Written by Terry Milberger, Director of Portfolio Management

Is there a “new normal” for growth in the U.S. economy that will result in several years of subpar activity?

This question is currently being debated by many economists. Those who believe “ normal” economic growth going forward will be much less than in the past sight a number of factors to support their case.

They point out that the recovery taking place since the recession ended last year is the weakest in post WWII history. This is in spite of record low interest rates, substantial quantitative easing by the FED, and fiscal stimulus in the form of a massive increase in government spending. Housing, generally a strong engine of growth coming out of a recession, continues to languish. They believe growth will be further impacted by the ongoing deleveraging by both business and consumers. Also, reduced spending and increased taxes by state and local governments will be further impediments to growth. The massive amount of debt at the federal level seems almost certain to result in higher taxes which would likely further retard economic activity. Lastly, they believe that much of the potential for U.S. economic growth will continue to be siphoned away by Asia and Asian-connected economies.

Economists who believe the US. economy will once again grow at a rate similar to the past mention a number of reasons. They say the latest recession was particularly severe and thus will take more time to return to normal growth. They feel housing will once again provide growth, but simply take more time because the bubble in prices was so inflated. Yes the deleveraging in the economy still has a ways to go, but will result in higher-quality growth once it is winds down. The level of debt at the federal level is indeed a problem, but finally seems like it may be addressed by Congress. Yes, higher taxes could be a drag, but hopefully the unproductive spending will be addressed also. The emerging markets should continue to grow the fastest, but as they grow their domestic economies they should provide a greater opportunity for exports from U.S.-based companies.

At this time, it seems like the U.S. economy is facing a combination of typical cyclical issues relating to a recession and other issues more secular in nature. There is no question that this combination has resulted in growth being below normal for this stage of an economic recovery. Will this pattern continue? Of course only time will tell, but the odds seem to favor growth being somewhat more muted than in the past.

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