A Tale of Two Recoveries

Where the US Economy is headed in 2011

At a recent luncheon in Atlanta, Marci Rossell, economist and former co-host of CNBC’s SquawkBox, offered an interesting explanation as to why the US economy appears so slow to recover from the 2008/2009 “Great Recession”.  Speaking to a joint session of CREW and CoreNet members and guests, Ms. Rossell chalked up our economy’s performance to a tale of two recoveries.

As defined by economists, the US economy has already fully recovered from the 2008/2009 recession.  Economists typically measure an economy’s health by its level of production.  According to Ms. Rossell, since the US economy has reached pre-recession production levels, we have therefore recovered from the recession.

To many businesses, though, it doesn’t feel like the recession is over.  Despite several quarters of positive GDP growth, unemployment remains stubbornly above 9% (at 2003 levels) and small business finances remain precarious.  So, with 2007 production levels at 2003 employment rates -- what gives?

A closer look at the numbers reveals something interesting.  There are actually two recoveries in the works.

Large, global, export-focused manufacturers have been experiencing positive earnings growth and positive “surprises” (higher than expected earnings).  These include companies like Intel, Boeing, and Caterpillar.  They have reduced their manufacturing and financing costs and found welcome markets for their products overseas.  On the other side, smaller, local, service sector businesses have not on the whole yet recovered.  Why?

Global manufacturers’ businesses are capital intensive.  For global manufacturers to increase profits, they reduce direct costs (meaning headcount), take advantage of cheaper financing costs (near zero real interest rates), and improve efficiency (invest in equipment and systems).  All these conditions occurred during the recession and are making current conditions positive for earnings growth.

Local service businesses, on the other hand, are labor intensive.  As revenues decline, so does the need for employee labor.  Until revenues increase at a stable rate, small businesses will avoid hiring more employees.  Typically, for these businesses to see revenue improvements, their customers, i.e. the average consumer, must increase spending on everyday services such as manicures, gourmet coffee, and eating out.  These activities are often the first to go when a family tightens its budget and are typically the last to return as family finances improve.

So, where does that leave the US economy in 2011 and beyond?  The US economy typically grows at a 3% annual rate (the historical trend).  With that level of growth, overall unemployment should decline to the 8% range over the next year or two.  Unfortunately, all of the stimulus money pumped into the financial system will push up interest rates and inflation.  But higher interest rates are not all bad.  Rising interest rates indicate increased economic activity and encourage more saving.

During the recession, the average American family reduced its budget, paid down credit card debts (first time in a while!), and actually saved money.  The “Savings Rate” increased from 0%, where it had been for many years, to nearly 5% now.  This means families are putting cash into bank accounts, money markets, and stocks and bonds.  This helps the economy because this money gets multiplied in the banking system through credit (typically 5x to 8x the amount of savings).  Increased credit availability should begin to spell relief for small businesses who are capital constrained, and, thus, help stimulate their ability to hire new employees.

Ms. Rossell offered one more observation.  Due to the currently improving manufacturing exports picture, major port cities have already seen an economic recovery.  On the contrary, if you are a landlord in an inland city with a portfolio of service sector tenants, hold on to your hat.  The wild ride is not yet over for you.

The long, slow march to a strengthened economy and improved employment picture is clearly underway.  The US economy is producing goods wanted around the world and so long as consumers step out occasionally for a high-end cup of joe or treat themselves to a nice meal out, we should see steady progress toward reduced unemployment in the service sector as well.   Although currently a tale of two recoveries, the twain should meet in the next couple of years, spelling relief for many anxious businesses, large and small.

Galaxy Partners is a national corporate real estate firm headquartered in Atlanta, Georgia. Galaxy provides Consulting, Transaction, and Management services exclusively to corporate clients throughout the USA.

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