The slow road back
This morning I promised that I would tell you about another fantastic blurb from John Mauldin's weekly e-letter. I've got a few spare minutes so here you go.
I have been saying for a while that the economic headwinds out there including massive debt, reduced leverage, an increased savings rate (consumer spending could fall from 70% at peak to 63% of GDP), aging Baby Boomers, rising taxes, a possible rise in interest rates if the market starts to choke on all of these Treasuries, the lack of a technological spark that will dramatically increase productivity (like the Internet did), etc... will likely lead to an extended period (years) of slow to no economic growth in the United States. We certainly aren't returning to the roaring growth that we've become accustomed to over the past two decades.
The Mauldin piece that I referenced sort of supports this theory. Take a look at the above chart that he provided. It looks at the decline in corporate earnings during recessions. Since 1945 U.S. economic recoveries from recessions have been rather fast, averaging only three to four years for earnings rise above their old highs.
The thick black line shows a corporate earnings drop that we have experienced during the current recession, a massive 69.2% from the peak in 2007 and earnings are still falling. I have a feeling that the recovery this time is going to look a lot like the pre-World War II economic recoveries, which took twelve to twenty years on average for earnings to return to their peak level. I'm not sure that it will actually take us a decade to recover, but all the evidence that I have seen leads me to believe that we certainly aren't headed for a "V" shaped three to four year recovery.
Earnings could slide by 80% from their peak before we're all said and done. If that happens, they would have to increase by 400% to return to their peak level. That would take six years with an unrealistic average rise in earnings of 24% per annum.