What’s "Normal" in the U.S. Economy, and Does Returning to Such Matter for the Dollar?

July 30, 2014

Today’s U.S. GDP data were considerably stronger than forecast and corroborate hopes that a sustained better performance is at hand.  Real GDP has expanded at a 3.5% or better annualized rate in three of the past four quarters., and personal consumption grew at least 2.0% in those three quarters.  On the other hand, year-over-year growth in the second quarter of 2.4% was not tremendously different from the results of 1.8% in the year to 2Q13, 2.3% in the year to 2Q12, 1.7% in the year to 2Q11 or 2.7% in the year to 2Q10.

Five years after after America’s deep recession ended, people are still hotly debating if there is a new economic “normal” and whether if that is a valid statement now even if it might have been true for a few years.  A significant downshift in growth of jobs and real GDP did occur, but it’s onset came in 2001 rather than 2008.  This can be seen in the table below where the control group of end-1950 to end-2000, which was America’s old normal, is compared to more recent times from the standpoint of growth in jobs and GDP.  The old normal is shown in the first data column.  In the second which shows average expansion in the seven years between late 2000 and late 2007, one sees a pronounced slowdown in both vital signs of activity.  Column 3 shows that since mid-2009 when the current upswing began, economic dynamism has still fallen well short of the old normal.  Changes over the past twelve months shown in column 4 indicates further revival but not yet back to the historic norm, and the final column, which encompasses the last 13-1/2 years reveals an extensive period when America did not on average meet its own historic standards.

% per yr 4Q50-4Q00 4Q00-4Q07 Last 5 yrs Last 12 mo Since 4Q00
GDP 3.5% 2.4% 2.2% 2.4% 1.7%
Jobs 2.1% 0.6% 1.2% 1.8% 0.3%

It’s generally taken for granted that the “old normal” is synonymous with the “good old days,” but was the past really so preferred? The years since Y2K have some properties that would have been considered quite desirable during the 20th century.  For one thing, inflation is lower now than during the control period.  For another, the downward trend in long-term interest rates in the United States and other key advanced economies since the early 1990s attests to a remarkably sustained and persistent drop-off in inflation expectations.  The breakneck growth of U.S. labor productivity in the 1990s fanned expectations of rapid growth in the early part of this century.  New applications of technology continue to be rolled out at an impressive pace, yet the current economy hasn’t lived up to expectations.  It’s not so much that the United States has done a bad job as perhaps that its animal spirits led many to do the wrong job.  In any case, some of the structural advantages — top-notch education, state-of-the-art infrastructure, a responsive public sector to national needs, and a welcoming immigration policy to name four — that once put U.S. enterprise at the top of the 20th century leader board are now sadly lagging the competition. 

The dollar didn’t hold its external value so well during the good old days.  There were only two instances multi-year appreciation, the early 1980s, and the late 1990s.  Since 1999, the dollar has also lost net ground but at a slower pace.  The response this year to signs of divergent monetary policy biases in the U.S. on the one hand and Japan and Euroland on the other is lifting the U.S. currency.  From 2014 lows of $1.3993 per euro and CHF 0.8696, the dollar has risen marginally more than 4.5%.  It’s also over 4.0% stronger versus the Australian and New Zealand dollars.  Gains relative to sterling and the yen are more modest.

A rising dollar will help to contain inflation and perhaps delay the onset of meaningful Fed tightening.  The big test for the U.S. economy starts when the Federal funds rate begins to rise.  All the good news on the jobs and GDP front have been achieved with the help of extremely low long-term and short-term interest rates and a concurrent stellar stock market real estate revival. Right now, the Japanese and Euroland economies need currency depreciation more than the United States and Britain.  When the divergence in monetary policies becomes real and not mostly expected, the pros and cons of a rising versus falling currency will not be a clear-cut as now.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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