Thursday, July 09, 2009

New normal growth rate of 2% compared to 3.5%

Investment company PIMCO talks about "The New Normal", the period of lowered expectations that they feel we are entering. In his latest Investment Outlook letter for July 2009, Bill Gross of PIMCO suggests that we should look forward to an annual real GDP growth rate of around 2% as the new normal, in contrast with the heady 3.5% rate we have become accustomed to. I agree that it is in the right ballpark, but I think there will be a lot of volatility and variance over time. Bill says:

... the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3.5%. There's no magic in that number, and no model to back it up, just a lot of commonsense that says this is how people and economic societies behave when stressed and stretched to a near breaking point.

Because of the uneven nature of fiscal stimulus spending, uneven rates for ongoing monetary stimulus and its eventual removal, and uneven rates of growth for growing new businesses and dwindling older businesses, my hunch is that the annual growth rates will vary in the 0.5% to 3.5% range in the coming years. That averages out to 2% a year, but we won't be able to depend on a solid 2% every year even as some years actually do come in above the 3% to even 4% range.

For how long? Bill says:

Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum.

-- Jack Krupansky


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