The recession’s darkest days may be drawing to a close, but that does not assure a bright future. The woes of the financial system and the credit, stock, housing and job markets have traumatized the economy so much, in the view of many economists and market strategists, that the average growth rate will be markedly and persistently lower than in the past.
This “new normal,” as it’s called, would put a crimp in corporate profits and therefore share prices, stifling rally attempts. (For more about the theory, here is the perspective of Eric Schurenberg, the editor-in-chief of CBS MoneyWatch.com.)
But one strategist, James Paulsen of Wells Capital Management, makes the case that the new normal will be more normal than new. Why would growth have to slow in the future, he wants to know, if it didn’t speed up in the past?
The economy hummed along at its usual pace, growing three percent a year, give or take, for much of the last decade. Other than to serve notions of karma and Schadenfreude after some reckless and stupid behavior by bankers, homeowners and others, why is there a need for payback if no measurable benefit accrued?
One reason that growth remained ordinary, as Paulsen sees it, is the chronic trade deficit that the United States has run with emerging economies, especially China. All that money flowing from here to there sapped our growth and boosted growth in those countries. If there is payback to come - and he expects there is - it will be for that and it will help our growth, not hinder it.
Higher growth in China, India, Brazil and other big emerging countries has made them richer and improved standards of living. Several developments are bound to occur as that process continues, all of them good for Western economies, Paulsen said.
As citizens of the developing world accumulate wealth, his thinking goes, they will want to spend it on the finer things in life, many of which are made elsewhere. Appreciating currencies, a consequence of higher growth rates and capital inflows, should make foreign goods even greater bargains for those nouveau-middle-class shoppers.
More important, as living standards rise, it will raise the price of goods manufactured there, making American and other Western products more competitive.
“It’s not that we’re going to export to China per se,” Paulsen told MoneyWatch, “but when we buy something at Wal-Mart for a buck, a few years ago maybe 80 cents went to China. Now it will be 50 cents and the rest will go to Tennessee.”
The ultimate result of this trend should be a reversal of the trade deficits. Those deficits have retarded U.S. economic output by one percentage point a year, he estimates; future surpluses should add a point. That two percent differential should offset the effects of the miscellaneous imbalances in the financial system that are being unwound and make the new normal a lot like the old normal.
It’s an interesting theory. There’s a simple, sensible logic to much of it, yet it remains outside mainstream Wall Street thinking, which may create investment opportunities.
Paulsen does make some iffy assumptions, especially his premise that recent excesses left no reckoning to be settled because they did not boost growth. It wouldn’t be the first time that oodles of dollars were shifted around to no good effect.
Also, his anticipation of open trade and freely floating exchange rates is based on an assumption that officials in the emerging world will play by the same rules as their counterparts in mature economies. Good luck with that.
Still, most of what Paulsen envisions does not rely on the goodwill of others. It would be a natural outcome of many years of superior growth in certain parts of the world, plus the tendency of economic forces to balance out eventually.
He offered suggestions on how very patient investors can profit if he’s got things figured correctly. He expects emerging stock markets to continue to outperform because growth rates in those economies will remain comparatively strong.
Paulsen also recommends American producers of basic materials and manufacturers of technology and heavy industrial products. He foresees their fortunes improving as they gain an edge over Korean engineering companies, say, or Taiwanese assemblers of television sets and personal computers.
So little investment has been made in these industries in recent years, except for certain facets of high tech, that it would take only a small uptick in consumer demand to create significant increases in profitability, he said.
They seem to be better contrarian plays than emerging markets, which are seldom far from investors’ thoughts. If Paulsen’s call for a resurgence of American manufacturing proves correct, few will see it coming.
