UMD Business Faculty Forecast U.S. Economy Sectors

Faculty at the University of Maryland’s Robert H. Smith School of Business have summarized 2012 forecasts for individual sectors of the national economy.

“Several important dynamics frame the 2012 economic outlook,” said Cliff Rossi, Tyser Teacher Fellow and executive-in-residence. These factors include:

• Massive financial deleveraging across the board by sovereign countries, state and local governments, banks, businesses, and individuals
• Fear and uncertainty among consumers and investors, despite faint signs of optimism at times
• Political self-interest and brinksmanship increasingly interfering with effective policy making

Rossi’s housing and small business forecasts incorporate prospects for credit and lending and segue to a banking outlook by finance faculty colleague Haluk Ünal. Consumer spending and retail forecasts follow, respectively, from marketing professors Janet Wagner and P.K. Kannan.

Housing

Housing will remain weak in 2012. We are in the middle of the cycle that started with the beginning of the crisis. We dug ourselves into an extraordinary large hole in terms where we have to come from in terms of house price depreciation standpoint. Also significant is the pace of foreclosure proceedings. The “robo-signing” controversy led to a moratorium on foreclosures – that has been lifted and at the end of 2011 we saw more foreclosure activity and that will put more property on the market and further depress prices and put further drag on any stabilization of housing markets in 2012. Thus, home prices will remain very weak and may decline a little bit more before stabilizing with slight improvement possibly by late 2012. – Cliff Rossi

Small Business

Small business owners will be challenged to obtain the credit they need for building their business and creating jobs. Moreover, they’ll be plagued by many of the same issues they faced last year in terms of building their client and customer bases. This being a presidential election year, we’re likely to face a lot of posturing and rhetoric around what Congress and the Obama administration could do for small business legislatively, but I wouldn’t expect too much to occur in terms of changes to, or moving through of the legislation we saw proposed by President Obama around the American Jobs Act.

On the other hand, several surveys at the end of 2011 indicated the small business outlook for 2012 as bullish along several dimensions. Small business owners signal they’re seeing improvement on the horizon, in terms of both their overall revenues and their ability to retain new customers and clients and in their ability to improve on the jobs front as well. The post-Thanksgiving “Small Business Saturday” was quite significant. About 100 million Americans supported (purchased from) small businesses, which was terrific and it was a level of support about 15 percent higher than expected. This was hugely important, and a shot in the arm, for small business. My concern is that it appears to be just a short-term effect.

The credit available for small business in 2012 will likely be on par with 2011 and in some cases not as good. To break this down, the Small Business Administration hit a record year in terms of their $30 billion in lending. Because of what’s going on in Congress and some of the stinginess we see there, it’s unlikely we’ll see record lending from the SBA. Private lending to small businesses will remain weak and, at best, on par with 2011. – Cliff Rossi

Banking

The banking industry has been charging off massive amounts in bad loans since the end of 2007. Last year saw more of the same, and a significant amount of noncurrent loans are on the balance sheets. There are over 10 million underwater mortgages. These credit losses caused significant earnings volatility. Since there is no meaningful growth on the real side of the economy, the banking industry should not see any significant revenue growth, nor significantly increase lending. Interest rates are low, the term structure is flat. Securitization, which used to be a serious source of income, is dead. The million-dollar question is: ‘How does the banking industry make money?’

Absent of new shocks, delinquent mortgages should improve in 2012. However, the budget deficit and the growing federal debt is a major threat to the banking industry. And no one seems to know how our political parties should address it. Unemployment is expected to remain high, inflation to be moderate, interest rates low, and growth in corporate profits to be low. This is not an attractive outlook. On the other hand, across the ocean, the contagion from European sovereign debt crisis is a major risk. A deeper recession in Europe can have serious adverse effects for U.S. banks.

These risks are well known. What is not well known is how to hedge these risks. Those banks that know the answer will come ahead. Others will find themselves at the mercy of the government. – Haluk Ünal

Consumer Spending

The consumer spending outlook for 2012 seems anemic. The 2011 holiday season sales, overall, were robust and consumers increased their spending significantly, compared to the last two years. This has, of course, depleted savings and increased the debt consumers are carrying, and this will have a negative impact on spending in the first half of the year. Although employment levels have picked up somewhat, most of the job creation has been in the low-paying service sector, and thus will have a tepid impact on discretionary spending. Ironically, the increase in retail sales and a positive outlook for businesses in the last quarter of 2011, has led to increased demand expectations for oil (reaching over $100 a barrel at the start of the year), which in turn has led to higher gas prices at the pump. Higher gas prices, higher rents and stagnant income levels will limit any spending momentum gained from the last quarter of 2011. Spending on consumer durables are going to be affected the most. Past data suggests the U.S. economy tends to do well in election years, and there could be optimism on this count with regard to increased consumer confidence and spending especially during the latter part of the year. This is however tempered by the strained global financial markets and continued uncertainty in Europe, which have the potential for significant downside risk to the economy. If these risks are mitigated, we can expect a bounce back in consumer spending for the second half of 2012. 
– P.K. Kannan

Retail

The retail industry is coming off a holiday season that started with a bang, but ended with a whimper. According to the National Retail Federation, in-store sales on Black Friday were 6.6 percent higher than last year’s. Retailers’ sales were up, but they were heavily reliant on discounts, which will take a toll on profits. The Wall Street Journal reported that sales stalled in December, increasing only 0.1 percent from November. In-store sales growth was driven by autos, which compensated for a 3.9-percent decline in electronics, reflecting consumers’ resistance to the price of televisions. The New York Times reported November-December sales for online retailers were up 15.5 percent.

In 2012, growth in overall sales for retailers is likely to be modest as consumers face stagnating wages and unemployment remains stubbornly high. Consumers will continue to focus on value. The greatest growth in sales will be in the e-commerce and m-commerce channels. Successful retailers will serve their customers through multiple channels. This means not just in stores, but also through devices such as computers, mobile phones, tables and televisions. Retailers, such as Macy’s, have been increasing their use of apps and QR codes to deepen customer engagement

A number of store-level trends are emerging, as retailers innovate to stay interesting and relevant to their customers. First, retailers are reducing average store size. For example, WalMart has a new 15,000 square-foot format, called WalMart Express, which will focus on convenience items. Second, retailers are experimenting with subleasing floor space to other, smaller retailers. For example, Target will begin subleasing space to Sephora and Trader Joe’s. Finally, retailers are growing by expanding into Canada, where the economy is stronger.

In 2012, retailers will face a challenging economic environment and demanding consumers. Their success in increasing sales will depend on proactive, customer-focused strategies. – Janet Wagner

Editors: The contributing faculty members are available for further comment. The Smith School has an in-house broadcast facility for live or taped interviews via fiber-optic line for television or multimedia content.

Cliff Rossi, executive-in-residence and Tyser Teaching Fellow
crossi@rhsmith.umd.edu, 301-908-2536, blog/bio: blogs.rhsmith.umd.edu/cliffordrossi

Haluk Ünal, professor of finance
hunal@rhsmith.umd.edu, 301-405-2256, bio:

P.K. Kannan, Ralph J. Tyser Professor of Marketing Science and chair of the Department of Marketingpkannan@rhsmith.umd.edu, 301-405-2188

Janet Wagner, associate professor of marketing and director of the Center for Excellence in Service
jwagner@rhsmith.umd.edu, 301-405-2126