Is the Recession Receding?

The pros say, “Yes.” But local business owners aren’t so sure. And, brother, can you spare a loan?

Illustration by Jon KrauseThere are enough crosscurrents in the U.S. economy to sink the sturdiest of financial boats. Stocks are soaring, but job growth is anemic and unemployment remains high. Real estate has bottomed out, but a bull market in foreclosures may just be beginning. Inflation is tame, but prices for gas and groceries are spiking.

Are we being tossed by persistent riptides or finally swimming to shore? Most economists and financial planners forecast brightening skies and safe harbors.

Adam Sherman, CEO of First Trust Financial Resources, predicts “continued, slow, sustained growth” for the economy, plus “some inflation” and “a resurgence in residential real estate” in the second half of the year. He looks for “moderate improvement” in the job market, with unemployment trending downward.

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“We’re already seeing [inflation] in commodities,” says Sherman, a Lower Merion resident whose Philadelphia firm manages assets for 2,000 clients. “In real estate, there should be a netting out of foreclosures, as bottom-feeders snatch up the properties and banks unload those they don’t want on their balance sheets.”

Many local analysts, however, have a less sanguine view of real estate’s potential to rebound. And the specter of depressed home prices and rising inflation could chill economic recovery.

In February, as prices jumped for fuels, metals and agriculture products, inflation watchdogs fretted that the upturn would spread and force the Federal Reserve to raise interest rates sooner and steeper than it wanted. Still, the consensus called for inflation within the bounds of a growing economy: 2-3 percent this year. Mark Zandi, chief economist at Moody’s Analytics in West Chester, says global competition should prevent wages from rising too sharply and inflation from becoming “unmanageable.”

“Businesses are profitable, household finances are improving, and the economy will begin to climb out of its recessionary hole in earnest this year,” wrote Zandi in a recent online article.

Meanwhile, the stock market has already emerged from its foxhole and reclaimed lost territory. Buoyed by the Fed’s bond-buying spree and surging corporate profits, the Dow Jones Industrial Average vaulted past 12,000 less than two years after its nadir of 6,547, prompting many strategists to profess that both investors and businesses will loosen their wallets and boost the economy.

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Harry Clark, founder of Clark Capital Management, sees a continued upside for the Dow (and other market barometers like the S&P 500) into midsummer, followed by a retrenchment of up to 30 percent for three or four quarters before a rally into the elections of 2012. “The short-term market looks very nice here; factory orders are good and earnings are above expectations,” says the Gladwyne resident, who’s a frequent guest on CNBC. “That (at or near a top) is when the public starts buying hand over fist.”

Similarly, Clark says, small investors tend to “panic and sell at the bottom.” It’s a perfect recipe for financial disaster. Philadelphia-based Clark Capital is considered one of the industry’s best at conserving capital during market downturns via a strategy of buying “put” options (short positions that convey the right to sell at a specified price)—effectively, insurance against a big loss.

Clark anticipates that, though the cyclical bull market will be ending later this year (a “down phase typically into a pre-election year,” he says), the secular bear market (which began in 2000 with the tech bubble and hit lows during 2009’s credit crisis) will be over in 2012 or 2013.

If you’re a long-term investor, that bodes well. But if you’re on the sidelines or have an itchy trigger finger, you’ll likely come up short. Timing in the financial arena is ever-elusive.

“People often rotate out of holdings and sectors when they shouldn’t,” says Irvin W. Rosenzweig, president of Rosenzweig & Associates Wealth Management Group in Wayne. “They’re often late to the game and miss opportunities.”

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When it comes to his clients, Rosenzweig recommends periodic rebalancing of assets to keep portfolios in proportion. Indeed, winners and losers may exchange places during any given time frame.

Interestingly, a rally in bonds paralleled that of stocks in 2010 until late in the year when Treasury yields spiked, sending bond prices lower and, to some observers, signaling inflation. Bonds continued their decline into this year, but Clark foresees a bounce back—though not a sizable one.

First Trust’s Sherman cites improved balance sheets, low interest rates, and the extension of the Bush tax cuts as reasons to stay with equities. But he recommends that the emphasis be shifted from small capitalization stocks (which have had a good run) to lagging large caps that pay healthy dividends.

Until investment income and profits translate to economic gains, however, we’re all left wringing their hands. The financial markets have long been seen as forward-looking, but until Main Street catches up to Wall Street, frustration rules. Those gussied-up corporate balance sheets owe much of their shimmer to expense cutting. Companies have made do with reduced inventories and fewer employees.

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That trend may be about to reverse itself. Sherman forecasts moderate jobs improvement this year, with the unemployment rate falling to 8.5-8.7 percent. Clark expects unemployment to stay above 8 percent in 2011, but sees it dropping “into the sevens” in 2012. He points to a rule of thumb that correlates unemployment with the country’s Gross Domestic Product (value of all goods and services produced): For every 1-percent increase in GDP, unemployment should decline by .2 percent. While this year’s consensus GDP growth is 3.25-3.5 percent, Clark sees it up to a percentage point higher.

If GDP growth does come in at around 4 percent, unemployment should drop by .8 percent. Not bad, but not great. In this scenario, to reach the mythical level of “full employment” (5.5 percent unemployment), we’ll need at least five years of steady growth or an economy that catches fire at some point. That could light up inflation.

“Unemployment is the single most difficult problem facing our nation today,” says Clark, who sees deflation as a greater current risk than inflation.

In his State of the Union address, President Barack Obama stressed the need for entrepreneurism to create new businesses and, hence, jobs. CNBC guest analyst Clark concurs, adding that about two-thirds of new jobs are added by small businesses (50 employees or fewer).

Nonetheless, renewed hiring by multi-national corporations remains a critical part of the equation. Some experts predict that bank lending is poised to rise, benefiting both large and small operators.

Apparently, relaxed credit has yet to find its way to Berwyn. “None of us feel lending is lifting,” says Kimberly Davis Cuthbert, owner of Sweet Jazmines Bakery, speaking for other local merchants.

A chef by training, Cuthbert says her 12-year-old business has been growing each year, and she’s always looking to expand. “We’re putting feelers out there right now,” she says.

Obtaining financing for new equipment and a larger workspace in today’s banking climate is no cakewalk. But while some of Cuthbert’s customers have begged off the most expensive cakes in these leaner times, her pastry line has continued to hum. “They say, ‘That’s the one thing I’ll do for myself,’” says Cuthbert. “They need a pick-me-up.”

Just down the pike, another Berwyn establishment, Patty Mac’s Café, serves an honest breakfast and brunch. Proprietor Patty McElaney says business was down 35 percent last year after a good 2009. “That’s when I got started in real estate,” says McElaney, who joined Prudential Fox & Roach but continues to run her eatery. “It was either that or close the restaurant.”

The doors remained open at Patty Mac’s Café, and business is “picking up a little bit,” she says.

Likewise, on the local real estate front, Maureen Sexton of Long & Foster’s Haverford office reports that home prices aren’t rising—but they’re not dropping anymore, either. “I’m hearing a little more confidence in buyers,” she says. “Those not concerned about their jobs are thinking about making a move.”

Real estate has been a major casualty—and perpetrator—of our current economic debacle, and you’d expect tightened budgets to sacrifice éclairs and Sunday brunches. But one place that ought to be recession-proof is the barbershop, right?

Not so, says Lou Durso, co-owner of Vince’s Barber Shop in Newtown Square. His youth business is down by a whopping 70 percent, and retirees—who normally account for 60 percent of his handle—have reduced their monthly visits to bimonthly. Regular working guys are getting their regular cuts. “With their kids, people bought clippers and cut their hair,” says Durso. “I count every haircut—it’ll take us four years to get back to where we were.”

Next door, where his brother, Phil, operates Felice Hair Design, appointments made by young people have also slackened. “Teenagers are growing their hair real long,” says Durso. “The economy has brought on a lazier trend.”

Signs of the economic slide are all around us—from boarded-up storefronts, to the contractor who shows up without his longtime helper, to the laid-off exec’s son who’s forced to leave a prestigious college. Adam Sherman’s clients include senior managers let go by big companies, whose severance packages are coming to an end. “I help with budgeting, altering debt, changing spending patterns,” he says. “These can be difficult discussions.”

Says Rosenzweig: “Some clients have been forced to delay retirement. They wanted early retirement, but it’s not going to happen. It becomes a matter of education.”

While economic travails and adjustments endure, sharp rays of optimism penetrate the cloud cover. Lower Merion’s Jay Weinstein, partner-in-charge of the Philadelphia office of EisnerAmper, offers an accountant’s perspective. And his numbers add up.

With its pickup in business restructuring, litigation support and international accounting—all earmarks of a slumping domestic economy—Weinstein’s practice has been busy the past couple of years. At the same time, his clients in the field of life sciences (hospitals, medical schools, biotech companies) have been largely unaffected by the recession. Now, he’s seeing signs of recovery in the broader economy—a big jump in new hires at his firm, banks becoming “more comfortable” with lending money, companies seeking ways to finance growth. “Those [expansion] discussions are happening again,” he says.

The stock market has recovered its mojo. Now it’s time for businesses to do the same and stop trimming—unless they happen to be barbershops.

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