The Recession Generation: A Graphic Breakdown

Over a lifetime, recession kids can expect to earn $100,000 less than their luckier cohorts.

Odds Stacked Against “Recession Kids”

What a difference a recession makes. Kids entering the job market during a recession – dubbed as “recession kids – earn an average of $100,000 less during their lifetimes than do youngsters who begin looking for their first job during better economic times.

That’s a bum deal for any college graduate looking for a first job today. And it’s far from the only significant hurdle that “recession kids” face when entering the job market.

The National Bureau of Economic Research reported that the attitudes, saving habits and earning power of youngsters entering the workforce during a recession are forever different than those of young job hunters who are looking for work during more favorable economic conditions.

For instance, for every percentage point in higher unemployment rates, new graduates entering the workforce earn a salary that is 6 percent less than what youngsters who enter the job market in better times fetch. That’s especially bad news today, when the national unemployment rate hovers near 10 percent. It’s also a trend that will impact these young job seekers for decades. When you start out in a 6-percent hole, it’s hard to catch up with those workers who took their first positions when companies were flush with cash.

“Recession kids” also have vastly different attitudes about both work and life. These youngsters support wealth redistribution and government intervention to help protect people who are struggling to land jobs or pay their bills. They also tend to invest their money more conservatively. They save more and spend far less. They also seek out the safest of jobs, hoping to avoid those dreaded layoffs.

Today’s young job seekers definitely qualify as “recession kids,” even though the recession has officially ended. After all, the unemployment rate for job seekers from the ages of 20 to 24 is more than 15 percent. That’s even higher than the national unemployment rate of nearly 10 percent.

Of course, the recession, the worst the country has seen in seven decades, hasn’t limited its impact to just young job hunters.

For instance, during the financial crisis the nation’s personal savings rate has more than quadrupled from 2008 to now, when the rate has risen to 4.5 percent. People have also increased the amount of time they spend with their families by 2.25 hours a day.

These are actually positive changes: We should all be spending more time with our families, after all. And socking money away is a good habit.

Good thing, too, because the job market has shown little evidence of easier times in the near future, especially for the “recession kids.” Employers report that they will hire 20 percent fewer graduates in 2010 than they did last year.

‘The New Normal' for business

Over the year several commentators have referred to “The New Normal”. The term was first introduced by Mr Mohammed El-Erian, CIO of Pimco, the bond asset manager, and has triggered a debate among economists on what it implies for economies in the long term.

What does the New Normal mean? Before the financial crisis struck in August 2007, the world was used to robust economic growth numbers that were upwards of 3 per cent year on year, and a labour market that was close to full employment. The private sector was flourishing and benefited from a world that had become more interconnected, with all the attendant benefits of increased trade and final consumption. Governments were able to lure voters with tax cuts.

Following the financial market crash and subsequent global recession of 2007-2009, all this has come to an end. It appears that the world will have to adjust to a new equilibrium that features more regulation, higher taxes, less leverage, lower growth and higher unemployment. This is the New Normal.

END OF AN ERA

There are a number of valid reasons why it may be hard to return to the “Old Normal” for the next 10, or possibly 20, years.

The era of cheap credit, which was the fuel of the economic growth engine, is definitely behind us. The shadow banking system that helped sustain it has collapsed, and quite rightly regulators are looking at ways to shut that door for good. Of course, markets move in cycles, and there will be a point in the future when banks will be able to loosen their credit standards. But this will take time.

The first phase of deleveraging in the banking sector is over. This was an abrupt and disruptive one. Now the second phase has begun, and this one should be more orderly. Nevertheless, continuing write-downs in residential property, commercial real estate and credit cards will force banks to deleverage their balance sheets still further. This means that in the years ahead the supply of credit will be limited, and this will impact economic growth.

Then, there is the global imbalance of Asian and oil-exporting countries using their large trade surpluses to fund American consumers' debt-financed spending. Although fundamentally so far nothing has been done about this problem, recent rhetoric from the BRIC countries (Brazil-Russia-India-China) suggests that there is growing caution about continuing to invest in US sovereign paper.

This would impact the US economy's ability to finance its household deficits. (Actually, this rhetoric seems to be just that: if these, and other countries such as Russia that have also spoken of this issue -- stop buying US debt -- where are they going to park their export surpluses?)

The Old Normal was based upon a model where the rest of the world was producing cheap products to satisfy US consumerism and in return received US fixed income paper. In the long-term the solution to this problem is for consumers in emerging market economies to start buying what that they produce. But this is not going to happen immediately, and therefore growth will be at a much lower pace.

IMPACT ON INDUSTRY

After the Lehman collapse the private economy imploded and governments all over the world had to implement rescue packages for their banks and wider economies. In addition to the banking sector, the manufacturing industry received state aid as well. For example, the US car industry was virtually nationalised. Other industries received similar such assistance, and these stimulus packages are still in place.

Withdrawing these incentives may trigger another fallout. This is the problem with state aid and protected industries: the sector gets used to this aid and becomes unviable as a profitable stand-alone entity. As Pimco CEO Bill Gross has said, the invisible hand of Adam Smith has been replaced by the visible hand of the public sector.

The US housing market is a crucial cylinder in the economic growth engine. After the collapse of the dot.com bubble the American consumer used housing rather than the stock market to raise funds to maintain spending, via several creative refinancing techniques. As a consequence, homeownership rose to approximately 70 per cent in the US. We now know that many housebuyers didn't really qualify for the mortgage loan they entered into, applying prudential standards.

Under the New Normal, homeownership will drop again to pre-housing bubble levels of around 65 per cent. This suggests that the sector can no longer be a driving force for economic growth.

LOWER DEFICITS AND GROWTH

The gigantic stimulus and rescue packages undertaken by governments across the world have derailed public finances; there is concern over how governments will stabilise borrowing. This environment of constrained borrowing and government budget cuts will peg back growth.

This New Normal is a distinct possibility. As such, the market environment is one where the US dollar will face serious difficulties and above-average growth will come only from the new economies in Asia and possibly the oil-exporters.

Therefore, investors need to modify their world view to take this into account.