Life in the slow lane

Slow growth. Tough financing. Tight-fisted consumers. Double-digit unemployment. Rising interest rates.

Welcome to your recovery. Feel better yet?

The annual UMB-sponsored Top Company trip to Napa Valley in October traditionally concludes with a breakfast session with Bill Greiner, the finance corporation’s chief investment officer. On this San Francisco morning, Greiner has no shocking surprises in store. He’s got a small silver lining he’ll mention as a coda after his forecast, but for the most part, this is stiff upper lip stuff.

Here’s what you need to know coming out of a recession that took the biggest swipe from consumer net worth in 70 years, culled from Greiner’s talk.

• Expect the economy to grow 2 percent to 3.5 percent, with unemployment at 10 percent or higher.
• If you need to finance your businesses, act soon – if you can find a bank that will lend to you – since the Fed likely will be nudging interest rates upward in spring or summer.
• Don’t worry about inflation for now, though it could become a threat over the next few years.
• Forget the consumer on getting us out of this one. The main driver of the economy in the months ahead: the federal government on a huge spending spree.
• The hot demographic market to target? Boomers ages 50 to 70.
• Exports will represent a bigger portion of U.S. economic power over the next few years.
• Manufacturing and capital spending will be a major economic driver.

“I’ve been saying I’d rather own Caterpillar Tractor than Starbucks Coffee,” Greiner said, noting that manufacturing and capital spending will grow at a faster rate than the overall gross domestic product.

And of the two, Caterpillar is the more likely contender to benefit from government spending.

Discretionary spending by the government not tied to interest payments or defense spending was 17.4 percent in relation to the gross domestic product at the time of Greiner’s talk, higher than any time in the last 50 years. “The government is out there with both guns blazing right now as far as spending money is concerned,” he said.

And that’s precisely what you want the government to be doing in times like these, Greiner said.

“It’s one of the reasons the economy is beginning to show some signs of lift, because the government is spending a whole lot of money right now,” he said. “We can all debate from a philosophical standpoint whether that’s good or bad, whether they’re spending money incorrectly or correctly. But the point is they are spending quite a bit of money right now, infusing demand within the economy to try to spur growth.”

Meanwhile, financing remains tight for companies trying to expand or simply wait out a long rough patch. Marginal borrowers will struggle over the next year as banks remain conservative.
“There are several banks, that because of their balance sheets, cannot loan money on commercial real estate, and that is affecting the market,” said Jon Robinson, CEO of UMB Bank-Colorado.

By the time you read this, we’ll be recapping what’s likely to be a lackluster holiday shopping season. Consumers have been paying down debt, Greiner said, but their net worth year-over-year dropped 17.2 percent in December 2008 – the largest drop since the end of World War II. (Though an October column from Newsweek writer Robert Samuelson cited a prediction from economist Susan Sterne of Connecticut-based Economic Analysis Associates that U.S. household net worth would rise 3.9 percent by the end of this year and 6.9 percent in 2010.)

With the employment outlook hardly rosy, don’t expect a big change soon.

“For the economy to grow 2 percent to 3.5 percent you don’t really need to hire a lot more people because your business itself is becoming more and more productive through capital infusion and wise investments within the business itself,” Greiner said.

So who has some money to spend? You might try baby boomers age 50 to 70. Despite the economic hit their portfolios took, they have more discretionary income than other demographic groups and are at a stage in life when they have changed their spending patterns. (Got a great plan for knee replacements or a new spin on retirement homes?)

“Mohamed El-Erian with (global investment firm) PIMCO is one of the strongest proponents of this concept,” Greiner said. “People who cater to that segment of the consuming society are probably going to do very well for the next five to 10 years.”

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