What if there is no “new normal”?

The popular view of the global economy is that we’re experiencing a “new normal” – low yields, low productivity and long-term stagnation. But, says John Stepek, that’s not necessarily true.


Virrtually anyone who wants a job in America should be able to get one

I want to pick up from where I left off yesterday. Where were we? Ah yes the theory that there is no "new normal".

Collapsing bond yields and an overwhelming view that the future is grim are predicated on the theory of the "new normal".

We face decades of secular stagnation: an era of weak productivity, low-quality jobs, low wages, rising inequality, political unrest, and low returns.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

In short, "it's different this time".

I suspect it's not. So let's look at some alternative theories

The US is running out of potential workers

Let's address the last question first. Stephen Williamson of the Federal Reserve Bank of St Louis has come up with a possible explanation for the poor jobs figure. Put simply, the pool of available workers is drying up, which means there's a ceiling on the number of new hires you can expect to see each month.

How does he come to this conclusion? Well, the US labour market is tight; no doubt about that. The number of vacancies is at its highest ever (the data on that goes back more than 15 years, so it includes the pre-crash era). Meanwhile, unemployment at 4.7% is very close to "its most recent cyclical low of 4.4% in May 2007", notes Williamson.

Given those conditions, virtually anyone who is in a position to get a job should be able to get one. So this doesn't look like a problem with the supply of jobs, but the supply of potential employees.

On that front, the working age population (15-64) is growing slowly (about 0.5% a year). So, says Williamson, if labour-force participation (the percentage of the working age population who are actually in the market for a job) and unemployment stayed static, you'd add about 60,000 people a month to payrolls.

He reckons that, allowing for unemployment to drop a bit more, 80,000 is the sort of number that we could expect to see without getting too worried about it.

What's kept wage inflation down?

Guillermo Roditi Dominguez points out that participation in the labour force has been particularly low among teenagers and those in their early 20s. (The participation rate among teenagers has dropped by about ten percentage points since before the crash, even as participation among the elderly has risen.)

Dominguez argues that this is largely down to the demographic impact of having two large generations competing in the workforce during the 2000s, along with the effect of the recessions of 2001 and 2008. This resulted in "a surplus of candidates, tipping pricing power to employers".

That resulted in wages stagnating. As he points out, during the 2000s wages as a share of revenues hit their lowest levels for decades we're talking since World War II at least here. They're picking up now, but they're still only where they were in 2006 or so. At the moment it's at about 58%, but in the past it has easily got as high as 65%.

It also means that the least desired demographic of employees is pushed out of the running, except in the tightest labour markets. That hits one group particularly hard, says Dominguez.

"A decline in bargaining power of employees combined with a large pool of potential applicants would lead to diminished demand for the most marginal workers: youths. Teenagers, after all, are the worst; why would anyone ever hire one unless there was no alternative?"

Therefore, if the employment market is as tight as it looks, we should soon see the return of teenagers to the jobs market, particularly as rising minimum wages make adults too expensive to hire. "I fully expect employers to resort to hiring teenagers, as they've always done, to protect margins or fill vacant positions."

Wages are already rising (adjusting for inflation) "much faster than in the 16 quarters from 2010 to 2014". Rising wages are likely to result in higher participation rates ie, more people actively looking for jobs which will take some of the heat out of the rate of wage inflation, but only until the additional labour is exhausted.

Productivity is low because cheap staff are being used instead ofnew technology

So summing it all up: a couple of recessions combined with an outsized dollop of labour has kept wages down. That in turn has squeezed productivity, because companies have preferred to hire staff rather than make productivity-enhancing capital investments.

It's taking time, but it looks like that could be changing now.

What would that mean? Well, we'll explore that in more detail another time. And maybe this theory is wrong. Maybe we really are in the mire that markets seem to accept that we're in.

But when everyone believes in a theory, it's always a good idea to pay attention to the minority reports from the contrarians who don't buy it.

Because when the entire financial world is positioned for one outcome long-term stagnation then betting on that outcome as an investor leaves all the risk to the downside, and very little reward on the upside.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.