After last month’s blockbuster government jobs report, I’ve been looking for signs of a normal economy. But as economists and market watchers talk of a “new normal” and “normalization,” I’ve been wondering just what a normal economy is.
First, Let’s start with a definition of normal.
In economist-speak, a normal economy is one in which interest rates are neutral, or in a state of equilibrium. They’re not high enough to slow economic activity, but they’re not so loose that they heat up inflation.
The problem is the neutral rate is always changing. Frankly, not even the best economists know exactly what that neutral rate is in real-time.
By way of example, here’s another frank truth.
The economy hasn’t been “normal” for a long time, if ever. The 10 years of economic expansion that preceded the pandemic certainly wasn’t normal. Not when more than five decades of economic history shows that the economy regularly dips into a recession every three to four years.
This decade of expansion, the longest in U.S. history, was propelled by irregular factors such as super-low inflation and near-zero interest rates.
Hence, if the most stable economic period on record was an historical aberration, a return to normal now is elusive.
Here’s what’s normal: Continuous change.
The economy is dynamic, a system made up of billions of individuals, companies that start up and go out of business, innovations and technologies that are born or wither, cultural trends, and demographic shifts. These drivers are continuously reshaping and redefining what normal is and what the neutral rate looks like.
This week offers us ample opportunity to flex the “What is normal?” question because we’re getting a boat load of data over the next few days. Here are the three indicators that I’m watching.
- Tuesday: Inflation – Did it continue to fall?
- Thursday: Retail sales – Have consumers remained resilient despite higher rates?
- Friday: Housing starts – Can residential real estate rebound from its inventory slump?
None of this data will tell us whether the economy is reverting to an idealized state of normal. But it will give us insight on how the economy continues to evolve.