Economic Forecast for 2010

Predicting the future is hard enough but it’s even more difficult as businesses grapple with an unprecedented recession. There’s just no reliable way to guess what 2010 will bring and many business owners said as much.

What many of them agree on, however, is there are good signs; they’re starting to peek around corners with more ease. But most of them also agree they don’t hold much promise for a healthy or full recovery in 2010.

Kathy Deck, the director of the Center for Business and Economic Research at the University of Arkansas and the area’s leading economist, said 2010 will be the year when the recovery takes hold, “but it will do so in fits and spurts.”

In her confident manner, she likened it to taking two steps forward and one step back. Business owners, she said, will have to analyze themselves and ask, “How does my business survive and thrive, how do we look compared to the competitors, and how do we get our piece of the pie?”

It will be tough, Deck said, but not catastrophic.

Here’s a look at what leaders in seven industries said about their plans for 2010:

 

Education

Down economic times can to be a boon to the education sector.

At least that’s the thought according to a Career Builder Industry Trends survey conducted earlier this year. The survey indicated 21 percent of workers plan to go back to school, either to obtain a formal degree, certification or some other form of training.

Marion Dunagan, assistant dean for graduate programs at the University of Arkansas’ Walton College of Business graduate school, has evidence even closer to home.

“Graduate school continues to be a terrific place to weather an uncertain economic climate,” Dunagan said. “The Walton College graduate school saw an 11 percent increase in enrollment last fall; applications for our MBA program that begins this January are up 60 percent.

“Not only are our numbers up, the quality of our students has increased substantially over the last year as more talented individuals are opting for a graduate degree to help secure their future.”

On a larger scale, the UA saw its total enrollment increase to 19,849 – an all-time high – for the 2009 fall semester. Applications for next year are up, too, according to vice provost for enrollment Suzanne McCray, meaning the UA might finally top a 20,000-member student body.

Northwest Arkansas Community College in Rogers continues to grow, too. Its 2009 fall enrollment of 8,104 is more than 41 percent higher than in 2007.

 

Commercial Real Estate

Empty storefronts and vacant office buildings were a common sight in 2009, and 2010 likely will be another challenging year for commercial real estate. Brokers are optimistic the market will begin to recover, but not until 2011.

Clinton Bennett of Grubb & Ellis, Solomon Partners in Bentonville, said the downturn in the market stemmed from the tightening lending environment as well as the perception of potential tenants and buyers.

“There’s been this perception that the situation is a lot worse than it actually is,” he said.

But Bennett believes those perceptions are improving.

“We’ve started to see the formation of the bottom in my mind,” he said. “Potential buyers and tenants are starting to realize that if they continue to wait for prices to drop, they might miss out on some real opportunities.”

Steve Fineberg, president of Steve Fineberg & Associates, said the commercial market is affected by several economic factors, all of which will need to improve before a turnaround can begin.

“The need for space is created by the expansion of businesses and/or startups,” he said. “The demand for expansion is driven by consumers.”

There hasn’t been a demand for space, which has resulted in a reduction in prices and lease rates, and an increase in vacancy rates. Vacancy rates in the office/retail submarket increased from 22 percent in the second quarter of 2008 to 23 percent in the second quarter of 2009.

Ultimately, the market will correct itself, Fineberg said, but it will take a lot longer without help from the government. The government could accelerate the market correction by implementing incentives for businesses to expand and for consumers to spend money, he said.

Marshall Saviers, vice president of Sage Partners in Fayetteville, said office leasing activity has picked up in the last three to six months.

“It seems most tenants sat on the sidelines for the first half of the year,” he said. “We expect office leasing activity to continue to be steady or pick up slightly in desired areas and buildings.

 “Landlords will have to continue to be aggressive, however.”

Investment activity has remained slow, Saviers said, but there are more potential buyers in the market looking for deals.

  “Hopefully investment transactions will start happening once buyer and seller expectations meet,” he said. “Land transactions will continue to be slow as end users are the only prospective buyers in the market.”

Banking

In 2004, the Business Journal reported, “Optimism was en vogue for bankers.”

Though optimism is still mentioned, most are singing a slightly different tune as they enter 2010. Jim Taylor, Northwest Arkansas president of First Security Bank, said he counts himself as cautiously optimistic.

“I don’t think we’ll be fully recovered this time next year,” he said, “but we’ve certainly seen improvement since this time last year.”

FSB is starting to see some things “shake loose” in terms of the residential market, but Taylor thinks cash flow and liquidity will continue to be restricted. Jobs will be the key to the economy, he said.

Taylor said loan portfolio quality will be key for banks over the next year.

“That’s a huge deal in profitability,” he said.

FSB is reviewing fee structures to “make sure it coincides with where we need to go,” Taylor said.

Another banker, who asked not to be identified, echoed Taylor’s sentiment about jobs. He was generally more pessimistic than Taylor about 2010, but also noted some repossessed property was beginning to move off his bank’s books.

Randy Dennis, president of DD&F Consulting of Little Rock, said as long as the economy is lagging, it will stress banks.

“Good borrowers are running out of money and I think it will [cause] wear and tear on banks,” he said. 

Dennis doesn’t think there will be another failure in Arkansas unless it’s a liquidity failure that “could hit any state at anytime,” but are few and far between, he said.

As for consolidation, Dennis thinks there will be more over the next couple of years, both through merger and acquisition activity as well as some banks divesting themselves from areas they moved into during better times.

He noted Arkansas banks are doing much better than banks in many other states.

Hospitality

How badly is the hotel industry hurting?

“We’re looking under every rock. Nothing is out of the realm of possibilities,” one local manager said when asked how hotels might try to stem the tide of declining revenues in 2010.

Matthew Disheroon, general manager for Homewood Suites by Hilton in Rogers, said he expects business at most hotels to be down as much as 10 to 35 percent from 2008 to 2009. He also agrees the industry isn’t likely to find an immediate fix.

“All the indications we’ve seen lead us to believe we won’t see any positive changes for a while,” Disheroon said, adding “a while” might mean the middle of 2011.

“We are anticipating 2010 to be relatively flat compared to 2009.”

And while the extended-stay market showed some signs of promise in Northwest Arkansas in 2009, the overall hotel market appears to have reached the saturation point. Both Marilyn Heifner, executive director of the Fayetteville Advertising and Promotion Commission, and Tom Galyon, executive director 
of the Rogers Convention and Visitors Bureau, said as much when contacted for a story in July.

“We only have a shortage about five or six times a year,” Heifner said in reference to events such as University of Arkansas football games and Bikes, Blues & BBQ.

 

Retail

Small retailers were sheepish about predicting their lot for 2010.

Steve Melody, owner of three Melody’s Choices gift stores, said it’s become increasingly more difficult to analyze the present, which helps him predict what to do in the future.

“It might be good one day and then off the next,” he said. “It’s almost a mish-mash.”

Consumer habits have been sporadic and seem to ebb and flow with whatever tone the national news seems to be taking, he said. 

Melody’s October was “a little soft,” but as of mid-December, the holiday months were tracking about the same as in 2008. This year was his 39th Christmas in business, he said.

He won’t know exactly what he’s going to do until the holiday numbers are in and tallied, he said. With that in mind, Melody said he replenishes whatever is selling and he plans to go to market in January to restock Christmastime goods.

On the other end of the retail spectrum, officials at Wal-Mart Stores Inc. have consistently hammered home the low price message all year, hoping to drive holiday sales. The company also raised the bar with its online presence, engaging in a price war with Amazon.com.

The National Retail Federation said in early October it predicts a 1 percent decline in retail spending during November and December.

How Wal-Mart fared won’t be known until early January as it reports its fiscal year-end, but the third quarter beat analyst estimates and the company raised the range of guidance for diluted earnings per share.

“The overall picture is hopeful and positive and the consumer seems to be upbeat and good natured,” Melody said.

 

Agriculture

The agriculture industry is expected to face another challenging year as the economy impacts demand. Leaders at Tyson Foods Inc. are hopeful, however, that demand will improve over 2009.

In its most recent earnings statement, Tyson said it had a net loss of $455 million in its fourth quarter, compared with net income of $48 million for the same a quarter a year ago.

In a conference call in November, President and CEO Donnie Smith said 2010 will be a better year for the company, but not without challenges.

“In general we’ve got to grow our volume, improve our return on sales, protect our cash and keep our inventory on target,” he said. “We need to fill up our plants and get better at yields, line efficiencies and labor efficiencies.

Chief Operating Officer Jim Lochner said he expects the improving economy will increase the demand for chicken, beef and pork products.

“Fiscal 2010 should be a much better year,” he said in a statement. “We think beef, pork and prepared foods will continue with a solid performance, and we expect the steps we’ve taken to improve chicken will manifest themselves.”

 

Transportation

Slow growth appears to be about the best the trucking industry can expect in 2010.

That’s the case not just in Arkansas, where companies like J.B. Hunt Transport Services Inc., Arkansas Best Corp., USA Truck Inc., and P.A.M. Transportation, are based, but nationwide. A recent Fitch Ratings report labeled the trucking industry as “highly fragmented,” a scenario that’s “made capacity rationalization more difficult.”

Fitch is a global rating agency that provides credit markets with independent and prospective credit opinions, research, and data.

“Consistent with the modest improvements in market conditions projected for next year,” Fitch director Stephen Brown said in a news release, “we expect the impact on freight transportation companies’ ratings in 2010 to be relatively minor, although any changes in ratings or rating outlooks are likely to be more positive than negative.”

Additionally, while the report expressed the belief volume trends might be on an uptick, it also contained the idea overall freight demand is “not expected to return to pre-recession levels until sometime in 2011 at the earliest.”