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Forecast 2011: Recovery Hinges on Consumer Activity

The recovery may have officially ended in 2009, but businesses are still waiting for a rebound. Consumers will determine when post-recession growth begins.

Phillip M. Perry (November 2010)
What lies ahead in 2011? If you're like most business owners, you're ready for a rebound in sales after two years of recession. But you may be dogged by a common question: How will the unsettled economy affect your company's success?

First, the good news: Businesses are currently 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.

Recalled to Life
Most economists agree with that assessment. Today's economy is like a convalescent patient: It needs time to return to full health, but at least it's no longer on life support.

Consider Gross Domestic Product (GDP) a standard barometer of economic well-being. In a healthy economy, this measure of general business activity grows robustly.

"We estimate that GDP will grow at 2.7 percent for 2010 when numbers are finalized," Koropeckyj says. That number represents a virtually flat growth rate, considering that it follows a GDP decline of 2.6 percent in 2009.

But 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. For an economy experiencing average growth, annual GDP increases at around 2.5 percent.



Strong Profits
Some current factors are especially conducive to a rebound. Perhaps the most important is the strong 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," Koropeckyj says. While 2009 corporate profits were flat, they are expected to increase by approximately 28 percent in 2010, 4 percent in 2011, and 14 percent in 2012.

These enterprises are accumulating lots of cash and earning close to no interest. "They are well positioned to expand both hiring and capital investments," Koropeckyj says. Both effects would stimulate consumers and retailers.

But many companies continue to refuse to invest aggressively in the future. They cite several concerns, including the unstable housing market, the European debt crisis, and uncertainty in the federal government regarding taxation, healthcare, and the environment.

Perhaps the most important concern of business owners is the low level of consumer confidence. The public's faith in the future is vital to a strong overall marketplace, since consumer activity represents 70 percent of the economy.

But the situation in this arena is 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 expectations, considering that the recession officially ended in 2009.

Stubborn Unemployment
Why the gloom? Consumers are clearly worried about jobs, as the recovery has not yet translated into an uptick in employment. By late 2010, unemployment measured 9.6 percent. That figure, up slightly from the 9.3 percent of 2009, is expected to increase in 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," Koropeckyj says. She expects unemployment to average 9.9 percent for 2011, eventually easing down to 9.5 percent late that year. The 2012 rate is expected to average 8.3 percent.

Those numbers are reining in consumer spending. "When people hear the unemployment figures, they are not going to tell anyone they are happy," Hoyt says. Additionally, consumers have lost massive amounts of wealth in their homes and stock portfolios, and are making little money on their savings due to low interest rates.
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