"New Normal of 2% GDP Growth Coincides With Biggs (Update2)
May 26 (Bloomberg) -- Americans may have to get used to unemployment greater than 8 percent for the first time since 1983 and an economy that won’t grow much beyond 2 percent as a consequence of the lost confidence in consumer credit that shattered financial markets.
By this time next year, “the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview with Bloomberg Radio.
“We are transitioning to what we call at Pimco a new normal,” El-Erian said. Pimco, in Newport Beach, California, is the biggest bond fund manager with about $756 billion in assets.
The Standard & Poor’s 500 Index must rise 41 percent to reach its last closing price before Sept. 15, when Lehman Brothers Holdings Inc. filed for bankruptcy, freezing credit markets. Since then, 10-year Treasury notes have climbed 4.6 percent. The disparity shows that stock investors aren’t convinced the economy and profits will grow fast enough to sustain a bigger advance.
The U.S. financial crisis and recession have produced lasting shifts in consumer spending and savings reminiscent of the 1950s that may crimp profits and productivity, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto and former chief North American economist at Bank of America Corp.
The last time U.S. gross domestic product grew at an annual rate of under 2 percent over a decade was the 1930s, when it expanded at an average 1.3 percent. In the 30 years before the recession that began in December 2007, the average was 2.9 percent. Over the past 15 years, it was 3 percent.
In the first quarter, after contracting at a 6.3 percent annual rate in the previous three months, the economy shrank by 6.1 percent. It was the weakest six-month performance since the last quarter of 1957 and first quarter of 1958.
The coming decade may, in some ways, remind people of those years during President Dwight D. Eisenhower’s administration, Rosenberg said.
“Life wasn’t so bad for the Cleavers,” he said, referring to the family depicted in “Leave It to Beaver,” the television show that ran from 1957 through 1963. “They weren’t up to their eyeballs in debt and they weren’t a three-car family with a 5,000-square-foot McMansion.”
Behavior by newly ascetic U.S. consumers, whose spending drives more than two-thirds of the economy, will translate into “less return to capital and less-remarkable equity returns,” said Milton Ezrati, senior economist at Jersey City, New Jersey- based Lord Abbett & Co., which manages $70 billion. “The whole picture is muted.”
Barton Biggs, former chief global strategist for Morgan Stanley, sees the near future as brighter with a “powerful” comeback in equities because of government stimulus packages around the world, he said in an interview with Bloomberg Radio.
“The system has had an incredible adrenaline shot, so I think we’re going to have a pretty strong recovery,” said Biggs, who runs New York-based hedge fund Traxis Partners LP.
U.S. stocks are at the start of a new market that may spur an 88 percent advance in the Standard & Poor’s 500 Index in the next two or three years, said Laszlo Birinyi, founder of Westport, Connecticut-based research and money-management firm Birinyi Associates Inc.
“We’re confident we are in a bull market,” Birinyi said in an interview with Bloomberg Television.
The S&P 500 has rebounded 31 percent since hitting a 12- year low in March. It remains about 43 percent below its October 2007 high, ending at 887 on May 22. Markets in the U.S. were closed yesterday for the Memorial Day holiday.
At Pimco, El-Erian expects that “markets will revert to a mean, but it will not look anything like that of recent years,” he wrote in his May Secular Outlook report. “The financial system will be de-levered, de-globalized and re-regulated.”
Worldwide, “there are insufficient demand buffers and fast-acting structural reforms to provide for a spontaneous and sustainable recovery in the global economy,” he wrote. “It will be a major shock to those that are trapped by an overly dominant ‘business-as-usual’ mentality.”
‘Very Low Growth’
“We will plan our cost model for very low growth,” he said.
Investors will have to get used to “a 5- to 7-percent return game, not a 15- to 20-percent return game,” said Mark MacQueen, partner and portfolio manager at Sage Advisory Services Ltd. in Austin, Texas, which oversees $7.5 billion.
“Things have changed,” MacQueen said. “Wall Street has changed; confidence in the United States has changed.”
A lasting effect of the recession may be a “markedly higher” natural rate of unemployment, said Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. The natural rate is one that neither accelerates nor decelerates inflation.
“It was 5.5 percent,” Phelps said. “Maybe it will be 6.5 percent -- maybe 7 percent.”
The U.S. may report on June 5 that the jobless rate moved to 9.2 percent in May, the highest since 1983, from 8.9 percent in April, according to economists surveyed by Bloomberg. In the recession of 1981-1982, unemployment remained at 8.5 percent or higher for two years, beginning in December 1981. It didn’t move below 7 percent until 1986.
“This unemployment outlook is troubling for the ability of the banking system to make money on consumer loans and credit cards,” they wrote in a report on May 15.
The economy has shed 5.7 million jobs since January 2008, marking the biggest employment loss of any economic slump since the Great Depression.
Highest Debt on Record
Consumers are saddled with debt built up during the boom years. The total amount of U.S. consumer credit rose by an average of 4.9 percent a month at an annual rate from December 2006 to July 2008, according to data compiled by Bloomberg.
Yet it has declined in six of eight months since August 2008, according to data compiled by Bloomberg.
As a percentage of net worth, household debt -- including mortgages -- is at 27 percent, the highest on record, according Federal Reserve figures.
The personal savings rate, which averaged 0.9 percent from 2004 through 2007, has climbed to 4.2 percent. People are responding in part to a drop in their wealth, with house values down 27 percent since June 2006 after rising 63 percent the previous four years, according to national Case-Shiller data.
“That in itself will be a big slowdown in the economy if people are saving instead of consuming,” said Kenneth Volpert, who oversees $180 billion in taxable bonds for Vanguard Group in Malvern, Pennsylvania. The national savings rate could peak at 9 percent, he said.
Household debt was 11 percent of net worth at the end of 1959 and the savings rate was about 8 percent, according to Fed and Commerce Department data. The average size of a home built in 1960 was 1,200 square feet, according to Census figures. That grew to 2,521 square feet by 2007, with 24 percent of new homes larger than 3,000 square feet.
Now, smaller may be back as people seek to devote less of their incomes to mortgage payments, said Ara Hovnanian, CEO of Hovnanian Enterprises Inc., New Jersey’s largest homebuilder.
“For some number of years certainly after this correction you will see that conservatism translate into both the size of the homes and the finishes customers want,” Hovnanian said. That means “fewer European cabinets and appliances and fewer granite countertops.”
Shoppers will be restrained, which will result in the number of U.S. malls falling by at least a fifth and weak chains succumbing to bankruptcy, said retail analyst Patricia Edwards, founder of Storehouse Partners LLC in Bellevue, Washington.
In preparation, Coach Inc. has begun to “engineer” its collections so at least half its handbags fall into the $200 to $300 range, compared with 30 percent previously, meaning an average reduction in price of 10 percent to 15 percent, CEO Lew Frankfort said.
Long after the economic contraction has ended, “consumers will spend less on luxury goods than they did before the recession began,” Frankfort said at an April 28 investors’ conference. “We are adapting to what will be a new normal.”
Abercrombie & Fitch Co., a teen-apparel retailer that had avoided offering discounts and promotions, said May 15 it will begin reducing what it charges at its Hollister stores. Brinker International Inc., the owner of the Chili’s Grill & Bar chain, said April 21 that it updated its menus to reflect a focus on “lower price points.”
That’s not to say that debt-fueled shopping sprees, expensive restaurants and run-ups in house values and stock prices won’t ever make a comeback, said Ethan Harris, co-head of U.S. economics research at Barclays Capital in New York.
“Will there be at some time in the next 10 or 20 years another big bubble and collapse? Absolutely,” Harris said. “You can’t entirely change human nature.”