The “new normal” U.S. economy is starting to look more like a classic expansion.
Signs of a quickening recovery are casting doubt on the notion that lasting stagnation has become the norm for the world’s largest economy, a view advanced by Pacific Investment Management Co.’s Bill Gross, Northwestern University’s Robert Gordon and former Treasury Secretary Lawrence Summers.
Behind the improved outlook: Consumers spending more freely after working down their debts, less drag from government budget restraint, a housing recovery and continued easy monetary policy.
“We are returning to an old normal,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York. “A lot of the headwinds that are holding the economy back are beginning to abate, including local government spending, fiscal tightening and household balance-sheet deleveraging.”
The term “new normal” was popularized in 2009 by Gross, PIMCO’s co-founder and chief investment officer, and former Chief Executive Officer Mohamed El-Erian to describe an era of lower returns, heightened government regulation, diminishing U.S. clout in the world economy and a bigger role for developing nations. The term was coined by Bloomberg News reporter Rich Miller.
Gross and El-Erian pegged U.S. growth at about 2% for the following three to five years, a period that is drawing to a close.
“What you’ll see in next the few years is we’re going to head back to a new destination,” Scott Mather, one of PIMCO’s six deputy chief investment officers, said in an April 25 Bloomberg Radio interview. The firm’s forecast for U.S. growth has increased to the high 2% level, “which is better than sub-2% level of growth that we’ve experienced for several years,” he said.
The median forecast in a Bloomberg survey of economists this month calls for growth to accelerate to a pace of at least 3% for the rest of 2014 and the following two years. Dutta sees an expansion of 3.5% for the next three quarters and says 3% “seems reasonable” for the subsequent two years.
The forecasts are in line with the 3.1% average annual rate per quarter from 1980 until the start of the recession in 2007. Since June 2009, the end of the deepest downturn since the 1930s, quarterly growth has averaged 2.4%. That’s slower than the average 3.8% rate seen in comparable 18-quarter periods following the previous three recessions.
The pickup would come in the face of persistent slack in the labor market, which is keeping the Federal Reserve committed to accommodative policies to bring about full employment and 2% inflation, Chair Janet Yellen said in an April 16 speech. Unemployment of 6.7% in March remains above the 5.2% to 5.6% level that policy makers consider full employment.
“This shortfall remains significant, and in our baseline outlook, it will take more than two years to close,” Yellen, 67, said to the Economic Club of New York.
Federal Open Market Committee participants project gross domestic product growth of 2.8% to 3% for 2014, 3% to 3.2% in 2015 and 2.5% to 3% in 2016.
“We are making considerable progress, and many of the headwinds that came from the crisis, from fiscal policy, from housing, are beginning to dissipate,” former Fed Chairman Ben S. Bernanke said in Toronto on April 22.
While housing has stumbled in recent months, more than 5.5 million new and previously owned homes were sold in 2013, the best year for the industry since 2006, according to data from the Commerce Department and National Association of Realtors.
“Many forecasters, and I would put myself among them, think we’re looking at a very good potential for faster growth in the U.S. and continued progress towards a full recovery from the tremendous impact of the financial crisis,” Bernanke said.
Bernanke, whose term at the Fed expired on Jan. 31 and who joined the Brookings Institution as a distinguished fellow in residence, led unprecedented actions such as cutting the benchmark interest rate to zero and buying bonds to bring down long-term interest rates.
The FOMC said last month that its benchmark rate will probably remain low for a “considerable time” after bond purchases end. The Fed, which holds a two-day policy meeting starting tomorrow, said it will weigh a “wide range of information” in considering when to raise the rate.