Improved diet and training can help out-of-shape, aging runners regain some of the speed that they achieved in their 20s. But aging still limits athletic potential. Similarly, economic growth may reaccelerate in an aging cycle, but the growth potential is still slower than at the start of a new cycle.

The U.S. economy should be in better shape than it was last year, when the Japanese earthquake and tsunami robbed U.S. industries of essential parts. But this is still an aging cycle and one that has not achieved as much growth as in previous cycles.

The sluggish growth of the U.S. economy reflects the interrelated weakness of consumer and business spending. Consumer income is rising slowly because employers are tightly controlling expenses. And U.S. businesses have sold less because consumers have had less money to spend.

The government sector hasn’t helped the economy gain strength, either. Recently, even the federal government has joined states and local governments in reducing spending. To make matters worse, many levels of government have increased taxes, further reducing the money consumers have to spend.

This makes exports a critical swing factor for the U.S. economy. Unfortunately, the economic deterioration overseas has reduced the odds that export growth can compensate for weak domestic growth.

CONSUMER SPENDING

The reintensified crisis in Europe and the weakness in the investment markets has weighed on U.S. consumer confidence. Even lower gasoline prices have not stemmed the slide in consumer confidence. Although lower confidence does not guarantee reduced spending, with household budgets stretched, it does not help.

Earlier this year, spending grew faster than income, but with confidence falling, spending has stalled while income continues to grow. Hopefully, once households have rebuilt some cash reserves and paid down debt, spending will reaccelerate.

BUSINESS

Many businesses have cash they could invest, and credit availability has improved significantly. Yet investment spending has slowed. Many businesses still face sluggish sales growth and continue to worry about rising taxes and the cost of government mandates.

But if economic growth continues, investment spending should recover. And with a continuing need to become more competitive, additional investment seems likely as long as the economy avoids recession.

WORRIES ABROAD

The congestive failure of the European currency may demand wrenching political and financial changes that Europeans are simply not prepared to make. To the extent that the crisis is rooted in economic imbalances as well as excessive debt, a series of crises seems likely as the health of the European economies continues to erode.

More recently, analysts have also started to worry about the health of China’s economy. Last year’s restrictive monetary policies may be responsible for China’s slowing economy, but recent statistics also raise questions about China’s long-term growth potential. With Europe’s economy contracting and other parts of the world also slowing, the worry over China’s growth comes at a time when other areas of the world are already in recession.

Therefore, just as slowing consumer and business spending has made it difficult for domestic economic growth to accelerate; broad global slowing is reducing the odds U.S. exports will revive. Emerging economies have eased monetary policy, which should help the global economy grow faster next year. If so, then growth in the emerging world should help reinvigorate U.S. exports. Still, while that would help extend this cycle, it would likely not generate the strong growth of a new cycle.

MARKET STRATEGY: ASSET ALLOCATION

The potential for long-term capital gains is greatest as economies recover from recession. So it makes sense to have the highest exposure to equities early in a new cycle as renewed growth is just getting under way and most investors are still reluctant to invest.

As the cycle matures, the risks of losses rise and the potential for gains declines. At that point, it makes sense to reduce equity exposure and increase your fixed income and cash holdings. That logic seems even more compelling given the risks that the European crisis currently pose to the global economy and to many international financial systems. European rates show that investors will at times pay for the privilege of owning fixed income assets. The goal of preserving principal or the hope for appreciation sometimes causes investors to bid prices well beyond what might otherwise seem sensible.

Money continues to flow into U.S. bonds and other havens of safety around the world. That will not continue indefinitely, but for now income generation remains a secondary concern for many investors.

If Europe can stabilize and the emerging economies revive, the probability of solid gains over the next year would improve. Without some improvement overseas, however, interventions by the Fed or by another central bank may spur shorter-term rallies, but longer term gains will probably be hard to achieve.

Mike Del Tergo is senior vice president and senior portfolio manager at Key Private Bank, Maine. He is based in Portland and may be reached at 874-7188 or michele_deltergo@keybank.com.