After four straight quarters of negative economic growth, the great recession is now over. While we've certainly made it through one of the most difficult economic periods in our history, it doesn't seem like anyone is celebrating; at least not yet. So what lies ahead and how should we chart the future?
Growth is good and things will surely get better, but the speed or lack thereof of the recovery makes a big difference. When the Dow was at 6,600 and Goldman predicted it would reach 10,000 by the end of 2009, few believed it. For those who sold and stayed on the sidelines for fear of losing even more, they're kicking themselves but justifying they really had no choice as they worried about their jobs and the value of their homes. We all know the story, but it is important to remember that for the vast majority of people the recession really isn't over.
To gauge the health of the recovery, it would seem to me that you only need to look at four things; unemployment, housing, US equities, and consumer spending. Clearly the equity markets have improved and it is expected they will continue to do so in 2010. Remember, we're still down more that 20% from the highs and the markets are essentially flat over the last ten years. As a result, the near term downside is minimized. Having said this, the consumer still has no real value in their homes and the piggybank of home equity loans may not come back for years. This combined with unemployment that is expected to rise even further in 2010 means that a noticeable recovery in consumer spending may not occur for 2-3 years. I'm not an economist, but it seems unlikely that we'll return to high rates of spending while the consumer continues to deleverage.
As a result, we're likely to see a rebound over the next few quarters followed by an extended period of flat to no growth. The markets may spike and fall and uncertainty and risk aversion will likely dominate the corporate psyche for sometime. As a result, leaders are likely to strategically reposition their companies while simultaneously focusing on improving productivity and profitability of core operations. Non-core operations will be sold and discontinued, and M&A and CEO turnover will rise. While all of this activity will be good for dealmakers and senior leaders as they reposition themselves, the positive effects of these structural changes may not be felt for several years. As a result, the labor market at the middle management level will likely lag behind the most senior levels in the market.
So, what does all this mean? My belief is that the recovery will stall in late 2010 and early 2011. While this may cause some turbulence, I also believe that most managers and investors are aware of this risk and unlikely to get out in front of themselves. As a result, we may experience a flat period in 2011 and into 2012, but I also believe that a sustained period of growth will follow. If we see solid growth in spending, rising home prices, and much lower rates of unemployment at that time, we could be in for several years of upside. As a result, it would appear wise to manage your expectations over the next couple of years but get positioned for sustained growth beginning in 2012.
