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Forecast 2010: Ready for a Rebound

No one can truly predict what direction the economy may take in the coming year, but some experts see better times ahead.

Phillip M. Perry (Nov 09)
Fair with gradually clearing skies." That's the forecast for the 2010 economy from one business observer. And after the stormiest year in anyone's memory, who can deny that a dose of even partial sunshine sounds pretty good?

Maybe 2009 was tough, but as a business survivor, you can congratulate yourself on your hardiness and take steps to capitalize on a rebound. "The weak have given up and the biggest have been humbled," says Bob Phibbs a consultant in Coxsackie, New York. "It's a new game for everyone."

Economy Exits Recession
The best news is that some key economic data now signal a broad move to positive territory. "The recession has ended and we are looking at a modest recovery in 2010," says Sophia Koropeckyj, managing director of industry economics at Moody's Economy.com, a research firm based in West Chester, Pennsylvania.

Economic health depends largely on trends in the gross domestic product (GDP), the yearly total of all goods and services produced in the United States. GDP for 2010 is expected to rise at a modest 2.0 percent, according to Moody's. That figure represents a rebound from the 2.5 percent decline expected when figures for 2009 are finally tallied. To put these numbers in context, the annual GDP increase for an economy in average growth mode is 2.5 percent.

While the GDP number for 2009 was pretty miserable, Koropeckyj notes that the economy actually enjoyed 3.0 percent growth in the last six months of the year. "The rebound has been entirely due to the federal stimulus money," she says, citing a number of programs such as these: aid to state and local governments, first time homeowner tax credits, Cash for Clunkers, a decrease in payroll tax deductions, and the extension of unemployment benefits. "All these programs have kept a floor under the economy and spurred some consumer spending," she says.

Indeed, the federal programs have been so important that Koropeckyj believes there is a real risk of a return of recessionary trends if the programs are allowed to expire. "That possibility could be forestalled by extensions of a number of these programs - and we believe that will very likely occur," she says. Federal stimulus money should support a strengthening economy in the first half of 2010. As for the second half, Koropeckyj expects further economic strengthening from a rebound in the private sector.

Shoppers Hold Back
Business owners are rightly concerned with low consumer confidence levels. "Most measures of consumer confidence are still very low," says Scott Hoyt, senior director of consumer economics at Moody's Economy.com. No secret why: Stubbornly high unemployment and a moribund housing market are key de-motivators.

Unemployment, at 10.2 percent as of November 2009, is expected to grow. "We expect unemployment to peak at 10.3 percent by the middle of 2010 and will end next year no lower than about 10 percent," says Koropeckyj. "Peak-to-trough employment will decline by about 8.5 million, by mid- to late 2010. We do not expect a recovery in employment until 2013. Because of this, the industries most dependent on consumer spending will be the ones that recover the latest."

Although layoffs are moderating significantly, it will take awhile for consumers to get back on board. "At least through the first half of the year, consumers will be asking, `Where will the money come from to spend?'" says Hoyt. "People are still paying down their debt and there are no capital gains to realize. Interest rates are low and dividends are not increasing."

While that's enough to put a significant drag on things, there is rosier news in the housing area. "Housing prices are expected to keep falling for another few quarters, but the market in terms of construction and sales is close to bottoming out," says Koropeckyj. "Sales have inched up in large measure because of improved affordability and the sales of foreclosed homes at deep discounts."

Business Remains Cautious
Burned by the rapid expansion and subsequent crash of the last few years, business owners remain cautious of the future and careful about taking on risk. "I think everyone feels they are battling back but the war is still on," says Walter Simson, principal of Ventor LLC, a New York based management consultancy. 

For businesses large and small, credit remains a key problem area. "People are breathing sighs of relief that banking seems to be stabilized, but not enough credit is yet being given to small and medium-sized enterprises," says Simson. Those businesses were often dependent on smaller finance firms that have been closed or merged with other companies, disrupting established  credit channels. And there is a new focus on quality in loan portfolios. "Some things that banks used to let slide are now large areas of concern," says Simson. "A lot of this stems from regulatory pressures."

Even credit card financing is causing problems. "Many small businesses fund their operations on their credit cards and that can pose problems as fees are increasing," says Marilyn J. Holt, a Seattle-based management consultant. "Even a small increase can have serious impact on your bottom line. So you either have to raise your prices or accept smaller profit margins."

In many cases, credit card companies are lowering credit limits and beefing up bills with surprise charges. "If you use credit cards in your business, watch your bills for new fees and look for changes in payment due dates," says Holt. "Card companies can slip them back, and that can spark big increases in interest rates."

Expansion Trimmed
When credit is available, many times the cost of money becomes an issue. "While there's more money available than a year ago, the problem is that the terms are not very attractive," says Michael Smeltzer, director of the Manufacturers Association of South Central Pennsylvania, a trade group whose members employ some 22,000 workers. "Profit margins in manufacturing continues to get squeezed, and if the terms of credit would squeeze profit further, our members are not inclined to make investments."

Capital investment dropped by 19 percent in 2010 and is expected to inch up by only 0.5 percent in 2010. "We expect big banks will start to improve their lending practices in late 2010 and small banks about a year later," says Koropeckyj. On the positive side, the drawdown of inventories that categorized manufacturing for much of the year is turning.  "We are seeing an improvement in industrial production sparked by an inventory swing," she says. "Businesses will start to build inventories again."

Building inventories, in turn, should feed the profit machine: While corporate profits declined 10 percent in 2009, they are expected to enjoy an increase of 2.0 percent in 2010, says Koropeckyj: "Corporate balance sheets are likely to improve next year, and those with good balance sheets are raising cash in the bond market thanks to low investment grade corporate bond yields."

Further, exporters are expected to enjoy a currency advantage. "The value of the dollar has gone down quite a bit and we expect it to fall further, which will be good for exporters," says Koropeckyj. "The dollar peaked at 112 against a broad based basket of currencies in the first quarter of 2009, has since fallen to 103 and is expected to be below 100 by the fall of next year."

Looking Ahead
As we go into the first few months of 2010, watch for trends in consumer and business confidence. Both measures will be key factors in the pace of rebound.

"Consumers are still quite skittish," says Koropeckyj. "The real risk to the rebound is from the labor market. A lot of people have been unemployed a long time and that creates a big weight on the economy. Too, the longer people are out of work the tougher is to get reabsorbed into the market. Their skills deteriorate and employers are hesitant to hire people who have been without work for a long time."

Koropeckyj believes that for their part, businesses are no longer cutting back on equipment and software purchases but they are not expanding, either. "They have already begun to reduce the rate at which they lay off workers but they will not start hiring people until they see the economy has already embarked on a recovery," she says. "That should start to be apparent sometime in 2010."

Position for Profit
So how can business owners position themselves for the rebound? Keep an eagle eye on your stockpile of merchandise, for starters. Take a fresh look at your market and introduce new programs that excite the customer. "More than ever, the tightening up of consumers and businesses have caused everyone to look at value," says Shep Hyken, a St. Louis-based management consultant. "What we need to do more than anything is break out of the commodity trap. Be a partner to your customers and be more concerned with their success than making a quick dollar in a transaction."

Also, advises Hyken, take steps to become more visible. That can mean providing content customers don't have to buy. "Keep asking yourself, `What can I give away to get noticed?' That may be a newsletter with helpful tips, or a webinar with voice on your web site."

In the next two or three months, we will be getting a more solid feel for how 2010 will shape up. "I think we'll know by no later than March the trajectory of the recovery," says Chicago-based consultant James Dion. And his forecast? "I think people will be surprised by how fast the recovery comes in 2010," he says. Why? "Three words: Pent up demand."

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