Quarterly Analysis from Michael Dubis, CFA
The Economy
Since June, it appears we’re starting to see some real light at the end of the tunnel nationally. Stock markets are up significantly since hitting the bottom in March. Recently, Federal Reserve Chairman Ben Bernanke was quoted as saying we’re out of the recession, but growth may not occur at the levels we’re used to.
I would say that’s an understatement. We just lived through a worldwide leverage bubble of epic proportions, impacting every major asset class in the world. So of course, we’re not going to return to the growth we’re used to, since the growth we were recently used to was not real. Most of our respondents agree that the national economy is still in a state of flux; locally, we’re doing much better.
There was a large improvement in the assessment of local economy. The majority of respondents still feel we’re in a fair situation, but since June respondents viewing our economy as good has increased by 30%. My sense, from the answers and from individual responses, is that almost all respondents are cautiously optimistic, some perhaps cautiously pragmatic, now building strategy around our new realities, which will likely be far slower growth and ongoing ambiguity.
A common misperception is that Dane County is “a safe economy” because of the University and government, but in an environment of high unemployment, budget cuts and lower tax receipts, we actually become a very risky market due to that concentration. Local governments will face lower property tax receipts as well. Local and state governments cannot print money like the Federal Government, so budgets matter. If not remedied, the result will be further program cuts, project cuts, job cuts, and increased taxes, all in a state where we already pay some of the highest total taxes in the country. There is little room to give, and it’s simply unrealistic to assume a local economy largely dependent on an over-extended government always creates a stable economy.
I am encouraged by several regional responses and data points that may indicate the beginning of the end, even if they don’t signal an upturn. For example:
- Since June, a majority view the local economy as fair to positive. Our respondents offer a fair mix of major industries in Dane County.
- Local home sales and prices did not experience anywhere near the depression other parts of the country experienced, yet existing-home sales (via MLS) in Dane County through July are down by about 15% from 2008, down by almost 50% from 2007. The news would have been worse if not for interest rates remaining at all-time lows and the first-time home buyer credit, which helped this part of our economy. The average sale price is down by approximately 8% from 2008. Fortunately, this is far less than other parts of the country.
- That said, local hiring by our respondents appears to have stabilized. Three months ago, it appeared there was a movement to start decreasing staff, but by mid-summer that turned around and many respondents are either staying the same or actually increasing. In fact, in August, the majority of respondents said they are now looking to hire.
Bottom Line: I think we should remain cautious. I remain cautiously pragmatic in that there are still far too many moving parts in the global, national, and local economy to get a true sense of confidence, but things aren’t as bad as they were.
There also are far too many divergent forecasts by very intelligent people that simply reinforce the fact that predicting the short term continues to be an exercise in self-delusion.
The only certainty is that it appears we are now far away from the bottom of the worst recession since the Great Depression, while all economic cylinders seem to be running again, albeit at a much slower speed.
IB Asked:
Commentary from our Participants
IB partnered with Chamberlain Research Consultants (CRC) to poll a pre-selected group of 100 companies, with Michael A. Dubis providing quarterly financial analysis. The IB100 group includes cross-industry, business-to-business, and business-to-consumer entities, and a few significant nonprofits.
Here are a few comments received:
Employment/Staffing: Projected 2010 business unemployment rates are going to really hurt our economic situation. Our business model combines multiple businesses with one unemployment account.
Large Printer: Budgets appear to be opening up, but we see many more competitive bid requests. Price seems to be the prime value driver.
Software Provider: Business is looking strong for the next quarter. We are experiencing a record month in revenue, following our best month of the year in July. The next few months look to be at the same pace.
Architectural Firm: I see a general interest in spending for long-term value. Firms and government will make investments in construction when a long-term savings is possible.
Bank: We are clearly through the worst part of the downturn. Slow growth for the remainder of the year.
Real Estate Company: I think most of us in this sector generally feel the future is bright in the Greater Madison area. Our specific challenge is to improve our information delivery to our future clients in ways they want to receive it.
Hotelier: Financial statistics such as home sales figures show that the economy may be turning around. Personally, we have not seen any improvement in our business yet. Government-funded assistance programs for businesses such as ARC loans are failing since banks are not participating or cooperating or willing to work hard for them.
B-2-B Retailer: It’s my opinion that the pendulum is beginning to swing back.
Consumer Retailer: I do believe people are feeling a little more confident in the economy. However, they are being very cautious about where they spend their money. They have to trust in the product or service and they have to feel there is real value.
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