New normal blues

Boring US growth is here, clear, get used to it

Boring US growth is probably here to stay, so get used to it. Second quarter GDP increased at a 1.7 per cent clip, according to the advance estimate released by the Bureau of Labor Statistics on July 31. That was fed by 2.2 per cent private sector expansion even as government shrank. Global growth is robust, though America's slice is smaller. The steady but unspectacular results could cool stocks while bringing the Fed closer to cutting stimulus.

Global economic expansion hit 3.1 per cent in 2012, according to the IMF, and is expected to remain at 3.1 per cent for 2013 and rise to 3.8 per cent next year. That's close to the average of 3.7 per cent from 1995 to 2007.

Current US growth, however, is distinctly slower than its 2.9 per cent average during those years. One reason may be that improved communications have made global supply chains easier to create. That, in turn, has made labor in emerging markets more competitive with American workers, meaning US growth could lag for some time.

The details of second quarter results are encouraging. Private investment was strong, rising at nine per cent over the previous quarter, thanks largely to a healthier housing market. Government's contribution to GDP declined again, though more slowly than in the previous two quarters. Consumption made substantial gains, even while the savings rate rose modestly on higher disposable income. Net exports dropped, with imports outpacing exports. Inflation was exceptionally mild: The GDP price deflator increased by a mere 0.7 per cent, and the personal consumption expenditures deflator was flat.

If growth holds steady at the current pace, the Fed will have little reason to continue its monetary stimulus program. And, without a hotter economy, companies almost certainly won't be able to sustain record earnings.

The combination will probably mean an end to the stock market's torrid performance, which has goosed the Standard and Poor's 500 index by 19 per cent this year. An unpleasant drop may not be out of the question. Call it the new normal, with a kicker.