Economists Paint Gloomy Picture of 'New Normal'
June 20, 2011
Financial advisers and investors may want to heed some cautionary words from several economists at the Wharton School who think that the country's current economic recovery will remain a sluggish affair and, whenever it does stabilize, it will likely mark the beginning of a "new normal" that's less robust and prosperous than prior cyclical peaks.
An online business journal article published by the Wharton School titled "The Economy: When Will Happy Days Be Here Again?" implies that the next good times will be "years away," and won't be nearly as rewarding as they were in the past.
"It's too soon to be talking about a return to a healthy economy; there is a long mid-range period in our future," said Susan M. Wachter, a real estate professor at Wharton.
She said the "key obstacle" to a healthy economy is real estate and that without a booming real estate market, there is no boom in construction employment, which in the last six recessions played a leading role in the recoveries.
Furthermore, with housing prices down at this point 31% on average, she said, "Borrowing against the home is not going to be part of the equation for the next three to five years," and even after that, "I think it is likely that this source of spending growth will be limited."
Wharton Emeritus Economices Professor Marshall E. Blume agrees about the importance of a housing rebound to any recovery, saying, "It's hard to get enthusiastic about the economy with house prices falling."
He notes that factoring in inflation, consumer spending has been flat for months (it fell in the latest retail spending report), with surveys showing consumer confidence slumping. That's a big problem in an economy where consumer spending normally accounts for more than 70% of GDP.
All those quoted in the Wharton article speak about the likelihood that several years down the road, if all goes well with the recovery, the U.S. economy will reach will be a "new normal."
This new state of "normal" will mean a higher level of unemployment will be considered "full employment"-probably about 6% or even more of the workforce-and fewer people will own homes, which will still not be worth what they were worth in the bubble years.
Wachter notes that home ownership has fallen from a high of 69% of households in 2004 to 64% today, and says it is likely to continue to fall to 61% or 62%. That would put things about where they were for most of the period between the end of World War II and 2000.
Worse, home ownership could fall even lower, she said, which would further depress prices. Under these circumstances, she doesn't see this economy reaching even a "new normal" state until 2016 or 2017.
Commenting on this rather gloomy picture, Gus Faucher, director of macroeconomics at Moody's Analytics, said, "There's no question that there has been a structural change in the economy caused by this recession." He cites a higher personal savings rate, for example, which impinges upon consumer spending habits-something he says is likely to prove lasting.
"People used to save through their houses or by investing in stocks, counting on these to fund their retirement, and they can't do that now." he said. "They have to put money in the bank or in 401(k) plans."
In a final bit of bad news, Faucher cautions that going forward, a recovered economy can be expected to grow at a slower than historic rate-probably an average of 2.5%-because of slower labor market growth thanks to impending retirement of tens of millions of Baby Boomers.