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What The 'New Normal' Means For Americans
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What The 'New Normal' Means For Americans

ROBERT SIEGEL, host:

From NPR News, this is All Things Considered. I'm Robert Siegel.

MICHELE NORRIS, host:

And I'm Michele Norris.

When it comes to the economy, slow growth may be better than no growth, but that doesn't mean it makes people happy. In the first part of this year, the economy expanded at a tepid pace, just under 2 percent. That's well below the average for the last half century, 3 percent growth per year.

SIEGEL: Some influential analysts are saying that we're in for a new normal, 2 percent growth, not 3. One percentage point may not seem like much, but as NPR's John Ydstie reports, the difference is huge.

JOHN YDSTIE: The "new normal" is a term coined by the brain trust at the giant bond fund PIMCO. Anthony Crescenzi, a PIMCO vice president, strategist and portfolio manager, is part of that brain trust.

Mr. ANTHONY CRESCENZI (PIMCO): The difference between 2 percent growth and 3 percent growth is of major importance and has major implications for the entire economy, for financial markets, for the budget.

YDSTIE: And the heart of the problem is job creation. Crescenzi and his colleagues argue that the U.S. economy could actually grow 2 percent a year without adding any new jobs. That's because the productivity of current workers is rising at about 2 percent a year.

Mr. CRESCENZI: In other words, a company can produce 2 percent more goods and/or services per year, even if it does not increase the number of people it employs.

YDSTIE: Mark Zandi, chief economist at Moody's Analytics, thinks some new jobs would be added in an economy growing 2 percent a year, but far fewer than in one growing 3 percent.

Mr. MARK ZANDI (Moody's Analytics): In a 3 percent world, we'd create roughly 1.6 million jobs per year.

YDSTIE: In a 2 percent world, he says, job creation would be less than half that, around 700,000 jobs.

Mr. ZANDI: That would not be enough to absorb the increase in the labor force each year and therefore the unemployment rate would rise.

YDSTIE: Zandi estimates it would rise a quarter of a percent a year and in less than five years, be back in double digits. In 10 years, the unemployment rate would be close to 12 percent. Of course, that means many of the workers sidelined during the recent recession would remain out of work.

Incomes would also be affected. Zandi estimates that in a 2 percent world, the average household income would increase $17,000 less over a decade than it would in a world of 3 percent growth. For a family that's car shopping, that's the difference between the price of a Hyundai compact and a Lexus sports sedan.

And says PIMCO's Tony Crescenzi, U.S. auto sales, which were over 16 million vehicles a year before the financial crisis, have declined substantially in a 2 percent world.

Mr. CRESCENZI: These days, because of high unemployment plus the lack of credit availability, car sales are running at a 12 to 13 million annualized rate. That's a new normal.

YDSTIE: The higher levels of unemployment in a 2-percent-growth world would make government budget problems much worse. People without jobs and incomes don't pay income taxes. They also purchase fewer goods and services, meaning less sales tax revenue for state and local governments.

Crescenzi says if the economy continues to grow at a 2 percent annual rate, federal budget deficits would hover where they are right now at about 10 percent of GDP, a dangerous and unsustainable level and twice what they'd be if the economy were growing at 3 percent a year.

Mark Zandi also cautions that with 2 percent growth, the U.S. could easily be pushed back into recession by events, like an oil price spike or Europe's debt crisis. And he says even 3 percent growth isn't enough cushion.

Mr. ZANDI: We really need to see growth that is closer to 4 percent for a couple, three years, get that unemployment rate down and then the risks of falling back into recession would be a lot lower.

YDSTIE: Zandi is actually predicting growth close to 4 percent next year and the year after. And he cautions against too much pessimism about the future.

Mr. ZANDI: We've been through things like this in our history and we've always overcome them. So I would counsel against expecting the world to look, five, 10 years from now, the way it looks today. I think our prospects are much brighter than that.

YDSTIE: But the PIMCO brain trust believes the "new normal" could easily last for five more years. John Ydstie, NPR News, Washington.

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