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Inward Investment Guides

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)
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Corporations will avoid investment as long as consumers remain 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, executive 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 resources 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," Smeltzer says. "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."

Housing Woes
Consumers, like business owners, 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," Koropeckyj says. "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. And they are expected to rebound to 830,000 in 2011. While that figure seems like a vast improvement, "It's not really a boom historically," Koropeckyj says. "Housing starts were averaging 1.6 million before the recession. The 2011 rebound represents some renewed activity in select undersupplied markets."

A related and equally serious problem is that homeowners won't benefit from increased property values for the foreseeable future. The median price for existing home sales is expected to be $162,800 in 2011. That represents a decline from the $171,400 average for 2010, despite existing home sales that are expected to rise to 5.9 million in 2011 from the previous year's 5.2 million.

Why the disparity? "Many foreclosed homes are still going on the market and being sold at big discounts," Koropeckyj says. "Sales of foreclosed homes do affect the selling prices of other houses." Stable or dropping home values make consumers feel less flush, negatively affecting spending.

Figures for the economy's retail sector reflect concern about unemployment and housing. At first glance, recent store performance looks strong: Hoyt expects core retail sales (which exclude the volatile auto and gasoline segments) to increase 3.6 percent when 2010 numbers are finalized. However, that increase succeeds 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." (Average annual core retail sales growth measured approximately 4.6 percent as of mid-October 2010).

Shy Borrowers
Until consumer confidence rebounds, companies with money to spend are not only closing their purses, but shying away from assuming debt. This reluctance to borrow is emerging after 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 Ventor Consulting. "Banks are telling me they are having trouble finding people who want to take business risks."
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