Crystal ball times three

OK, I lied. Part three of business writer Phil Perry's economic forecast story for 2009 did not get posted Friday morning. But it is Friday afternoon, so I was close. One more to go, along with a short sidebar story, that I'll post early next week. Just as a reference point, here's part one and here's part two ...

Businesses scale down
Your course probably will be confronted with the same credit squeeze your golfing customers experience. “Practically everything we sell uses financed money,” says Don Schackne, president of Personnel Management and Administration Associates, a consulting firm in Delaware, Ohio. “Our whole economy revolves around borrow, pay back, borrow, pay back. But now the banks are saying ‘We don’t have the money or if we do we are going to be real careful.’”

As we enter 2009 it’s clear that the main focus of the nation is on addressing and alleviating this credit squeeze. “The lack of credit availability and its exorbitant cost when available, trumps every other business problem,” says Ken Goldstein, an economist at The Conference Board.

Frozen credit can have serious impact on any company’s operations.  “We’re feeling the credit crunch,” says Michael Smeltzer, director of the Manufacturers Association of South Central Pennsylvania, a trade group whose members employ some 250,000 workers. “One of our members producing components for capital goods laid off 25 percent of its workers last week.” The reason was directly attributable to the credit freeze that is prevalent around the country. “The companies that are buying our member’s products are purchasing less inventory because they cannot get the necessary funding.”

Given the tight credit environment, your facility will most likely take a second look at expansion plans. Capital investment is expected to decline 2.7 percent in 2009. That’s a dramatic pullback from the 3.1-percent expected increase of 2008.

The credit freeze may even affect your ongoing operations if you become a target of your bank’s belt tightening. “I would expect more banks will be calling clients and saying ‘We want to make some changes to our relationship,’” Simson says. “That will cause some pain.”

What kind of changes? “A banker might say, ‘I want a higher interest rate,’” Simson suggests. “Or, ‘I want more structured terms.’ Or more monitoring of your financials or a different legal agreement or higher fees. Some bankers might even say, ‘Maybe you will be happier with another bank.’ Well, if three out of five banks start saying that, you have a credit crunch and you can’t borrow money at any cost. Such conversations are probably happening in many places even as we speak.”

Are you in the practice of using one or more credit cards to fund your inventory and other needs? Be prepared: Your providers may either lower your credit limit or start beefing up their bills. “Many of the financial companies suffering huge losses are big backers of credit cards,” Holt says. “So they will be looking closely at making more money by upping the costs of their cards to both merchants and users.” What to do? “Keep an eye on your cost of accepting cards. Start to look around for better deals.”

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 might be “significantly higher” this winter than they were last year, Hoyt says.
While the cost of oil has been trending down in recent months, the decline is not steep enough to make up for the sharp increases of 2008. “Even if prices go down further they are not expected to get to where they were earlier in the decade,” Koropeckyj says. The reason is growth in demand from China and India. “There is more demand in general and less ability to drill for more oil easily at a low cost.” The price for a barrel of oil is expected to be $70 by the end of 2008 and $83 by the end of 2009.

High energy costs can affect profits. “The energy issue is becoming a bigger and bigger issue in our profit-and-loss statements, and I don’t know where the end is,” Smeltzer says. “I think what will happen is, manufacturers and others will begin to migrate more frequently in search of lower energy costs just as they have done in the past for lower labor costs.”

Again, we'll cap things off Monday with the final part of the story, along with a short sidebar.