The economy in 2010

Fair with gradually clearing skies.

That’s the forecast for the 2010 economy from one observer. And after the stormiest year in recent memory, who can deny that a spell of even partial sunshine sounds pretty good?

Maybe 2009 was tough, but as a business survivor you can congratulate yourself on your hardiness and take steps to make the most of the rebound.

“The weak have given up and the biggest have been humbled,” says Bob Phibbs, a consultant based in Coxsackie, N.Y. “It’s a new game for everyone.”

Economy exits recession

The best news is that some key economic data now signal a broad move to positive territory.

“The recession has ended and we are looking at a modest recovery in 2010,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Economy.com, a research firm based in West Chester, Pa.
The health of the U.S. economy depends largely on trends in the gross domestic product, the yearly total of all goods and services produced in the country.

The University of Michigan’s economic forecast, which the International Sleep Products Association uses in creating its own industry forecasts, expects GDP to grow 1.7% in the first half of 2010 and 2.5% in the second half.

Moody’s Economy.com forecasts GDP to rise a modest 2% in 2010. That figure represents a rebound from the 2.5% decline expected when figures for 2009 are finally tallied. To put these numbers in context, the annual GDP increase for an economy in average growth mode is 2.5%.

While the GDP numbers in 2009 were pretty miserable, Koropeckyj notes that the economy actually enjoyed 3% growth in the last six months of the year.

“The rebound has been entirely due to the federal stimulus money,” she says, citing a number of ways the federal government pumped money into the economy: aid to state and local governments, first–time homeowner tax credits, Cash for Clunkers, a decrease in payroll tax deductions and the extension of unemployment benefits. “All these programs have kept a floor under the economy and spurred some consumer spending.”

Indeed, these federal programs have been so important that Koropeckyj says there is a real risk of a return to recessionary trends if the programs are allowed to expire.

“That possibility could be forestalled by extensions of a number of these programs—and we believe that will very likely occur,” she says.

Federal stimulus money should support a strengthening economy in the first half of 2010. As for the second half, Koropeckyj expects further economic strengthening from a rebound in the private sector.

Holding back

Companies are right to be concerned by low consumer confidence levels.

“Most measures of consumer confidence are still very low,” says Scott Hoyt, senior director of consumer economics at Moody’s Economy.com. It’s no secret why: Stubbornly high unemployment rates and a moribund housing market are key disincentives to spending sprees.

Unemployment, at 10% in November, is projected to increase.

“We expect unemployment to peak at 10.3% by the middle of 2010 and will end next year no lower than about 10%,” Koropeckyj says. “Peak–to–trough employment will decline by about 8.5 million, by mid– to late 2010. We do not expect a recovery in employment until 2013. Because of this, the industries most dependent on consumer spending will be the ones that recover the latest.”

Although layoffs are moderating significantly, it will take a while for consumers to start spending more freely again.

“At least through the first half of the year, consumers will be asking ‘Where will the money come from to spend?’ ” Hoyt says. “People are still paying down their debt and there are no capital gains to realize. Interest rates are low and dividends are not increasing.”

While that’s enough to put a significant drag on spending, there is better news regarding housing.

“Housing prices are expected to keep falling for another few quarters but the market, in terms of construction and sales, is close to bottoming out,” Koropeckyj says. “Sales have inched up in large measure because of improved affordability and the sales of foreclosed homes at deep discounts.”

Businesses remain cautious

Burned by the rapid expansion and subsequent crash of the past few years, business owners remain cautious about the future and careful about taking risks.

“I think everyone feels they are battling back but the war is still on,” says Walter Simson, principal of Ventor LLC, a New York–based management consultancy.

For businesses large and small, credit remains a significant problem.

“People are breathing sighs of relief that banking seems to be stabilized, but not enough credit is yet being given to small– and medium–size enterprises,” Simson says. Those businesses were often dependent on smaller finance firms that have closed or merged with other companies, disrupting established credit channels. And there is a new focus on quality in loan portfolios.

“Some things that banks used to let slide are now large areas of concern,” Simson says. “A lot of this stems from regulatory pressures.”

Even credit card financing is problematic.

“Many small businesses fund their operations on their credit cards and that can pose problems as fees are increasing,” says Marilyn J. Holt, a Seattle–based management consultant. “Even a small increase can have serious impact on your bottom line. So you either have to raise your prices or accept smaller profit margins.”
In many cases, credit card companies are lowering credit limits and beefing up bills with fees and service charges.

“If you use credit cards in your business, watch your bills for new fees and look for changes in payment due dates,” Holt says. “Card companies can slip them (fees) back in and that can spark big increases in interest rates.”

Expansion trimmed

When credit is available, the cost of money still can be an issue.

“While there’s more money available than a year ago, the problem is that the terms are not very attractive,” says Michael Smeltzer, director of the Manufacturers Association of South Central Pennsylvania, a trade group whose members employ some 220,000 workers. And that’s driving decisions to borrow for capital investment.
“Profit margins in manufacturing continue to get squeezed, and if the terms of credit would squeeze profit further, our members are not inclined to make investments,” he says.

Business owners have indeed held back on expansion. Capital investment dropped by 19% in 2009 and is expected to inch up only 0.5% this year.

“We expect big banks will start to improve their lending practices in late 2010 and small banks about a year later,” Koropeckyj says.

On the positive side, the drawdown of inventories that categorized manufacturing for much of the year is turning.

“We are seeing an improvement in industrial production sparked by an inventory swing,” she says. “Businesses will start to build inventories again.”

Building inventories, in turn, should feed the profit machine. While corporate profits declined 10% in 2009, they are expected to enjoy an increase of 2% in 2010, Koropeckyj says. “Corporate balance sheets are likely to improve next year and those with good balance sheets are raising cash in the bond market thanks to low investment–grade corporate bond yields.”

Further, exporters are expected to enjoy a currency advantage.

“The value of the dollar has gone down quite a bit and we expect it to fall farther, which will be good for exporters,” Koropeckyj says. “The dollar peaked at 112 against a broad–based basket of currencies in the first quarter of 2009, has since fallen to 103 and is expected to be below 100 by the fall of this year.”

Looking ahead

In the first few months of this year, watch for trends in consumer and business confidence. Both measures will be key factors in determining the pace of the rebound.

“Consumers are still quite skittish,” Koropeckyj says. “The real risk to the rebound is from the labor market. A lot of people have been unemployed a long time and that creates a big weight on the economy. Too, the longer people are out of work, the tougher it is to get reabsorbed into the market. Their skills deteriorate and employers are hesitant to hire people who have been without work for a long time.”

“For their part, businesses are no longer cutting back on equipment and software purchases but they are not expanding either,” she adds. “They have already begun to reduce the rate at which they lay off workers but they will not start hiring people until they see the economy has already embarked on a recovery. That should start to be apparent sometime in 2010.”

Many business owners are troubled by uncertainty over government policy, Smeltzer says.

“Where are we going to be left in terms of cap and trade? Health care reform? State and local tax rates?,” Smeltzer asks. “All those things have become almost monumental. If I don’t know what my business costs are going to be, I am not inclined to hire workers and make capital investments.”

Position for profit

How can you position yourself for the rebound? Keep an eagle eye on your product line. Take a fresh look at the mattress market and introduce new programs that excite the customer.

“More than ever, the tightening up of consumers and businesses has caused everyone to look at value,” says Shep Hyken, a St. Louis–based management consultant. “What we need to do more than anything is break out of the commodity trap. Be a partner to your customers and be more concerned with their success than making a quick dollar in a transaction.”

And take steps to become more visible. That can mean providing information or benefits consumers don’t actually have to buy.

“Keep asking yourself, ‘What can I give away to get noticed?’ ” Hyken says. “That may be a newsletter with helpful tips or a webinar with voice on your Web site.”

In the next two or three months, analysts think they’ll have a more solid feel for how 2010 will shape up.

“I think we’ll know by no later than March the trajectory of the recovery,” says Chicago–based consultant James Dion.

His forecast? “I think people will be surprised by how fast the recovery comes in 2010.”

Why? “Two words: ‘Pent–up demand.’ ”

Industry forecast: Value of shipments to grow 7%

The mattress industry likely reached a low in summer 2009 and can look forward to modest market improvements in 2010, according to the International Sleep Products Association’s economic forecast.

“This has been the worst industry recession in memory, but it appears that we are at the bottom looking up,” the report says.

Produced in September, the report anticipated that the dollar value of mattress shipments in 2009 would be $5.4 billion, 13.5% lower than 2008. For 2010, ISPA expects the industry to experience a recovery, with the value of mattress shipments forecast to grow 7%. The dollar value of shipments, bolstered by higher unit prices, peaked in 2007 at $6.9 billion. From 2007–2009, the value of shipments will have contracted by 21.3%, according to the report.

ISPA forecasts unit shipments to fall 10.5% in 2009, after declining 11% in 2008. That represents the fourth annual decline in shipments, which peaked in 2005 at 43.7 million units. Unit shipments are projected to rise 3.5% to total 33.2 million in 2010 and are forecast to reach 35.2 million in 2011.

Each economic forecast from ISPA includes “Another Perspective,” written by Jerry Epperson, a partner in the Richmond, Va.–based investment banking and advisory firm Mann, Armistead & Epperson Ltd. Epperson says that creating any forecast based on the past year is difficult.

“Looking beyond this terrible year becomes almost an alphabetic challenge,” he says. “Will the recovery be V–shaped, U–shaped or the double–dip W shape? One Wall Street wizard recently predicted a reverse square root–shaped recovery!”

He continues: “Given the ample bad news in the last year plus the controversy that continues about our economic future, it is difficult to forecast a recovery with any real vigor but it should happen and…we foresee some surprises on the upside.”

While Epperson calls the anticipated 7% growth in the dollar value of mattress sales in 2010 “heavenly,” he points out that such a growth rate is fairly anemic when compared to recoveries after past recessions.

“Those recessions were also shorter and shallower, so there is the potential for a double–digit gain in 2010, in our opinion,” he says.

For the industry to rebound, the housing market has to stabilize, consumer credit needs to flow freely and consumers have to feel more confident about the economy. If that happens, Epperson says, the mattress industry is poised to benefit because it has “cut overhead, reduced indebtedness and downsized to its most efficient facilities with the best work force to a degree beyond anyone’s memory.

He concludes: “It may be years before we return to record shipment levels, but profits can return very rapidly.”

Creating the forecast

Since the mid–1980s, the International Sleep Products Association has published economic forecasts for the mattress industry. The forecast is produced using an econometric model, which statistically links the mattress industry with the larger home furnishings market and the U.S. economy.

The industry forecast reflects the consensus of the ISPA Forecast Panel, which is made up of leading mattress producers and component suppliers. ISPA’s econometric model is used to generate a baseline industry forecast based on the outlook for the national economy prepared by the University of Michigan. This initial forecast is then reviewed and analyzed by the Forecast Panel.

The resulting “consensus” forecast couples the econometric model’s statistical relationships with insight and up–to–the–minute market movements observed by seasoned industry participants. The members of the Forecast Panel adjust the econometric model to produce a forecast consistent with the average of the predictions.

The most recent ISPA forecast for the total domestic mattress industry was created in September 2009 and extends through December 2011. ISPA will update the forecast in April, as it does each year.

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