Photo: USS Hanson
In 2009, Mohamed El-Erian, CEO of PIMCO – the world’s biggest bond fund manager – coined the term “new normal” to describe the period of economic malaise the U.S. would experience in the wake of the biggest recession of a generation.The “new normal” was characterised by below trend growth, high unemployment, and ultra-low interest rates as the U.S. suffered the economic consequences of the crisis.
On Thursday, El-Erian told CNBC that the “new normal” may soon be over.
He wasn’t quite ready to call the end of period, but he was getting close.
Bigger picture, a lot of analysts are now calling The Big Turn.
Société Générale economist Aneta Markowska agrees, and she thinks it could happen in the first half of 2013 – even sooner than most expect.
In a note to clients Friday – titled “Preparing for the end of the ‘new normal'” – she wrote:
It has been our view for some time that 2013 will see an inflection point on growth, and we expected the watershed moment on growth to come during the second half of the year. The risks are shifting, however, and we could get there sooner.
Recent data suggests that after a very weak Q4, Q1 GDP could print well above trend, despite the fiscal drag coming from tax increases. Recent indications on employment and housing demand reinforce the positive message.
On the Fed, we are still leaning toward a year-end termination of asset purchases. However, as the markets try to front run the Fed, the watershed moment could come long before then. Consequently, we are revising our forecast for the 10-year Treasury yield and now look for a 2.2% target at the end of Q1, and a year-end target of 2.75%.
The 10-year Treasury yield is currently at 1.84 per cent, so Markowska expects a sizable backup in yields in the first quarter of 2013.
Markowska says the reason is because even despite the weakness that will be revealed in the Q4 GDP report, the first quarter of 2013 should be much better:
However, if our beancounting is correct, it implies much more ‘juice’ in Q1. Ironically, despite the fiscal drag from higher tax rates, Q1 GDP may print in high 2s or perhaps even as high as 3%. That’s because the lifts from business investment, housing, inventories and trade may more than offset the expected hit to consumption from higher tax rates.
It also appears that real consumer spending ended the year on a strong note with real PCE rising up 0.3% m/m in December. This would put the December level 1.5% annualized above the Q4 average. This positive momentum will also help absorb some of the fiscal drag.
All of this coincides with increasing evidence that the U.S. is escaping from the “liquidity trap” that has made monetary policy so ineffective in the crisis era.
It’s not out of the woods yet, but even with all of the negativity surrounding the upcoming budget battles in Washington expected to unfold over the first quarter – and barring any shocks – the U.S. economy may be closer to the end of the “new normal” than even El-Erian will admit.
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