Industry struggles with 'perfect storm' of bad economic conditions

Publish Date: 
Oct 29, 2012
By Mary Slepicka

CARSON, Calif. - As the powersports industry tries to figure out how to increase sales in a still-weak economy, one expert says buck up: It may be a while.

On Oct. 24, as the Eastern seaboard prepared for a predicted meteorological armageddon, members of the Motorcycle Industry Council learned that the nation’s slow economic recovery is due to a perfect storm of fiscal, societal and political events.

Each event in and of itself is not a surprise, but in combination they deliver serious head winds that keep the U.S. GDP from growing the way it should, said Jerry Nickelsburg, senior economist at UCLA’s Anderson School of Management. Nickelsburg delivered the keynote address at the MIC’s annual “Inroads to the Future” communications symposium held in Carson, Calif.

As a result, he said analysts don’t expect the economy to begin seriously revving up until almost 2015, regardless of who wins the White House in 2012.

Consumers have started deleveraging. For the last 60 years American consumers have been a buying and borrowing bunch, counting on their homes as their nest eggs. “That expectation was shattered in 2008,” Nickelsburg said. These days, consumers are buying less (and financing purchases even less), and stashing all available funds into savings. “And when savings rates go up, consumption goes down,” he noted.

This "new" consumer conservatism will stretch far into the future, because the millennial generation may be the most frugal of all. “They know bad economic events can happen,” and they understand that they cannot rely on home ownership for financial security, he noted.

Housing is still weak. “Places are still overbuilt,” he said. Although there has been a small increase in housing starts in 2012, the pace is slow, and Nickelsburg said he expects to not see any type of real growth in this sector until 2014 and beyond. Weak housing means still weaker vacation housing, long considered a driver for powersports sales, particularly in the off-road, PWC and snowmobile sectors.

Exports – but where? Exports are a major business in the United States, but the country’s largest customer (China) and its second largest customer (the European Union) are both in recession. China, he said, will begin to focus inward on its domestic market needs, and a growing Chinese middle class will eventually present an opportunity for desired American-made products.

The EU, however, is a bit trickier to predict. “Europe is the bigger risk,” he said. “No one knows what is happening there.” The Union so far has under-delivered on economic performance, and if the current crises in Greece and other countries escalate, the Union may come apart, sending the continent into a “deep depression,” he said.

Monetary policy has nowhere to go. State and local governments are still struggling with budget deficits that aren’t expected to abate until around 2015, Nickelsburg said. Interest rates are low, and the banks are flush with cash, but no one is borrowing, he added. Economists at UCLA’s Anderson School are forecasting that GDP will remain at a 2 percent to 3 percent growth rate through 2015, which is a full percentage point under the 4 percent needed to sustain an economic comeback.

But what is the real 800 lb. gorilla sitting on the country’s growth potential? Permanent loss of jobs.

The Anderson School reportedly studied the unusually slow recovery from the 2008 “Great Recession” against equally recessions in the early and late 1970s, the early to mid 1980s, and the early 1990s. These recessions were equally dire at their peaks, he noted; however, in previous decades the country bounced back much more quickly than it has since 2008. And that’s because, back then, employment rates were able to rebound. (continued)