The New Normal


Our economic future depends on adaptability.

Our economic future depends on adaptability.

Fortnightly Magazine - September 2009

For the past several months, analysts and pundits have been using the term “the new normal” to describe post-recession economic conditions. The phrase describes a variety of changes, from stock-market returns to personal savings rates, but it boils down to this: After the recession, the economy will go through a soft recovery, and it won’t return to pre-recession levels of financial and market activity in the mid-term future.

The idea is centered primarily on trends in banking and finance—which makes sense, since that’s where the meltdown began—but of course the whole economy depends on the strength of our financial institutions. Nobody is exempted from the new normal. “The forces of consolidation and shrinkage will spread beyond banks, impacting a host of non-bank financial institutions,” writes Mohamed El-Erian, CEO of PIMCO, in the firm’s May 2009 outlook titled A New Normal .

El-Erian’s scenario also predicts that governments around the world will continue their trend toward intervention in markets. “Burden sharing will feature more prominently,” he writes, forecasting a “heavier hand of government in economic life.”

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Of course, not everyone agrees with this outlook. However, in the utility industry we see plenty of evidence to support it. Power and gas sales are diminishing rapidly for many utilities and much of the industrial demand destruction seems permanent (see “ The Fortnightly 40 ”). Also, interventionist government policies are shepherding utility investments, most notably toward green-energy and smart-grid technologies.

This industry always has been influenced by “the heavy hand of government;” there’s a reason we’re called “regulated utilities.” But recent trends are fundamentally changing how electricity and natural gas are provided to customers. Government policies, market forces and technology trends seem to be reshaping every- thing from resource-planning assumptions to customer-service practices.

Whether these changes portend a structural rebuild or an incremental shift in the utility business model, they’re challenging executives and regulators to re-examine the industry’s financial and regulatory foundation—and to adapt it to the realities of a new normal.

Rational Prudence

In terms of macroeconomics, the new normal suggests previous economic growth was an illusion, a bubble inflated to irrationally exuberant levels by a debt-financed shopping spree. And now that the bubble has burst—via the housing market collapse, the subprime mortgage crisis and the Wall Street meltdown—life will be a whole lot less buoyant. “Exuberance and excess, spawned by cheap credit, are making way for prudence and pragmatism,” write Rutgers University scholars James W. Hughes and Joseph J. Seneca in a February 2009 report.

Whether this prediction is correct or not, an honest assessment must recognize certain overhanging realities—namely the country’s yawning trade deficit (including energy imports) and its inflationary fiscal and monetary policies (see earlier Frontlines columns, “ Security vs. States’ Rights ,” July 2009, and “ A Time to Lead ,” October 2008) . Even if housing and banking should spring back to improbable pre-recession levels, America’s growing deficits will bleed our GDP, constraining stock-market prices, real-estate values,