As you know, 'good times' don't last forever....yet, people want to believe they do. Like the turkey, who believes good times are commonplace until the third week of November, most people expect the good times to roll on. And so, they only see what they are looking for.
If you understand that there are business cycles, you look for the unexpected and when it surfaces, you see it long before others do.
The CEO of the General Electric Company (GE) didn't anticipate a dip in profits during the first quarter---probably because he anticipated business continuing as usual. GE stunned Wall Street last month when it reported first-quarter results below expectations, a stumble it blamed partly on the credit crisis.
Now, GE recognizes that the Recreational Vehicle (RV) and Watercraft industries lead the economy during the downside of a business cycle. Traditionally, these recreational industries have led the stock market, housing starts and other early warning indicators because they are the largest discretionary purchases made by the consumer.
That is why the GE consumer-finance unit plans to stop providing loans for the purchase of recreational vehicles (RVs) and most watercraft. "It's a challenging time for RV and Marine financing," said Cristy Williams, a spokeswoman for GE Money. "We just didn't see the returns that we wanted to see." GE has said it would reduce its exposure to some of the more-volatile areas of the financial-services sector. The company is expected to sell as much as $50 billion in consumer and weaker-performing commercial-financing assets this year.
During a time of high gasoline prices, distribution disruptions and a declining national economy in the mid-1970s, I was general sales manager for an RV and Marine industries equipment supplier.
These two industries represented the only markets for our company that had less than a 50% marketshare...with two larger and better financed companies holding over 50 percent of the market. Our management team quickly became energized and focused to increase our marketshare because the alternative was unacceptable. That is when I discovered that tough times are a very good time to build marketshare. Your prospects are more receptive to switching suppliers and suppliers are motivated to increase their sales in order to survive. With that knowledge and motivation, our company won over 90% marketshare within a two year period and the company survived and prospered.
As Sam Zell of Equity Group Investments said recently, "One thing I know for sure: The assessment of opportunity is an art. There have been many examples in my career where the information was available to everybody. But why was I able to see that opportunity--and the rest of the world didn't--I don't know. And, by the way, the rest of the world didn't see it until long after we were up and running."
In the past 25 years, Americans have kept shopping through good times and bad.
In every quarter except one since 1981, consumer spending rose over the previous year, adjusted for inflation. The main fuel for the spending was easy access to credit. Banks and other financial institutions were willing to lend households ever increasing amounts of money. Loans to consumers were viewed as low-risk and profitable.
Economists have been complaining about excessive borrowing and spending since the early 1980s. But no matter how many times economists predicted the demise of the consumer, the spending continued. The latest data from the Bureau of Economic Analysis show that the personal savings rate---the share of income left after consumption---fell from 12% in 1981 to just over zero today. And debt service, which is the share of income going to principal and interest on debt, kept rising.
The subprime crisis marks the beginning of the end for the long consumer borrow-and-buy boom. Standards for real estate lending have been raised. Credit cards are still widely available, bit it is only a matter of time before issuers get tougher. Research by one economist suggests that every $1 decline in house prices lops about $.09 off of spending. That accords well with calculations by BEA economists. They figure that households took out $340 billion in cash from mortgage and home-equity financing in 2006. That source of funding could largely disappear over the next couple of years.
What comes next could be scary. Reduced access to credit will combine with falling real estate values to hit poor and rich alike.
Sources: The Wall Street Journal, May 6, 2008, BusinessWeek, November 26, 2007 and LSAmagazine, University of Michigan, Fall 2007