By Scott J. Brown

The end of the year is a natural time for reflection, and the current period is no exception. However, this year also marks the end of a decade, one that many investors would like to forget. It is also a season for looking ahead, with some degree of hope and optimism.

The S&P 500 ended 1999 at 1469.25 and is currently trading at about three-quarters of that. The -25% return reflects the fact that we were in an equity bubble at the start of the decade and in the Great Recession at the end of the decade. The NASDAQ composite ended 1999 at 4069.32, about 85% higher than it is now. The 10-year Treasury note yield was 6.44% at the end of the last decade, which was not a bad return in comparison (also illustrating the advantage of having a diversified portfolio). The dollar lost 30% of its value against the euro, but only 11.5% against a broad basket of currencies – down 23% against the major currencies (which account for about half of U.S. trade) and up 3.5% against the other currencies (which account for the other half of U.S. trade).

Private-sector nonfarm payrolls in November were 1.5 million lower than in December 1999 (overall payrolls rose by about 460,000, thanks to increases in government jobs – which rose 9.5% a little less than the growth in the population).

Manufacturing payrolls fell by 5.6 million, or 32.6% over the last ten years (while manufacturing output, which is adjusted for quality changes, such as faster processor speeds, fell just 2.3%). Between the mid-1960s and the year 2000, the level of U.S. manufacturing jobs was more or less steady, falling in recessions, but rebounding in recoveries. In the 1980s, the rule of thumb was that one out of 10 factory jobs was lost each year, but was replaced by a new factory job. That changed in the 2001 recession. There was no rebound in manufacturing jobs during the ensuing economic recovery. A large part of that was due to globalization. Increased foreign trade had been a factor for a long time. However, reductions in transportation costs (larger vessels and increased port capacity) and a relatively strong dollar (against the Asian currencies) likely accelerated the impact on U.S. manufacturing.

Even with the sharp downturn over the last several quarters, real GDP rose 17.9% from 4Q99 to 3Q09, or a 1.7% annual rate (the population has grown 10.6%, or 1.0% per year, over the same period – which means that real GDP per capita has average a 0.7% pace over the course of the decade). Nonfarm business productivity rose by 29.6%, or 2.7% per year. A large part of the boost in productivity growth has been through technology. Cell phones, networking equipment, and the use of the Internet exploded in the 1990s, but the impact on the economy was greater in the 2000s. There’s a dark side to these gains. Firms can do more with fewer workers.

Looking ahead, the economy faces a number of serious challenges. Roughly eight million jobs have been lost since the recession began. If nonfarm payrolls rose by 200,000 per month, it would take nearly three and a half years to regenerate that many jobs. However, from the start of the recession to that time, the growth in the working age population will have generated the need for nearly another eight million jobs. Clearly, this is a major mountain to climb. Substantially stronger job growth, on the order of 300,000 or more per month, would be a big help. That could be achieved with a couple of years of 5% to 6% GDP growth. Hence, as long as core inflation remains low and inflation expectations remain well-anchored, Federal Reserve policymakers should be willing to let ‘er rip.

This is not just the end of a decade, but also the end of an era. Nobel Laureate Paul Samuelson died last week. His contributions to economics were many. In his Ph.D. thesis, he brought higher mathematics to economics, bringing rigor and added clarity to economic analysis. In his popular textbook, written more than 50 year ago, he championed Keynesian economics as a tool to escape a depression or severe recession (particularly when interest rates are near 0%).

Negative feedback loops played a major part in the downturn. For example, job losses led to weaker consumer spending, which led to more job losses, and so on. Those negative loops appear to have ended for the most part, but we’ve not yet reached a point where positive feedback loops have taken over. That should come over time. It’s how recoveries build. A little bit of good news should lead to a little more consumer spending and a little more business investment. Tight credit will remain a restraint in the near term. However, bank lending should loosen up over the course of 2010.