Our worsening economy: A snapshot of what the future may hold for our industries

That crash you just heard was the U.S. retail market hitting the floor. On Oct. 15, the U.S. Department of Commerce reported that consumer purchases fell 1.2 percent, marking the third straight month of declines. According to an Oct. 15 Bloomberg news report, “The eroding U.S. economy drove retail sales into their longest slump in at least 16 years.”

“The outlook has worsened in the last couple of months,” Rosalind Wells, chief economist for the National Retail Federation, told SNEWS® on Oct. 24. “Even though the bailout is in place, and might be stabilizing things a bit, the fallout in the economy will be pretty dramatic.”

Wells and others SNEWS® spoke to for an overview of the current economic state said the credit market is thawing a bit, but Main Street will still feel dramatic effects from the economic crisis. Wells isn’t alone in her predictions: Small business experts and economists all have said the next period of time will be a rough one.

SNEWS knows the current economic state is important for your business. This is one look at different ways it’s affecting our industries and your business in a periodic and ongoing series of stories. Stay tuned for more in-depth reporting on the current situation as it develops and changes, from interviews with experts, closer looks at small businesses and how they are coping, to economic statistics, breaking news and how it affects consumers.

“The biggest issue we see, with the holidays coming closer, is consumer behavior,” Wells said. “If that is dramatically affected, a lot of retailers will be suffering.” And suffering is almost certain. “The unemployment rate will certainly rise, and incomes will be affected,” Wells said, adding that household wealth has been decimated. “So the combination of all these factors is making consumers very cautious.”

Wells said that the economic crisis has reduced retail employment throughout the year, and that will continue. “I hear that retailers who were thinking about hiring even just temporary employees for the holiday season are thinking twice about it,” she said.

With a bleak holiday season on the horizon, retailers and manufacturers are also facing a credit crunch, and they must work harder to secure the capital they need to stay afloat. Already in the fitness industry, two large retailers in the last six weeks are going under, accounting for 130 stores total that will either disappear or shrink in number significantly. And SNEWS knows others in both the outdoor and fitness industries aren’t immune as consumers tighten their belts to be cautious.

Getting credit

“Businesses of all sizes are being held to stricter credit standards,” said Neil Lerner, director of the Small Business Development Center at the Wisconsin School of Business of the University of Wisconsin-Madison. “Lines of credit and financing to take on new projects and customers are vital. Many smaller firms are inherently more risky, though not all. A credit thaw will certainly help smaller firms obtain the financing they need. With tighter credit standards, they will be scrutinized more thoroughly for their ability to repay; however, good companies and good projects will get financed.”

He said that there is hope for small and medium-sized firms that have a close relationship with their local banker. “Many community, state and regional banks have strong deposit bases and are looking to finance good small businesses,” Lerner told SNEWS. “Small businesses and their banks have the availability of U.S. Small Business Administration (SBA) guaranteed loans. This is a great program that can guarantee 75 percent to 85 percent of the bank loan to a small business. This is great for the business because the bank reduces their risk by a tremendous amount and encourages them to make that small business loan. In addition, the bank does not have to add to their reserves to cover the guaranteed portion of the loan. In our current situation, this is a great advantage to the bank.”

Under the current system, a business must pay extra fees to obtain an SBA loan, and Lerner said it would be great if the federal government reduced or eliminated those fees. “Then, small businesses could put every penny of their financing to work in our economy,” he said.

The bigger scheme of things

In an address at the Outdoor Industry Association Rendezvous in early October, Clyde Prestowitz, founder and president of the Economic Strategy Institute, said that credit is still freezing up all over the world. He said that, due to the lack of capital in the global economy, “It’s inevitable that we will go through a period of recession. And what I fear is something worse than recession because this is not just a U.S. crisis.”

While faltering mortgage loans accelerated the U.S. economic crisis, other countries are dealing with even worse real estate markets. “If you look at Ireland, the U.K. and Spain, their real estate values have been much more out of align than in the U.S., and that is beginning to correct now,” he said. Any solution to the global crisis “depends not just on what the U.S. Treasury does, but also what the European central bank does, as well as the bank of Japan, the Chinese and other major dollar holders.”

We’ve got major issues

While the real estate markets play a key role, the U.S. economy has primarily been weakened by the fact that our trade deficits, consumption and borrowing greatly exceed our exports, production and savings. Prestowitz noted that in 1981, the trade deficit was $27 billion a year and that was thought to be huge and not sustainable. Today, the trade deficit is about $850 billion.

“We now have a tilted world in which the consumption in the global economy is largely in the U.S., and savings and production and investment is outside the U.S., largely in Asia,” said Prestowitz. “This has created a world in which the U.S. accumulates each year another $700 billion to $800 billion in deficits.”

One major problem, experts told SNEWS, is that, for a very long time, the United States has been building a domestic consumer economy, and now consumption accounts for 70 percent of U.S. GDP. Because we are consuming so much more than we produce, we must borrow from the rest of the world. “The U.S. economy needs a daily injection of $3 billion of foreign funding net — that means we really need $7 billion a day of foreign funding,” said Prestowitz. Compare that to China, which has about $1.7 trillion of reserve savings, or Japan, which has about a trillion dollars in savings, he explained. As these countries save, they also use money they make from exports to the United States to buy U.S. Treasury bonds and invest in American companies.

Now we are to the point that the structure of the U.S. economy has so weakened the dollar that countries do not get a good return when they invest in U.S. dollars: “For a while everyone was happy, because we were living beyond our means,” said Prestowitz. “If everyone kept on buying and borrowing, and Asians and Russians would promise to keep producing and lending, no problem. But nobody can make that promise, and the promise is breaking down. They have so many dollars, and are getting a return of only 1 or 2 percent. In the U.S., everybody is so in debt they begin missing payments and the scheme unravels.”

Long-term implications

Prestowitz said he sees major economic shifts coming our way. “Costs of energy have increased dramatically for things like shipping a container overseas,” he said. Due to energy costs, the high price of manufacturing overseas and the weak dollar, he said that much of the production that has gone to Asia would come back to North America. SNEWS has already seen a few companies bring back some manufacturing to North America with others whispering of that in the future.

Also, he projects that the dollar might no longer serve as the world’s main currency. “Already, Kuwait has unpegged its currency from the dollar and floats its currency against a faction of currencies — the dollar, Yen and Euro,” he said. Also, there has been a lot of discussion about pricing oil and international commodities on a faction of currencies. “Once that happens, the U.S. will not be able to run big trade deficits,” said Prestowitz. “If America wants to buy oil, it will have to make something or provide a service to earn Yen and Euros to buy a barrel of oil.” Eventually, consumption as a percentage of GDP will have to drop.

“The day in which the U.S. is the overwhelmingly dominant power,” said Prestowitz, “is going away.”

—Marcus Woolf

SNEWS knows the current economic state is important for your business. We will take a look at different ways it’s affecting our industries and your business in a periodic and ongoing series of stories. Stay tuned for more in-depth reporting on the current situation. Email us at snewsbox@snewsnet.com with any tips, comments or ideas on stories you’d like to see.