DOW JONES NEWSWIRES 
 

A part of the U.S. production capacity and labor market will have to be permanently laid off if nominal gross domestic product growth can't be kept around 5%, bond-fund king Bill Gross says.

The founder of giant bond-fund manager Pacific Investment Management Co. said in his monthly newsletter that economic growth including inflation must grow close to 5% in order for the economy's balance to be maintained. Figures at the moment is not only anywhere near that level.

If nominal GDP doesn't grow at 5%, Gross said, "Employment levels become unsustainable, retail shopping centers unserviceable, automobile production facilities unprofitable, and the economy itself heads toward a new normal where unemployment averages 8% instead of 5%, housing starts total 1.5 instead of 2 million, and domestic auto sales 12 [million], instead of 16 million annual units."

For investors, a lower 3% nominal GDP as part of Gross's "new normal" would mean lower profit growth, permanently higher unemployment growth and capped consumer-spending growth, as well as increased involvement of the government, Gross said.

He added high-risk bonds, commercial real estate and lower-quality municipal bonds could suffer more than just cyclical defaults if they don't become government supported, but that kind of government support would "substantially change the character of the American capitalistic model."

Investors should remember a lower GDP means "haircuts for assets on the upper end of the risk spectrum, as well as extremely low-yielding returns for government and government-guaranteed assets at the bottom end," Gross said.

Pimco is a unit of Munich-based Allianz SE (AZ).

-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; kerry.benn@dowjones.com