June 01, 2011 — This Edition is for Non-retail Business Readers
What lies ahead in 2011? If you’re like most business owners you’re ready for a rebound in sales after two years fighting the recession dragon. But maybe you’re dogged by a common question: How will the unsettled economy affect the success of your marketing programs?
Here’s some good news: You are now operating in an economic environment that is slowly but surely on the mend.
“The recovery will start to ramp up in 2011, then really expand quite strongly in 2012 and 2013,” says Sophia Koropeckyj, managing director of Industry Economics at Moody’s Analytics, a research firm based in West Chester, PA. (www.economy.com).
Recalled to Life
Most economists concur with that assessment. Today’s economy is like a patient in convalescence: It needs more time to return to full health but at least it’s no longer on life support.
Consider the most common thermometer of economic health: Gross Domestic Product (GDP) or the yearly total of goods and services produced in the United States. In a healthy economy this measurement of general business activity increases at a robust pace.
“We estimate that GDP will grow at 2.7 percent for 2010 when numbers are finalized,” says Koropeckyj. That number represents a growth rate which is virtually flat considering that it comes off a GDP decline of 2.6 percent in 2009.
The good news is that GDP is expected to grow by 3.1 percent in the coming 12 months, according to Koropeckyj. That’s a much healthier number since it’s calculated from a decent previous year figure. (To put these numbers in perspective, the annual GDP increase for an economy in average growth mode is 2.5 percent).
Some current factors are especially conducive to a rebound. Perhaps the most important is the healthy state of corporate profits. “Medium and large companies have been very profitable over the past 12 months, thanks partly to low interest rates, minimal hiring and no wage pressures,” says Koropeckyj. Coming off a pretty flat 2009, corporate profits are expected to increase by 28 percent in 2010, by 4 percent in 2011, and a healthy 14 percent in 2012.
These enterprises are accumulating lots of extra cash, earning close to zero percent interest. “They are well positioned to expand both hiring and capital investments,” Koropeckyj says. That would have a stimulating effect on consumers and retailers.
Unfortunately, for the most part, companies large and small are refusing to invest aggressively in the future. They cite a number of concerns, including the negative effects of the unstable housing market, the European debt crisis, and the unsettled nature of federal laws in many areas such as taxation, healthcare and the environment.
Perhaps the most important concern of business owners, though, is the low level of consumer confidence. The public’s faith in the future is critically important for a healthy general marketplace, since consumer activity represents 70 percent of the economy.
Here, unfortunately, things are not so good. “Consumers are majorly depressed,” says Scott Hoyt, senior director of consumer economics at Moody’s. “Consumer confidence has been at levels characteristic of a deep recession for over a year.” That’s inconsistent with what one might expect, given the fact that the recession officially ended in 2009.
Why the gloom? Consumers are clearly worried about jobs: The recovery has not yet been accompanied by an uptick in employment. By late 2010 unemployment was running at 9.6 percent, according to Moody’s. That figure, up slightly from the 9.3 percent of 2009, is actually expected to increase over the coming months.
“Once job creation kicks into higher gear, people on the sidelines will perceive the labor market as more hospitable and will start applying for work,” says Koropeckyj. She expects unemployment to average 9.9 percent for 2011, eventually easing down to 9.5 percent late that year. The rate in 2012 is expected to average 8.3 percent.
Those numbers are enough to keep consumers restrained. “When people hear the unemployment figures they are not going to tell anyone they are happy,” says Hoyt. Additionally, consumers have lost massive amounts of wealth in their homes and stock portfolios, and are making very little money on their savings because of low interest rates.
Corporations will remain shy of investment as long as they see consumers parked on the sidelines. “Investing in a business has a lot to do with confidence—in yourself, your market, and your customers,” says Michael Smeltzer, director of the Manufacturers Association of South Central Pennsylvania, a trade group whose members employ some 220,000 workers. “That confidence is where the weakness is today.”
Companies with cash to invest are also concerned about the erosion of the middle class—a population segment that has long been the bulwark of the nation. “Too many governmental policies are encouraging companies to expand offshore where governments embrace the opportunity to host new businesses,” says Smeltzer. “Manufacturing has always been a great wealth generator for our country and is the number one driver for middle-class prosperity. Offshore migration is a significant risk for the future.”
Consumers are also concerned about the continuing glut of homes. “The housing market is still performing quite poorly and is not expected to stabilize until later in 2011,” says Koropeckyj. “The big problem is the huge inventory of unsold homes.”
Housing starts are expected to total 590,000 when 2010 numbers are tallied, up from the 550,000 of 2009. They are expected to rebound to 830,000 in 2011. While that figure looks like a huge improvement, Koropeckyj points out that “it’s not really a boom historically. Housing starts were averaging 1.6 million before the recession. The 2011 rebound represents some renewed activity in select undersupplied markets.”
A related problem, equally serious, is that existing homeowners won’t benefit from increased value in their properties for the foreseeable future. The median price for existing home sales is expected to be $162,800 in 2011. That’s actually a decline from the $171,400 average for 2010, despite the fact that existing home sales are expected to rise to 5.9 million in 2011 from 2010’s 5.2 million.
Why the disparity? “Many foreclosed homes are still going on the market and being sold at big discounts,” explains Koropeckyj. “Sales of foreclosed homes do affect the selling prices of other houses.” Stable or dropping home values make consumers feel less flush, and that has a negative effect on spending.
Concerns about unemployment and housing are reflected in the numbers for the economy’s retail sector. At first glance recent store performance looks good: Hoyt expects core retail sales (which exclude the volatile auto and gasoline segments) to increase some 3.6 percent when 2010 numbers are finalized. However, that increase is calculated off the results of a dismal 1.9 percent decline in 2009.
Even so, Hoyt expects the gradually improving economy to enliven consumers: Retail sales are expected to improve by 4.2 percent in 2011. “We are expecting better performance in almost every segment of retailing.” (To put these figures in context, average annual core retail sales growth has been running at 4.6 percent in recent times).
Until consumer confidence rebounds, companies with money to spend are not only closing their purses but also shying away from taking on more debt. This reluctance to borrow comes at a time when the recession-based credit freeze has largely thawed.
“Banks are now open to lend and the money is available, but demand from entrepreneurs is down,” says Walter Simson, principal of New York City-based Ventor Consulting (www.ventorllc.com). “Banks are telling me they are having trouble finding people who want to take business risks.”
Consumers, for their part, are also borrowing less. “Three years ago people were spending their home equity at retailers,” notes James Dion, president of Dionco Inc., a Chicago-based consulting firm (www.dionco.com). “Then all of a sudden that money disappeared. Also, credit card issuers have tightened up credit lines. People who had $2000 limits before might only have $900 or $1100 now. As a result, the use of credit cards has dropped dramatically in favor of debit cards and cash.”
In the longer term, consumers refinancing their mortgages will end up with more cash to spend as a result of lower debt payments. This trend is being fed by low interest rates and minimal inflation, two conditions that economists expect to remain through 2011.
When will a robust rebound happen? When consumers decide they have reset their balance sheets sufficiently.
“At some point consumers are going to say ‘I have started saving, my finances are in better shape, and now I need to replace my car and buy some new things that I have been avoiding,’” says Simson. “Then demand will be back and it will be dramatic.”
New York writer Phillip M. Perry has published widely in the fields of business management and law. A two-time recipient of The American Bar Association’s annual award for editorial excellence, Perry was awarded an M.A. in the Humanities from California State University. He maintains a web site at www.editorialcalendar.net and can be reached at firstname.lastname@example.org.