Where's the "New Normal" Now?
It has been popular to say that the economy suffered permanent (or at least long-lasting) damage during the financial crisis, and the economy’s new speed limit once recovery was fully underway would be 2 percent GDP growth and nonfarm payrolls rising 160,000 or so per month.
We’ve long been skeptical of this unduly pessimistic view. While the recovery to date has certainly been disappointing and has suffered one frustrating setback after another, it has been impossible to gauge the long-term potential when so many short-term drags were in play. And the list of these temporary forces—deleveraging, Euro debt crisis and austerity, Japanese tsunami, debt ceiling, sequester and government shutdown, to name a few—is quite long.
Now the picture is starting to change, and the medium-term outlook is quite different than it seemed in the early stages of recovery. Nonfarm payrolls have grown 230,000 per month on average in the first half of 2014, capped off with June’s 288,000 gain. We’re finally getting a glimpse of what this recovery can look like once the roadblocks are removed, and the “New Normal” is rapidly becoming Old News.
There are still plenty of weak spots in the economy, to be sure. The millions of unemployed or out of the job market completely, including many long-term unemployed, are a stark reminder of how much more the economy needs to heal. Over the medium term, however, the economy is likely to have more upside surprises than downside.
Commercial real estate will be a major beneficiary as the economy gains momentum. The pick-up in hiring will have a direct impact on the office sector, with more rapid declines in vacancy rates supporting rent growth. Retail properties will benefit as well, as consumers with jobs are more likely to head to the mall than those without. Other sectors will also improve along with the overall economic environment.