MIDYEAR 2010 OUTLOOK FOR BUSINESS

In the January 2, 2010 edition of Horse Racing Business, the topic was “Outlook for 2010,” which was an analysis and forecast of the U. S. economy in the upcoming year, as well as an assessment of how the racing and breeding industry would fare. Following are two paragraphs from the analysis:

“The best estimate here is that the U. S. economy will slowly recover in 2010. Here’s why I say slowly: The consumer, whose spending accounts for about 70% of GDP, is still generally scared for his/her job or is out of work. The individual’s house may be under water in that the mortgage exceeds the dwelling’s worth in the marketplace. This negative wealth effect provides neither the capability nor the inclination to spend. These factors, coupled with misguided government policies of out-of-control spending, almost assuredly higher tax rates to pay for it, and an increasing reliance on China to buy U. S. debt, portends trouble four or five years out. Even if there is a fast recovery in GDP and employment, it may be short-lived once the Congress and the Federal Reserve take away the punch bowl of colossal spending and easy money.

Anyone running an equine-related company can look to the future with hope, but hope is not a strategy. Incorporate into your plans a lukewarm-growth scenario (perhaps 2.5%- 3% GDP for 2010 and a year-end unemployment rate of 8%) with a high probability of occurrence. Anything better will be a pleasant surprise, and you will still be in business.”

At mid-year, this evaluation is on target, except that the unemployment rate is about 9.5%.

Economic prospects for the remainder of 2010 look to be mediocre. The unemployment rate is stubbornly high and the current 9.5% metric is misleading. Many people have given up looking for full-time jobs, which means that they are not counted as being unemployed. Others are underemployed in jobs they would normally be too qualified to fill. Credit scores for millions of people in the United States have hit new lows. FICO, Inc. data reveal that 25.5 percent of all consumers—or close to 43.4 million individuals—currently have a credit score of 599 or less. The U. S. home market is very fragile and things do not look set to improve much anytime soon.

Companies are flush with cash (an estimated $1.8 trillion on their balance sheets), but they are understandably reluctant to hire new employees because the president and the congress are doing little or nothing to assuage concerns about what 2011 will bring in terms of taxes and regulation. Strong anti-business rhetoric and legislation is coming out of Washington and protectionism is finding favor. Moreover, the Bush tax cuts will expire on December 31, 2010 and there is uncertainty among individuals and company leaders about whether Washington will permit the greatest tax increase in U. S. history to proceed. Raising taxes in a period of tepid economic growth is a poor idea. Finally, the American public has lost confidence in Washington’s willingness to cut spending to mitigate runaway budget deficits. One possible bright spot is that Treasury Secretary Tim Geithner told CNBC the Obama administration “hopes” to have a 20 percent tax rate on dividends and capital gains. But the word “hopes” itself creates doubt.

All of this confusion causes businesses and consumers alike to be more cautious. The renowned late economist Milton Friedman is responsible for the permanent income hypothesis, which, boiled down to its essence, says that consumers make choices based on their long-term income expectations, rather than on current income. With so much job insecurity among people working, coupled with high unemployment, the remainder of 2010 looks to be stagnant from the standpoint of economic activity.

The second-quarter corporate earnings that have been released this week are overall better than expected, although the reason is more cost containment than top-line growth in revenues.  However, key economic indexes such as manufacturing and retail sales indicate that the economy is losing steam. Yesterday’s release of the University of Michigan’s Survey of Consumer Sentiment revealed that consumer optimism plunged in early July to its lowest level in 11 months, from 76 in June to 66.5 in July.

The Federal Reserve said this week that economic activity for the remainer of 2010 will be lackluster and that it will take 5 1/2 years to again reach a 5.5 percent unemployment rate. Prudent businesspeople will proceed accordingly, especially in an industry like racing wherein so much of the spending that supports it is discretionary.

Copyright © 2010 Horse Racing Business

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