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Forecast 2008: Economy Slows, Housing Woes

In looking at the year ahead, most observers see a challenging environment where healthy profits will require nimble management.

Dec/Jan 08
(page 2 of 2)
More From Less
Efforts to increase productivity, the time-honored cure for escalating labor costs, have pretty much played themselves out over the past three years. "Businesses have outsourced, moved offshore, cut back, jettisoned unprofitable lines, and offered rebates," says Goldstein. "And after all of that, they are still stuck with the unholy trio of wage increases, higher costs for medical benefits, and expensive retirement plans." When 2007 figures are finalized, productivity growth is expected to come in at 1 percent, about even with the performance of the previous year. Not much improvement is anticipated for 2008.

Finally, no element of labor costs has received more attention recently than the perpetually aggravating increase in healthcare coverage. "Healthcare costs are going up in astronomical figures," says Schackne, "and my clients are asking, `How much of this premium can I subsidize?' Employer contributions have gone from 100 percent down to 60 percent in many cases, and employers are saying `I cannot absorb this anymore.'"

Business Confidence
The confluence of such forces has given many business owners second thoughts about the solidity of the nation's economic underpinnings. The Conference Board Measure of CEO Confidence, which had declined to 45 in the second quarter of 2007, edged down to 44 in the third quarter (a reading of more than 50 points reflects more positive than negative responses).

Softening business confidence can be self-fulfilling because of its negative impact on the capital investment decisions and expansion plans that are so critical to a healthy economy. Indeed, economists had expected capital investment to grow at a much stronger pace than the 4.7 percent now anticipated when 2007 numbers are tallied. Such growth has slowed dramatically from the 6.6 percent recorded in 2006. Any rebound over the coming 12 months is expected to be modest at best: anticipates a 5.4 percent increase in 2008.

The current decline is troubling but should not be overstated. "Business confidence is more moderate than low," says Goldstein. "The modest decline in late 2007 was not enough to suggest that business investment will fall further from its already slow pace. But it's not likely to kick up any time soon either."

Additionally, the decline of the dollar has brought new vigor to those companies selling overseas. "In 2007, the dollar has been depreciating against every currency," says Koropeckyj. The dollar is not expected to rebound through the end of 2008. Exporters should benefit, according to Koropeckyj. "Supposedly, U.S. manufactured goods will become more attractive overseas, particularly with the major trading partners of Europe and Canada."

Recession Risk
Business owners begin the new year in a risky economic environment. Will the nation fall into recession? estimates the risk of such a downturn in 2008 as 1 in 3. That's a reduction from the 40 percent level that the organization maintained between the housing industry debacle of last summer and the Federal Reserve's interest rate cut this past September.

While the Fed may cut rates further, Koropeckyj cautions against expecting too much from monetary policy, as the recession risk is still elevated compared to the last few years. And what else might trigger a recession? According to Koropeckyj, there's little doubt that the most likely culprit would be a downturn in consumer confidence and shopping patterns: "The big wild card is this: Will consumers continue to support the economy?"

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