Real Estate Forecast 2009: Economic Slowdown to Continue

The frightening news never seems to end: stock markets crashing, government bailouts resulting in creeping socialism and corporate welfare, massive home foreclosures, frozen credit, crippled banks and massive fraud in the billions. The government was not there when they were supposed to be there to act as a referee and regulator. And as any hockey fan can tell you, when there are no referees present, the game gets ugly

How does this affect your company? As we enter the New Year there's no doubt business is facing the most challenging economic environment in decades

The U.S. Economy went into recession in December of 2007; however the media avoided the subject so as not to take the spotlight off, and a highly profitable political race for the presidency. As we entered 2009, the erosion of the housing market became the number-one problem facing the economy, and as the economy continued to erode, the rate of foreclosures started to skyrocket. A bottoming out of housing prices is not expected to occur until the end of 2009.

The housing market erosion caused severe problems in the financial sector. According to Moody's Economy.com the Gross Domestic Product (GDP) growth for 2009 is expected to be only 1.0 percent. The Gross Domestic Product is the yearly total of all goods and services produced in the United States . That's a considerable drop from the 1.6 percent increase anticipated for 2008. To put these numbers in context, the GDP for an economy in average growth mode is 2.5 percent.

To position your company for survival or even success, you must comprehend three major trends: declining consumer spending, frozen credit, and a rise in the cost of goods sold.

As Americas manufacturing base moved offshore to cheaper labor markets. C onsumer borrowing and spending has driven the economy. In 2003, consumer spending represented 65 percent of the American economy, today that figure is 70 percent. The reason for the increase has been the availability of credit. Now we are seeing that availability of credit being reduced. As a result, we will see consumers recoil from any discretionary purchases.

Rising unemployment and the threat of unemployment will only add to consumer anxiety. The nation will likely be looking at continuing job losses into the summer of 2009. Whatever job gains can be accomplished in the second half of 2009, will most likely not keep the unemployment rate from rising. The unemployment rate is expected to grow to 7.07 percent by the end of 2009 from the current level of 6.5 percent (October 2008 figures).

Job losses are clearly a negative when it comes to household income. Moody's Economy.com predicts that total wages in the country will rise by 2.86 percent in 2009. That moderation from the 3.59 percent increase of 2008 should put further downward pressure on sales — especially at retailers. Consumers who don't have jobs or who are concerned about losing them will be cautious shoppers this Christmas and well into the New Year. When incomes are under pressure, consumers tend to find alternative sources for pocket cash. Unfortunately, these sources are also drying up because even alternative sources of income require other consumers to take advantage of them. Most Capital gains have dried up and there is no more appreciation in home equity, which people have borrowed against in the past. Indeed, borrowing any kind of money is more difficult now, even for consumers who have always paid their bills on time. Many of the financial companies suffering huge losses are big backers of credit cards.

Consumer confidence is clearly very weak right now. Shoppers are expected to cut back in particular on high-ticket goods, and will opt to repair rather than to replace high-ticket goods. Shoe repair is a good business to be in right now.

As we enter 2009, it's clear that the main focus of the nation is on addressing and alleviating the credit squeeze. The lack of credit and its exorbitant cost when credit is available trumps every other business problem. Practically every good or service American businesses sell uses financed money. Small businesses in the American economy depend upon a cycle of healthy cash flow where they can borrow, pay back, borrow, and pay back. This cycle is in danger as banks are saying, we either don't have the money to lend or we have to tighten up on the terms of lending.

Given the tight credit environment, companies will most likely take a second look at expansion plans. Capital investment is expected to decline by some 0.13 percent in 2009. That's a dramatic drop from the 3.78 percent expected increase of 2008.

If you are in the practice of using one or more credit cards to fund your inventory and other needs? Be prepared for your credit card companies either lower your credit limit or start beefing to add on more user fees up their bills. Businesses of all sizes will be hit by an increase in the cost of goods sold, driven by higher energy prices. Pricier fuel translates into higher costs for production and for transportation to end users, putting pressure on manufacturers, service businesses, and retailers alike. And on the buy side, consumers are shelling out cash for energy that they would otherwise spend on goods and services. Home heating costs will be significantly higher this winter than they were last year and high-energy costs will continue to be a major feature in profit and loss statements.

Survival of your business may depend upon looking for ideas in technology and system improvements to get more done with fewer labor hours. Use the down time to increase your businesses capacities through educating your staff, refreshing your technology and looking at your processes. Look for new opportunities to sell goods and services offshore through the use of the Internet. The thing to remember, and it sounds counter intuitive, this is the time to build up your business through strategic planning and capacity building. As you enter the New Year, avoid panic and remember that you can't cut your way to profitability — you also have to create new initiatives that boost sales by offering customers real value. But plan those moves carefully, keeping one eye on the risky environment. Be sure of your projects before you invest in them or as my father used to tell me, “A wise carpenter measures twice before he cuts once, because you cannot stretch a board which has been cut too short”.