The New Normal Growth Rate


Written by: Jon McGraw

U.S. stock markets finished the week – and the quarter – on a positive note.

The Federal Reserve’s accommodative monetary policy and strong profit growth helped provide the lift needed to propel the S&P 500 Index to a record high. The Dow Jones Industrials Index also finished the week above its previous record close. For the quarter, the S&P 500 was up about 10 percent, the Dow was up about 11.3 percent, and the NASDAQ finished up about 8.2 percent.

Despite the strong performance overall, markets were somewhat choppy during the week. Concerns about Cyprus and the Eurozone debt crisis overshadowed markets early on. A positive report on durable goods from the Commerce Department helped push markets higher, as did a home-price index report from Standard & Poor’s Case-Shiller that showed the biggest yearly increase in home prices since the summer of 2006. This report seemed to have held more sway with investors than either weaker-than-expected new home sales or lower-than-anticipated consumer confidence. Late in the week, the GDP growth rate for the fourth quarter of 2012 was revised upward, but remained sluggish at 0.4 percent annually.

The U.S. Treasury market generally has benefitted from worries inspired by the Eurozone debt crisis. The latest episodes in the crisis – the Cyprus bank bailout and Italy’s failure to form a government – helped nudge rates lower last week. The U.S. continues to be perceived as relatively safe.

Fears about Eurozone debt issues generally have had a positive effect on gold prices, too, helping the precious metal reach a record high price in September 2011. That has not been the case this year. Gold finished the quarter down by more than 5 percent.

Data as of 3/29/13







Standard & Poor’s 500 (Domestic Stocks)







10-year Treasury Note (Yield Only)







Gold (per ounce)







DJ-UBS Commodity Index







DJ Equity All REIT TR Index








How fast should the United States’ economy be growing?

According to The Economist, “In the three years since the end of the recession in mid-2009, growth averaged 2.2 percent, barely half the 4.2 percent average of the seven previous recoveries.” This begs the question: How fast should the economy be growing?

Economists, academics, and policy makers have been trying to figure that out. Many have started with an economic theory put forward by noted economist Milton Friedman in 1964. His “Plucking Model” postulates the business cycle is like a string attached to a board. The board represents “the ceiling of maximum feasible output.” Once in a while, the string is plucked down by recession and then it springs back. The idea is the depth of a recession will be mirrored by the strength of the recovery that follows.

At first blush, the Plucking Model doesn’t appear to apply to this recovery. The Great Recession was the deepest downturn since World War II, and the country hasn’t snapped back. According to several recent reports, there may be a reason for this. Our ‘ceiling of optimal output’ – the fastest rate at which our economy is expected to grow – may be lower than it used to be.

  • Productivity and Potential Output Before, During, and After the Great Recession, a working paper from the San Francisco Federal Reserve, found growth in the U.S. was slowing in the mid-2000s although the slowdown was largely unrecognized before the Great Recession.
  • What Accounts for the Slow Growth of the Economy After the Recession, a Congressional Budget Office study, determined about two-thirds of the difference between America’s current growth rate and the average growth after previous recoveries is due to long-term trends including demographic changes. The other one-third is credited to low demand for goods and services.
  • Disentangling the Channels of the 2007-2009 Recessions, by James Stock of Harvard University and Mark Watson of Princeton University, also found slower growth in the U.S. is largely the result of demographic trends such as a limited labor supply as Baby Boomers have begun to retire and the number of women joining the workforce has leveled off.

Considered together, the reports seem to indicate U.S. economic growth began slowing before the recession and, unless demographic trends shift, our country may continue to experience slower growth.

Weekly Fun – Think About It

“I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.” —Michael Jordan

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