicting a future in which the U.S. GDP grows at no more than 2.0% to 2.5% per year, is compelling. That low growth rate would constrain corporate revenue, earnings growth and stock prices, among other consequences.
The U.S. has already registered below-trend GDP growth at this recovery's start -- just 3.5% in the third quarter, versus the more than 6% GDP growth typically registered in an expansion's initial stage. Here's why the slow-growth conditions might continue:
Housing sector doldrums: The massive overbuilding and the subsequent bust mean it will take at least another year to work off excess inventories in single-family homes, condos, co-ops, etc. Further, slumping prices will cause some families who would typically trade-up to stay put -- eliminating additional sector activity. As a result, housing won't be as strong a growth engine as it has been during previous expansions.
Frugal consumers: Americans are in the midst of making up for a decade of unsustainable overconsumption -- spending fueled in many cases by debt -- by increasing their savings. Currently, Americans are saving at about a 3% annual rate, but it did approach 5% earlier in the year. Also, asset declines in stock portfolios and homes are further impressing upon Americans the need to save: People have realized that they can't count on their 401(k) or their home appreciation being quite as large bonanzas as they had hoped for. Because consumer spending accounts for roughly two-thirds of the U.S. economy, a sustained reduction in consumption will weigh on GDP growth.
Demographics: The U.S. population is aging, and its largest segment, the post-World War II baby boom generation, is starting to retire. That implies even less consumer spending, as adults typically decrease spending in their retirement years.
Export traffic jam: In general, U.S. multinational corporations are well-positioned for the next global economic expansion from the standpoints of product quality and distribution networks. The problem is, so are are many of their foreign-based competitors. Moreover, dozens of formidable emerging-market nations have export-dominant economies: They must export to grow. Hence, the current global expansion will probably feature a surplus of goods (at least initially) and intense competition. That's likely to keep U.S. export revenue below what it would be without those surplus goods, limiting the tailwind from exports to U.S. GDP.
U.S. budget deficit reduction: Spending for the bank bailout, related financial system measures and the fiscal stimulus package will have to repaid at some point. So will spending for the wars in Iraq and Afghanistan, which currently totals $934 billion, not counting interest. Health-care reform will limit entitlement spending growth in Medicare and Medicaid, but additional spending cuts and tax increases will be needed, and more resources will be removed from the private sector. Net result? Historically, tax increases have constrained U.S. GDP growth.
Workforce reduction: The current recession has resulted in the loss of more than 7.6 million jobs, and more than 15 million Americans are looking for work. Basically, current nonfarm payrolls are about at the level they were in early 2000. The nation needs to create 100,000 to 125,000 jobs each month just to keep the unemployment rate from rising. Further, even assuming a return to 200,000 to 225,000 monthly gains in jobs -- and that's a big assumption, given current demand conditions -- it would take the nation more than six years to replace all of the jobs lost so far during this recession. That suggests the U.S. will not nearly have the demand characteristics of previous expansions, with constrained household formation another damper on GDP growth.
Wage stagnation: The aforementioned slack in the labor force -- and the competition from lower-cost production centers abroad -- has led to another problematic trend: stagnant wages in many U.S. job segments. Simply, if this trend continues, it does not bode well for consumer spending.
Two Rays of Hope
PIMCO's Bill Gross, who heads the world's largest bond fund, has forecast a new era -- a period of "capitalism with limits" that will feature lower returns on equity, lower GDP growth and reduced job creation. He's not the only one forecasting a mild, U-shaped economic recovery.
Is there any chance that the U.S. can avoid this slow-growth future? What factors might counterbalance those mentioned above and enable the country to experience robust GDP growth again -- say, 6% in the expansion's initial stage, and above 3% thereafter? That's a good question. No economists have 6% initial expansion-stage forecasts out there now, but the key to achieving strong growth lies in the appearance of a domestic catalyst – a growth engine that really adds to job creation. Green technology holds promise, but it's not likely to create millions of new jobs, at least not initially.
However, two historical precedents -- macroeconomic "rays of light," if you will -- present counterarguments to the slow-growth forecast.
First, the U.S. economy has never fallen into a double-dip recession after an 18-month downturn.
Second, historically, once momentum has begun to increase in the U.S. economy, the economy has kept accelerating until the Fed "took the punch bowl away," i.e., until it increased short-term interest rates (and in the post-financial crisis era, that will include removing quantitative easing funds). This suggests that, as long as the Fed keeps interest rates low and quantitative easing in place, it will at least create conditions that are ripe for an increase in demand and commercial activity. Whether that increase in demand appears remains an open question.
Financial editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.
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