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A New Normal for the U.S. Economy: Slow and Steady

Conor Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
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For the first time since 2009, all sectors of the economy are chugging along at normal rates: The housing industry pulled out of its nosedive, the government sector ended its downturn, and as of this quarter, the industrial recession is over. Policy makers face a new challenge, building on an economy in which no major sector is in contraction. But first, the U.S. deserves some recognition for the feat it just accomplished.

The downturn from 2014 to 2016 was the first time in history when the U.S. had an industrial recession that didn't turn into a broad-based recession.

Industrial Production Index
Percent change from a year earlier
 
Source: Federal Reserve

This month showed that the industrial recession's threat has passed. A key indicator for manufacturing industry sentiment, the ISM Manufacturing Index, is at its highest level in 16 months.

Job losses in the "mining and logging" industry, which includes energy, improved for the fourth straight month, indicating that the big job cuts in energy are probably behind us. Capacity utilization in the mining sector, after falling to its lowest level in history, has bounced sharply two months in a row. United Rentals, an industrial equipment rental company, said in its quarterly earnings call this week that rental rates increased sequentially in June for the first time in 16 months.

While it's unlikely that energy investment will boom any time soon, from a growth standpoint, going from negative to flat has just as big an impact on overall GDP growth as going from flat to positive. A flat, or perhaps slightly growing, industrial sector in the second half of 2016 will be the strongest nudge to growth that the sector has contributed since early 2014.

One of the reasons the economic expansion has been frustratingly slow is that since 2009, there has almost always been some part of the economy either deleveraging or in recession. Households were deleveraging until 2012; their efforts to reduce debt were a drag on spending and growth, and made easy monetary policy less effective because households weren't looking for credit. Housing's impact on GDP was volatile and contributed nothing through the beginning of 2011.

Housing's Contribution to GDP Growth
 
Source: Bureau of Economic Analysis

As the housing sector finally bottomed and households were finishing their deleveraging, the government recession began as stimulus turned to austerity in 2010. Government retrenching persisted until 2014, another drag on growth. Finally, as austerity was abating, the economy got an energy shock as oil fell over the course of 18 months from $100 a barrel to $25 a barrel. The knock-on effects chilled the industrial sector and exports, another drag on growth just as it looked like the economy had some positive momentum.

Throughout all this tumult, the economy has continued to grow, labor market slack has fallen, wage growth has improved, and core inflation has gradually firmed. The good news is for the time being there are no obvious candidates for another external shock to the U.S. economy. Auto sales may have plateaued, multi-family residential construction may experience some mild contraction, and venture capital funding may dry up, causing a recession in Silicon Valley, but none of these factors is likely to cause a growth shock the way housing, government austerity and the industrial sector have.

Pessimists have called this current post-recession economy "the new normal." They're bemoaning an economy with less credit growth, lower economic growth, lower wage growth and lower inflation, as new financial regulation, slower population growth, an aging society and risk aversion take their toll. But there are positives to this new normal as well.

The over-reliance on debt and financial leverage during the 1990s and 2000s created dependencies that set the economy up for contagion. That excess leverage, and many of those dependencies, are largely gone, yet the fear of them remains. The "new normal" of the 2010s has so far entailed slower growth, but it has also meant that a bust in one industry need not take down the entire economy. As we look ahead the latter part of 2016 and soon enough to 2017, simultaneous growth in the housing, government and industrial sectors may finally create enough momentum to bring back comparisons to the "old normal" of the booming 1990s.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Conor Sen at csen9@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net