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.

We're entering some very strange territory in this country as it becomes more apparent every day that the extremists on the right and on the left are gearing up for a major fight.  While Obama won by running to the middle, the debate over the last few weeks on healthcare is fanning the fires on both ends of the extremes.

As a fiscal conservative, I, like many in this country, have difficulty relating to the extremists on the right and the left.  I'm not as socially liberal as the base of the Democratic Party and I'm not as radically "conservative" as the base in the Republican Party.  Importantly, I'm not alone as the vast middle in our country share these same views.  Having said this, the views expressed in the media, and increasingly the banter amongst my friends and colleagues, reflect the extreme view of the moment.  Just as the Democrats believed they could do no wrong after the election, the Republicans are now "doing the happy dance" as healthcare reform looks like it could in fact be Obama's Waterloo.  While disappointed in the current situation, far too many people are almost gleeful to see Barack fall in the polls.

Clearly people are angry that they've lost money in the market and their homes are not worth nearly as much.  The middle class in the country see nothing but rising costs and reduced benefits in the future and they blame the financial irresponsibility of our government.  These concerns are most clearly seen in the light of healthcare reform.  Nevermind the countless elements of any healthcare package that will have positive effects, it is clear to most people in this country that we'll get less, it'll cost us more, and the government will have a bigger say in our lives.  That means healthcare reform is a big loser for the Democrats and a big winner for the Republicans.

At the end of the day, the debate over healthcare will prove to be cathartic.  We'll move past the debate and the economy will eventually improve.  We'll likely swing back to the right and eventually find the middle again, and the big issues won't change.  Namely, that America isn't the center of the universe anymore.  This is the "Asian Century" and we'll look more like Europe as the century progresses.  The day or century of reckoning is here, and the sooner we face it the better off we'll be. 

Instead of engaging in the daily "one upsmanship" that fuels our debates these days, I hope we'll find a more moderate middle ground.  If the politicians in Washington would be a little more humble in victory and gracious in defeat, perhaps the vast middle in our country could find a voice.

When will Americans take back this country from the politicians and the media?  Let me know your thoughts.    

After meeting with a variety of private company owners and private equity investors this summer, I've been surprised by the tentativeness in both camps.  While I'm a firm believer that M&A activity is poised to pick up and is a leading indicator of a recovery, I have to ask, "What are they waiting for?"

We have all heard the same comments from small and medium sized business owners who say they've weathered the storm and feel the worst is behind them.  They reflect on the anxiety they experienced during the crash, and the vast majority of those still standing feel they were fortunate to have saved the business.  While clearly relieved, they also express cautious optimism for the future with a lack of conviction of how quickly things will noticeably improve.  I then ask if they've considered selling the business, and almost to a man I hear, "the private equity guys have disappeared, but that's OK because I sure wouldn't want to sell anything right now if I didn't have to".

As for private equity firms, they've been busy fixing the companies in their portfolio they can save and calming investors.  They've also taken a look at potential deals, but they're extremely skeptical of the future potential of any company that is on the block right now.  As the private company owner says, "Why would anyone want to sell anything right now unless they have to?"  There we have it.  It really isn't about a lack of capital or leverage, it's really about a lack of confidence and unrealistic expectations.  Sellers still haven't adjusted their expectations on valuations to address the risk private investors still see in the market. 

For the buyers, they continue to wait for that magical day when valuations appear more reasonable.  For sellers, they're keeping their fingers crossed that their businesses continue to improve and that private equity buyers will come back.  While it seems like a standoff, I believe the buyers will come rushing in when they feel they may miss the window.  Buying good companies at a bit of premium is going to look a whole lot easier than buying marginal companies at a discount and trying to turn them around.  You get what you pay for.

So, where are the private equity guys?  What are they waiting for? 

Let me know your thoughts. 

As I've been traveling the country this summer and talking with leaders from many different walks of life, the conversation has inevitably drifted to our assessments of when things will noticeably improve.  Back in March, I wrote a short piece on when things will start turning around so I thought I'd revisit the question.

Aside from the slowing rise of new unemployment claims, the 40% rally in the equity markets, and Q2 earnings reports which generally met or exceeded analyst expectations, the mood in this country is cautiously optimistic at best.  Interestingly, when the market corrected a bit this week (which is healthy and to be expected) it was somewhat surprising to hear some predict that the sky is falling and that we may retest the bottom.  It's clear that the fear and pain is just below the surface, and people will get scared quickly if a major correction occurs.  Having said this, almost everyone feels that things will get better in 2010.

But what are the triggers to get us moving?  In March, I pointed out that we watch two trends to predict improvement in the executive search business; namely CEO turnover and M&A activity.  Interestingly, CEO turnover has been reported to have increased 20% this past month, and while a month does not make a trend, it is the first sign that CEOs and Boards are ready to move on.  In addition, the private equity firms and investment banks are preparing for a healthy resurgence in the IPO market.  Lazard just hired a senior banker to lead their activities and private equity firms are preparing for IPOs to show returns for their investors.  Without exits and leverage, the deal market has been dead, but the signs are there for a significant increase in transactions over the next 12-18 months.

While these trends drive management turnover which is good for my business, they are also the signs that value creation opportunities are in greater abundance and that visibility is improving.  These leading indicators of a turnaround are improving, but two additional things need to happen to really clear the decks for growth.  First, the US Government needs to move past healthcare and demonstrate a unified focus on jobs and economic recovery.  Obama has tested our patience and more government spending will only postpone a recovery at this point.  Secondly, the government's role in the financial markets needs to be curtailed.  As one real estate investor told me, "There are great deals out there, but investors will not invest if they think there is another government subsidy or regulation coming out."

With Obama's poll numbers slipping and the timing for a vote in Congress quickly approaching, my bet is on a grand compromise to move past healthcare in the Fall.  Obama will work to improve his approval rating, and consumer confidence should improve; perhaps not in time for the holiday season but probably in time for the spring.  As a result, we should see solid growth in 2010 as long as these trends continue.  Whether the growth can be sustained to avoid a "W-shaped" recovery is a debate for another day, but I'm cautiously optimistic we'll be "breaking out in 2010".

What are your thoughts?  Do you see other key trends to watch?