No New Normal JPMorgan Sees V-Shaped Recovery in U.S.
Instead of a so-called New Normal of subdued growth, the U.S. may be heading for a robust recovery.
The worst recession since the 1930s has created a reservoir of demand that will buoy the economy, say a growing number of economists led by James Glassman at JPMorgan Chase & Co., former Federal Reserve Governor Laurence Meyer and Stephen Stanley at RBS Securities Inc.
“Whenever we have plunged off a cliff and fallen into a deep hole in the past, for a while the economy has a tendency to bounce back very quickly,” said Glassman, a senior economist at JPMorgan in New York. Glassman and his colleagues this month said forecasts of 3 percent to 4 percent growth in coming quarters may be too low given “pent-up” consumer demand.
JPMorgan’s outlook contradicts the view popularized by Mohamed El-Erian at Pacific Investment Management Co. that elevated unemployment and record wealth destruction will keep growth at 2 percent or less for years. The divergence highlights the dilemma for policy makers, who must decide whether to maintain record fiscal and monetary stimulus or begin to pull back and prevent a surge in inflation should growth accelerate.
El-Erian, chief executive officer of Newport Beach, California-based Pimco, said “the indicators we follow continue to point to sluggish medium-term growth in the U.S.,” when asked to respond to arguments for a so-called v-shaped recovery.
A report from the Federal Reserve today added to signs of recovery as industrial production rose 0.5 percent in July, the first increase in nine months. A separate government report showed consumer prices were unchanged, emphasizing companies lack pricing power after the biggest drop in U.S. gross domestic product in any recession since the 1930s.
Confidence among U.S. consumers unexpectedly fell in August for a second consecutive month as concern over jobs and wages grew, according to the Reuters/University of Michigan preliminary index of consumer sentiment today. The U.S. has lost 6.7 million jobs in the recession that began in December 2007.
The New Normal theory predicts that the recession will leave unemployment, forecast to reach 10 percent for the first time since 1983 early next year, higher for years. Glassman and Meyer dispute that.
“The thing I object to most about the New Normal idea is that we are stuck and have to accept higher unemployment -- if you look at the Fed, they are doing everything they can to fight it,” said Glassman, who formerly worked as a Fed economist in Washington.
Meyer, who served as a central bank governor from 1996 until 2002, said he and his colleagues “don’t find any evidence” that the unemployment rate consistent with stable inflation is now higher. Meyer is now vice chairman of St. Louis-based Macroeconomic Advisers LLC, whose economic estimates are monitored by the National Bureau of Economic Research panel charged with dating U.S. recessions.
Meyer expects GDP to jump by 3.6 percent in 2010 and 3.9 percent in 2011. Annual growth surpassed 3 percent only once so far this decade, in 2004, and has averaged just 2.2 percent.
“The big driver of that is home prices,” said Meyer, referring to his recovery forecast. “If home prices stabilize, that is a tremendous boost to housing that dominates every other variable in our equation. There is a lot of pent-up demand in that particular area.”
Home construction has subtracted from GDP growth for a record 14 straight quarters through June 2009. Consumer spending has also dropped in four of the past six quarters, and is down 2 percent from its peak in July-to-September 2007, the biggest retrenchment since 1980.
Housing and automobile sales are at “very depressed levels” and are likely to contribute to growth even if they don’t reach prior peaks, said Stanley, chief economist at RBS Securities in Greenwich, Connecticut, who used to work at the Richmond Fed.
“Consumers are holding off on practically all of their discretionary purchases,” said Stanley, who sees the expansion picking up from 2.9 percent next year to 4.4 percent in 2011 and “about” 3.5 percent in 2012. “There is a lot of pent-up demand.”
Recoveries from the past two recessions were weaker than in previous decades. After the 2001 recession, the economy expanded just 1.6 percent in 2002, picking up to 2.5 percent the next year. The 1990-91 recession was followed by 3.3 percent growth in 1992 and a 2.7 percent gain in 1993.
By contrast, the U.S. roared out of the 1981-82 recession. In 1983, GDP rose 4.5 percent, accelerating to a 7.2 percent pace in 1984, when Ronald Reagan won re-election with victories in 49 of 50 states.
Alan Blinder, the former Fed vice chairman who is now an economics professor at Princeton University in New Jersey, has described himself as “skeptical” of the New Normal scenario.
“To accept a 2 percent trend, you have to believe in about a 1.2 or 1.3 percent productivity trend -- I don’t,” Blinder said in an e-mailed response to questions. He added that he sees growth sustained at “closer, but not quite, to 3 percent” in coming years.
Fed policy makers in their latest projections submitted in June anticipated an expansion of 2.1 percent to 3.3 percent from this year’s fourth quarter to the same period next year and 3.8 percent to 4.6 percent in 2011.
Chairman Ben S. Bernanke and his Federal Open Market Committee colleagues two days ago said the economy is “leveling out.” The central bank has pumped about $1 trillion into the banking system in a campaign to end the crisis, triggered by mortgage defaults, that has caused more than $1.6 trillion in losses and writedowns among financial firms worldwide.
President Barack Obama last week said: “We are pointed in the right direction,” in remarks at the White House. “We’ve rescued our economy from catastrophe.” The administration anticipates a gathering impact from its $787 billion fiscal stimulus into next year.
Some companies are also seeing signs of a turn in the economy.
Karen Hoguet, chief financial officer at Macy’s Inc., the second-biggest U.S. department store chain, said on a conference call Aug. 12 that the Cincinnati-based company is “cautiously optimistic” its sales trends will improve.
A rebound in equities in recent months will help repair households’ balance sheets and buttresses the outlook for spending, said Glassman at JPMorgan.
The Standard & Poor’s 500 Stock Index has climbed about 50 percent from its low in March. U.S. stock-market capitalization has increased by almost $4 trillion in that time.
Economists this month lifted their projection for third- quarter growth by 1.2 percentage points to 2.2 percent compared with July, according to the median of 55 forecasts in a Bloomberg News survey. That is the biggest such boost in surveys dating from May 2003. Forecasts for 2010 were raised to 2.3 percent from 2.1 percent.
Neal Soss, chief economist at Credit Suisse Group AG in New York, played down concern that the economy may suffer a “double dip” recession.
“Historically these double dips are routinely forecast and actually very rarely come to pass,” Soss said in a Bloomberg TV interview this week. “Once the economy tends to get some upward momentum, it tends to keep going that way.”
And flowers and rainbows and unicorns... (or not)