The recession is nearing its end. At least, it seems to be. A generally improving trend in the economic data has forecasters saying the downturn will turn into an upturn sometime between early this summer (the optimistic view) and late next winter (the pessimistic one).
But here's my assessment: So what? A recession is defined by the Business Cycle Dating Committee of the National Bureau of Economic Research, the semiofficial arbiter of such matters, as a "significant decline in economic activity spread across the economy." It's certainly better for economic activity to be increasing rather than decreasing, but the focus on whether the economy is in recession or not can miss a lot. "I don't care about what the dating committee says. I'm concerned about longer-term issues," says Yale economist Robert Shiller. "We are in for an extended period of subnormal economic growth." Mohamed El-Erian, chief executive officer of bond-investing giant Pimco, has popularized a catchier if less informative phrase for what we're in for: "the new normal."
Defining the parameters of this new normal is not something that can be done with pinpoint precision. I started paying attention to the news (and subscribing to Time) during another period of economic turmoil, the late 1970s, and soon became convinced that I would never know a world in which gas was affordable, inflation wasn't in double digits and jobs were anything but scarce. Then the 1980s and '90s happened. So there is a danger in extrapolating present conditions to the future--and the U.S. economy has a wonderful penchant for surprising us all to the upside. But here are five areas where it seems reasonable to venture a guess as to what the immediate future will be like:
This is an extremely fashionable topic at the moment. Some cultural observers even think Americans are due for a prolonged shift away from the consumption obsession of the post--World War II era. That strikes me as an iffy bet, but it is clear that the debt-fueled consumer spending binge of the past couple of decades is over. The household debt-to-income percentage more than doubled, from 65% in 1982 to 135% in 2007. That turned out to be way too much for us to handle, and now the leveraging process has gone into reverse. The latest household debt-load reading from the Federal Reserve is 128%, and while nobody knows exactly where the percentage will end up, a lot lower seems like a safe prediction. Which means that for years to come, American households will be spending less than they take in.
2. Bear markets.
The long boom in stock prices from 1982 to 2000 and the shorter one in housing prices from about 1997 to 2006 were fueled by rising debt. Ever easier mortgage terms and falling interest rates provided a brisk tailwind for home prices. In the stock market, higher profits pushed along by bigger consumer and corporate debt loads brought higher stock prices. Start ratcheting the indebtedness down and throw in slower growth, and both of these processes go backward. For the long-term health of the economy, that's good--as we've learned, debt-fueled growth is not indefinitely sustainable. It means, though, that both the stock market and the housing market will be confronting headwinds for years to come.