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How to survive (and prosper) in this economy

Craft & Hobby Association. May 2, 2008. How to survive (and prosper) in this economy. Bernard Baumohl. The Economic Outlook Group, LLC. www.EconomicOutlookGroup.com. THREE KEY THEMES 1. Where is the U.S. economy headed? 2. What’s the outlook for consumer spending?

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How to survive (and prosper) in this economy

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  1. Craft & Hobby Association May 2, 2008 How to survive (and prosper) in this economy Bernard Baumohl The Economic Outlook Group, LLC www.EconomicOutlookGroup.com

  2. THREE KEY THEMES 1. Where is the U.S. economy headed? 2. What’s the outlook for consumer spending? 3. What can retailers and manufacturers do in this challenging environment? The Economic Outlook Group

  3. The U.S. Economy • Are we in recession or not? Does it really make a difference in this climate? • The recovery will be (agonizingly) slow. The Economic Outlook Group

  4. Rare Trifecta of Forces Dragging the Economy Down Collapse in home sales, prices and construction Full blown credit crunch Cutbacks in consumer and business spending The Economic Outlook Group

  5. Home prices fall more than 12% since January 2007 (S&P/Case - Shiller Composite 20 Home Price Index) 220 200 180 160 140 120 100 Index (2000 = 100) 2000 2001 2002 2003 2004 2005 2006 2007 2008 The Economic Outlook Group

  6. Decline in home prices the last 12 months(February 2008 vs. February 2007) Source: RealtyTrac The Economic Outlook Group

  7. Construction Spending $ Billions, monthly annualized $ 2007 2008 The Economic Outlook Group

  8. Housing’s impact on the economy • Home construction alone: 5% of GDP …plus related homebuyer purchases (appliances, furniture and etc.): 23% of GDP • Homebuilders hire 11% of total U.S. work force • Value of real estate owned by households is a massive $20 trillion The Economic Outlook Group

  9. It’s getting ugly out there! • U.S. default/foreclosures jumped 112% in IQ ‘08 versus year ago. • One of every 194 homes is in some stage of foreclosure • Nearly 3 million foreclosed properties will be on the market in 2008 and 2009 • 8.8 million borrowers are “underwater.” • Worst states: Nevada 1 out of 54 homes California 1 one of 78 homes Arizona 1 out of 95 Florida 1 out of 97 homes Source: RealtyTrac The Economic Outlook Group

  10. CREDIT CRUNCH Who is to blame for the current mess? ANSWER: Just about EVERYONE! Consumers have been borrowing irresponsibly for years Lenders have been doling out money recklessly -- NINJA mortgages and other loans Easy money fired up demand for homes from qualified, unqualified buyers as well as U.S. and foreign speculators Investors (hedge funds and investment banks), frustrated by low yields, were demanding securities with higher returns Brokerage firms and banks responded by crafting a panoply of arcane and complicated securities backed by subprime mortgages that “promised” higher returns. Rating agencies stamp AAA approval on bonds they didn’t understand The Economic Outlook Group

  11. CREDIT CRUNCH Who is to blame for the current mess? ANSWER: Just about EVERYONE! MORE…. Regulators ignored warnings of abuses in the mortgage lending business Federal Reserve kept short term rates low for too long Easy money not only heated up real estate activity--- but swelled household debt Homebuilders were constructing houses 50%more than underlying demand Day of reckoning has arrived!! The Economic Outlook Group

  12. Comparing Losses Where does the latest financial crises rank? Costliest natural disaster in U.S. history: Katrina (2005): $80 billion Most catastrophic attack on U.S. soil: 9/11 (2001): $50 billion Losses and writedowns (so far) from subprime disaster: $235 billion IMF projects total cost of subprime disaster: $945 billion!! The Economic Outlook Group

  13. Comparing Losses Where does the latest financial crises rank? Costliest natural disaster in U.S. history: Katrina (2005): $80 billion Most catastrophic attack on U.S. soil: 9/11 (2001): $45 billion Losses and writedowns (so far) from subprime disaster: $235 billion IMF projects total cost of subprime disaster: $945 billion!! The Economic Outlook Group

  14. Comparing Losses Where does the latest financial crises rank? Costliest natural disaster in U.S. history: Katrina (2005): $80 billion Most catastrophic attack on U.S. soil: 9/11 (2001): $45 billion Losses & write downs (so far) from subprime disaster: $312 billion IMF projects total cost of subprime disaster: $945 billion!! The Economic Outlook Group

  15. Comparing Losses Where does the latest financial crises rank? Costliest natural disaster in U.S. history: Katrina (2005): $80 billion Most catastrophic attack on U.S. soil: 9/11 (2001): $45 billion Losses & write downs (so far) from subprime disaster: $312 billion IMF projects total cost of subprime disaster: $945 billion!! The Economic Outlook Group

  16. Consumers to cutback on spending • Job market is weakening. • Household income not keeping pace with inflation. • More Americans struggle with their debt. • Household wealth is on the decline. Americans feel poorer now. The Economic Outlook Group

  17. Job market is deteriorating Monthly Change in Business Payrolls Thousands of jobs 2008 2006 2007 Source: Bureau of Labor Statistics The Economic Outlook Group

  18. Growth in Real Earnings Average Weekly Earnings, 1982 dollars 12-month % change 2007 2008 Source: Bureau of Labor Statistics The Economic Outlook Group

  19. Gasoline: $4.00/gallon within reach The highs are getting higher AND lows are getting higher too! The Economic Outlook Group

  20. % of total borrowers 1995 1997 1999 2001 2003 2005 2007 Sources: Federal Reserve Board (FRB), American Bankers Association (ABA): 30 days overdue on credit cards, HE and auto loans: The Economic Outlook Group

  21. Households have seen their wealth decline as the value of their homes and stocks have fallen Household Net Worth - Yr. end ($Trillions) Source: Federal Reserve The Economic Outlook Group

  22. Consumer Spending Trends Retail Sales, monthly % change % 2007 2008 Source: Commerce Department The Economic Outlook Group

  23. Please!…Is there ANY good news out there? • Great Depression comparisons are nonsense! • Federal Reserve has moved aggressively to stop financial hemorrhaging in financial sector. Credit freeze to thaw soon. • Business inventories (outside of real estate) are not excessive • Unemployment not expected to climb beyond 6%. • Pent-up demand to buy homes • Inventory of unsold new homes lowest in years! • Home Affordability is the highest in 5 years • Growing reluctance by banks to foreclose • Not all regions of the country are hurting The Economic outlook Group

  24. 2004 2005 2006 2007 2008 2009 Sluggish Economic Growth Ahead % Real GDP, Quarterly Actual Forecast 1Q ‘08 The Economic Outlook Group

  25. U. S. Macroeconomic Forecasts The Economic Outlook Group

  26. What can businesses do in this difficult environment? • Hiring • Inventories • Advertising & Marketing • Capital Spending • Pricing The Economic Outlook Group

  27. Typical Business Cycle Ride Output (Real GDP) We are now at this point in the cycle Peak Recovery Expansion Recession Recession Trough Recovery Trough Time The Economic Outlook Group

  28. Understand and use the “Business Cycle” to your advantage Output (Real GDP) OK to raise prices Increase capital spending Do NOT raise prices! Reduce inventory purchases Flexible employment strategy Spendmore on ads Hire skilled workers at trough Time The Economic Outlook Group

  29. Employment strategies • At the “first signs” economy is peaking, enact hiring freeze. Supplement workforce with temporary staff. Allow attrition. • As economy slows, introduce a “no-layoff” policy. Prepare incentives to reduce payroll costs (e.g., offer non-pay or partial pay sabbaticals, early retirement, flex time, require vacation time). • Other benefits of “no layoff” policy: Prevents competitors from stealing your talent. Employee morale remains high, which lifts productivity. Avoids the cost of rehiring and retraining workers once the economy recovers. The Economic Outlook Group

  30. Employment Strategies • Best time to scoop up talent is near recession lows. • You can cherry pick workers with the most skills and have maximum leverage setting pay contracts pay during downturns. The Economic Outlook Group

  31. Recession is a good time to increase advertising • Most companies typically slash advertising budgets during economic downturns. Smart strategy is to the opposite. Your ads will stand out. Less noise. • Ads placed during recessions lead to better brand recognition; you will be in a better position once the economy is growing again. • Advertising rates are also cheaper during recessions. The Economic Outlook Group

  32. Timing Your Capital Spending • As economic activity gets close to peaking, preserve cash flow, hasten accounts receivables and reduce capital spending. (Don’t wait until recession has begun.) • Increase capital investments once recession is underway. Easiest and cheapest time to purchase equipment or buy other firms. The Economic Outlook Group

  33. Inventory management • As economic activity peaks, reduce production and inventory purchases. • Sharply discount poor-selling goods during recessions. • Begin to add inventory as recession hits bottom. The Economic Outlook Group

  34. Pricing during the business cycle Key concept Elasticity = measures how sensitive customers are to a change in price. LOW elasticity = a price increase will have LITTLE affect on demand. (Think gasoline, health care or a drug addiction.) HIGH elasticity = an increase in price can GREATLY change demand. (Examples = travel, restaurants, certain foods.) The Economic Outlook Group

  35. Using the business cycleElasticity can vary during a business cycle Recession = elasticity of demand is higher. (Consumers are much more sensitive to price changes.) DO NOT LIFT prices during economic weakness. Why? A price hike will be more than offset by less demand for that product ─ and you may lose market share. DO LOWER prices during an economic downturn. Why? Consumers are much more price sensitive and value oriented. You may even increase market share and brand loyalty. The Economic Outlook Group

  36. Using the business cycleElasticity can vary during a business cycle During periods of economic strength, price elasticity declines. OK to lift prices: As job and income improves, consumers are more tolerant of price increases. Good time to lift revenues and accumulate cash reserves in preparation for next downturn. The Economic Outlook Group

  37. Best Leading Economic Indicators of Business Cycle & Consumer Spending Employment Report (www.bls.gov) Weekly Claims for Unemployment Insurance (www.owsdoleta.gov) Consumer confidence surveys(www.conference-board.org) Real Income Growth(www.bls.gov) Consumer Durable Goods Spending (www.bea.gov) Household Net Worth?(www.federalreserve.gov) Consumer Non-Revolving Loans(www.federalreserve.gov) Retail Sales (ex-autos and gasoline) (www.census.gov) E-commerce Retail Sales(www.census.gov) Existing Homes Sales and Prices (www.realtor.org) Capacity Utilization Rates (www.federalreserve.gov) Major stock indexes ─ S&P 500 The Economic Outlook Group

  38. The Economic Outlook Group Bernard Baumohl The Economic Outlook Group, L.L.C. 475 Wall Street Princeton, New Jersey 08540 (609) 529 1300 www.EconomicOutlookGroup.com

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