Ephor Group is a Management Advisory firm that provides Useful Capital and Management Science to create wealth producing enterprises.

2012 Economic Forecast

 

The economic forecast is for a slow growth economy for the foreseeable future.

  • Uncertainty in 2010/2011 is creating market bifurcation separating companies into "Laggards versus Leaders." Uncertainty stems from:
    • Slow Growth Economy, Debt troubles, Debt hangovers, Global crisis, Political election, Delayed decision making, Rampant mediocrity, too much noise and clutter in the marketplace.
    • Rising Costs & Complexities = rising costs across healthcare, labor, and regulatory compliance costs of doing business. The US government continues to pile on new regulations, 40,000 pages worth just went into effect on the first of January.  The most significant will be the IRS 1099 reporting requirement.  Obamacare still creates uncertainty and is driving up healthcare costs.
    • Small business squeezed by big government and big business.
  • Capital & Financial Engineering has limited availability.
    • Credit facilities will be asset based lending only.
    • Venture continues to ride the wave of “Consumerism.”
    • Mezzanine lenders remain eager to put capital to work with transaction structure and pricing relatively flexible.
    • Access to growth capital for the very best business models only.
    • A third of corporate and financial corporate development buyers said they would be buying in 2010 and 2011, versus nearly 95% intended to acquire with 42% intending to acquire 3 or more deals in 2012 (SEQ 2012 Survey results).  
Growth will occur for companies that have lowered their costs of sales compared to competitors, reduced their overall cost structures, and have a portfolio plan for growth and expansion.

In 2012, the goal is to create a defensible nitch by adapting to and solving highly segmented customer value propositions.

The challenges of the past few years,have convinced us that winning and succeeding is really more about having the right strategy, team, and resources and then subsequently utilizing them; then about working longer and harder!

 

It is clear to us, that to be a leader a capital efficient revenue strategy for Growth and Expansion married with Management Science and technology, and coupled with a commitment to learning and change is required. 

Over the past decade, we have had the pleasure of working with numerous technology, BPO, Marketing, Healthcare, VAR, staffing, payroll and HR outsourcing providers as well as our friends from the private equity and institutional investor arenas, with great success and learning. We thank-you. 

 


American Small Businesses Vulnerability Economic Recap:
           

In February, in our early year economic outlook, we predicted the following about 2011: clearly there would be little to gradual economic growth in the holistic US economy, a lack of consumer spending, married with uncertainty in the real estate and capital markets. We furGarry_Meier_Bio_image_photother predicted that SMEs (small to medium size businesses) would experience double dip recessionary pressures as a result of the lack of access to capital and the suppressed levels of business to business spending.

 

The recent news on GDP, which illustrated an expansion of only 1.3 percent and consumer spending up a mere 0.1 percent in the second quarter, coupled with the downgrade of the USA debt, including the lack of a longer term resolution to the deficit is accelerating the problematic economic issues facing small business; therefore it is clear to us at Ephor, the SME sector of the economy has reached double dip symptoms.

 

Economists say that the Great Recession began in December 2007.  And for most small business owners, and for the majority of Americans, the downtown of 2008/2009 never really ended.

 

And what’s worse is that the economic indicators do not show signs of improving in the near-term.  An Ephor Group research survey of small business owners in Q2 2011 found that the majority of businesses are underperforming (only 1 in 5 businesses are “outperforming”). 

 

In fact, we at Ephor believe that the growth rate will not improve significantly until the monthly gain in jobs is consistently 300,000 jobs or more. And, at that rate the gains would have to be consistent for over two years to bring the economy back to what is traditionally considered a reasonable unemployment figure.

 

Read what sectors are poised for growth here: American Growth Sectors

 

We at Ephor therefore believe the symptoms of a double dip environment are clearly in place, and this downturn will continue for a minimum of the next 10 quarters. 

 

 

Consider the following from a recent MSNBC report titled, “10 signs the double-dip recession has begun.

 


1.Inflation is occurring.
There is almost nothing that damages consumer confidence as badly as a rapid rise in prices. Starbucks recently increased the price of a bag of coffee by 17 percent because wholesale prices have risen by almost twice that rate in the last year. Cotton prices nearly doubled in 2010.  Summer and back to school clothing prices are up as much as 20 percent. Therefore, for the time being, the consumer’s ability to buy even the most basic items such as clothing has been undermined. Consumers today pay more for sugar, meat, and corn-based products as well.


2.Investments have begun to yield less and become more volatile.
Part of the false recovery was driven by the stock market surge which began when the DJIA bottomed below 7,000 in March 2009. The index had risen above 12,000, however in the past few weeks has again fallen to less than 10,800.  As result, the American household nest eggs that were decimated by the collapse of the market in 2008 have not rebounded to levels that enabled people to splurge on themselves.  Additionally, Americans have very few places to put their hard earned dollars, which really only include 10-year Treasuries which yield about 3 percent. The market may not be a friend to investors for quite some time.


3.Oil prices have impacted the economy.
Oil prices are supposed to drop as the economy slows as they did in 2008 and early 2009 when crude fell from over $140 to under $50. That drop at least allowed consumers and businesses like airlines to more easily afford fuel. Recently, crude has moved back above $100 and appears to be stuck there regardless of the economic situation. American budgets have been hurt by the rising cost of gas. Americans of more modest means have been particularly affected. A slowdown in driving usually also leads to a decline in the retail sector as consumers reduce unnecessary travel to stores. The impact on all small business is even greater as the general spend to and from businesses decreases as well.


4.The federal budget deficit is not helping.
The federal budget deficit has decimated any chance for another economic stimulus package which could have been effective.  The failed Obama stimulus package of $787 billion may have saved some American jobs, but it is long over and did not work if a drop in unemployment and a sharp improvement in GDP were its primary goals. The deficit has caused a call for severe austerity measures which have already become part of the economic policies of countries from Greece to the U.K. to Japan. Job cuts in the U.S. will not be restricted to the federal level. A recent UBS Investment Research analysis predicted that state and local governments will cut 450,000 jobs this year and next. That process is already well underway. States like California and New York currently run massive deficits and the rates they must pay on bonds has risen accordingly. Newspaper headlines report almost daily on battles between state unions and governors over employment and benefits.


5.Unemployment is one of the biggest challenges the economy faces.
Unemployment creates two immediate problems. People without jobs drastically curtail their spending, which will ultimately affect GDP growth. The second is the need for tens of billions of dollars every year in government aid to keep the unemployed from becoming destitute. That support has increased deficits and the domino effect is that cash-strapped governments need to make more spending cuts. Ephor feels this may be the biggest challenge the economy faces.
Unemployment has worsened because people over 65 to continue to work because the values of their homes — which they once counted on as the financial basis of their retirements — have dropped so sharply. Older Americans also fear that cuts in Medicare and perhaps Social Security are inevitable which increases the cost of their golden years. The jobs that older Americans have taken are often ones that younger Americans might have. People in their 20s must accept low wages to enter the workforce. This has delayed their prime consuming years well into their 30s which will damage GDP recovery now and for another decade.
The worst of the unemployment problem is the roughly 5 million Americans who have been unemployed for over a year. Their unemployment benefits have run out in many cases. The burden of their care falls to their families, friends, community organizations and non-profits. A family which has to support an unemployed person may be a family which cannot spend beyond its basic needs. To the extent that the federal or state governments can support the unemployed, the cost to run support programs increases. 


6.The debt ceiling accentuates the problem.
The United States debt ceiling being raised only accelerates the problem. It is clear the economic and employment effects of the raising debt cap are the same as the deficit, but they are actually more insidious and longer term outcomes. The first by-product of debt reduction, or at least a slowdown in its growth, is the need for higher taxes and a lower level of government services. Higher taxes usually slow economic improvements, particularly when they are not coupled with stimulus measures.
A number of economists have pointed out the expense reduction alone will not sharply improve the United States balance sheet. The increase in Medicare and Social Securities costs, brought on by an aging population, are also likely to trigger a need for higher taxes. Tax increases could keep the economic growth of the US on hold for years. The taxation of companies decreases and often eliminates profits, particularly during an already troubled economic period. Profits which disappear usually cause cuts in purchasing and jobs, especially in the SME sector. Taxes on wages and inheritance undermines consumer spending. And, a growth in national debt from already all-time highs will increase the borrowing costs of the U.S. That, in turn, drives up interest rates for everything from mortgages to credit cards. 


7.Access  to credit limits small business.
The lack of access to credit especially for the credit starved SME sector has hurt the economic activity for both individuals and small businesses. Many very large companies can borrow money at rates as low as 2 percent because of their strong cash flows and balance sheets. Banks have been much less willing to loan money to companies with under 100 workers because these firms often rely on a few customers for revenue and usually have very little money on hand. Home builders have continued to struggle. Construction jobs, which were a huge amount of the SME employment base in states like Florida, have not returned. 


8.Housing is a drag on the economy.  
Housing is considered by many economists to be the single largest drag on the American economy, and the housing market has gotten much worse in the last two months. A report from The New York Federal Reserve published early this year said: “When home prices began to fall in 2007, owners’ equity in household real estate began to fall rapidly from almost $13.5 trillion in 1Q 2006 to a little under $5.3 trillion in 1Q 2009, a decline in total home equity of over 60 percent.” Real estate research firm Zillow reported on more recent developments. “Negative equity in the first quarter reached new highs with 28.4 percent of all single-family homes with mortgages underwater, from 27 percent in Q4.” Many homeowners who want to sell their homes cannot do so because they cannot afford to pay their banks at closing. Whether for good or ill, the American home was the primary source for money used for retirements, college educations and the purchases of many expensive items such as cars and durable goods. Economists point out that this leverage helped contribute to the credit crisis as people could not cover the costs of home equity loans as real estate values collapsed. This may be true, but the drop in inherent values happened so quickly that the balance sheets of millions of Americans were destroyed. Their ability to consume was severely damaged, further harming GDP. High mortgage payments bankrupted or nearly bankrupted people who have lost jobs or have found that their incomes had stagnated. The building industry became a shambles overnight. And, whatever the effects have been over the last three years, they are getting progressively worse as home values drop to decade lows.

 

There is no relief in sight because potential buyers worry that price erosion has not ended.

 

In conclusion, for the foreseeable future the outlook for the economy is simply not favorable and specifically for the SME (small to medium enterprises) sector that outlook is even further suppressed.  Bankruptcy rates for the SME sector will continue to rise as a result of management and the leaders of small businesses simply not adjusting and altering their business models to reflect the exogenous economic factors that are prevalent.  The businesses that will survive and prosper will make those required adjustments either thru great timing or great skill or both. We at Ephor urge all small business to seek outside help and become change agents. It is up to us as a business community to lead the economic recovery just like we have done in every economic downturn.

 

Let us know how we can assist you in your efforts, and best of luck in the near-term.


 

Read more about improving your business model, operating performance, and wealth strategy:

 

 


“The goal is wealth creation by driving shareholder value through the use of efficient growth methodologies and experienced execution,” said Garry E. Meier, Chairman of Ephor Group.   

 

“Creating wealth is all about creating the qualities of right: the right strategy, with the right people, with the right model, and the right business process. Our approach provides the required operational execution support and risk mitigation strategies that every enterprise warrants.”

 


Contact an Ephor today at:
713.977.3600
ephor [at] ephorgroup.com


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