A new report from Canaccord Capital’s Michael Manford paints a bleak economic picture.

“We expect to see profits drop by 5%-7% this year and average only 6%-8% growth over the next few years. So, after the traditional recovery bounce in the equity markets, double-digit returns will be tough to come by,” Manford concludes.

The clue that trouble is brewing is the recent and unexpected high inflation numbers. says Manford. “It is our belief that the U.S. economy could use a recession. Recessions have proven rather useful in the past to create enough room in the labour markets to allow the economy to grow for many, often as much as ten, years without generating too much inflation.”

Manford says, in the U.S., the “normal” mid-cycle pace of inflation has been in the 3% area. “Trying to reduce that pace tends to be so costly in terms of unemployment and its political fallout that it really isn1t worth the trouble. Even so, that natural rate is a point where policy makers should start to resist inflation.”

Part of the problem, he says, is productivity. Perceived massive productivity gains have been a bit of a mirage thanks to a huge increase in capital spending over the past few years, says Manford. All that spending has left excess capacity and capital spending growth that is likely to run at just 2%-3% over the next few years.

“If we are right, the combination of the tech wreck, more sane lending practices and the rebuilding of corporate America1s much tattered balance sheets should combine to slow capital spending growth for several years. As a result, we can expect to see a mere 1%-1.5% advance in productivity over the next few years, which just so happens to be about 0.5% below the long-term average.”

So what does all this mean? “First, that the core rate of inflation, which is overwhelmingly labour costs, will likely hover in the 3% area over the next six to nine months. This will likely keep headline inflation in the 3%-3.75% area over that period. In fact, that1s what the bond market has been in such a flap about. The bond vigilantes seem to have their horses out of the stable, but not saddled yet. But, if our view rules, we should see long-term rates rise into the 6-6.5% area.”