The three data sets represent the 2009, 2010 and 2011 benchmarks. As expected, the earlier data were much more optimistic than the latest figures. We have noted many times during the past few years that the BEA is under tremendous political pressure to produce the most optimistic view possible during periods of poor economic performance.
Notice how significant the downside revisions were in both 2010 and 2011. The 2009 trough was more than 2% lower than originally forecast and a rebound that was predicted to have moved up to new highs has yet to return to pre-recession levels. In terms of growth rates, the recent high at 3.5% in the third quarter of 2010 was the lowest peak recorded since the Great Depression as shown on the following graph from John Mauldin's latest weekly commentary.
Additionally, a decline of year-over-year (YOY) GDP growth below the 2.0% level has been followed by a recession every time during the last 60 years. The YOY growth rate now stands at 1.6%, indicating that a return to outright economic contraction during the next few quarters is becoming more likely.
Since the economic rebound began in early 2009, our analysis has suggested that the cyclical recovery would be weak by historical standards and the GDP data are trending exactly as anticipated. As we have noted many times during the past several years, the primary reason for the tepid recovery is excessive debt. The following graph displays total US debt as a percentage of GDP.
The surge in debt that occurred from 1980 until 2010 was a prototypical unsustainable trend and we have now entered the necessary, albeit painful, deleveraging phase. The last time a comparable unsustainable advance developed, a sharp decline followed, engendering two decades of subpar economic growth and an accompanying secular bear market in stocks that lasted from 1929 until 1949. It is no coincidence that the stock market has been mired in a secular bear market of similar character for the past 11 years.
Research has clearly demonstrated that an excessive debt problem cannot be solved with more debt. Once a structural deleveraging process of this magnitude begins, it must proceed to completion before the foundation for the next structural growth cycle can be formed. Given the early stage of the current deleveraging cycle, it will likely not complete until the second half of this decade. Until then, the economy will continue to struggle and the secular bear market in stocks will continue to limit the long-term investment potential of equities.
With respect to the cyclical bull market from early 2009, the deteriorating GDP trend suggests that the development of a long-term top is becoming more likely. Cyclical uptrends have an average duration of 33 months when they occur during a secular downtrend. Therefore, at a duration of 29 months, the current bull market could terminate at any time during the next nine months. Additionally, the extreme nature of the reaction off of the 2009 low suggests that next cyclical downtrend will likely be equally violent in character.
There have not been any meaningful long-term breakdowns with respect to technical or cycle analysis yet, but an important signal will likely be generated sometime during the next two months, so it is time to monitor market behavior closely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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