Think » optimism

Possible dream? Starting a company in a recession

Joyce M. Rosenberg — Sat, 23 Jan 2010 18:00:47 +0000

NEW YORK (AP) — While much of the business world struggled with cutbacks and layoffs during 2009, many people saw opportunity. Undaunted by the recession, they started their own companies.

Entrepreneurs are by and large an optimistic lot, with faith in their ideas and their ability to execute them. So it’s understandable that they would find reasons why it made sense to start a business in a sickly economy. Among them: It’s easier to rent commercial space at a discount when landlords are hungry for tenants.

Still, many had some scary moments as customers stayed away or money ran low. A look at how four new business owners fared last year:

WAITING FOR THE CONSUMER TO SPEND

Mike Sweeney had what he thought was a great idea for a new product: Clipa, a hook that people use to hang pocketbooks and other bags from restaurant bars or counters.

The recession didn’t faze him. “I thought it was actually a good time,” said Sweeney, who saw advantages in starting a company during a recession. Rental space was cheaper, suppliers were hungry for business and there was a pool of good job candidates.

But when the Irvine, Calif.-based entrepreneur began selling Clipa April, he discovered how hard the retail business had become. Some consumers were willing to spend the $20 for his product, “but not in the volume we expected.”

“We went to some trade shows and the response was less than we expected,” Sweeney said. By August and September, he was feeling uneasy because “we were burning through money,” the personal funds he raised to start the company.

Since then, business has gotten better as consumers have started feeling better about spending. “It’s been growing every month. We’re getting up to where we expected to be initially,” Sweeney said. He’s selling Clipa online and his sales reps are getting it into stores. And he’s feeling optimistic enough to start selling another product later this year.

WORKING THROUGH THE BAD TIMES

After more than 27 years co-owning a public relations firm, Henry Feintuch and his partners went their separate ways as 2008 ended. On Jan. 2, 2009, his new firm, Feintuch Communications, opened for business.

“It was very scary,” Feintuch said, recalling that at first, he didn’t know which of the old firm’s clients would migrate to his new venture. “We lost money consistently for the first half-year, as you’d expect in a new business.”

There were several times when “we literally did not have funds to make payroll,” Feintuch said. So he and his new partner dipped into their own funds, and their employees never knew there was a problem.

He also had encouraging signs: “Each month would show more billings than the month before.” But, Feintuch added, “we never knew if we were going to grow into the black.”

Feintuch said he and his current partner helped the New York-based company grow by partnering with companies on projects and accounts rather than expanding the current staff of four people.

In June, “we literally broke into the black,” Feintuch said. This month, the company expects to hire two more people.

“It looks like we weathered the worst of it.”

TIMING THE REAL ESTATE MARKET

It might seem counter-intuitive to start a real estate business in a recession that started with the collapse of the housing market. But Joe McMillan and his three business partners went ahead and started their real estate development company during the first quarter of last year.

“When you’re entering real estate when the market is correcting, you have more significant upside potential,” said McMillan, CEO of New York-based DDG Partners. “From our perspective, it has been a very good time to enter the market.”

DDG was able to get properties that were well-priced because the market was weak. The company has several projects under way, including a building under construction from the ground up in lower Manhattan.

Perhaps because of DDG’s good timing, McMillan said his company hasn’t had the uncertain moments that many other startups did in 2009. The company is also self-financed, so “we haven’t had to battle the banks,” he said.

“There was never any point that I had a lack of conviction in what we were doing and the business model,” McMillan added.

He said 80 percent of the company’s projects are expected to be in New York, with the rest in Boston and San Francisco.

GOING IN SEARCH OF SALES

Lisa Michelson says, “I believe poor economic climates sometimes breed opportunity.” So she came up with a product that targeted fashion and budget conscious women — those who could no longer spend $500 or $700 on a handbag, but would be willing to spend $100 or $200.

Michelson started her New York-based company, Lisa David Designs, a year ago, and found that along with opportunity, the economy presented many challenges. She went to trade shows to try to sell to retailers, but found that attendance at the expos was below expectations, which meant fewer chances to make sales. She also found it wasn’t so easy to hire the workers she needed, although layoffs had greatly expanded the pool of job candidates.

Michelson also ran into some of the frustrations that many small manufacturers experience in the best of times. Like suppliers who wouldn’t sell her less than 1,000 yards of a particular fabric, much more than she needed.

She learned she needed to be creative in order to bring in more sales. So instead of trying to sell to some retailers, she’ll run a trunk show where she takes her handbags to a store and sells them herself, giving the merchant a cut of her sales. She also has her product line on an online handbag Web site.

But business is getting better now, and she’s optimistic enough about 2010 that she’s planning to take on a fifth sales rep.

Summer View

Jeff Thredgold — Tue, 30 Jun 2009 15:42:34 +0000

The U.S. Economy
…growth resuming?
The extended American recession, now into its 18th month, will be the longest and deepest of any since the Great Depression. A return to positive (if modest) U.S. economic growth during the July to September quarter is the consensus view of forecasting economists. Modest growth should be followed by more robust performance during 2009’s final quarter and more solid growth throughout 2010.

A return to U.S. economic growth clearly does not suggest that problems with housing, commercial real estate, sick investment portfolios, and wobbly financial markets are behind us. But it IS a step in the right direction!

Budget Deficits
…tooooo much
The Obama Administration’s aggressive spending initiatives will see a deficit approaching $2,000,000,000,000 in fiscal year 2009, which began October 1, 2008. For each dollar the government takes in, it will spend two. Such a deficit will be four times the largest ever recorded, which, by the way, was last year. To the Administration’s defense, it did inherit major economic and financial challenges from the Bush Administration.

The greater issue will be how to rein in estimated deficits averaging nearly $1 trillion annually during the following eight years. The President is likely to face more opposition to aggressive spending by more conservative members of his own party.

Commercial banks will be aggressive in returning TARP funds to the U.S. Treasury in order to get the government out of their boardrooms. The phrase “We’re from the federal government and we’re here to help you” hit home one more time.

Unemployment
…approaching 10%
The U.S. economy suffered a net decline of 3.1 million jobs during 2008, the worst year since 1945. Even greater losses will occur in 2009. However, monthly reported losses should ease as the year progresses.

The nation’s jobless rate has reached 9.4%, with additional increases in store. The jobless rate could approach, or slightly exceed, 10.0% by early 2010.

Inflation
…which camp?
Consumer prices (the CPI) actually declined 0.7% during the most recent 12-month period, following the 0.1% rise during 2008, the smallest increase in 54 years. Most forecasters see the CPI rising near 1.5% in 2009.

Where we go from there is the subject of intense debate. One influential camp of economists sees major inflation pressures after 2010 resulting from aggressive monetary policy and massive budget deficits.

The other vocal camp sees a Japanese-style deflation unfolding in coming years, tied to weak residential and commercial real estate values, major slack in labor markets, and global recession. Pick your poison.

The Federal Reserve
…near zero
The Fed’s critical federal funds rate, at an all-time low of 0.00%-0.25% since mid-December 2008, could easily stay at that level most of the year. The Fed has engaged in one unprecedented program after another, collectively known as “quantitative easing,” to address the near-paralysis that has all too frequently plagued financial markets for the past 12-24 months. The Fed’s “exit policy” from such actions is drawing greater scrutiny.

Long-Term Interest Rates
…which direction?
Thirty-year fixed-rate mortgages for conventional loans averaged 4.82% (Freddie Mac) during most of April and May, before rising nearly 1.00% in recent weeks. Mortgage finance for higher-priced homes remains spotty in many communities.

Whether the Fed will boost its purchases of U.S. Treasury notes and mortgage-backed securities or do something else creative in an attempt to push rates back down is the $64 question. Lower rates would help existing home prices to stabilize and clear high levels of new and foreclosed homes from the market.

The Global Economy
…2010 rebound?
Economic and financial challenges abound for both developed and emerging nations across the global community. However, significant increases in stock markets around the globe suggest the worst is behind us.

For the first time since World War II, the U.S., Japan, and Europe are in recession simultaneously. Renewed U.S. economic growth, combined with reasonably solid growth in China and India, suggest the global recession could conclude by mid-2010.

Japan is in serious recession, with the economy contracting at a roughly 15.0% annual rate during 2009’s first quarter. A plunge in exports to the world was the culprit. However, more recent signs suggest some level of economic stability may be at hand.

China—which recently surpassed Germany to claim the #3 economic ranking in the world behind the U.S. and Japan—is dealing with major challenges tied to economic growth slowing from 120 miles per hour to near 75 mph. China is making solid efforts to boost domestic demand within its economy, in part fueled by its own stimulus program.

India’s economic growth pace slowed from near 9.0% annually to a 5.8% annual pace during 2009’s first quarter. Stronger growth is likely over the next 12 months.

Europe and the U.K. are currently buried in serious economic downturns, with the likelihood that both could be laggards in 2010 as the global economy picks up speed. Ailing financial systems and problem loans to Eastern Europe will likely constrain a rebound when it does occur.

Russian politicos are keeping their fingers crossed, hoping oil prices continue to rise. The dive in oil and commodity prices of the past year soon led to painful budget cuts, sharply higher unemployment, capital outflows, and a record decline in industrial production.

High levels of government inefficiency and rampant corruption are part and parcel of doing business in many South American nations. Such a reality is more painful when commodity prices are lower than before.

Mexico is getting hit from all sides, leading its economy to plunge at a 21% annual rate in the first quarter. This nation’s critical tourism sector has been hammered by 1) fewer global visitors tied to recession; 2) the serious escalation in drug trafficking violence which has kept visitors away; and 3) the H1N1 (swine) flu which only added to tourism weakness and other economic disruptions.

Canada remains in recession as its top customer…the U.S.…buys less. Eastern provinces deal with a weak auto sector, while the west deals with lesser commodity values.

The Bottom Line?
A serious and lengthy U.S. recession should give way to stabilization and modest growth in coming months. We also expect…unprecedented budget deficits tied to massive “stimulus” spending…more employment pain…modest inflationary pressures this year…extremely low short-term and volatile long-term interest rates…and a sick but soon-to-improve global economy.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 17 June 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

*Artwork from franckie under Creative Commons license at Flickr.com.

Rising Consumer Confidence

Jeff Thredgold — Wed, 03 Jun 2009 12:00:06 +0000

With consumer spending representing 70% of the U.S. economy, rising confidence levels are important. The Conference Board’s latest monthly measure of consumer confidence rose sharply to 39.2 in April, versus 26.9 in March. The index is based on a representative sample of 5,000 U.S. households.

The latest measure was the second consecutive rise, and was at its highest level since last November. In contrast, the index hit a record low in February near 25.

We still have a long way to go. For the index, 1985 equals 100. The index averaged 57.9 in 2008 and was at 90.6 in December 2007, the month the economy officially entered the recession.

The primary index is split into two components, the Present Situation index and the Expectations index for the next six months. While the Present Situation index had a slight gain from 21.9 to 23.7, the Expectations index rose sharply from 30.2 to 49.5.

Those anticipating business conditions will worsen over the next six months declined to 25.3 percent from 37.8 percent, while those expecting conditions to improve increased to 15.6 percent from 9.6 percent in March. The employment outlook was also considerably less pessimistic. The percentage of consumers anticipating fewer jobs in the months ahead decreased to 33.6 percent from 41.6 percent, while those expecting more jobs increased to 13.9 percent from 7.3 percent.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 6 May 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

*Artwork from imeusdesign under Creative Commons license at Flickr.com.

Similar Numbers … Different Stories

Jeff Thredgold — Mon, 01 Jun 2009 20:05:52 +0000

The American economy contracted at a 6.1% real (after inflation) annual rate during 2009’s first quarter, very close to the 6.3% real annual rate of decline during the prior quarter…

…that’s where the similarity ends

While the fourth quarter’s various economic components were almost all scary, the more recent data had numerous elements of optimism as to where we go from here…

…the overall message is that this painful recession has about run its course, with a return to positive (yea!) if modest U.S. economic growth perhaps by late summer, one reason stocks continue to move higher

The Data

The 6.1% real annual rate of decline in the nation’s gross domestic product (GDP) during the January-March period was weaker than the consensus 4.8% rate of decline expected by forecasting economists. GDP is the most complete measure of all goods produced and services provided within U.S. borders. The data will be revised in late May and late June as more complete information is available.

However, various components which led the overall measure lower actually suggest stronger performance in coming quarters. In addition, select components of the U.S. economy wherein spending declined are highly unlikely to do so again in coming quarters:

• Consumer spending, which represents 70% of all U.S. economic activity, actually rose at a 2.2% annual rate during the first quarter, after declining sharply during the two prior quarters. Such spending seems to have largely stabilized, although weak labor markets and eroding home values will limit any meaningful upside to consumer spending in coming quarters. Stronger consumer spending added 1.5% to first quarter GDP, versus the prior quarter

• Government spending (believe it or not!) actually declined in the first quarter, led by declines in defense spending and lesser state and local spending. However, government spending will surge in coming quarters as the $787 billion economic stimulus program kicks in. Lesser government outlays subtracted 0.8% from GDP versus the prior quarter

• Companies slashed capital spending at a 38% annual rate during the first quarter, with investment in software and equipment down at a 34% annual rate. Business investment in new buildings was down at a 44% annual rate. Weak business investment pulled GDP down 2.6% from the prior quarter

• Businesses also slashed the level of inventories of goods by $104 billion during the first quarter, the largest quarterly decline on record. This factor alone subtracted 2.8% from first quarter GDP. The sharp reduction of goods “on the shelves and in the storerooms” suggests that manufacturing output will be ramped up faster than previously thought when overall spending by consumers and businesses strengthens

• U.S exports to the world fell at a 30% annual rate during the first quarter, the largest decline in 40 years. The plunge in exports illustrates how a global economy in recession buys less in the way of U.S.-made goods. This factor subtracted 4.0% from GDP. However, U.S. imports also fell sharply, adding 6.0% to GDP

• Housing investment fell at a 38% annual rate, the largest decline since 1980, and the 13th consecutive quarter of decline. Housing weakness subtracted 1.4% from GDP, when compared to the prior quarter

Plenty of Pain…

Even as more rays of hope are appearing in the American economy, its dismal performance in recent quarters has been one for the record books. The past two quarters represent the sharpest six month contraction in 51 years.

When including the 0.5% real annual rate of decline during 2008’s third quarter, the economy contracted for three consecutive quarters for the first time since 1974-75. The current recession, which officially started in December 2007, is now into its 18th month. By comparison, the two prior recessions each lasted eight months.

…But Likely To Improve

Last week’s Tea Leaf included the latest USA TODAY quarterly survey of roughly 50 national economists (including yours truly). It noted the consensus view that the U.S. economy will return to slightly positive economic growth in the third quarter…now just two months away.

The latest monthly survey of Blue Chip Financial Forecasts (where I serve as one of 50 surveyed economists) provides a very similar forecast. Both forecasts see the U.S. economy growing at an increasingly stronger rate each quarter through the end of 2010.

Even the Federal Reserve has climbed more solidly aboard the “economic growth is coming” bandwagon. The Fed’s Open Market Committee concluded its two-day meeting last week with perhaps the most optimistic view of the economic and financial landscape in 18 months. The FOMC’s statement noted that “the economic outlook has improved modestly since the March meeting” and “some easing” of tough financial conditions has occurred…

…Don’t bring out the marching bands just yet, but the economy’s darker days seem to be behind us.

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the 6 May 2009 issue of Jeff Thredgold’s Tea Leaf newsletter.

*Artwork from franckie under Creative Commons license at Flickr.com.

Good News Focus

Jeff Thredgold — Thu, 05 Feb 2009 22:56:30 +0000

HAPPY TALK |

We clearly face serious economic and financial challenges today. However, there are also many favorable developments taking place within the U.S. economy. This piece focuses ONLY on the “good” news…

• For every dollar of U.S. economic output generated today, we burn less than half as much oil as 30 years ago

• Donations to charity set an all-time high in 2007, with more than $300 billion donated by individuals, foundations, and corporations. As a percentage of GDP, Americans gave twice as much as the next most charitable nation … England

• Productivity of the average U.S. worker rose an average of 2.6% annually during the past 10 years, the largest gains in 40 years. Rising productivity is a long-term key to higher standards of living

• The number of people who have quit smoking (46 million) now exceeds the number who still smoke (45 million). Roughly 21% of adults smoke today, versus nearly half in the early 1950s

• U.S. exports to China have risen roughly 24% per year since 2001, making China the fastest growing market for U.S. goods

• Violent crime overall is down 55% since 1993, with violence by teens down 71%. School violence has declined by half from a decade ago

• Air pollution declined 25% over the past 30 years even as the population and the economy grew. Water quality also continues to improve. More progress will occur in coming years as companies see rising value in “going green”

• For the second time in two decades, the U.S. airline industry did not have a passenger fatality or major accident in 2007

• The upward “mobility” of the typical American remains the greatest in the world. Why? The U.S. economy “rewards” the combination of hard work and educational achievement more than ever before … and more than any other country in the world

• During the early 1960s, the five-year survival rate from cancer for Americans was one in three. Today it is two in three … continuing to climb … and the highest in the world

• Police officer deaths during 2008’s first six months were the lowest in 43 years

• A year-end 2007 Gallup Poll noted that “more than 8 in 10 Americans say they are satisfied with their personal lives at this time, including a solid majority who say they are ‘very satisfied’”

• Childhood obesity, which rose sharply over the past two decades, appears to have stabilized

• The U.S. still accounts for roughly 40% of global research and development (R&D) spending

• A record 29% of men have earned a bachelor’s degree or higher, versus 26% of women, also a record. This compares to a combined 7.7% in 1960. A record 84.6% of adults over age 25 now have at least a high school diploma, versus 24.5% in 1940

• Seat belt usage by Americans is currently at 82%, versus 49% in 1990 and 14% in 1983

• Flexible work schedules are now the norm for 43% of workers, up from 29% in 1992 and 13% in 1985. This allows greater flexibility for more people, especially those with children

• In 1967, only one family in 25 earned today’s equivalent of $100,000 or more. Today, one in six families does. The share of families earning more than $75,000 annually in real dollars has tripled from 9% to 27%, while the share of families earning between $5,000 and $50,000 in real dollars has fallen by 19% since 1967

• The U.S. role of dominance in the global economy in recent years has been as clear-cut as at any time since the 1950s

Jeff Thredgold is an economic consultant to Zions Bank

Featured in the Winter 2009 Issue of Zions Bank’s Insight newsletter within the January/February 2009 issue of the Community magazine.

*Artwork from arimoore under Creative Commons license at Flickr.com.