So Long, ‘New Normal,’ We Hardly Knew Ye

01/18/2011 1:06 pm EST


Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Job growth will return this year just as the shoppers already have, writes Dan Wiener of the Independent Adviser for Vanguard Investors.

Writers and pundits love new and catchy phraseology that they feel captures the social, cultural, and yes, even financial, zeitgeist. And in 2010 they loved nothing more than to talk about the "new normal" that would somehow turn everything we'd learned about the stock and bond markets on its head.

But rather than some "new normal," I think the latter half of 2009 and most of 2010 reflected more of a return to normalcy that was so sorely missing during the credit debacle that became the recent Great Recession. Interest rates have begun rising. So have stock prices. Businesses are beginning to borrow and hire again.

This "normal" may include higher-than-wanted, or warranted, unemployment, and a housing market that just can't right itself. But who said normal was 4% unemployment or homes that one could flip for a profit every six months or so?

Most market pundits, economists and investors got it wrong last year at this time, suggesting that the economic recovery in the US would be a long, slow slog with nary a hint of the typical V-shaped rebound that has characterized most post-recession expansions.

V Stands for Victory
The fact is that the recovery has, in many ways, been a very strong rebound off the bottom of a horrible economic retrenchment. The biggest problems have been, and remain, employment and housing. I don't believe we are anywhere close to solving the housing crisis, and prices for real estate in many parts of the US will remain mired for at least the next year or three.

The employment situation, on the other hand, is hinting at improvements. And these improvements are following on a very strong series of economic data points that suggest to me that the economy will grow to record levels in 2011. As it does, consumer balance sheets will improve, and job creation will grow. [Even John Mauldinexpects better things from the economy this year—Editor.]

I do not believe we are going to come even close to the 4.8% rate we saw in February 2008. For one thing, as more people go back to work, more people who gave up looking for work will come back, keeping the official unemployment number high. But job creation and the number of people working in this country will improve in 2011, riding on the tailwind of greater economic activity.

Why so optimistic? Let's look at a few factors working in our collective favor.

Leading Indicators Rising
The economy's leading economic index (LEI), a metric produced by The Conference Board, combines ten indicators, including weekly hours worked, new orders for consumer and non-defense capital goods, stock prices, interest-rate spreads, and consumer expectations, along with housing data and other components of our huge economy into one number.

Even a year ago, as the general consensus was that the economy was not going to see a robust, V-shaped rebound, the LEI was indicating just the opposite. And as you can see in the chart below, after a brief slowing in late spring 2010, the upward trend has continued.

Why? First, incomes are rising. And spending, as we saw in the numbers around holiday shopping, is also on the increase. You can see in the graph below that after a serious pullback in 2008 and early 2009, the consumer is back at the mall, indicated by the steady month-over-month increases in consumption. And while incomes aren't rising as quickly as they were before the recession, the month-over-month increases show personal income growth solidly on the mend.

Uncharacteristically, the consumer is also in balance-sheet repair mode. The notion that your home is a personal ATM against which you can simply take out money month after month is over. As incomes have been growing, saving rates have been rising. And yet the consumer has been out to the mall and shopping on the Internet. When the final numbers on Christmas 2010 are released, I think we'll find that it was a very cheery holiday shopping season, indeed. If the consumer can spend, and save, this is a win-win for our economic recovery.

Lots of Cash on the Sidelines
By the way, there's about $9.8 trillion in cash sloshing around in money market accounts, bank accounts and the like, according to the St. Louis Federal Reserve, so there's money out there. And it also bears mentioning that corporate balance sheets are flush. The latest estimates are that there's about $2 trillion in cash on the books at the biggest US companies.

One thing companies could do, and are actively being encouraged to do by policymakers in Washington, is to spend some of that money on growth and expansion. And that could mean jobs.

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