What is the ‘New Normal’—Part II?

Popular Economics Weekly

Fed Chairman Ben Bernanke is sounding more optimistic these days. What is behind his optimism that seems to counteract the “New Normal” predictions of bond traders such as PIMCO and other fiscal conservatives who fear massive debts will hurt growth and fuel increasing inflation?  Bernanke feels that domestic economic activity is bound to pick up with a worldwide pickup, as Asia and Europe slowly recover from their malaise.

Chairman Ben gave his most recent speech to southern legislators in South Carolina. “After a precipitous decline in late 2008 and early 2009, the U.S. economy stabilized in the middle of last year and is now expanding at a moderate pace. While the support to economic activity from stimulative fiscal policies and firms' restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth.”

Third quarter Gross Domestic Growth was 2.4 percent—good but not great enough to bring down the unemployment rate, which is stuck at 9.5 percent.

Domestic demand is the basic driver of growth — consumer spending, business fixed investment, housing investment, and government purchases. Real final sales to domestic purchasers rose a very positive 4.1 percent, compared to a 1.3 percent gain in the first quarter. Basically, demand by said U.S. consumers, businesses, and the government was up significantly in the second quarter.

Bernanke highlights growing strength in the consumer sector, which powers almost 70 percent of economic growth. This showed up in an 18 percent rise in imports, mostly from consumer purchases. “In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions. In the business sector, investment in equipment and software has been increasing rapidly, in part as a result of the deferral of capital outlays during the downturn and the need of many businesses to replace aging equipment. At the same time, rising U.S. exports, reflecting the expansion of the global economy and the recovery of world trade, have helped foster growth in the U.S. manufacturing sector.”

The biggest surprise was the growth in commercial and residential investments. Real nonresidential (i.e., commercial) fixed investment increased 17.0 percent in the second quarter, compared with an increase of 7.8 percent in the first. Nonresidential structures increased 5.2 percent, in contrast to a decrease of 17.8 percent. Equipment and software increased 21.9 percent, compared with an increase of 20.4 percent. Real residential fixed investment increased 27.9 percent, in contrast to a decrease of 12.3 percent.

July total nonfarm payroll employment did not so well, declining by 131,000 and the unemployment rate was unchanged at 9.5 percent, said U.S. Bureau of Labor Statistics. This was mainly because federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work. The good news was that private-sector payroll employment edged up 71,000, seasonally adjusted. e

What is now happening is that consumers are saving much more, as the Q2 preliminary savings rate shot up to 6.4 percent. This is in part due to the drop in spending, but also because consumers continue to pay down their debts.

Consumer credit contracted again in June, this time by $1.3 billion. If there is good news it's that the level of contraction is less severe than prior months. Also good news is an upward revision to May which now shows a $5.3 billion contraction vs. the initial contraction of $9.1 billion. Nonrevolving credit offers some good news, up $3.2 billion on top of May's increase of $1.8 (revised from a $6.5 billion contraction). Solid unit vehicle sales in July point to possible gains for this component in the next report.

All the talk about the ‘new normal’ may have a useful purpose. It is making policy makers aware of a possible need for a more comprehensive social safety net to provide for the millions who have been out work for the longest stretch since the Great Depression.

Even stalwart Republicans, like Bush economic advisor Glenn Hubbard believes government should boost educational opportunities for workers whose jobs are never coming back, said the New York Times. “If there is a new normal, it’s more about the labor market than G.D.P,” said Hubbard.

And PIMCO’s Bill Gross, also a fiscal conservative, is now advocating an expanded role for government to spend tens of billions on new infrastructure projects to put people to work and stimulate demand. He said, “We think the coma will last for years unless government policy changes to restimulate the private sector and bring unemployment down”.

Harlan Green © 2010