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In Search of the ‘New Normal’

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You're traveling through another dimension — a dimension not only of sight and sound but of mind.

A journey into a wondrous land whose boundaries are that of imagination. That's a signpost up ahead: your next stop: The New Normal.

With the mists of uncertainty starting to recede following the deepest financial crisis since the Great Depression, it’s as if we’ve been trapped in a two-year episode of the “Twilight Zone.” Not even the seemingly prescient and frequently prophetic Rod Serling could have imagined the bizarre economic twists and turns that have taken place over the past 24 months.

While the long term effects of the crisis are still unfolding, one thing is certain. Americans have been forced to change their lives in ways both large and small. It's a world of new normals, with more belt-tightening, less income and, in many cases, a newfound gratitude for the most basic human comforts: family, home and health.

Old Ways Will Be Restored

The New Normal also encompasses of a wholesale readjustment of expectations for both individuals and businesses. With millions of Americans thrown out of work, many of whom had held the same positions with the same company for years, the concept of employment security has evaporated. Following the beating that so many took to their retirement portfolios, the idyllic notion that we would one day be able to retire in comfort has likewise dissipated.

Most economists now believe that as we enter this era of new normality, aggregate household debt will be lower, personal savings will be higher and consumption, as a share of Gross Domestic Product (GDP), will shrink. The impact of this transition will ripple through both the domestic and international economies.

At home, we’ve already seen a hefty chunk of our bloated retail infrastructure disappear as businesses have shifted their focus to producing more for export. Abroad, countries that have depended on exports to fuel economic growth are moving toward greater domestic consumption. This transformation will translate into lower savings rates in emerging economies like China, and a reduced international appetite for U.S. government debt, making it more difficult for us to borrow our way out of future crises.

Very little has defined the past decade more than the orgy of personal consumption. Credit was easy. From large flat-screen TVs and I-phones to furniture and foreign cars, Americans spent as though there were no tomorrow.

Historically, this hyper-intensive level of domestic consumption represents a substantial departure from the norm. After the pent-up demand following the World War II era of austerity subsided, personal consumption in the U.S. was extraordinarily steady for nearly three decades.

Consumer spending as a percentage of GDP averaged about 62 percent between 1951 and 1980. As wages began to increase along with the availability of credit, personal consumption rose to 64.6 percent in the 1980s, 67.3 percent in the 1990s, and an astonishing 69.8 percent between 2001 and 2008.

Spotting the Defects

We now know that this surge in personal spending is unsustainable. It was not simply the real estate bubble that collapsed. The rapid deflation in the real estate market also was emblematic of deeper readjustment in how we spend, save and invest.

This downtrend in personal spending is also indicative of basic flaws in our economic make-up. Over the past 20 years, we have seen a decline in our manufacturing economy and concomitant rise in service-based employment.

Without a productivity base to ground the economy, the disproportionately high salaries and even higher investment returns became untenable. This is why the emphasis of President Obama, along with nearly every other credible policymaker, has focused a great deal of attention on rebuilding our industrial economy. Green jobs are as much a political catch phase as they are an economic call to arms.

Although government-based stimulus and inventory rebuilding has produced a 5 percent growth during the first quarter of this year, it appears we now are slouching toward a sustained period of weaker expansion. Predictions of global growth have seen a downward adjustment from the pre-recession levels of 4.7 percent to a much lower 3.25 percent to 3.5 percent over the next three to five years.

For investors who have grown accustomed to sharp growth in their portfolios over the past ten years, this will mean a significant reorientation of their expectations. Similar to the 1950s, ‘60s and well into the mid-‘80s, returns of 2 percent to 3 percent per year will become the new normal. In the aftermath of this financial crisis, most analysts agree that it will be several years before our appetite for the type of risk that governed prior decade re-emerges.

In reality, the New Normal isn’t new. Rather, it’s a return to the way we were. Like water, history has shown that the economy always seeks its level, and always finds equilibrium.

Welcome to the New Normal.

John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com