What’s in store for 2010

Filed under: Contributed Columns |

The good news is economists have signaled that nationally the recession ended at the end of the second quarter of 2009.

And, Colorado Springs fared even better, with the local recession ending at the end of February. However, most middle market companies are not yet seeing the benefits.

High unemployment and a persistently weak housing market are putting a drag on consumer spending and any recovery.

So what do middle market companies make of this seemingly contradictory information going into 2010?

First, consider that having the economy return to an expansion and the recession ending is a critical step in returning to more normal business growth trends. But, it takes time to turn the ship and recover to a more robust economy.

Employment growth normally lags economic recovery and today is no exception. “Companies are not going to hire again until they are confident the business will gain productivity from the hire,” said Fred Crowley, senior researcher of economics at the University of Colorado at Colorado Springs. “Until that time businesses would rather pay overtime to existing employees.”

During the last recession, it took until 2006 to recover all the jobs lost. Crowley expects this recovery to be the same.

What is different is that Colorado Springs is better off than the rest of the nation. Local unemployment peaked at 7.5 percent versus the current national rate of 10.2 percent. In the past, local unemployment was always one or two points above the national average.

The local housing market realized modest declines in value. Homeowners certainly felt the impact, but it was not as ruinous as in other areas.

To date, adjusting for normal trends, housing prices in Colorado Springs have grown 4 percent to 5 percent. Housing inventories have also reached a more appropriate level, with a little more than 5,000 houses on the market, down from two years ago when monthly inventories were approaching 8,000.

The national market is less clear.

“I don’t believe that the housing market has reached bottom nationally,” said Stephen Barrows, assistant professor of economics at the U.S. Air Force Academy. “I expect to see continued pressures on home prices nationally which puts pressure on consumers to deleverage and cut back on spending.”

Other important indicators for middle market companies to watch include:

Industrial production — up significantly since March 2009

Consumer sentiment — up 20 percent to 25 percent above the low point in December 2008. People are not thrilled yet, but they are feeling better.

Federal Reserve Bank of Kansas City Manufacturing Index — also up of late.

Most economic indicators point to a better 2010 than 2009, but don’t necessarily project a strong year of growth.

“History teaches us to expect national economic malaise for 2010 and even into 2011 as we wait for employment and the banking sector to fully recover,” Barrows said. “There will be growth, but it will be slow like walking through mud.”

Laddie Blaskowski, president of Business Truths, said the way his clients view the economy depends in large part on their industry.

“For the most part, our clients believe 2010 has glimmers of hope that it might be better than 2009,” he said. “They’re remaining very conservative and cautious in how they make decisions, but are watching for opportunities that will help them gain business.”

“Colorado Springs’ economic picture is brighter, due in part to a smaller recession than the nation, our strong military presence, and reduced volatility from the large manufacturing companies no longer here,” Crowley said. “Manufacturing jobs are important to business growth; however, they tend to be more susceptible to downturns.”

Looking ahead, Barrows sees strong business opportunity in the health care sector for 2010 and beyond especially with the aging baby boomers.

Crowley feels companies who learn from the past, watch what’s going on in the economy and make decisions fully aware of the risks will best take advantage of opportunities that might arise.

Inflationary pressures are worrisome for both Crowley and Barrows, but they differ on time horizons.

Crowley sees inflationary pressures showing up as early as the second half of 2010, led by fuel and transportation prices. Barrows thinks inflation will be kept at bay for the next two years, but worries about the Fed’s ability to tighten up monetary policy quickly enough to stave off inflation once banks start lending their reserves.

Banking issues are giving some local companies reason to worry about next year.

“While our clients are interested in the timing of the recovery, inflationary pressures, unemployment, etc., the most critical impact they are concerned with is the affects on the banking industry,” said Chris Blees, CEO of BiggsKofford. “We’ve seen a very large number of clients experience unprecedented lending issues in the past year. Therefore, the impact of the economy on their banking relationships is where the rubber is hitting the road right now for our clients.”

Both Barrows and Crowley advise middle market companies to be conservative in their approach to investment and borrowing to expand.

Ann Snortland, principal of Snortland Communications, is the spokeswoman for the Peak Venture Group Middle-Market Entrepreneurs. She can be reached at ann@snortcomm.com.