The economy: what next? Featured

8:00pm EDT June 25, 2008

Last year, public companies had the worst fourth quarter in a decade. Banks and insurance companies had the worst quarter in 35 years.

The only way to go at this point is up, if you ask some economists, including Dr. Robert Froehlich, vice chairman, DWS Scudder, a division of Deutsche Bank Group. During a May economic summit in the Detroit region, he responded to issues ranging from the effects of lower interest rates to the economic stimulus package.

Reflecting on Froehlich’s talk and his message that there are good thing to come, Craig Johnson, president and CEO of Franklin Bank in Southfield, Mich., addresses what business owners can expect as we enter the second half of 2008 and see through the presidential election in the fall.

“There are positive indicators that as interest rates begin to positively impact the economy, consumer spending and consumer confidence will increase, and that’s good for business, regardless of what business you are in,” Johnson says.

In your opinion, are we officially in a recession?

From a micro perspective, when you examine the economy in southeast Michigan, it’s hard to argue that we are not in a recession. However, plenty of economists across the board report that, nationally, we are not going into a full-blown recession. Rather, we are experiencing a downturn caused by the mortgage issues and the resulting drops in home values. Overall, the economy has grown and continues to grow, just at a slower pace. That’s the big picture.

But here at home, we feel pain from the blows that the auto industry has taken in the last year. A look at consumer confidence and business performance in the last two quarters supports the ‘downturn’ theory, and most would say that, yes, we in this region are in a recession. But that will change. The good news is that interest rate cuts and the economic stimulus package will improve the economy as we look forward to late 2008 and 2009.

What will interest rate cuts do for the economy and businesses?

Historically, positive effects from interest rate cuts take 12 to 18 months to make an impact on the economy. We have seen this pattern in the past, and there is no reason to expect that now will be any different. In the last four months, the Federal Reserve has cut interest rates by 325 bases points. But we cannot expect to reap the economic rewards of these cuts overnight. In time, consumer confidence will improve with these lower rates, and people will take advantage of them by investing in real estate and growing their businesses. Low rates please consumers, a happy consumer spends and businesses reap the rewards. Every player is linked — every industry and every economic piece of the puzzle, from the stock market to real estate to manufacturing.

Will the economic stimulus package jump-start the economy as expected?

Many economists are projecting that Americans who receive economic stimulus checks will spend the majority of the rebate, which represents only a small portion of their disposable incomes. But consider this: If someone mails you a check for $600, will you spend only that amount? Will you purchase a big-screen television for $599, or might you decide that this ‘gift’ justifies spending more — since that $600 was a freebie, after all?

While one segment of the population will use that stimulus check to buy groceries, pay down debt and manage regular household expenditures, the other camp will consider it a jumpstart to a purchase that costs far more than the amount distributed in the check.

The economic stimulus package could have a much greater impact on the economy than what initially was estimated. This will positively impact the economy in the next 90 to 120 days, during the period when checks are mailed and subsequently cashed and spent. This will inevitably benefit manufacturers, retailers and other service providers who will attract happy consumers that have newly inflated pocketbooks.

What should business owners do now to prepare for a possible upturn?

Begin to plan today for that time, and meet with financial advisers to discuss what moves you want to make with your business when the lending environment improves, consumer confidence increases and the economy perks up. Rather than planning ahead 90 days as you may be accustomed to doing, look out further — think six months, 12 months down the road. Involve your banker in strategic plans so when the time comes to seek funding, everyone is on the same page. Bear in mind that by planning ahead and starting these discussions now, you’ll stay ahead of the curve as competition sits on the fence.

CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at clj@franklinbank.com or (248) 386-9860.