AKRON (Jan. 3, 2011) — If economists are certain about one thing—based in part on the “Great Recession” this country is still emerging from—it's that “uncertainty” will prevail in 2011.
“The watchword for the economy going into the new year is uncertainty—uncertainty about the political climate; uncertainty about taxes; uncertainty about commodity prices; uncertainty about Fed (Federal Reserve Board) policy and interest rates; uncertainty about the dollar,” said Bill Witte, associate professor emeritus of economics at Indiana University and a member of the Kelley School of Business' annual Business Outlook Panel.
“Despite a modestly stronger foundation for continued economic growth, thanks to some strengthening in consumer and capital spending, the U.S. economy remains quite fragile entering into 2011 and downside risks remain prominent,” according to the Conference Board, a nonprofit group that issues economic forecasts and assessments. It added: “The disappointing November employment report underscores our view that the U.S. economic recovery faces large headwinds that likely pushes economic growth below 2 percent for all of 2011.”
“I think consumers are going to be more confident because we will have less layoffs. The economy will continue to increase, not at the levels that people want, but it will increase,” said Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Mich.
“That's a positive. The more positives in a marketplace, the greater the increase in consumer confidence. For 2011, we see the economy gaining modestly. We see employment gaining modestly. We see a reduction in layoffs. We see an increase in consumer confidence,” Mr. Virag said.
The consensus seems to be that the U.S. economy, and the automotive market in particular, have nowhere to go but up.
“The auto market will probably be looking better than most other areas of the economy. And that's because it's coming from being so far down,” said Ken Mayland, president of ClearView Economics L.L.C. in Pepper Pike, Ohio.
“The past year has been one of disappointingly weak recovery, and, sadly, we expect that 2011 will bring more of the same,” Mr. Witte reported, noting that 2008 and the first half of 2009 produced the worst recession since the Great Depression and the U.S. economy has experienced the worst recovery since World War II.
Over the five quarters since the economy hit bottom, total growth has only registered at 3.5 percent. The economy overall is expected to expand at about a 3-percent rate in 2011. “This will be a little better than 2010, but not enough to make much progress against the damage done during the recession,” Mr. Witte said.
Expect joblessness to remain a challenge, he added, predicting inflation will remain below 1 percent through the coming year, while consumer spending is expected to rise very slowly. Energy prices are forecast to increase moderately in 2011 in the absence of any major supply or security disruptions, he said.
On the upside, the lackluster economic forecast is a boon for the automotive aftermarket, which has profited from prevailing consumer reluctance to spend big sums on new vehicle purchases for the past couple of years.
“When you look at new vehicle sales, yes, we've had an increase in total units but we're coming off a dismal 2009…when you don't buy new cars, you tend to replace your current vehicle with aftermarket parts. So that has helped the tire aftermarket,” Automotive Consulting Group's Mr. Virag said.
He predicted the final tally on 2010 new passenger vehicle sales will range between 11.5 million and 11.7 million units. Conversely, in a typical recovery the industry would be enjoying sales of 13 million to 13.5 million units, he said.
“We're looking at slow but steady growth. We're looking at new vehicle sales in the 12 million to 12.2 million range in 2011. And, again, a lot of it still hinges on the economy. If the economy becomes more robust, if there are gains in employment, if people feel secure in their jobs, we'll see overall improved vehicle sales and improved tire sales,” Mr. Virag said.
“Vehicle sales would continue to grow because we're still producing less than the scrappage rate, so we have to work toward producing and rebuilding the stock of autos on the road—we need that,” said Clear¬View's Mr. Mayland.
“It's going to be a pretty mediocre year for the economy and in terms of the public's point of view, unsatisfying.”
Even with the possible increase in new-vehicle purchases, Mr. Virag believes the automotive aftermarket will continue to enjoy improved sales.
“If you look at the new vehicle market, 12 to 12.2 million really is not that significant of a growth factor. So people will still be keeping their old cars. People will have to replace tires.
“It's a necessity that really you have no choice in if you're driving to work, if you're driving for pleasure, your tires are going to wear and they ultimately need to be replaced at some point in time—either through buying a new vehicle or replacing them through the aftermarket.
“So I think the tire market will gain both on the OE side, and I think it will gain on the aftermarket side,” Mr. Virag said.
“The fleets are getting older and so there's a substantial need for maintenance, a full range of maintenance, discretionary and non-discretionary maintenance,” said Mr. Mayland, who called this “a continuing positive factor.”
As for the persistently high unemployment rate, a survey of U.S. employers reports the most optimistic hiring expectations in more than two years, according to Manpower Inc. of Milwaukee.
U.S. employers across 13 industry sectors generally anticipate small staffing gains for the first quarter of 2011, according to the seasonally adjusted results of the company's latest quarterly Manpower Employment Outlook Survey. The adjusted outlook for the first quarter of 2011 is up 9 percent, compared with plus-5 percent during the same period last year and plus-5 percent during the fourth quarter of 2010.
Of the more than 18,000 employers surveyed, 14 percent anticipate an increase in staff levels in their first quarter hiring plans, while 10 percent expect a decrease in payrolls. The percentage of employers planning to keep staff levels unchanged, about 73 percent, “persists at unsurpassed levels.”
“Across nearly all geographies in the world, the confidence to do additional hiring is improving,” said Manpower Chairman and CEO Jeff Joerres. “However, like the U.S., the lack of robust demand for products and services is creating a persistent level of uncertainty.”
“The fact that hiring expectations are trending upward is an encouraging sign,” said Jonas Prising, Manpower president of the Americas. “This quarter's survey responses paint a picture of a job market that is easing up, although not as quickly as anyone would like. We are still stuck in first gear, but the ongoing sector-wide improvement we have seen over the last year suggests that the labor market is ready to shift to a higher gear in 2011.”
Among the 13 sectors surveyed, the first quarter outlook was negative only in the construction industry (down 9 percent), while government hiring is expected to be flat. Employers in mining and wholesale and retail trade expect their hiring pace to decrease compared with the previous quarter.
Employers in the Midwest and South are the most optimistic, with a net employment outlook of plus-10 percent. Employers in the Northeast have an employment outlook at plus-9 percent, while employers in the West have a plus-7 percent outlook.
What does this all mean for independent tire dealerships and auto repair shops? It depends on the local market dynamics, according to analysts.
“If you see a market opportunity, then you should definitely expand,” Mr. Virag advised tire dealers. “It depends on how much they retrenched during the recession, if they did, and what the opportunities are in the future moving forward. There's still going to be opportunities in the aftermarket. That's a growing opportunity.
“The fleet in North America is aging. With an aging fleet you know you have more demand for replacement parts. That will continue. Those companies that are in a good market position, they should definitely look at expansion opportunities.
“Those companies that are still experiencing a challenge in the marketplace, I think they should conserve cash and manage the business to ensure that they survive.”
With the Republicans regaining control of the House of Representatives, Mr. Mayland predicted the business climate may improve.
“Part of me says, 'OK, we'll have a friendlier business environment.' But what I would advise business is to continue what it has been doing over the past more than a year and hunker down and figure out how to get by with the current level of business activity….
“The coming year will be a year to keep tighter rein on inventories. I think there's been some inventory run-up over the past year.… Invest, not as if the economy is going to see gangbuster growth but invest just judiciously,” Mr. Mayland said, adding, “I think companies should operate their businesses cautiously, not optimistically.”
He said the recent stimulus package, including maintaining the Bush-era tax cuts, “takes 'pessimistically' off the table, or another way of saying that is it seems to reduce the chance of seeing a double-dip recession. It takes it off the table.”
Mr. Mayland also sees an easing of credit conditions for businesses. “We're moving in the direction of 'easier' underwriting. But we're a long way off from being 'easy.'…Banks will be more inclined to look at credit applications and act favorably on them.”
He noted that in 2011 bankers will be looking at business' financials for 2010, which was a recovery year compared with 2009. “Companies will have a favorable year behind them and in support of their credit applications.
“That should make the bankers more inclined to lend.”
As for a return to better times, Mr. Virag predicted the U.S. economy won't return to normal until 2013 or 2014, “after the next presidential election.”
Mr. Mayland had a more pessimistic forecast, facetiously predicting a return to normalcy by 2018 or 2019.
“What I worry about is this issue of fiscal drag,” he said, explaining that the recently passed extension of the Bush tax cuts will only add to the overall federal deficit and delay the inevitable tax increases.
“We've kicked that problem down the road maybe two years. But it's not going away…. At some point the bills are going to come due. The federal government is going to need to put in place some draconian spending cuts and make major changes in entitlement programs.”
With a higher fiscal deficit and an increase in taxes down the road, “all those things are going to weigh on the economy's growth prospects,” Mr. Mayland continued.
“So if we didn't have this fiscal drag, we might see a couple of years of 4- to 5-percent economic growth. But because of this drag from spending cuts and tax increases, that's going to keep us to 2.5- or, generously, 3.5-percent growth rate.”
At that low-growth rate, “you don't make much progress in lowering the unemployment rate.”
“The fiscal drag makes this drag out for a long, long time—the improvement in the economy and improvement in the labor market situation,” he said.
To reach Kathy McCarron: [email protected]; 330-865-6127.