Business Fuel Cards

2010 is finally history. The economic recovery, which officially began in 2009, was scarcely evident as the US economy muddled through 2010. It seemed that for every piece of good news, like the strong end to the 2010 Christmas shopping season, was countered by news of a setback, such as unemployment rates that unexpectedly returned to nearly 10% during the same period.

The government’s stimulus efforts have run their course. The TARP program is officially over and tax credits for new home buyers have all expired. The economy now has to perform on its own without all that artificial stimulation.

The fed has reduced interest rates to historic lows to internally stimulate the economy. If interest rates were the cause of The Great Recession this action should have revved up the economy and put us back on track. With federal reserve interest rates at 0% the economy should be white-hot. However, high interest rates are not the problem, so lowering them did not spark an economic rebound. Here’s why with my forecast for 2011:

Unemployment Will Probably Stay Stuck Near 10%

The dirty little secret behind this statistic is that the 10% figure represents only those who currently have no earned income. Those who are working one or more part-time jobs because they can’t find a full-time work, are underemployed in their field, or who are laboring out-of-bounds of their education or training are considered by the government to be employed. When this expanded population is taken into account, the actual unemployment/underemployment statistic is most likely double the official figure.

Unfortunately, there are now multiple barriers to lowering our now chronically high unemployment level. Some of the most important are:

The huge oversupply of foreclosed and unsold homes – The reasoning here is straightforward: there is no need for new construction in a saturated market, which means no construction jobs. Jobs in support industries that supply new home construction goods and services will obviously also be affected. More on this topic below.
Continued restraint in consumer spending – more on this topic below.
Major (and many smaller) corporations continue to outsource overseas everything from manufacturing to admin support – much is made of sending low skill or semi-skilled manufacturing jobs overseas, while the US supposedly maintains its edge through high tech startups at home. The government likes to point to numerous high tech startup companies as proof this strategy is working.
Some entrepreneurs do successfully start corporations that may eventually employ 50 white collar workers. However, the product they create is outsourced to manufacturing overseas in a factory that employs perhaps 5000 workers to produce it. Granted, it may cost less per unit to manufacture there, but those 5000 low skilled or semi-skilled workers employed there are exactly the type of person most likely to be unemployed in the US.
So, manufacturing, the great economic engine that for over 100 years was the promise of the high school graduate being able to enter the middle class, is essentially gone, which in great measure explains the growing class rift in our nation.
Note that when manufacturing is sent overseas, the outsourcing company essentially has to teach the foreign corporation how to create the new product, which is new knowledge that a foreign power can use to its own benefit. China is the best example of this. We have successfully trained and paid the Chinese (and others) to beat us at our own game, as evidenced by China’s growing economic might and a political presence that now must be reckoned with.
Hiring temporary workers, rather than in-house employees – temporary or contract workers are far cheaper to hire than in-house employees who qualify for benefits like health insurance and the retirement program. The company owes no loyalty to temps or contractors, and they can be hired and fired at will.
Corporations no longer hire employees with “potential” or experience in parallel or complementary industries – major corporations have ceased to think long-term in many areas, shifting their focus nearly exclusively to near term actions that produce short-term results. Examples of this myopic view range from focusing on the next quarter’s stock earnings per share to viewing employees as a short-term commodity rather than long-term assets.
Viewing employees as a commodity results in corporate behavior of hiring what’s needed for the moment and discharging them when the immediate need disappears, which in turn results in a goal of only searching for and hiring employees “who can make an immediate contribution to the bottom line.”
The exponential increase in education, credential, and experience criteria for candidate employees over and above actual position requirements – new hire employees are now expected to “hit the ground running” and be able to “make an immediate contribution to the bottom line.” Like a new electronic gadget, a new employee should be able to “work right out of the box.”
This new expectation was unheard of only a few years ago during the era when employees were a valuable asset to be invested in over the long term. Then, new hires weren’t expected to be able to make meaningful contributions until they had been with a corporation long enough to learned the ropes.
Now, most hiring authorities don’t even make the effort to understand what skill set is actually required to perform the job they’re hiring for. So, advanced degrees, myriad commercial certificates, and recent experience in everything are specified in the hope that the overkill will result in a person eventually hired that can do the job.
These excessive requirements are then passed to the human resources (HR) department, which dutifully uses them as an inflexible tool to screen the applicant database. The popularity of online employment applications has exacerbated this problem, where the HR person can enter “MBA” as a search term and never see the many capable, well qualified people who are discarded because they don’t have this degree.
As an example, you may not need an engineer with an MBA to be the head of a maintenance department. The better candidate may well be a military veteran non-commissioned officer (NCO) who successfully ran a repair depot. Hiring the former NCO would bring superb talent and a broad background into the organization, could probably be hired at a substantial savings for the company, and may stay with the company longer than the highly credentialed engineer who is intent on furthering his career climbing the corporate ladder.
Further, most large corporations have returned to profitability during the Great Recession through extreme cost cutting, mostly through layoffs in their labor force. Employees who survived the purges were told to take on the extra responsibilities of their former colleagues, so technically the same amount of work is being performed by fewer people (which is responsible for the great gains in national productivity figures compiled by the government and widely reported in the media). This approach obviously places all the necessary skill set eggs into fewer baskets, which creates entirely predictable problems when the new multi-taskers eventually leave and corporations try to replace them with another single person who can do the newly defined mega-job, rather than spreading skills (and risk) over several employees.
The well documented bias against hiring the unemployed – On the surface this bias may seem counterintuitive, after all, someone who’s unemployed is readily available and could probably start Monday, right?
However, the corporate thought process generally follows this logic path; “most corporations layoff their least productive workers during a downsizing, therefore if you’re unemployed you were among the least desirable or productive workers or you wouldn’t have been laid off. It follows then that there must be something wrong with you that we don’t know about, otherwise you would be employed” regardless of your skill set, recent experience, or personal references.
It’s unfortunate that this twisted and nonsensical logic that is frequently imposed on situational “outsiders”, from marital status to any of society’s other membership groupings, has now found its way into corporate hiring mentality.

I recommend Louis Uchitelle’s book, The Disposable American, for more on this topic. (I have no financial interest in this recommendation.)

The unemployment bottom line – The unemployment/underemployment rate will little change in 2011, with those fitting the categories above most affected.

Real Estate Foreclosures Will Continue at a Record Pace and Housing Prices Will Remain Depressed in Most Areas of the Country

The government statistics here are shocking, with estimates that nearly half (HALF!) of all homeowners with mortgages have homes that currently appraise for less than the mortgage value; they’re “upside down”. Further, nearly 20% of all mortgages nationwide were in some stage of foreclosure at the end of 2010, with rates much higher in the hardest hit states of Michigan, Florida, Arizona, Nevada, and California.

The efforts of the banking industry to work through this massive backlog lead to the “robo-signing” fiasco, where foreclosure paperwork was being routinely approved under oath en mass without verifying what was being attested to in the court documents. Faced with active investigations by attorneys-general in all 50 states, banks temporarily suspended foreclosure proceedings during the 4th quarter of 2010 to straighten out the mess they created, which the news media widely (and inaccurately) reported as a sign the economy is improving. However, the backlog must be worked through to get the bad debt off the banks’ books, so foreclosures will resume at perhaps even a greater pace when the paperwork is straightened out, probably by the second quarter of 2011.

The huge inventory of foreclosed and otherwise unsold homes will keep housing prices depressed. As long as there are so many unsold homes on the market (with more to arrive when the banks resume foreclosure processing), the oversupply will keep prices down and may drive them ever lower in 2011. Even after the foreclosure backlog is reduced, many new home sale listings will appear on the market when prices start to rise from the concealed backlog of those who want or need to sell, but didn’t list when prices were low, which will depress prices again. I wouldn’t be surprised if it took until 2015 to work through this immediate and hidden backlog.

The real estate bottom line – in most markets, residential real estate values will remain depressed or will decline further in the high impact states. Now is the time to buy if you have income security, the necessary available cash, an astronomical credit rating to qualify for a mortgage, and can find a bank willing to lend.

Energy Prices Should be Stable

Recent articles in authoritative publications have reported that on-shore crude oil storage is full to capacity and that mothballed tankers functioning simply as floating storage tanks are anchored off the coasts of Great Britain and Iran. A recent inventory showed that 50+ tankers were anchored off of the coast of England alone.

Most oil producing countries derive the majority of their national income from crude oil sales, so their incentive is to keep pumping, regardless of market price, in order to maintain their revenue stream, which will keep supplies abundant. So, the world is awash in crude oil, with inventory stores in excess of demand, putting downward pressure on gasoline prices. Overall, gas prices should remain relatively stable during the first half of the year, absent an unplanned disruption like a major refinery fire or a hurricane that destroys oil platforms. That’s good news for every household and corporate budget in our petroleum-based economy.

The wild card is China, again. Prior to the recession, China became a net importer of crude oil and was starting to compete on the world market for the limited supply of crude available (remember $150 per barrel spot market crude?). If other world economies improve and start consuming more oil, then everyone will return to competing for limited energy supplies on the world market. And China will most certainly win any contest here, because their trade surplus has given them an unlimited supply of dollars to buy oil with.

The energy bottom line – energy prices will most likely slowly increase throughout the year as the fragile recovery continues and the economies of the world pick up steam.

An alternative scenario is that energy prices remain stable when China’s real estate bubble collapses (see 2011 Economic Forecast – Part 1: The World View from a US Perspective for elaboration on this possibility), causing a large loss of personal wealth for the average Chinese citizen, dramatically driving down internal consumption, and leading to China’s own internal economic recession.

Crude prices will not decline because OPEC will adjust production to maintain oil in the $90-$100 price range.

Consumer Spending Will Remain Flat

People out of work spend only what they have to on the barest necessities. People who are afraid they will be next out of work, cut back on spending in order to save for what might come to pass, and also focus on buying only the practical, needed, and necessary. People who are secure in their jobs, but don’t want to be seen conspicuously consuming during hard times, will curtail their luxury purchases. Need I say more?

Further, it’s underreported that the historically low interest rates have meant a sharp drop in savings interest income for retirees. Retirees dependent on interest income have had to sharply reduce their spending in order to avoid further encroachment on their principal. Typically, the budget cuts include things like the lawn service contract, the beauty shop, dry cleaning, and eating out, all of which impacts local businesses.

The modest economic improvement widely reported during the last half of 2010 is probably the result of businesses simply restocking depleted inventories to low levels, which is good news but not great news. However, the buying surge that turned the 2010 Christmas shopping season into a last minute success means that retailers will start 2011 on better financial footing because they won’t have to start the year having to liquidate seasonal inventory (and profits) at 50%-70% off to generate cash flow.

Additional reasons that I think consumer spending will continue to be restrained in 2011 include the increased personal savings rate (an eventual benefit, but lowers consumer spending in the short term), a focus on reducing credit card debt, unplanned new car payments in the household budget resulting from the federal Cash for Clunkers program, and credit that’s either not available at any price or only at unfavorable interest rates and terms when it is.

The consumer spending bottom line – consumer spending on non-essential purchases will continue to be restrained in 2011. When consumers do make purchases, they will focus on the needed, necessary, and practical, and avoid luxury items even if they can afford them. Family vacations will be to local or regional destinations, rather than the exotic venues.

The Credit-Starved Economy

It’s widely reported that large corporations are currently hoarding large amounts of cash. This stockpile gives them the ability to hire, expand production, and grow organically if they wanted to, but they are refusing to do so in light of what I’ve shared above. Even a White House meeting with the president in 2010 wasn’t enough to persuade them to resume hiring if they can meet market demand with staff on hand.

However, large corporations continue to have aspirations to grow and, rather than slowly growing organically, the method they’re often choosing is rapid growth through acquiring their competition. When companies combine, the result may possibly be good for the new, larger corporation (the marriages generally have a 50-50 chance of commercial success), but the result always has two negative economic impacts:

The cash and loans required to buy the competitor removes large amounts of capital from the market that would otherwise be available for mortgages and loans to small and mid-sized businesses (SMBs), and
Mergers always result in layoffs as the new corporation works to eliminate duplicate functions to help pay for the merger. After all, you don’t need two payroll departments, two HR departments, two training departments, etc.

So, large corporate mergers have a break even chance of internal benefit, but nearly always have a negative impact on the economy.

Credit will most likely continue to be tight for SMBs in 2011. Banks say they have money to lend in this area, but the reality is the qualifying bar is set so high that very few will be able to meet it. It’s noteworthy that this economic barrier persists despite the availability of government Small Business Administration loan guarantees and the president repeatedly summoning banking CEO’s to the White House to urge them to begin lending again.

Finally, a common source of loan collateral for SMBs is no longer available in most cases. In areas hard hit by the collapse of the real estate market, the business owner’s home equity line of credit has been completely erased if the property value is now less that the outstanding mortgage balance. Even if there is some equity technically available, few business owners have the stratospheric credit scores necessary to qualify for the loans.

If longer term loans remain unavailable, SMB’s will turn to the only recourse they have left, which is financing their need for operating cash with personal credit card debt. Unfortunately, this option is fraught with danger because lending institutions issuing credit cards are rapidly changing card terms, raising interest rates to usurious levels, requiring most new cards to have variable interest rates (a practice which helped get us into this mess in the first place), and lowering credit limits in response to the new federal laws enacted in February 2010. These moves effectively sidestep the legislation intended to curb these abuses.

At a time when banks can borrow at 0% from the fed, it’s not uncommon for the credit cards they issue to charge 15% or more on outstanding balances. Further, the new laws do not apply to corporate credit cards, exposing the company to even greater financial risk if the owner is forced to finance via this route.

The credit bottom line – expect little or no improvement in credit availability in 2011.

The Impending Commercial Real Estate Tsunami

Commercial real estate values and investment income will probably take a drubbing as vacant store fronts drive down rents renegotiated in 2011. Failing businesses have created a glut of vacant commercial space in many areas and vacant commercial space doesn’t generate income. Surviving business owners will have several alternative locations to choose from and will use the oversupply as leverage to negotiate lower lease rates for the space they do occupy for as far into the future as possible.

And devalued properties of all types will have an adverse effect on local tax digests, forcing local governments to either raise property tax rates or trim operating and school budgets. Which of these choices do you think your local government will make?

Deficit Spending and the Growing Threat of the National Debt

Fiscally, the United States is in a mess and is rapidly approaching the financial meltdown so many European countries are currently experiencing.

The annual budget deficit – the federal government currently spends $3 for every $2 of revenue it receives and the annual spending gap is now over a trillion dollars (a TRILLION dollars) a year. Proposals to close this gap through either increased tax revenue, such as eliminating the homeowners mortgage deduction, or by cutting spending, such as cutting back on Medicare entitlements, meet with howls of constituent protests and go nowhere in a hurry. Note that Medicare alone accounts for 12% of all federal spending and that figure is certain to increase as baby boomers begin to retire in large numbers from the workforce.

The federal government currently spends $1,000,000,000 more every 8 hours than it brings in. It’s ridiculously obvious that this can’t continue for long, yet collectively Congress keeps kicking the can down the road to tomorrow (figuratively speaking) instead of dealing with the issue.

The US government borrows money to support this deficit spending through the sale of US treasury bonds. During World War II the debt was largely financed internally with American citizens buying “war bonds” at rallies that featured real-life war heroes on display.

Today we sell our bonds to foreign powers finance the deficit. Who’s buying them? The largest single buyer, by far, is China, followed by Japan, Germany, and the Arab OPEC nations. So, we are effectively (and quietly) being held hostage to those who buy large amounts of our bonds, because if they don’t buy them, then we can’t operate the federal government. It follows, then, that the nations buying our bonds use this leverage to exercise considerable influence in our behavior behind the scenes. We are no longer a totally independent nation.

Larry Burkett’s book, The Illuminati, is a fictional work about a foreign country that brings down the United States using exactly this leverage. For those who say that can’t happen, the book makes an interesting read of a plausible scenario. (I have no financial interest in this recommendation.)

The national debt – The accumulated national debt has reached an unimaginable size. The previous administration added more to the national debt than all previous presidents combined, including Ronald Reagan’s, and the current administration is on track to exceed this sorry milestone in just its first 4 years in office. We continue to add to this debt, which must be paid back at some point, almost without thought. For example, the president’s much heralded tax deal forged at the end of 2010 added $900 billion dollars to the national debt in extended income tax cuts, additional jobless benefits for the long-term unemployed, and a temporary cut in social security taxes without corresponding cuts in social security spending, at the stroke of a pen.

Predictions are, depending on interest rates, for interest payments alone to equal all non-defense spending of the federal budget by perhaps 2015.

There are only 4 ways out of this mess and they will become increasingly painful the longer we, as a nation, avoid changing our spendthrift ways:

Massively cut spending – this will be very difficult, since the federal budget would have to be immediately cut by 1/3 to be able to simply stop borrowing. It would have to be cut even further to begin paying back principal on the debt.
This step will further impact the national unemployment rate as large numbers of government employees are laid off in the downsizing, as we have seen happen in the European Union bailouts. Most popular government programs would have to be axed or pushed off on the states to fund, such as Medicare, which currently consumes 12% of the annual federal budget alone.
Enacting huge tax increases – this move will generate howls of protest because no one wants to pay more of their hard-earned money for fewer services. As an example, how easy do you think it would be to eliminate the cherished homeowner’s mortgage interest deduction?
Defaulting on the debit payments – this is an admission of bankruptcy, pure and simple. If we take this route the government’s access to credit on the world market would immediately dry up. After all, if we stop paying on our current bond obligations, how many more bonds do you think we could sell to foreign governments the next time we needed to borrow money?
Printing dollar bills – this is the route to hyperinflation, because as the money supply increases the value of each dollar falls. The most often cited example of the folly of taking this route is the Republic of Germany following World War I, as it struggled to meet the surrender terms imposed by the Allies and make payments to the victorious nations for the cost of the war. Germany was forced to print money to meet its financial obligations, sparking the hyperinflation recorded in the pictures of German citizens in the 1920′s hauling wheelbarrows of money to the grocery store to buy a loaf of bread.

The national debt bottom line – At the present rate of deficit spending, interest payments on the national debt will overwhelm the national budget by 2015. At that point we will be left with 4 stark choices to deal with the mess we’ve created: massively cut federal spending, enact huge tax increases, default on the debit, print money, or do some combination of these choices. The outlook is stark.

The US National Forecast Bottom Line

What does all this mean? Well, in the near term a realistic forecast is to be cautiously optimistic that the fragile recovery will continue, absent any further shocks to our financial system. However, the economy will be dragging a ball-and-chain along with it in the form of high unemployment, depressed commercial and residential real estate markets, the lack of available credit, the corporate preference to acquire the competition rather than hire new employees, and the looming national debt crisis.

If the scenarios above make sense to you then my suggestion is for small and medium-sized businesses, like professional practices that depend on elective procedures and service industry businesses, to be prepared for clients and patients to continue to defer discretionary spending until at least the second half of 2011. If you’re a retailer, you should keep inventories lean for the first half of the year.

And my personal recommendation is for everyone to reduce their personal debt to as close to zero as possible by 2015.

Will this all come to pass? It’s hard to tell because we haven’t been here before, but I’ve shared my best guess. Do you think I nailed it or do you have a different opinion? I look forward to your comments.

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