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Forecast 2009

Thursday, January 01, 2009
A Stormy Economy Could Dampen The Business Climate In The Coming Year
By Phillip M. Perry

Home foreclosures. Frozen credit. Crippled banks. Sinking stocks. The scary headlines are everywhere.

No doubt your micro-business is entering the most challenging economic environment in decades. But what’s that mean to your operations? What steps can you take to survive and thrive?

Here’s what the experts have to say.

Position Your Micro-Business For A Recession
First, the big picture: As we enter 2009 the implosion of the financial system has strained a business environment already suffering from a crippled housing market.

“We are now looking at an economy that is going into a recession,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Economy.com, a research firm based in West Chester, Pa. “We anticipate very weak growth through 2009 before the economy gets back on track in 2010.”

The numbers tell the tale. The most important figure is gross domestic product (GDP), the yearly total of all goods and services produced in the U.S. GDP growth for 2009 is expected to be -.05 percent, according to Economy.com. That’s a considerable softening from the 1.4-percent increase anticipated for 2008 when final numbers are tallied.

To put these numbers in context, the GDP for an economy in average growth mode is 2.5 percent. No wonder business people are bracing for the worst.

“For many companies the financial meltdown feels like the business equivalent of 9/11,” says Walter Simson, principal of Ventor LLC, a New York-based management consultancy. “People are expecting big shocks and bad news.”

The bottom line will be under siege at most businesses. Corporate profits are expected to decline 5.7 percent in 2009, reports Economy.com. That comes on the heels of a 6.9-percent drop expected when the numbers for 2008 are finalized. No rebound in profits is expected until 2010.

To position your micro-business for a successful ride through these troubled waters, start by understanding the three big trends that you’ll need to grapple with over the next 12 months. They are:
  • A decline in consumer spending
  • A freezing of business credit
  • A rise in the cost of goods sold
Prepare For Consumers To Pull Back
Shed a tear for the consumer borrowing and spending that has driven the economy in recent times.

“Five years ago consumer spending represented 65 percent of our economy,” says consultant Simson. “Today that figure is 70 percent. The reason for the increase has been the availability of excess credit. Now we are seeing that availability being reduced. As a result we will see a pullback of consumer spending on discretionary purchases.”

Rising unemployment will only add to consumer angst.

“We are looking at continuing job losses into the summer of 2009,” says Scott Hoyt, senior director of consumer economics at Economy.com. “Job gains in the second half of 2009, given a growing labor force, will be insufficient to keep the unemployment rate from rising.”

The unemployment rate is expected to grow to 7.7 percent by the end of 2009 from the current level of 6.7 percent.

Job losses, of course, are clearly a negative when it comes to household income. Total wages in the country are expected to rise by 2.5 percent in 2009, according to Economy.com. That moderation from the 3.6 percent increase of 2008 should put further downward pressure on sales — especially at retailers.

“Consumers who don’t have jobs or who are concerned about losing them will be cautious shoppers,” says Hoyt.

At the same time, the rise in unemployment is not expected to be great enough to cause a decline in labor costs for employers.

When incomes are under pressure consumers tend to find alternative sources for pocket cash. Unfortunately, these sources are also drying up.

“Obviously there are no capital gains around anymore,” notes Hoyt. “And there is no more appreciation in home equity, which people have borrowed against in the past.”

Indeed, borrowing any kind of money is more difficult now, even for consumers who have always paid their bills on time. Even credit card companies are tightening up.

“Given current trends in the economy, it’s hard to see where consumers will get money to spend,” says Hoyt.

All of these factors are coming together to dampen enthusiasm.

“Consumer confidence is clearly very weak right now,” says Hoyt. “We had been hoping for some improvement because of lower energy prices, but with the recent events in the financial markets we are no longer convinced that confidence will improve until well into 2009.”

Shoppers are expected to cut back in particular on high ticket goods.

“There is going to be a slowdown in luxury items as well as in expensive things that people will opt to repair rather than to replace,” says Marilyn J. Holt, a Seattle-based management consultant. Holt points to her local hardware store which recently removed a line of expensive toilets from an end cap display. The substitute? Toilet repair kits that cost just $19.95.

Micro-business owners should plan their inventories for frugal, cost-conscious customers. Position your offerings as necessary, not discretionary. Provide lower-cost alternatives to high-priced products and services. Promote value in your services.

Plan For A Continuing Credit Crunch
Your own micro-business will probably be confronted with a credit squeeze similar to your customers’.

“There is currently a shutting off of access to credit for businesses,” says Economy.com’s Koropeckyj. “That will affect not only capital investment, but also the ability to borrow short term to meet payroll and cover inventory costs.”

As a business owner, you’ll most likely take a second look at expansion plans. Capital investment is expected to decline by some 2.7 percent in 2009. That’s a dramatic pullback from the 3.1 percent expected increase of 2008.

The credit freeze may even affect your ongoing operations if you become a target of your bank’s belt tightening.

“I would expect more banks will be calling clients and saying ‘we want to make some changes to our relationship,’” says consultant Simson. “That will cause some pain.”

What should you anticipate?

“A banker might say ‘I want a higher interest rate,’” suggests Simson. “Or ‘I want more structured terms.’ Or more monitoring of your financials or a different legal agreement or higher fees. Some bankers might even say, ‘Maybe you will be happier with another bank.’ Well if three out of five banks start saying that, you have a credit crunch and you can’t borrow money at any cost. Such conversations are probably happening in many places even as we speak.”

Are you in the practice of using one or more credit cards to fund your inventory and other needs? Be prepared: Your providers may either lower your credit limit or start beefing up their bills.

“Many of the financial companies suffering huge losses are big backers of credit cards,” says management consultant Holt. “So they will be looking closely at making more profits by upping the costs of their cards to both merchants and users.”

What can business owners do?

“Keep an eye on your cost of accepting cards. Start to look around for better deals,” advises Holt.

Expect Energy Prices To Increase Your Cost Of Goods And Services
Businesses of all sizes will be hit by an increase in the cost of goods sold driven by higher energy prices. Pricier fuel translates into higher costs for production and for transportation to end users, putting pressure on manufacturers, service businesses and retailers alike.

And on the buy side, consumers are shelling out cash for energy that they would otherwise spend on goods and services.

“Home heating costs will be significantly higher this winter than they were last year,” says Hoyt.

While the cost of oil has been trending down in recent months, the decline is not steep enough to make up for the sharp increases of 2008.

“Even if prices go down further they are not expected to get to where they were earlier in the decade,” says Koropeckyj.

Look for ways to economize on your energy costs. And don’t expect that you can pass energy expenses on to customers without compromising your sales numbers.

Watch For New Ideas And Markets
There are steps you can take to stay afloat in a rough economy.

Keep looking for ideas in technology and system improvements to get more done with fewer labor hours. This has been a winning tactic in recent times.

Productivity increased by 3 percent in 2008, according to Economy.com. That’s an improvement over the 1.4 percent of 2007. And there’s more good news ahead: Productivity growth is expected to increase by 2.5 percent in 2009.

Want another profit strategy? Look to foreign markets. Exports are expected to increase by 6.9 percent in 2009, according to Economy.com. While that represents a moderation over the 8.78-percent increase clocked in 2008, there’s still room here for new players.

“There is great opportunity in export-related capital goods,” says Simson. “If you make a widget that Europeans can buy, I would get distribution in Europe as quickly as possible. This is a wonderful time for exports. It will be the only game in town for the next three years.”

The good news for exporters is that the dollar, despite some recent strengthening, is expected to remain weak against the euro in 2009. By the end of this year it will take $1.39 to buy what a single euro can purchase, according to Economy.com. That represents only a minor strengthening over the $1.52 clocked in 2008.

Finally, as you enter the new year, avoid panic and remember that you can’t cut your way to profitability. Reducing costs will only take you so far.

You also have to create new initiatives that boost sales by offering customers real value. And you need to find cost-effective ways to market your value to customers who are pinched for spending money.

But plan those moves carefully, keeping one eye on the risky economic environment.

“Be sure of your projects before you invest in them,” says Simson. “Take a second look at everything.”

New York City author Phillip M. Perry is taking a fresh look at his own business operations in light of the changing economic environment.

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