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A Reason For Optimism
By: Alan Beaulieu
Issue: 2010jan
Look for increased economic activity in 2010 and even better numbers in 2011.
The U.S. economy is finally showing improvement as measured by the Gross Domestic Product (GDP) and U.S. Industrial Production. The news is both encouraging and consistent with a forecast I made late last summer as a speaker at PPAI’s North American Leadership Conference.
The economy has entered into a broad U-shaped recovery, which is great news for most people although those still unemployed cannot be expected to participate in the celebration just yet. There is a lot of talk about a “w-” shaped recovery or a “v-” shaped recovery. The “w” supposes that the current improvement is akin to a sugar-high brought on by government spending. The concerns for the “w” are understandable but external leading indicators show recovery is sustainable. The “v” supposes that the economy will be back at late-2007 levels in no time. While the optimism is appreciable, it is entirely misplaced; there are just too many problems yet to be dealt with (think banking industry and everything related to it). Plan on a rather boring, slow, broad trough in 2010 with more exciting times in 2011. The key is to be profitable at today’s level of activity. If you can do that, your business will be fine in the quarters to come.
Retail Sales Growth
The graph, which compares distributor sales with retail sales over the past 34 years, shows a small uptick in the retail sales 12/12 rate-of-change (see box). You may have to look closely, but it is there. The cyclical momentum is shifting from negative to increasingly positive even as you read this. It is hard to overestimate how important this is given that retail sales make up approximately 71 percent of the U.S. economy. Expect more rise in the 12/12 rate-of-change in 2010. Our forecast calls for retail sales to end 2010 about 1.5 percent ahead of 2009. While that will not make for a blockbuster year, it will feel great after 2008 and 2009.
Digging a little deeper we note that the late back-to-school shopping helped sales in September. Additionally, mall traffic was up 5.0 percent in the third quarter, a good sign to be sure. While this is all good news, the gains to date are mild by historic measures. The seasonal rise in the quarterly figures is milder than 58 of the last 62 years. That is hardly impressive. So the cyclical direction is becoming positive but the underlying trend dynamics are lackluster.
What is impressive is how consumers are behaving. People have behaved in a very responsible way, one that will provide for a solid foundation for economic growth later on. Specifically, consumer credit fell for the eighth consecutive month in September, the longest stretch since 1991. Total consumer credit has shrunk 4.8 percent ($119 billion) to $2.5 trillion off its July 2008 peak. Consumers are charging less, using cash more and continue to save about 3.3 percent of their disposable personal income. This may not help retailers this year, but it is a part of the “wellness program” that will restore a measure of health and stability to consumer spending going forward.
If you look back at the graph you will see PPAI distributor sales’ 12/12 rate-of-change tracks rather closely to retail sales. That means that all the good news we have been talking about should translate into increased activity for promotional products businesses as we traverse 2010. And the news should get even better for 2011.
Low Interest Rates Ahead
The short-term interest rates are a very low .24 percent (monthly data) when we went to press. Rates staying this low means we have an extended opportunity to take advantage of the lowest short-term rates in 120 years. How do we do that? We remember that commercial paper rates move along with the federal funds rate over the long term. With the Fed seemingly determined to keep interest rates low through at least the early part of 2010, we should expect a similar trend from commercial paper rates. This is a great time to borrow money (assuming you have a great balance sheet) and expand your business into new markets, services and products. It’s also a good time to think about buying assets that will protect you from future inflation because now you can lock in the lowest rates anyone has seen in a very long time.
Five Steps For The New Year
The first item on your agenda should be to make sure you are profitable at today’s level of activity. If your profitability is dependent around a return to 2007 or early 2008 levels of activity, you have a problem going forward. For many of us, the economy will not be that generous for a long time. Instead, you need to find a way to be profitable at today’s reduced levels of business. We strongly suggest that you plan on leveraging your 2010 profits into missionary efforts to enable the business to sell into new markets or to boldly sell new products and services your customers want. You may have to spend some money on marketing studies and customer research to determine which markets, products or services on which to focus.
Second, a weaker dollar might improve your competitive position if you source products domestically as a weaker dollar will make foreign-made goods more expensive. Conversely, you may need to do some price shopping if you source from outside the U.S. as a cheaper dollar will make imports more expensive. Add some compelling competitive advantages to your cost structure and you will have an advantageous platform from which to sell.
Third, note that the economic segment of Nondefense Capital Goods New Orders (excluding aircraft) is providing some compelling evidence that business-to-business activity is picking up. We have been waiting for this signal to confirm that a fundamental recovery trend is ahead. This fundamental improvement in business-to-business activity will increase corporate budget allotments for marketing, advertising and promotions.
Look for the worries about commercial real estate (CRE) to fade into the rearview mirror the deeper we traverse 2010. This constitutes the fourth event to look for. There is a lot of concern that a meltdown in the commercial real estate market will do to the U.S. economy what housing did—cause another crash (the second leg of the downturn that is anticipated by proponents of the “W” outlook). We are anticipating a fair amount of pain in commercial real estate for property owners, realtors and bankers, but are not anticipating that this will trigger part two of the Great Recession. Rather, this pain is more likely to create some incredible buying opportunities for people with substantial cash. Buying property at the trough is a great way to create wealth on the upside of the business cycle.
We are not sanguine about the dangers in this market, but think the math speaks for itself. There is approximately $500 billion in CRE loans due for refinancing in 2010, and banks are currently holding excess reserves at the Federal Reserve in the amount of $860 billion. Layer on top of that the fact that the Fed and Treasury still have slightly less than $1 trillion at their disposal and the recent pronouncement from the Federal Reserve that a decline in the value of the underlying assets will not in itself trigger reclassification of loans in considering the quality of a bank’s assets. What we are looking at is a problem, but not one that is big enough to sink the economy back into recession.
Another event to look for, and fifth on our list here, is an improvement in commercial and industrial loan activity. Commercial and industrial loan activity is presently 11.0 percent below the year-earlier level. This is the worst year-over-year percentage in the post- WWII history and accounts for the difficulties experienced by those trying to get credit. Unfortunately, the situation is not likely to get appreciably better any time soon.
Historically, commercial and industrial loans year-over-year comparison will stay below zero for at least a year after the GDP data starts to rise. If you can remember the construction difficulties in the early 1990s, one of the reasons the pain lasted so long was that it took three years before the commercial and industrial loans year-over-year comparison broke upward through zero. Don’t look for even the “new norm” for lending activity to be there for us until late 2010 at the earliest.
Be aggressive as you look forward, plan to be busier and gear up for a better year ahead. Then, pick up your game a couple of notches as you contemplate 2011. The old proverb is still true: “You can’t change the wind, but you can adjust the sails.”
Alan Beaulieu is president at Institute for Trend Research, a Boscawen, New Hampshire-based firm offering economic forecasts for 350 industries and markets with 96-percent accuracy.
www.ecotrends.org
Defining 12/12
A 12/12 rate-of-change is a way to see where a company, industry, country or any data series is in terms of the business cycle. With it we can see where things are now (heading up, lower, sideways) and we can find leading indicators to see where we will be in the future. In brief it is a ration that compares this year’s activity to the year-ago level of activity, but instead of looking at it on a single-month basis, the rate of change uses a 12-month moving total which smooths out normal volatility, unusual occurrences and seasonal influences. For a more complete description, go to www.ecotrends.org or reference our book, Make Your Move.
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