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Forecast 2011

Friday, February 25, 2011

Recovery Could Bring Opportunities

By Phillip M. Perry


Ready for a rebound in 2011? Who isn’t?

But if you’re like most micro-business owners, you’re more than a little concerned about how an unsettled economy will affect your sales in 2011.

Here’s some good news: You are now operating in an economic environment that is slowly but surely on the mend. And that means 2011 promises to be a better year. Here’s what you need to know to plan for the coming months.

The Numbers Look Healthy

“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, a research firm based in West Chester, Pa.

Most economists concur with that assessment. Today’s economy is like a patient in convalescence, they say. It needs more time to return to full health, but at least it’s no longer on life support.

Consider the most common thermometer of economic health: gross domestic product, the yearly total of all goods and services produced in the U. S. In a healthy economy this measurement of general business activity increases at a robust pace.

“We estimate that GDP will grow at 2.7 percent for 2010 when numbers are finalized,” says Koropeckyj.

That number represents a growth rate which is virtually flat considering that it comes off a GDP decline of 2.6 percent in 2009. The good news is that GDP is expected to grow by 3.1 percent in the coming 12 months, Koropeckyj says. That’s a much healthier number. To put these numbers in perspective, the annual GDP increase for an economy in average growth mode is 2.5 percent.

Retail Should Rebound


Retailers should also experience a better 2011.

“We are expecting better performance in almost every segment of retailing,” says Scott Hoyt, senior director of consumer economics at Moody’s.

Hoyt expects core retail sales (which exclude volatile auto and gasoline sales) to increase 3.6 percent when 2010 numbers are finalized.

But the future looks even better. In 2011 retail sales should rise 4.2 percent.

Profits Are Improving


Some current factors are especially conducive to a rebound. Perhaps the most important is the healthy 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,” says Koropeckyj.

Coming off a flat 2009, corporate profits are expected to increase by 28.0 percent in 2010, by 4.0 percent in 2011, and by a healthy 14.0 percent in 2012. And these enterprises are accumulating a lot of extra cash.

“They are well positioned to expand both hiring and capital investments,” Koropeckyj says.

A move by larger companies to start spending unused cash will have a stimulating effect on micro-businesses and consumers. So far, though, companies large and small are holding back on hiring and expansion out of concern about low consumer confidence, a still unstable housing market and the unsettled nature of federal laws in many areas such as taxation, health care and the environment.

These uncertainties have caused business owners of all sizes to avoid borrowing money for growth at a time when the credit squeeze that came with the recession is thawing. Both consumers and small-business owners have access to more credit than they did a year ago.

“Banks are now open to lend, and the money is available, but demand from entrepreneurs is down,” says Walter Simson, principal of New York City-based Ventor Consulting. “Banks are telling me they are having trouble finding people who want to take business risks.”

Consumer Confidence Remains Shaky

There’s little wonder why businesses are leaving money in the lending bin: Most share a concern for the state of consumer confidence. The public’s faith in the future is critically important for sales since consumer activity represents 70 percent of the economy.

Here, unfortunately, things are not so good.

“Consumers are majorly depressed,” says Hoyt. “Consumer confidence has been at levels characteristic of a deep recession for over a year.”

That’s inconsistent with what one might expect, given the fact that the recession was declared officially over in June 2009, and sales at retail stores have been improving.

Why the gloom? The current recovery has not yet been accompanied by an uptick in employment. By late 2010 unemployment was running at 9.6 percent, reports Moody’s. That figure, up slightly from the 9.3 percent of 2009, is actually expected to increase over 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 to 9.5 percent late in the year. The rate in 2012 is expected to average 8.3 percent.

Those weak employment numbers are enough to keep consumers restrained. Additionally, consumers have lost massive amounts of wealth in their homes and stock portfolios and are making little money on their savings because of low interest rates.

Housing Woes Continue


Consumers 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 finally tallied, up from the 550,000 of 2009. They are expected to rebound to 830,000 in 2011. While that figure looks like a huge improvement, Koropeckyj points out that “it’s not really a boom historically. Housing starts were averaging 1.6 million before the recession. The 2011 rebound represents some renewed activity in select undersupplied markets.”

A related problem, equally serious, is that existing homeowners won’t benefit from increased value in their properties for the foreseeable future. The median price for existing home sales is expected to be $162,800 in 2011. That’s actually a decline from the $171,400 average for 2010, despite the fact that existing home sales 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,” explains Koropeckyj. “Sales of foreclosed homes do affect the selling prices of other houses.”

Stable or dropping home values make consumers feel less flush, and that creates a negative effect on spending.

Demand Will Ramp Up


In the longer term, consumers refinancing their mortgages will end up with more cash to spend as a result of lower debt payments. This trend is being fed by low interest rates and minimal inflation, two conditions that economists expect to remain through 2011.

When will a robust rebound happen? When consumers decide they have reset their balance sheets sufficiently.

“At some point consumers are going to say ‘I have started saving, my finances are in better shape, and now I need to replace my car and buy some new things that I have been avoiding,’” says consultant Simson. “Then demand will be back and it will be dramatic.”  


New York City author Phillip M. Perry is planning new marketing initiatives to capitalize on the 2011 economic rebound.


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