Multi-Unit Franchisee Magazine Issue I, 2013 | Page 90
FranchiseMarketUpdate
By Darrell Johnson
Is It 2012 All Over Again?
Will Congress finally act fiscally responsibly in 2013?
I
n all likelihood, 2013 will feel a lot
like 2012. Only two significant factors could change the economic environment in 2013 from the past
two years of choppy, but painfully gradual
improvement.
One factor—global conditions—is
unpredictable and largely out of the control of any of us. Global weaknesses are
outside our control, but weigh heavily on
the recovery. And it’s unlikely many positive shocks are looming in the next year
or two internationally. We can’t expect
much from Europe any time soon. BRIC
countries are unpredictable, led by China’s
apparent slowdown.
The other factor—our own Congress—
is within our country’s control. Unfortunately, I don’t have very high confidence
in a positive outcome. If the politicians in
Washington somehow are overwhelmed
by a strong dose of common sense (I hold
out very little hope for this), the influence
a compromise will have initially is big,
in that it removes uncertainty. Knowing
what tax and spending environment we
will have for the next few years will help
all of us make better business decisions.
We have a growing lag in capital spendi ng caused by uncertainty; a compromise
will reduce that uncertainty and stimulate
basic economic growth. The same is true
for consumers: uncertainty will diminish
and spending decisions will be made and
not delayed. However, many of the spending decisions may be to not spend for the
following reasons.
Public debt is above 100 percent of
GDP. Not only the federal government,
but also some of the most populous states,
have no ability to spend their way back
to economic health. Although household
debt has started to come down from alltime highs, it is only at 2006 levels and still
well above historical norms. We simply
took about 10 years of normal consumer
and government spending and compressed
it into seven. Earning our way back to
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Multi-Unit Franchisee Is s ue I, 2013
normalized spending levels is still a few
years away.
Further, a lot of consumer spending
ability is in the hands of older Americans,
who are starting to enter a retirementspending mindset. Since 1965, the ratio
of Social Security covered workers to
beneficiaries has dropped from four to
below three. This ratio is headed lower,
and we can’t do anything about it quickly
because it’s a generational issue—unless
we do something such as open our borders to massive immigration, which usually
involves younger people.
If Congress can
remove the
uncertainty that is
within their power,
we will have a decent
recovery over the next
two to three years.
Finally, hundreds of years of economic
history has shown that rebounds from
downturns caused by financial crises come
in three phases and take 7 to 10 years to
find a new normal. This time around the
first phase, marked by capital contraction
from consumers, businesses, and government, lasted until 2011. We’re in the
second phase now, revealed as a gradual
willingness for capital providers to begin
lending again, albeit very conservatively. By
historical standards, this phase should last
another two to three years. Thereafter, we
will reach a new normal where consumers
are optimistic, businesses are expanding,
and capital providers are willing to move
out further on the risk curve, pricing loans
to reflect differential risk.
All these factors lead me to conclude
that we are two to three years away from
seeing significantly improved confidence
levels, the most reliable indicator of economic activity. Therefore, the ability of
Congress to alter the 2013 economy is
indeed limited on the upside. However,
they can significantly affect this forecast
on the negative side. While the fiscal cliff
was scaled, further delaying a willingness
to meaningfully address the underlying issues—primarily tax policy and the social
safety net—will lead only to further uncertainty. And uncertainty is the enemy of
making job-creating investment decisions.
To be sure, the Fed has done all it can
to buy time for Congress to get infected
with common sense. Interest rates are at
unprecedented lows, which at first had a
modest stimulus effect. However, few consumers or businesses are waiting for interest rates to drop another 25 basis points
before making an investment decision.
The cost of debt capital is so low right now
that it isn’t much of a factor in investment
decisions. This manufactured low-interest
strategy will work for only another year
or two, at which time we are likely to see
a rapid rise in interest rates, putting a big
damper on the recovery.
Through all of this, consumers and
businesses have remained quite optimistic,
a clear cultural difference that Americans
have always had. Taken as a whole, businesses have lowered their debt-to-capital
ratios and are sitting on a lot of cash. Banks
also are sitting on a lot of cash. If Congress can remove the uncertainty that is
within their power, we will have a decent
recovery over the next two to three years.
However, if Congress continues to perfect
the business of finger-pointing and blame,
it makes it very hard for businesses and
consumers to make capital expenditure
decisions they will have to live with for
many years to come.
Darrell Johnson is CEO of
FRANdata, an independent research
company supplying information and
analysis for the franchising sector
since 1989. He can be reached at
703-740-4700 or [email protected].