News Service

10-09-08

ISU economists assess recessionary conditions, give tips for tough times ahead

AMES, Iowa -- While the United States economy has yet to hit the official benchmark of a recession -- defined as two consecutive quarters of declining Gross Domestic Product (GDP) -- two Iowa State University economists agree that it appears headed there fast, particularly in the wake of the financial crisis. And they warn that businesses and consumers should make plans for tougher economic times ahead.

"At the very least, we know there are sectors of the economy that are exhibiting strong recessionary indicators and the retail industry is at the forefront of those trends," wrote Meghan O'Brien, an economist with Iowa State's Regional Capacity Analysis Program (ReCAP), in a new report she authored titled "Retail Economics 101: Lessons and Strategies of a Recession."

"With the rash of recent retail bankruptcies, store closings, and increasingly vacant retail space it is apparent the retail industry is facing tough times," she said. "Because retail is the second largest sector in the U.S. in number of businesses and employees and accounts for 8.3 percent of GDP, the implications of a retail recession are numerous and far reaching."

Joydeep Bhattacharya, an associate professor of economics at Iowa State, sees a bear market on Wall Street as further evidence of the recession ahead.

"Typically bear markets precede recessions and usually follow tight-money policies (raising interest rates) of the Fed," said Bhattacharya, who has research expertise in monetary theory, credit market imperfections and bank panics. "This time, it appears that the bear is awake even after the economy has done well (in terms of GDP) for the past two to three quarters. Also, Fed monetary policy is at its loosest in a while. Judging by the past, this signals that a deep recession is underway, or is on its way."

O'Brien reports dismal performance of the economy's leading indicators, such as rising prices, lower disposable incomes, lower savings rates, declining consumer spending, a housing slowdown and rising unemployment. She says Iowa's retail employment began declining in 2007 while the nation's retail employment was still increasing, indicating Iowa's adjustment to the recession might be more gradual.

But retailers should still brace for the worst.

"What these indicators tell us about the outlook for retailers is that the record consumer spending expansion is over," said O'Brien, who is also an ISU Extension program specialist.

Some of that consumer spending was made on credit, and even with the government's $700 billion bailout plan, the financial crisis might result in credit card limits being lowered. Bhattacharya says consumers should prepare, to the extent possible, by substituting out of credit card borrowing into other sources of funds.

"Consolidating a bunch of expenses -- say, home improvements -- and taking out a home-equity line of credit would be a far better alternative," he said.

O'Brien's report details a gloomy retail forecast too, with the National Retail Federation projecting the weakest holiday season in six years.

"The economic situation adds up to a perfect storm for retailers," she said. "It is not only possible, but probable that the retail sector will not even meet the lowered expectations of this year's forecasts. This will mean significant hardship for many Iowa businesses and communities."

In preparation, O'Brien provided these tips in her report:

Tips for Consumers and Retail Shoppers:

• Now is a good time to be a consumer. You might have less money to spend but retailers want your money more than anytime in recent history. Take some time to shop around for the best prices, environment and service.
• Your dollar is your vote. If you really enjoy shopping at a local retail store don't expect it will be waiting for you to come back if you switch your shopping habits. Choose where you spend your dollars based on whom you would most like to continue doing business with.
• Be reasonable about where you travel to shop. Driving an additional 10 miles to save a dollar probably isn't worthwhile. Try and maximize your savings per trip.
• Limit credit card use. Retailers may be running great specials but stocking up at 70 percent isn't saving you money if the balance stays on your credit card for multiple billing periods.

Tips for Retailers and Business Owners:

• Just like consumers shouldn't rely on debt to purchase items at a discount, neither should you. Financing unnecessary inventory with debt because it is being offered at reduced prices won't make you money in the long run.
• Offer consumers lower price substitutes in your store. Lower price point options may keep a consumer in your store from shopping at a discounter.
• Don't be afraid to have sales or specials to move inventory. The downturn won't last forever and getting more people in your store or restaurant is the key to building long lasting customer relationships and repeat business. You might not make the same profit per item or customer that you were prior to the downturn, but you are making sales and meeting customers.
• Don't assume the raising prices will keep your revenue stream stable during a downturn. The price elasticity of the goods you sell will determine whether you can raise prices or not. Do not raise prices on highly elastic goods -- those where people's buying habits will change based on the price of a good -- as this will reduce the quantity demanded dramatically.
• Know your inventory, this might include keeping detailed records or journals of what you sell the most of and to whom. Pay attention to your competition and their prices. Being in touch with the nature of your inventory can limit lost revenue with respect to price changes and stocking of inventory.
• Consider low to no cost options to revitalize your space. Changing the layout of your store can add instant appeal with little or no expense.
• Be prepared to make some sacrifices and tough choices. Plan for the future and think strategically about where you want to be when the down time ends.
• Listen to your customers, they are your greatest asset.

O'Brien's complete report can be found at http://www.econ.iastate.edu/research/webpapers/paper_12995.pdf.

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Joydeep Bhattacharya

Quick look

Meghan O'Brien, an economist with Iowa State's Regional Capacity Analysis Program (ReCAP), authored a new report titled "Retail Economics 101: Lessons and Strategies of a Recession." O'Brien and fellow ISU economist Joydeep Bhattacharya both see economic indicators that suggest a deep recession is underway, or on its way.