The New Normal vs. The New Mix

by Marilou Long on March 18, 2010

in Earnings,Economic Indicators,Investment Strategies

In today’s Morning Briefing from Ed Yardeni, he describes the debate going on between two competing schools of economic theory.  The New Normal as described by Pimco’s Mohamed El-Erian, posits that the US will experience years of lackluster economic growth.  He foresees real GDP growth around 2% and a high unemployment rate for years to come.

The phrase “the New Mix” was coined by Joe Carson, an economist with AllianceBernstein.  Mr. Carson forecasts that the economy will be driven more by exports and business investment while housing-related and auto-related industries will continue to lag.

Dr. Yardeni tends to agree with the New Mix, and he provides some evidence from the GDP accounts:

A review of the numbers in the real GDP accounts suggests that there is a compelling case for the New Mix.  At the end of last year, real exports of goods & services was $1.56tn (saar) and real business spending on equipment & software was $917.4bn.  Both were much bigger than real residential investment ($364.0bn) and real auto output ($290.6bn).  The first two New Mix winners totaled $2.47tn and the end of last year, or 278% greater than the New Normal losers at $654.6bn.

These same trends are still reflected in current earnings reports.  One surprise this year could be the return of the consumer to the New Mix.  While the foreclosure data remains grim, the retailers’ earnings reports have shown considerable resilience on the part of the US consumer.  The key will be whether these good earnings have been a one time bump due to pent up demand generated by the massive balance sheet deleveraging of the past two years.

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