Sunday, April 20, 2014

Bill Conerly

Bill Conerly is principal of Conerly Consulting LLC (www.conerlyconsulting.com) and chief economist of abcInvesting.com. He’s also the author of Businomics: From the Headlines to Your Bottomline – How to Profit in Any Economic Cycle.

Features

Soft landing

2014 Economic Preview

Be prepared for an improving, but unpredictable, economy.

November 29, 2013

Landscapers and lawn care contractors will find the economy providing enough support for them to make progress, but 2014 will not be strong enough to bail out poorly managed operations. The local economy is important to everyone, and they will continue to be quite varied. However, the largest driving force in most communities will be the national economy.


Long way down. The recession was like a man walking down the street and falling into a deep hole. The falling down period lasted about a year and a half. Then another two years were spent climbing out of the hole. When the poor fellow was finally back up to street level, not only was he dirty and shaken up, but he was three blocks away from where he would have been if he had been able to keep walking instead of going down and up the hole. Now the guy is shuffling along, not able to regain his normal stride. He’s moving in the right direction, but not as fast as he usually walks. As a result, he’s not catching up with his original schedule. We economists say that the country is out of recession, but nobody feels good about the economy now.

Consumers are increasing their spending, but only in pace with their incomes. There have been times when consumers were very optimistic and spent in anticipation of rising income or wealth – but not now. There have also been times when consumers were frightened and cut back their expenditures despite rising incomes – but not now. Instead, they are advancing cautiously. Be wary of media reports that “the consumer is tapped out” or “the consumer has too much debt.” Instead, recognize the wide variety of people out there. Some have jobs, some don’t.

Some have too much debt, while others own their cars and even their homes free and clear. Some have low wage jobs, but others are making good money. The landscaper does not need everybody to be doing well, so long as a fair portion of the population is doing well, and that’s the case today.


Slow build. New residential construction has been the brightest part of the economy in the past year – good news for contractors who install new grass, trees and shrubbery. Housing starts peaked at about 2 million units per year, then dropped to half a million units. Now we are on pace for nearly one million starts in 2013.

Next year should be even better. New construction will not regain the old peak level, but better days are clearly ahead. Mortgage rates are still low, though not quite as low as in the spring. More importantly, those years of very low construction left us in need of new housing. Lawn care professionals who gave up on the new construction market might want to consider re-entering that field.

Non-residential construction, in contrast, will remain fairly tame through 2014. Vacancy rates are still high, though edging down. Rents are just starting to increase. Usually, speculative developers would see a need for new buildings a few years out. Today, some see the need, but few can get financing. As a result, we are underbuilding relative to our long-run commercial property demand. In the meantime, property owners are just beginning to enjoy stronger returns. The small increase in occupancy, along with the small increase in rents, brings revenue up without much increase in expense.

In 2014 some property owners who had been keeping their maintenance costs at bare bones levels will decide to spruce up their properties for competitive advantage. The landscapers who make sales calls at the right time may well reap the benefits of increased maintenance spending.


Control variables. Sales potential in the lawn and landscape business is moderately positive, but labor costs are a substantial unknown. The trend for wage rates has been growth at about 2 percent per year. The economy won’t grow fast enough to put more upward pressure on wages, but politics could well change total labor cost.

The Affordable Care Act throws a monkey wrench into business labor plans. Small businesses are working hard to keep their full-time headcount to less than 50 employees, with full-time defined as 30 hours per week. Although the business mandate to provide care has been delayed, its implementation uses a one-year “look-back,” so employer statistics in 2014 will drive the health care mandate in 2015. It’s likely that those employers willing to offer full time work can get good labor at a favorable wage rate.

On the other hand, the individual mandate to buy healthcare coverage may make workers feel a little poorer and less willing to accept a job without benefits.

Policies toward immigrant workers are also in a state of flux. Mandatory E-Verify usage may well spread. Many employers find that workers with paper documents don’t care to be scrutinized by the electronic system. Contractors who are required to use E-Verify are likely to find a smaller pool of job applicants. The future of E-Verify is caught up in the political controversy over immigration policy.


On small and large scale. Small businesses with bank credit lines will find that interest rates remain low. The cost of financing trucks may edge up a little. However, the many companies without bank loans will continue to find that credit standards are fairly high.

The local communities across the country will generally feel the effects of these national trends. The overall economic forecast is favorable, but risks must be considered. Fifty economists were recently asked about the risk of recession. Their responses averaged out at 13 percent probability, or about one chance in eight. That’s a lower risk than they reported a year ago, but one chance in eight is still pretty high.

Be ready. Bankers say the biggest mistake their business customers make in a downturn is being slow to cut expenses. A contingency plan with trigger points can help speed up the decision-making process. First, write out what you will do if business turns down. Begin with some easy cutbacks, then move to more serious expense slashing, and finally write down the steps you would take if the business were at risk of failing. Next, pick a trigger for each stage.

The first round of cuts might occur if sales drop by five percent; the second round of cuts after a 15 percent decline; and the final cuts after a 30 percent drop in sales. Everyone has different costs and cushions, so everyone’s numbers will be different. Find good numbers for your business. If a recession comes, your decision-making will be much faster if you thought through your plans ahead of time. You probably won’t need that contingency plan, but if you do, then your company’s survival may depend on it.

 


The author is an economist and a writer for Forbes.

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