The New Abnormal

The New Normal is a less lucrative place for Americans, says McKinsey’s global managing director, Ian Davis. “We are experiencing not merely another turn of the business cycle, but a restructuring of the economic order,” he writes in a new issue of the McKinsey Quarterly.

The order that will emerge is not yet a clear picture, but parts of it are in focus. For one, there will be less leverage, and it will cost more. As Davis says, tartly, “Business models that rely on high leverage will suffer reduced returns. Companies that boost returns to equity the old fashioned way—through real productivity gains—will be rewarded.”

Government will be bigger, and that will either mean something good: better transparency and global cooperation on finance; or something bad: protectionism.

Even in the best scenario, America will no longer be a nation of people playing “Pimp My Ranch House.”

it was clear before the crisis began that US consumption could not continue to be the engine for global growth. Consumption depends on income growth, and US income growth since 1985 had been boosted by a series of one-time factors—such as the entry of women into the workforce, an increase in the number of college graduates—that have now played themselves out. Moreover, although the peak spending years of the baby boom generation helped boost consumption in the ’80s and ’90s, as boomers age and begin to live off of retirement savings that were too small even before housing and stock market wealth evaporated, consumption levels will fall.

There will still be great business opportunities, Davis says, singling out genetic engineering, software and clean energy. But it sounds to me like the days when such businesses printed money for their founders are probably gone.