Economic Shifts Will Impact Shows in New Ways — Some Good, and Others, Not So Much
Oceanside, CA - While the most recent data paints a slower-growing economy, it also may foreshadow a transition in the U.S. Corporate profits and manufacturing growth levels are waning but hourly wages are up and new households are forming. Here is a look at the shifts in the economy and how that could impact trade shows.
During the recovery, business investment has been the mainstay. In the early years of the recovery, large companies reaped benefits through cost cutting, layoffs and Federal Reserve (Fed) stimulus. In recent years, small business started recovering, as credit became more available and labor markets stabilized. The average worker and consumer struggled with stagnant wage growth, new job skills needed, low savings levels and underwater mortgages, which led to unprecedented income inequality. “Our research shows this may be changing soon,” said Frank Chow, chief economist for Trade Show Executive Media Group.
Corporate profits were one of the biggest benefactors of this recovery, Chow pointed out. Since June 2009, after-tax corporate profits rose almost 164%, peaking in Q3 of 2014. However, by the end of Q4, profits started to slow, decreasing about $57 billion. So far, in the First Quarter of 2015, profits are expected to decline (2.8)% year-over-year, according to a Thomas Reuters consensus forecast. “Some economists predict that sluggish profits may persist for the rest of 2015,” Chow warned.
Lower Profits, Less Marketing Spend
“Dwindling profits usually result in lower business spending, including marketing through trade shows,” said Chow, although it could take six months to a year more before we feel the impact. Since August 2014, business spending has been declining, Chow said. A key proxy for business investment is core durable orders, which excludes aircraft and defense goods. Core orders fell (1.4)% in February, the sixth drop in a row, and down in 13 of the past 18 months. Even the broader durable orders have dropped in five of the past seven months. Chow listed several factors identified by economists that are keeping a damper on profits and thus business spending:
- Inevitability of future increases in the Fed interest rate,
- Rising U.S. dollar,
- Soft global markets,
- Curtailing capital expenditures due to slumping oil prices, and
- Weakening manufacturing growth.
“These factors are intertwined,” Chow pointed out. “It started with the Fed announcing the end of quantitative easing (QE) last year and possible interest rate hikes in 2015 depending on inflation and employment targets.” In the meantime, the rest of the developed world is battling recession or deflation and going in the other direction with Japan and the Eurozone implementing their own QE programs. China recently announced a new stimulus initiative. “As a result, the dollar shot up in relation to currencies in other countries,” he pointed out.
Strong U.S. Dollar is a Mixed Blessing
The strengthening dollar, which has jumped over 20% since Q1 of 2014, is hurting U.S. manufacturing as our exports are more expensive. Although manufacturing had a good 2014, growth began slowing last year and continues in 2015. In March, the ISM Manufacturing Index fell for the fifth month in a row. Compounding the manufacturing struggles is the precipitous fall in oil prices, which halted oil production projects and restrained companies in placing orders for new equipment.
“All this weakness translates into reduced corporate earnings,” Chow said. S&P 500 companies derive about 40% of their sales from overseas. “This means top-line revenues will also be negatively impacted in a variety of industries,” he said.
However, companies in the domestic consumer sector will be untouched by the higher dollar, and energy-intensive companies will experience lower costs. Many market analysts are forecasting double-digit earnings growth in Q1 for these companies.
Robust Job Market – in Trade Show Industry Too
On the other hand, the tide appears turning for the average worker. Average hourly wages started rising in October 2014. It took a big spike in January to $10.55 hour, a record high, and has maintained that level through March.
Despite a disappointing payroll gain of 126,000 in March, breaking a string of 13 straight months of 200,000 or more new jobs, most economists believe it was weather-induced and growth will resume in the spring. March recorded on all-time high in the number of employed persons even though severe weather was a big drag on the economy. Most importantly, long-term unemployment has been falling since July and reached a record low of 1.63% in March. Finally, the number of job openings has steadily climbed for five months before jumping in February to 3.5% of total employment – a record high according to the JOLTS data, suggesting job gains in the months ahead.
Anecdotal information from trade show headlines reflects more hiring, more job-hopping and a changing of the guard in high-profile positions with wages and perqs on the rise.
The Multiplier Effect
The improved labor market has encouraged greater household formation, which is very important if economic growth is to sustain a higher level, said Chow. In December 2014, U.S. household formation hit a record 2 million, a gain of 23.7% from November. Household formation during the last quarter of 2014 was at the highest level since 2005. It appears Americans are starting to form households at rates more in line with those before the recession. “Strong household formation can have a powerful multiplier effect throughout the economy,” Chow pointed out.
One multiplier effect is on home sales. Most new households start as renters, and over time, many transition to buying a home, usually an existing one before upgrading into a new home. “This has a positive impact on home prices, which in turn, will increase home equity and get some people out from underwater mortgages,” said Chow. Already, the National Association of Realtors Pending Home Sales Index increased 3.1% in February and is 12% stronger than the year prior. Moreover, new single-family home sales jumped 7.8% in February.
Here are other trends that are benefiting even lower-income households:
- Minimum wage push – recent hikes in 20 states while the Administration campaigns for a national increase.
- New affordable housing programs by the Administration, allowing 3% down payments and 3% rebates.
- Expanded Medicaid programs in many states.
- Rising consumer confidence.
Leaders and Laggards
So far, the softening in corporate profits and business spending has not adversely affected trade shows in general. In the future, it may cause some shifting as consumer-oriented and housing shows will outperform, while those concentrated in manufacturing or energy may begin to lag. Other companies protect their future profits by hedging against the dollar or diversifying through acquisitions domestically or overseas, especially while interest rates remain low.
“Most companies are hoping consumer spending and housing will bounce back strongly, while QE will work magic in global economies like it did in the U.S., causing profits to soar again. That’s a big hope,” Chow said.
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