Welcome to the New Normal

Secondly, the recovery is going to take longer and be much less robust than any recovery since WWII. With unemployment likely to go over 10%, and with our new-normal world not needing as much production of so many things, unemployment is going to stay stubbornly higher for longer than in any previous recovery. I'm going to look next week at a very sobering report from the San Francisco Fed that suggests we may be for a longer than usual jobless recovery.

Thirdly, all this is going to affect corporate profits, especially in companies that depend on consumer spending. Those investors who expect corporate profits to rebound in 2010 are likely to be disappointed. (For the record, if you go to the S&P website, analysts are projecting anywhere from a 40% to 60% rebound in earnings for 2010 for the S&P. (I'd willingly take the "under" on that bet if I could find any takers.) I think whatever profit recovery that's built into the market at today's prices is generous. It's going to be tough to get much of a return from traditional buy-and-hold equity index investing for some time.

Fourthly, this is a global problem and primarily one in the "developed" world. I think we'll find that much of Europe will be worse off than the US. If there are bright spots in the developed world, I tend to think they will be in Canada and Australia/New Zealand. The opportunities are more likely to be in emerging markets, after they adjust to the new normal.

What all this means is that we as investors, entrepreneurs, managers, employees, and consumers need to adjust our expectations. For those of us in the US, this is complicated significantly by the fact that we really have no idea what new level of government spending and taxation we'll be faced with in 2010 and beyond. For one of the few times in my life, what the government does is likely to have a huge impact on the economy, as there's the potential for a significant shift in the very fundamental nature of government involvement in the economy. It's difficult to see what the new normal will be in this regard.

In Continental Europe, your new normal is going to be further complicated by a banking crisis that's likely to put a real crimp in any recovery. China and Asia must adjust to lower US consumer spending. They've built too many factories to supply what seemed to be an insatiable US consumer market. They have to find new internal markets or face their own new normal.

All that being said, at some point, perhaps as early as the third quarter, we could see a positive number for GDP, although I think it will be later. Part of the reason that we'll see some positive numbers is that year-over-year comparisons are going to get easier to make. Last summer, when inflation was close to 5%, and I was writing that deflation was the real danger, oil was rising from $40 to $160, and food prices were going through the roof. Now oil is back to $70 and so we get lower year-over-year inflation numbers. Over the last 2 years, the price of oil/energy is up, but we measure inflation on a yearly basis.

Housing construction was once about 5% of GDP. Obviously, the collapse of housing construction has had a rather negative impact on recent GDP numbers. But housing is probably close to, if not at, a bottom. Even if it dropped by another 20%, it would have far less of an impact on GDP at the much-reduced level where it is now.

It's similar with inventories. They can only drop so much, and eventually they get to the new normal and stop being a drag on the statistical GDP. We're not in an unrelenting death spiral; there is a bottom. It's like a person jumping out of an airplane: They fall rather rapidly until the parachute opens, and as they get closer to the ground, they manipulate the chute to further slow the descent. But until they reach the ground, they're still falling. That's the case today. The economy is still falling, but the parachute has opened. We are going to reach the bottom at some point. We will find that new normal. We just need to adjust our activities and plans around that new destination.

I truly believe we'll get back to 3% GDP growth and 4% unemployment at some point in the future, but it's going to be more than a few years, especially if taxes are raised as much as is being talked about in some circles. But just as in the late-'70s, when the outlook wasn't very bright, things will change for the better. When the question was asked back then where the new jobs would come from, the correct answer was: "I don't know, but they will come."