Stock marketInvestors know that the U.S. economy continues to experience strains in the aftermath of the financial crisis. Yet there's major disagreement over a far more pessimistic notion that gained currency during the depths of the downturn. Dubbed the "New Normal" and pushed relentlessly by bond giant Pimco, this darker view suggests that the crash of 2008 ushered in a new era of American economic history marked by much slower growth.

The basic argument: As indebted consumers focus on repairing their balance sheets and as regulatory burdens increase following an era of deregulation, overall growth simply will not be as vigorous as it was in the past. That's the New Normal in a nutshell.

Looking on the Bright Side

But a growing roster of high-profile money managers have taken aim at this theme. Billionaire fund manager Ken Fisher of Fisher Investments recently called the view "idiotic" and predicted the decade ahead would resemble the boom times of the 1990s more closely than the anemic expansion embedded in the New Normal framework.

Jim Paulsen, the chief investment strategist of Wells Capital Management, listed evidence showing that the current economic expansion is just as robust on many measures than past recoveries, despite predictions for muted growth.

Real GDP expansion in the first year following this recession came in at 3% compared to 2.6% in 1991 and 1.9% in 2001, for example. And persistent job creation lagged the end of the last two recessions by 12 and 21 months, compared to just six months this time around.

The first 14 months of the current recovery have seen 205,000 jobs lost, compared to 220,000 and 935,000 during the 1991 and 2001 downturns.

While technically correct, these measures may nevertheless overstate Paulsen's case. The National Bureau of Economic Research recently marked the recession as officially over last summer.

Normal Is a State of MInd

Yet, the duration of the downturn was the longest on record since the Great Depression. The bloodshed on the jobs front peaked as far back as January of 2009, and long-term unemployment remains at near-record highs. That makes comparisons with more recent recessions less convincing.

Arguably, the notion of a New Normal rests on even thinner evidence, but it nevertheless seems to have a significant impact on the psychology of financial markets. Investors have piled into assets like bonds, despite rock-bottom yields, while they shun a relatively cheap stock market.

The New Normal view has long been criticized as self-serving, since Pimco manages the world's biggest bond fund, and the forces it outlines tend to favor the bond market. But the firm has used its enormous success to push into the equities market, and Pimco head Bill Gross now seems to espouse a more careful position.

The New Winners

Amid the malaise, superior returns may be found by focusing on roaring emerging markets and stocks that pay solid dividends, such as Procter & Gamble (PG) and Johnson & Johnson (JNJ), Gross said recently. And safe instruments, like government bonds, may be too expensive if the Fed can add further heat to the recovery.

Other investing superstars, like David Tepper of hedge fund Appaloosa Management, have also made a strong case for stocks recently. But the New Normal framework has had an impact that reaches beyond investors' asset allocation decisions. Despite scant supporting evidence, it's even affecting how economic policy has been shaped, as Paulsen noted. It has also taken a toll on consumer and employer sentiment across the board.

Still, the New Normal view may have a kernel of truth, and investors probably shouldn't abandon it wholesale. What seems to be emerging now, however, is a healthy -- and long overdue skepticism -- about its overarching conclusions.

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One of the hallmarks of laissez faire economic policies are bubble and bust cycles. The freemarket model concentrates capital that is used to speculate in markets rather than being invested. The ultimate result of mergers and acquisitions is a single corporation. Unless we can get over the notion that business is good and government is bad we will continue to be the victims of our own misguided economic myths.

October 02 2010 at 8:52 AM Report abuse rate up rate down Reply

If the recession is "over", how come I don't have a job?? Including hundreds of thousands of other job-seekers. Those people making stupid statements like that have never held a REAL JOB; they just sit somewhere and pontificate!!

October 02 2010 at 2:14 AM Report abuse rate up rate down Reply

This is just common sense. The rest of the world has woken up to the fact that they can have their own steel, automobile and computer manufacturers. There's no reason to buy all that stuff from the U.S. when, with a little investment, you can manufacture it on your own. Growth in America will continue, albeit at a much slower rate than in the past. And foreign economies will grow at a faster rate for a while. It's just one of the many positive effects of capitalism and competition. In the long-run we all prosper and we're all better off. Heavy industry in America will really have a hard time due to our labor costs. But we still have the advantage in high-tech, agriculture and financial services.

October 01 2010 at 10:09 PM Report abuse rate up rate down Reply
Cactus Pete

People need to realize that the big advance was driven by a small number of traders who play with a lot of money.

October 01 2010 at 6:19 PM Report abuse rate up rate down Reply

Jrg- you are the smart one here.

October 01 2010 at 1:25 PM Report abuse rate up rate down Reply

ksm- there isn't 17% real unemployment, that is the number they use for people who are underemployed and unemployed, including some who have taken jobs they don't really want. Lets compare apples to apples here. The unemployment number has been derived the same way it has been for many years, so you can do a comparison of other recessions. In reality, there is always 3-5% unemployment, even in robust economies, due to job changes and shifts, retirements, etc. So the real number is more like 5.6% unemployment if you take out those shifts, etc. Now there is something to think about. Sure its exaggerated, but you calling it 17% unemployment is also.

October 01 2010 at 1:24 PM Report abuse -2 rate up rate down Reply
1 reply to garyrjas's comment

The broader Govt. U-6 unemployment rate April 2010 was 17.1% & can be referenced on the web at answers. com.

October 01 2010 at 2:33 PM Report abuse rate up rate down Reply

High-profile (High Speed Program Traders)Money Managers need someone to shear since the SEC isn't doing their job. Real GDP of 3% wouldn't have needed government stimulus. Why are so many banks failing with Mark to Fantasy? 750,000 people fell off the unemployment rolls last month.

October 01 2010 at 12:02 PM Report abuse +2 rate up rate down Reply

Percentages compared without the base can mislead. Most 'media reporting' covers one side of the coin. 17% real unemployment less 5% unemployed (considered full employment) means 12% of former employed anen't buying anything other than necessities, PLUS those employed but underwater on their mortgages, PLUS those trying to get out from under the boot of usuary interest on credit cards leaves the 2% rich & a fairly small % of Mainstreet to lift the economy for there to be anything but S L O W growth---hopefully. We are not doomed, but the medicine is bitter & will be remembered longer than past recessions--I think.

October 01 2010 at 11:53 AM Report abuse rate up rate down Reply

This is a spin to get the American people to think they can only exspect less. This hides government rules that make it inpossable for the small busnesse to survie and grow.

October 01 2010 at 11:52 AM Report abuse +2 rate up rate down Reply

The stock market is not THE economy. THE economy is people with jobs that pay enough so that they can buy the goods and services that business offer. You cannot have an economic recovery in a consumer economy without includeing the consumers. I am happy that the market is doing well but if every proof was needed that the market is not THE economy all one needs to do is look around. Where are the jobs? Why aren't people buying anything but the basics required for subsitance? Because for the last thirty years the earning power of workers (consumers) has shrunk substantially and not kept up with inflation. Rather than raises credit cards where given out. Wealth kept being transferred out of circulation to those at the top of capitalism's food chain. Now the middle class has been stripped of its buying power. There has never been a more time in American history when the inequaility in the distribution of income has been higher. Once is was just about the same and that was in 1928 adn 1929 when the real state bubble burst and then the stock market crashed. During the next four years republican economic polices resulted in the Great Depression. It took FDR years to bring the economy back. Until the middle class gets its buying power back we are going to have lean times. Economies grow from the bottom up not the top down. The myth of supply side prosperity has been busted.

September 30 2010 at 5:08 PM Report abuse rate up rate down Reply