Don’t Look for Big Improvements in 2010

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Personal, Business Bankruptcies Increase

Despite the Increasingly upbeat talk from Washington, I don’t see turnaround in 2010. And neither do a group of economists surveyed in January by the Wall Street Journal (WSJ) newspaper. The consensus: The U.S. economy will perform as poorly this decade as it did during the last one which marked the worst performance since the 1930s. The recovery seen by some in the last half of 2009 was driven in large part by government stimulus programs, which will be cut back this year. And as cautious Americans are saving more, they’re spending less on big ticket toys such as motorcycles.

“It’s easy to be dismal about the U.S. economy,” said one economist, whose outlook was seconded by another: “We’re not likely to have robust growth anytime soon.” The one bright spot cited by several economists was strength in places such as China and India, which could stimulate U.S. exports. Unfortunately, I don’t see that helping the U.S. powersports industry much, expect for OEMs like Harley-Davidson and Polaris, which have made moves in both those countries. BRP also could stand to benefit from growth outside the U.S. because of its strong international base.

The turbulence that began in the powersports industry in 2008 continued last year and will drag on through 2010, I believe. The same problems that existed last year— lack of sufficient consumer and business credit, weakened consumer confidence, a languishing housing market, lack of any meaningful new powersports products, excessive non-current inventory at the dealer level, and increased fumbling by the federal government— will continue in 2010, dampening any hope of a substantial recovery in our industry this year.

In a nutshell, I see more of the same lackluster performance for our industry in 2010 that we saw last year, and I don’t look for any real improvement in the problems that plague consumers and small businesses until 2011 or perhaps 4Q 2010, at best.

There are some bright spots, however. While we’re not likely to see much product innovation as OEMs hunker down to control risks, we are seeing moves by Polaris and others as they expand into electric and low emissions vehicles. Polaris offered its Breeze electric golf cart last year and last month launched its EV LSV, a low speed vehicle electric vehicle designed for on-road and off-road use by the military. Meanwhile, BRP is expected to bring its exciting high performance recreational SXS to market any day.

I think you’ll see a much bigger push by factories—from many countries— into the low speed electric segment. This could be a good revenue stream for dealers who are prepared to handle this new type of power source. Another bright spot for dealers who survive 2010 is that there will be fewer dealers to split up the smaller consumer pie. And, of course, inventories at the dealer level are being reduced as OEMs cut back production, increase promotions and reduce their efforts to push dealers into buying unwanted machines for which there is little consumer demand.

Hidden Problem: Consumers,  Businesses  Running Out of Reserves

Unfortunately, I believe there are a lot of hidden problems among small business and consumer households that are not showing up in the national statistics, which often suggest growing consumer confidence and increased corporate performance.

I think it’s very likely that many employed consumers respond more positively to consumer confidence surveys today than they did, say, 12 months ago, for the simple reason that they don’t fear any more layoffs. Most of the cuts that were needed have been made, and most of the survivors probably are safe in the near-term. That’s certainly reason to be more confident.

And many of those who lost their jobs this year have managed to patch together contract positions or jobs in other industries. Again, it’s reason to be more confident when you have some cash coming in the door even if you don’t have the steady job you used to have.

But the quality and stability of those two “jobs” often aren’t nearly the same, are they? And that contract employee isn’t really likely to pop for a new bike, is he, even if he’s moved off the unemployment rolls? He knows there’s an end to the contract in sight, usually less than 112 months down the road.

Looks Are Deceiving

Take a drive through any well-maintained middle class neighborhood in your town and you might be reassured. Nice homes. Nice yards. Things look good, don’t they? A lot of those people are prospects to buy a bike, aren’t they, or at least a scooter?

Don’t be fooled by that first look, though. I’m betting that a number of those households, even if they still have two wage earners, are bringing in a lot less than they did 18 months ago. In fact, it’s a pretty safe bet that both those workers have taken sizable salary cuts, moves that have forced them to use their savings and maybe tap into their 401(k) funds.  I haven’t been able to find any national statistics on 401(k) redemptions, but there are indications in Minneapolis that redemptions are at record levels for investors younger than 60 years of age. That means they have to pay a withdrawal penalty of 10% in addition to the 20% in taxes they have to pay. And that suggests that these withdrawals are being made for necessity not for pleasure.

At the same time, I believe that many small businesses are in the same boat: they’ve used up their reserves, their credit lines are tapped out and/or reduced, sales are down, and their existing customers are cutting back purchases and pushing payments out to 60 days and beyond. And while they strive to keep their work force, the small businesses often are forced to make cuts in employee compensation, which further stimulates the cycle.

Bad Bankruptcy News

One indicator of economic weakness that we can track is the filing of personal and business bankruptcies, and the trend is not good, especially in big powersports states such as California and Arizona.

Business filings were up 38% last year over 2008 and personal filings were up 32% through November. In Arizona and Nevada, personal filings jumped 79.6% and 59.5%, reports the Wall Street Journal. And in California, personal bankruptcies climbed 58.8% last year, the paper reported. One California attorney told the WSJ that he is seeing more clients whose debts have gradually piled up following job losses.

This year won’t be all bad, and there will be a few bright spots for dealers who are positioned to take advantage of opportunities. But overall, it looks like another tough year, no matter what the politicians in Washington say.  JD

Contact me with news tips and story ideas
at 952/893-6876 or joe@powersportsupdate.com.

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One Response to “Don’t Look for Big Improvements in 2010”

  1. Mike Jones Says:

    Sadly, this is spot on. Joe’s analysis exactly matches the trend lines that we are seeing in all aspects of our dealership.

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