Commentary

The New Normal Is So Normal


How did things in 2010 ever get so ... normal? All year long, the notion of a New Normal of reduced expectations dominated the national debate about the economy and its future. Voicing his fears of a slow-growth, higher-inequality "New Normal" on 60 Minutes on Nov. 7, President Obama was merely the latest to test-drive a phrase that went viral in the summer of 2009, after Pimco's Bill Gross used it in an investor letter. In this extended New Normal, the bond fund manager wrote: "Growth is slower, profit margins are narrower, and asset returns are smaller than in decades past." It's a time of steadily high unemployment, slow-moving credit, and budget cuts. Normal, in this context, is the last thing anyone wants.

Strange to find, then, that the New Normal is as old as hard times. In 1920, Warren G. Harding campaigned for President on a "return to normalcy"—by which he meant the prosperous isolationism of the pre-World War I era. In 1939, a decade into the worst economic slump in American history, New York City Mayor Fiorello La Guardia remarked: "We must realize that it is not a temporary depression but a New Normal and adjust ourselves accordingly." That year, New York's Central Park was filled with people living in tents, and the world's tallest tower had so many vacancies that it was nicknamed the "Empty State Building."

Normals feel permanent. They never are. "The old normal, whatever it was at the time, just doesn't stick around very long," says business historian John Steele Gordon. He ticks off panics in 1837, 1857, 1873, 1893, 1907, and the crashes of 1929 and 1987. Most were followed by pretty good times. World War II ended the Depression and was followed by more than two decades of strong growth. The crash of 1987 gave way to the 1990s boom. The dot-com bust of the early 2000s then gave way to the real estate bubble, which burst into ... this New Normal.

As economic eras go, this one has already worn out its welcome. Two years after the global financial system very nearly collapsed, the U.S. is still climbing out from the wreckage. Unemployment remains stubbornly near 10 percent. The Federal Reserve, White House, and Congress seem to be pushing on stimulative strings, with short-term interest rates lingering near zero. According to property tracker Zillow, $9 trillion in home value has been lost since prices peaked in 2006, while the Federal Deposit Insurance Corp. has seized 319 banks since 2007.

"It's totally different this time," says Mike Marinaro, owner of an engineering consulting firm in suburban Indianapolis. Over the past two years, he had to lay off his four employees and shell out for Cobra medical coverage when his wife lost her job with the public school system. Next month, Marinaro's youngest daughter graduates from college with only a six-week internship lined up, around the time Cobra runs out. Marinaro says he's on the brink of shutting down his firm—"You used to be able to plan," he says—and it doesn't matter that he can get a home equity line of credit for 2.24 percent.

So here we are; how long will we stay? "Characterizing this as the New Normal is a misnomer and misdirection," says James Paulsen, chief investment strategist of Wells Capital Management. "There's this concept everywhere that, 'Hey, this is it. It just has to be.' " Yet already, not all the indicators are depressingly "normal," Paulsen notes, pointing out that the current economic recovery is actually stronger than the last two (in 2001 and 1991) in terms of profits, real gross domestic product growth, and job creation, even though employment remains unusually depressed. Companies are making money, though they're still not spending much of it.

Sooner or later, this normal will pass. When it does, we'll look back on developments that helped give it a peculiar flavor of its own. This is the year we got used to streaming video, unusually oppressive summers, bike-sharing, flash sales, 9.6 percent unemployment, and free shipping. It might not be much to look at, but it's our own New Normal, until the next one comes along.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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