Last year, public companies had the
worst fourth quarter in a decade.
Banks and insurance companies had the worst quarter in 35 years.
The only way to go at this point is up, if
you ask some economists, including Dr.
Robert Froehlich, vice chairman, DWS
Scudder, a division of Deutsche Bank
Group. During a May economic summit
in the Detroit region, he responded to
issues ranging from the effects of lower
interest rates to the economic stimulus
package.
Reflecting on Froehlich’s talk and his
message that there are good thing to
come, Craig Johnson, president and
CEO of Franklin Bank in Southfield,
Mich., addresses what business owners
can expect as we enter the second half
of 2008 and see through the presidential
election in the fall.
“There are positive indicators that as
interest rates begin to positively impact
the economy, consumer spending and
consumer confidence will increase, and
that’s good for business, regardless of
what business you are in,” Johnson says.
In your opinion, are we officially in a recession?
From a micro perspective, when you
examine the economy in southeast
Michigan, it’s hard to argue that we are
not in a recession. However, plenty of
economists across the board report that,
nationally, we are not going into a full-blown recession. Rather, we are experiencing a downturn caused by the mortgage issues and the resulting drops in
home values. Overall, the economy has
grown and continues to grow, just at a
slower pace. That’s the big picture.
But here at home, we feel pain from the
blows that the auto industry has taken in
the last year. A look at consumer confidence and business performance in the
last two quarters supports the ‘downturn’
theory, and most would say that, yes, we
in this region are in a recession. But that
will change. The good news is that interest rate cuts and the economic stimulus
package will improve the economy as we
look forward to late 2008 and 2009.
What will interest rate cuts do for the economy — and businesses?
Historically, positive effects from interest rate cuts take 12 to 18 months to
make an impact on the economy. We
have seen this pattern in the past, and
there is no reason to expect that now
will be any different. In the last four
months, the Federal Reserve has cut
interest rates by 325 bases points. But
we cannot expect to reap the economic
rewards of these cuts overnight. In time,
consumer confidence will improve with
these lower rates, and people will take
advantage of them by investing in real
estate and growing their businesses.
Low rates please consumers, a happy
consumer spends and businesses reap
the rewards. Every player is linked —
every industry and every economic piece
of the puzzle, from the stock market to
real estate to manufacturing.
Will the economic stimulus package jump-start the economy as expected?
Many economists are projecting that
Americans who receive economic stimulus checks will spend the majority of the rebate, which represents only a
small portion of their disposable
incomes. But consider this: If someone
mails you a check for $600, will you
spend only that amount? Will you purchase a big-screen television for $599, or
might you decide that this ‘gift’ justifies
spending more — since that $600 was a
freebie, after all?
While one segment of the population
will use that stimulus check to buy groceries, pay down debt and manage regular household expenditures, the other
camp will consider it a jumpstart to a
purchase that costs far more than the
amount distributed in the check.
The economic stimulus package could
have a much greater impact on the economy than what initially was estimated.
This will positively impact the economy
in the next 90 to 120 days, during the
period when checks are mailed and subsequently cashed and spent. This will
inevitably benefit manufacturers, retailers and other service providers who will
attract happy consumers that have
newly inflated pocketbooks.
What should business owners do now to
prepare for a possible upturn?
Begin to plan today for that time, and
meet with financial advisers to discuss
what moves you want to make with your
business when the lending environment
improves, consumer confidence increases and the economy perks up. Rather
than planning ahead 90 days as you may
be accustomed to doing, look out further
— think six months, 12 months down the
road. Involve your banker in strategic
plans so when the time comes to seek
funding, everyone is on the same page.
Bear in mind that by planning ahead and
starting these discussions now, you’ll
stay ahead of the curve as competition
sits on the fence.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at [email protected] or (248) 386-9860.