Rough Road Ahead
By Kay Anderson, Caroline Kennedy and Meredith Schwartz -- Gifts and Dec, 11/1/2008 12:00:00 AM
The state of the gift industry is directly and immutably linked to the state of the economy. High fuel costs, rising unemployment, factory closings, a plunging stock market, the sub-prime mortgage crisis leading to a housing slump and credit crunch are all combining to create a lot of worry among consumers and businesses alike. Even as we go to press, the reports coming from Wall Street and elsewhere keep changing the outlook — and for the most part, not for the better.
The credit freeze sent shock waves across the entire U.S. — indeed the world — economy. It's too soon to tell whether the Federal buyout of so-called toxic debt will lubricate credit lines sufficiently to get consumers buying again. And it is not just consumers who are affected; the gift and decorative accessories industry is made up of many small-to-medium businesses on both the retail and wholesale end, which depend on lines of credit to bring in or produce fresh merchandise and cover business expenses.
Through the end of September, government figures showed the economy was still growing, albeit at a slow pace. Unemployment held at 6.1 percent, lower than the 7 percent average during the '80s recession years, but on par with that during the '90s recession. As we go to press, the figure may be dramatically changing; reports of job losses in the financial sector and anticipated layoffs in the automobile industry threaten the unemployment rate. A few experts are saying some areas of the country are already in a recession.
The downfall of the housing market has had an impact on the gift and home decor industry. Not only are there fewer new houses to stimulate new furnishings purchases, but tumbling house prices, along with tightening credit standards, have put the kibosh on home equity as a source of ready cash for purchases.
High energy costs have caused rising prices for many goods and services and a pull-back in consumer spending for postponable purchases. Foreclosures and tightening credit have also contributed to consumer malaise, if not downright fear.
CONSUMING, BUT CAUTIOUS
Still, as of May, most consumers were still planning to carry out some, if not all, of their redecorating plans. Eight out of 10 of the more than 3,500 U.S. consumers responding to an exclusive survey by Gifts & Decorative Accessories' sister publication Home Accents Today and HGTV said they'd still spend some money to redecorate or refurnish their homes.
Some buyers were spending exactly as planned. Most, though, were changing their approach, looking for less expensive product or buying piecemeal. Consumers' changing approach to shopping included pre-purchase research, highlighting the importance of an Internet presence because they are shopping longer and harder via the keyboard, not the car, and doing less impulse buying. “With gas prices so high it affects everything, so I am trying to look things up on the Internet before I drive to see them,” commented a 57-year-old from New Jersey.
While “green” is not at a top priority, four in 10 said they want their home furnishings to be “green.” Cost is a sticking point, however. “I'm trying to be more green, but some things are more expensive,” said a 47-year-old from Mississippi.
By October, when Worthington, Ohio-based BIGResearch surveyed consumers, the mood was more pessimistic. Those very confident/confident in chances for a strong economy dropped nine points to 19 percent, erasing gains of almost five points per month in August (23.6 percent) and September (28.3 percent).
“Consumers seem to have hit the foxholes,” commented Joel Naroff, chief economist at Cranford, N.J.-based Commerce Bancorp. “When they don't know what will happen, they become really conservative.”
“We may be entering a period of manic-depression for consumers, with mood swings dictated by the latest good or bad news,” commented T.J. Marta, economic and fixed income strategist for RBC Capital Markets. “The dramatic upswing in consumer sentiment last month, stemming from declining energy prices, has reversed. In the past month, Americans have been confronted by a worsening global credit crisis, a plummeting stock market, rising unemployment and continued housing price declines.”
According to the most recent results of the RBC CASH (Consumer Attitudes and Spending by Household) Index, consumer confidence dropped 32 points in October, the largest single-month decline in overall sentiment since the Index began in January 2002. The Index currently stands at 37, compared with 69.2 in September.
This does not bode well for that all-important fourth quarter. The National Retail Federation is forecasting slower sales during the holiday season, with only a slight increase over 2007, as consumers pull back on spending. Other retail consultants predict that sales will fall.
Retailers are nervous, even though many ordered more cautiously this year. They are fully stocked up and the bills are coming due. Will the customers buy as much as they hope or will they pull back even more?
THE JOB MARKET
A BIGResearch survey in early October showed consumers are very worried about future employment prospects. Almost two-thirds said they expect more layoffs in the next six months, up from 45.7 percent in September. Worse still, 7.5 percent fear they'll get a pink slip themselves, the highest since May 2002.
On the flip side, the Spherion Employee Confidence Index, conducted by Harris Interactive for Spherion Corp. found three-fourths of workers still believe it is unlikely they will lose their jobs in the next 12 months. “While this month's index does not reflect the full impact of the crisis on Wall Street [the survey was taken in September], it is encouraging to note that in the early days of the financial turmoil, workers were generally confident about their personal job security,” said Roy Krause, president and CEO of Spherion Corp.
Consumers' pessimism about future job prospects may be on target. According to the results of the latest Manpower Employment Outlook Survey, U.S. employers are projecting a continued decline in hiring intentions for the fourth quarter. “Weakening market conditions are causing many companies to carefully adjust their hiring in line with the demand for their product or service,” said Jeffrey A. Joerres, chairman and CEO of Manpower Inc.
This is supported by recent reports of some retailers and other businesses paring back on temporary personnel for the holiday period and some even considering lay-offs.
The Conference Board's Employment Trends Index also points to future higher unemployment rates, suggesting that the unemployment rate may exceed 7 percent as early as the second quarter of 2009. Said Gad Levanon, senior economist at The Conference Board, “The persistent slackening in labor market conditions, worsened by the financial crisis, has reached a level that in the past led to significantly slower wage growth across most industries.”
THE CREDIT CRUNCH
In a July survey by the Federal Reserve, about 65 percent of U.S. bank lending officers said they'd tightened standards on credit card loans in the past three months. Banks also had tightened commercial and industrial loans.
In a separate August poll by the National Small Business Assn., 67 percent of business respondents said they'd been affected by the credit crunch, vs. 55 percent in February. More reported tighter terms for bank loans and credit cards.
“Several short-term credit channels such as commercial paper are also freezing up, which can seriously impact day-to-day business operations,” warned Dr. Bart VanArk, vice president and chief economist of the Conference Board.
According to the most recent Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the Federal Reserve Board, a large percentage expect banks to tighten credit standards on all major loan categories in the second half of this year. A smaller, though substantial group, expect banks to tighten standards in the first half of 2009.
The tightening up on credit in the commercial sector will have a direct impact on gift vendors, making it more difficult to develop product lines, exhibit at as many trade shows and extend terms to customers.
THE END OF THE TUNNEL?
“The economy is struggling to find a bottom and eventually begin to gather momentum for a recovery,” says Ken Goldstein, labor economist at The Conference Board. “Financial market turmoil complicates the process — limiting access to credit. Indicators show little reason to expect better economic conditions over the next few months. We may not see any signs of improvement until well into the second half of 2009. Until then, a very slow economy is the most positive expectation.”
How bad is bad? “The impact of a freeze in the money markets will be widespread. If businesses have difficulties rolling commercial paper, it will affect daily activities of the economy: payrolls, payments to suppliers …, ” says Orawin Velz, associate vice president, Economic Forecasting, Mortgage Bankers Assn.
If the bursting of the dot-com bubble hit the economy like a tire having a fast blowout, the housing market's woes and ensuing credit freeze are like a slow leak the mechanic can't find. Four tires are flat and the government — make that governments, because the European Union and Great Britain joined in — are jacking up the chassis to put new ones on.
By the best estimates, it will be well into next year, or even 2010, before the rubber will be hitting the road at a reasonable speed again. Until then, as Bette Davis famously said, “fasten your seat belts, it's going to be a bumpy ride.”
Small Business Indicators
| Q2-'07 | Q3-'07 | Q4-'07 | Q1-'08 | Q2-'08 | |
|
Source: Administrative Office of the U.S. Courts; Board of Governors of the Federal Reserve System; National Venture Capital Assoc.; U.S. Dept. of Commerce; Bureau of Economic Analysis; Small Business Administration.
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|||||
| Business bankruptcy filings (thousands) | 6.7 | 7.2 | 8.0 | 8.7 | NA |
| Proprietors income (billions, current dollars) | 1,050.2 | 1,063.8 | 1,073.8 | 1,071.7 | 1,077.3 |
| Rates for smallest loans (under $100,000) | 8.0% | 7.8% | 7.2% | 5.6% | 4.9% |
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