There has been much talk of late about the “new normal” of slower economic growth that we may see in coming decades. It is defined by bond trader PIMCO’s Bill Gross as what he calls declining global aggregate demand—the declining demand of consumers, businesses, and government for additional good and services. We have lived through an excess of consumption and debt, and must now pay for it, in other words.
“Developed nation consumers are maxed out because of too much debt, and developing nations don’t trust themselves to stretch their necks for the delicious leaves of domestic consumption just above,” he said in his current economic outlook.
How true is this? He might be correct for the short term—ten million jobs have to be created to replace those lost in just the past 2 years—but not about future growth. What is true is that we will have to live with less indebtedness. But substantial growth is continuing in new industries and developing nations—Brazil, India and China are the 3 fastest growing major nations in the world.
Consumers have been the first to pay down their debts, while businesses haven’t had to borrow much because of huge cash flows during the last decade that enabled them to finance their own operations without borrowing—and what little expansion there has been. So huge amounts of cash are sitting on the sidelines, which positions those with good ideas to expand rapidly.
Government will have to begin to size down as well, once this recovery picks up and the wars on terror have been resolved. This means consumers will be more selective in what they buy, and businesses more selective in who they hire. A recent New York Times article documented the ways industries have been able to achieve record profits (up 40 percent from late 2008 to Q1 2010), without much hiring.
This has resulted in profits rising much faster than revenues. Among the 175 companies in the S&P 500 that have already reported earnings last quarter, reported the NY Times, revenues averaged a 6.9 percent increase, while profits rose 42.3 percent.
How so? Firstly, productivity is rising faster than wages and salaries. Companies are investing more in technologies than workers, in other words. Year-on-year, productivity advanced 6.1 percent in the first quarter-up from 5.6 percent in the prior quarter. And unit labor costs—both wages and benefits—declined another 4.2 percent, compared to minus 5.1 percent the previous quarter. Output growth was a whopping 4.0 percent annualized, in other words, while hours worked barely budged up to 1.1 percent.
This is while personal income growth is barely rising. It grew just 1.6 percent in May, easing from 2.6 percent in April. Inflation was mixed in May. The headline PCE price index was flat as was also the case the prior month. The core rate, however, firmed to 0.2 percent from 0.1 percent in April.
The result is a basic disparity between income brackets, with the top 10 percent of incomes rising, and the majority of wager and salary earners with no income growth at all. This is probably the main reason for the ‘new normal’. Something that New York Times’ columnist Bob Herbert highlighted recently.
A Yale study showed that more than 20 percent of Americans experienced a 25 percent or more loss in household income without any financial cushion from 1985-95, the highest in 25 years. This is with our unemployment rate hovering around 9.7 percent. So many more than just the unemployed are suffering from the effects of the Great Recession. But an income shift is occurring that should aid consumers, and shorten the era of falling incomes of the new normal—expiration of some of the most inequitable Bush II era tax breaks, and restoration of the taxable rates that helped to create a budget surplus during the Clinton era.
Harlan Green © 2010
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