On Tuesday, Federal Reserve chairman Ben S. Bernanke opined after a speech before the Brookings Institution that from a technical standpoint, the recession is very likely over. To the 9.7% of the workforce who are not employed that does not provide much relief. Consumers, based on their level of confidence in the economy’s future, are becoming resigned to the “new normal.” Wall Street, that great radar detector of uncertainty around the corner, may have already built in this new normalcy into its prices.
Since the end of the first quarter 2009, stock prices overall have been enjoying a resurgence, albeit bumpy at times. The investment community may be experiencing green shoots but when it comes to where the nation is now in terms of economic growth, the green shoots look more like weeds. For example, we have lost over a million jobs during the last three months. More than likely we will lose approximately 250,000 jobs again in September. Unemployment will likely remain somewhere between 9.6% to 9.8%. Gross Domestic Product will likely increase slightly in the third quarter. All this while the fiscal fertilizer we call the American Recovery and Reinvestment Act is being sprinkled from the White House lawn throughout the rest of the nation.
What is most disconcerting is the acceptance of the new normalcy. Americans are apparently resigning themselves not only to 10% unemployment for the next year but also to an erosion in growth, a turning away from our production possibilities. Our real GDP fell from $12.93 trillion in the first quarter of 2009 to $12.89 trillion in the second quarter of 2009. Our real GDP, based on historical annual growth rates of three percent, should be at $14.03 trillion, which means that we have a gap in productivity of approximately $1.14 trillion. Ten years ago this would have been unacceptable. Today, it is the new normal.
To be fair to Dr. Bernanke, when he refers to the likelihood of the recession ending, he may be basing this on an expected uptick in third quarter GDP. By my admittedly rough estimate, third quarter GDP should be approximately $13.14 trillion, up 1.9% from last quarter. The gap between where we are and where we should be in terms of growth will probably shrink to $1 trillion or by 12.2 %.
But while we blow a collected sigh of relief and watch consumer confidence and stock prices increase next quarter, we should reconsider the new normal. We should not let this mindset impact how we approach economic policy. The new normal reflects not only a regression in our standard of living; it is reflecting how we approach productivity and possibly innovation. “It is what it is” has been the mantra for too long. If we do accept this new mindset, then we run the risk of ignoring an unemployed class that has almost doubled in the past two years. The unemployed still vote.