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Cable Technology Feature Article

October 12, 2010

Business Economists Trim Growth Forecast

By Gary Kim, Contributing Editor

Economists at the National Association for Business Economics (NABE) said U.S. joblessness will remain high, with the unemployment rate persisting at over 9.5 percent or more through midyear 2011 before easing only slightly to 9.2 percent by year-end 2011. 

This will mark the worst post-recession job recovery on record, NABE said. NABE economists also have trimmed their projections on economic growth; those projections now remain sub-par through year-end. 

All of that obviously matters to any retailer of goods and services, including telecom, cable, satellite and application providers. In the enterprise market, it often is said that price matters only after functionality questions are answered. But in this environment, price might matter more than it has in the past. 

In the consumer market, where price always is quite important, it likely will be paramount. The buying environment likely will be complex, however. Consumers have shown a willingness to buy highly-valued products such as the iPhone (News - Alert) and iPad. But in many cases, that might come at the price of reduced spending on lesser-valued products. 

That could take the form of lower spending on more "commodity" type products, as consumers shift spending to products with perceived higher value. It takes no particular insight to guess that this will create additional pressures on profit margins and retail prices, as the logical approach is to bundle more value and offer higher discounts. 

That is not to say the economy will stagnate. Real GDP will accelerate gradually during 2011, but remain moderate for the whole of next year, with real gross domestic product now expected to advance 2.6 percent in 2010, down from the panel’s May prediction of 3.2 percent. 

Next year’s 2.6 percent gain is atypical for a cyclical rebound and only matches the long-term growth trend previously expected by the NABE panel. In other words, though there typically is an above-average growth spurt coming out of the recession, that might not be the case this time. The recovery will grind along, rather than skyrocket. 

As you would expect under such conditions, consumer spending is expected to remain modest throughout the forecast horizon due to weak job gains, persistently high unemployment, and negligible growth in household net worth reflecting only small gains in the stock market and home prices. 

This year’s holiday retail sales are expected to be especially weak, rising only 2.5 percent from last year. While most forecasters attribute the recent rise in household saving to “fundamentals,” especially losses in household wealth, one in five believe an attitudinal shift toward greater thrift has been the key driver behind increased saving. 

Most households probably are in the midst of a "deleveraging" process that diverts spending to debt reduction. But some think a broader trend might be at work that permanently depresses consumer spending. 

Labor market conditions will improve slowly. Monthly payroll gains are forecast to average 150,000 or less until the latter half of 2011, at which time gains will improve to a range of 170,000-175,000. 

The housing recovery is intact, but tepid overall. Housing starts in 2010 will barely improve over last year’s record low, though a sizable advance is predicted for 2011. 

Except for the dismal 2008-2010 period, housing starts of 750,000 units next year would still qualify as the worst showing since 1948. Home prices have also hit bottom, based on the FHFA Index. NABE’s Outlook panel’s call for a 1.5 percent decline this year has already been registered through the first half of 2010. 

Businesses represent the bright spot in the forecast. The outlook for real spending on equipment and software calls for sustained double-digit growth over the forecast horizon, and has actually improved since the last NABE forecast in May. 

Real spending on structures remains weak, but is shown to bottom out in 2011—a modest improvement over the last NABE forecast. Underpinning these prospects is a solid profit recovery of a 25 percent advance this year over last year’s already impressive 15 percent gain. Profit gains will moderate in 2011, but remain strong overall—up 6.9 percent.

The bad news for retailers is that the difference between "recovery" behavior and "still in the recession" behavior might not be all that different, at least for a while. Several obvious business strategies therefore will remain salient: "buying growth" through acquisition and fierce attempts to grab market share from competitors. 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Tammy Wolf