Econosystems - Economic, Information Brokerage and Business Writing

Article

Slowdown or Recession? Shifting Economic Trends Lead
the United States Economy Into the Winter Holiday Season

An Economic Outlook - October 31, 2006
by Anne Ramstetter Wenzel, M.A., Econosystems.

As the U.S. economy begins the fourth quarter of the year, gasoline prices are falling, unsold home inventories are rising, and U.S. automobile manufacturers have announced plans for layoffs and factory closures. Retail sales in September were quite strong, except at automobile and parts dealers and gasoline stations (retail gasoline sales fell 9% from August 2006 levels). Inflation, which had been creeping up and causing cost input price concerns for U.S. businesses, suddenly dropped in September along with energy prices. The current unemployment rate of 4.6%, while higher than the 3.9% rate of the year-end 2000, is quite low by historical standards, which is causing many business owners and American CEOs to report difficulties finding qualified workers for open positions. Will problems in the housing and automobile manufacturing industry drag the economy into recession? Will wage pressures offset the recent drop in energy prices and rekindle inflation? A closer look at the economy will reveal that there are currently pockets of strength, and inflation currently remains in check in most parts of the country.

The story is the same throughout most regions of the United States, according to the Summary of Commentary on Current Economic Conditions by Federal Reserve District (see http://www.federalreserve.gov/FOMC/BeigeBook/2006/): Construction and sales of homes are falling, while nonresidential construction continues to increase. Manufacturing activity is increasing moderately in most areas except in the Philadelphia and Cleveland districts, and tourism is up in most areas except those impacted by hurricanes. The services sector continued to grow, although at a slower pace. Consumer and business spending also continues to increase. Some districts (Richmond, Atlanta and San Francisco) reported difficulty finding skilled workers, which is leading to upward pressure on wages.

According to the Conference Board (www.conference-board.com), consumers have become less pessimistic as gasoline prices drop: While only 16% of those surveyed in September expect the economy to improve, a much smaller 10% expect the economy to worsen, down from 12% in August. More consumers now expect their incomes to increase over the next several months: Consumers’ improved income outlook will likely help improve retail sales results during the winter holiday season.

U.S. retail sales, not adjusted for inflation, were 5.5% higher in September 2006 than in September 2005. The retail sales numbers were dragged down by gasoline sales, which fell 9%, as gasoline prices fell to $2.38 per gallon (regular grade), down from $2.77 a year earlier (regular gasoline prices have since fallen to a U.S. average of $2.20 per gallon). Sales at automobile and other motor vehicle dealers barely registered growth (+0.1%) for the first three quarters of 2006, as compared to 2005 levels. Furniture and home furnishing sales, while up year-to-date from last year's levels, sputtered in September, to a tiny 0.2% gain over August 2006 levels (on a seasonally adjusted basis).

Some retail categories continue to have strong sales gains, such as building materials, garden equipment and supplies (up 8.3% from September 2005 levels); clothing and clothing accessories (up 10.7% from September 2005 levels); sporting goods, hobby, book and music (up 8.2% from September 2005); nonstore retailers (Internet and mail order, up 12.9% from September 2005); and food services and drinking places (up 8.3% from September 2005 levels). Consumer spending has been fueled in part by an increase in real earnings: Average weekly earnings in the U.S., adjusted for inflation, increased by 2.2% in September 2006, on a seasonally adjusted annualized basis.

While the retail sales numbers illustrate an underlying strength to consumer spending, many industries are experiencing slower sales and production at the producer level. Industrial production activity (manufacturing plus energy generation) on average showed no change in output in September 2006. Automotive products showed a steep decline in the 3rd quarter of 2006. Construction and business supplies production fell in both August and September 2006, as have the textile, clothing and paper products industries. Electricity generation also fell on a seasonally adjusted basis.

Despite weaknesses in certain manufacturing sectors, many other sectors are experiencing strong growth. Production of selected high technology industries (computers, communications equipment and semiconductors) was 23% higher in September 2006 than year earlier levels; home electronics equipment production was up 22% and transit equipment production was up 60% from September 2005 levels.

While the economic news is mixed by industry and region of the country, one foreboding sign of slower times is a significant drop in the outlook of U.S. Chief Executive Officers (CEOs). The Chief Executives' Confidence Measure, the result of the Conference Board’s quarterly survey of about 100 CEOs, fell to 44 in the third quarter, down from 50 in the 2^nd quarter of 2006 (a reading of less than 50 points reflects more negative than positive responses). According to the survey, 16 percent of business leaders expect economic conditions to improve in the coming months, down from 21 percent of those surveyed during the 2^nd quarter. Capital spending plans fell, with only 28 percent of business executives reporting increases in their companies' capital spending plans, down from 35% who reported increased capital spending plans in 2005.

Small business owners are also increasingly pessimistic. According to the National Federation of Independent Business (NFIB) September 2006 survey, the outlook for business conditions six months from now has worsened substantially since the winter of 2005. The net percent of those who thought general business conditions would be "better" minus "worse" turned negative beginning in March, for the first time since February of 2001. Sales expectations for the next three months are also the lowest they've been since the spring of 2003. Also, actual employment changes (net percent "increase" minus "decrease") have been negative most of this year, for the first time since the summer of 2003. Hiring plans are strong, however, with a net 17% planning to "increase" versus "decrease” employment over the next three months. Finding qualified employees has emerged as one of the top concerns of small business owners. One in four small businesses surveyed have a position they are not able to fill right now. Business owners listed "Quality of Labor" as one of the top three "single most important problem" (after "cost and availability of insurance" and "taxes"), echoing the concerns reported in the Federal Reserve’s Beige Book.

The United States has added 1.7 million jobs over the past year, but the rate of growth slowed dramatically in September 2006. The number of mass layoff events (which involve more than 50 employees) have increased every month since May of this year, and the number of persons filing for unemployment insurance as a result of these events was the highest for the year in August (in August there were 1,193 layoff events, which led to 127,944 new claims for unemployment insurance). Given the increased pessimism of business executives and small business owners, the difficulty of finding qualified labor for open positions, and an increased number of layoff announcements, it's likely that job growth will slow further, and may even fall slightly beginning the fourth quarter of 2006.

After weighing the strengths and weaknesses of the current economic outlook, it appears that on balance a marked slowdown is in the works. The question then becomes, "What does the economic slowdown mean for business?" For microbusiness owners who sell luxury goods (demand for which tends to fluctuate with income), sales growth will be hard to come by once layoffs in the housing and automobile industries go into effect during the fourth quarter. Although the layoffs are concentrated in just a few industries, the ripple effect of lower incomes and cutbacks in spending will begin to affect overall sales beginning in January (the positive effect of lower gasoline prices will likely postpone the negative effects of a slowdown). Falling energy prices should keep business cost pressures low during the fourth quarter of 2006. But market pressure to raise wages and salaries, along with an expected rebound in energy prices as winter demand strains energy supplies, will lead to increased cost pressures beginning in the first quarter of 2007. Many business owners will then be facing the ultimate squeeze: Weakening demand along with higher input costs. Operating efficiency and a concentrated emphasis on offering true value to customers will be a survival imperative for microbusinesses beginning in 2007.

Anne Ramstetter Wenzel, owner of Econosystems, helps small business owners identify who is most likely to buy their products or services, then creates business planning documents that help her clients focus on growing sales more easily. Ms. Wenzel is also editor of the eNewsletter "Small and Home Business Market Monthly," packed with market information and a "Marketing from the Trenches" column. To view a sample newsletter and subscribe, visit http://www.econosystems.com/newslettersample.htm.

View our
Article Archives

Click here for our
Article Archives

Subscribe to
Small and Home Business Market Monthly:
IT'S FREE
You'll receive info on hot or growing markets and creative marketing ideas in the "Marketing from the
Trenches" column.
View a sample newsletter.