Economic eddies: Which way does it all swirl?

LCT Magazine
Posted on March 7, 2008
By Martin Romjue

Is the economy really headed out for a prolonged recess? Or did it just have a big, brutal lunch and is snoozing off the bloated effects?
Amid all the tumult — emotional political rhetoric, doomsday forecasts and hysterical handwringing — we can conclude that the economy is not doing one thing yet: Taking a deep breath.
As economic uncertainty rises, the more a question begs the limousine and chauffeured transportation industry: how will its services fare during the dolldrums?

I spoke recently at length with Scott Solombrino, president and CEO of Boston-based Dav El Chauffeured Transportation, who offers this observation: “We’re not a necessity, but a luxury. We’ve tried to make it a necessity. Every time there is a setback in the market, it gets cut back and viewed as a luxury.” Solombrino mentioned that middle class consumers tend to downgrade to taxis and public transportation during hard economic times in a kind of trickle down effect.
 “What I think we’re faced with is a major consumer credit crisis seeping into housing and consumer markets,” Solombrino said. “That will affect people’s mental state on how rich someone really feels. That will slow down consumer spending.”

But even luxuries become necessities if people want them bad enough. Solombrino offers some rays of hope: Parts of the limousine and chauffeured transportation industry are recession proof. An obvious one he mentions is the wedding market.
 Many operators would also cite proms and bachelor parties. Special once-in-a-lifetime events happen no matter what the economy does, and people are likely to stretch budgets to keep their precious life events special.
 I also spoke recently with Kevin Klowden, managing economist at the Santa Monica, Ca.-based Milken Institute. The institute is a world-class, non-partisan think tank that looks at the economy in a non-political way.
Klowden said we are either on the brink of a recession or an extreme slowdown with little growth. He said it’s impossible to predict if a recession would be mild or nasty. Certain states or regions of the country may tip into a recession even if the U.S. economy overall does not, he said. Such states as California, Florida, Arizona, and parts of New England, are more vulnerable because of their higher exposure to the subprime-mortgage fueled credit crisis.
 
“It feels like we’re right on the edge. It’s possible for one to happen,” Klowden said.
 
On the state of corporate transportation, the biggest factor is the subprime mortgage squeeze on financial services companies, Klowden said. Those companies face major cutbacks and adjustments, and are not as likely to spend on corporate travel as deal-making drops off. Higher fuel costs also are nibbling at corporate travel budgets, prompting less use of all types of transportation, he said.
 
Nevertheless, the big picture offers some levity. Brian Wesbury, a chief economist for First Trust Portfolios, wrote in the Jan. 28 edition of the Wall Street Journal that rampant economic pessimism conflicts with the little evidence of actual economic trouble. He offers these observations:
 
“Models based on recent monetary and tax policy suggest real GDP (gross domestic product) will grow at a 3% to 3.5% rate in 2008, while the probability of recession this year is 10%.”
 
“The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending December 2007 and 3.2% in the second half during the height of the so called credit crunch.”
 
That rosy outlook needs to be balanced against a recent report on the ailing economy from the Associated Press:
 
“Dangerous cracks in the nation's job market are deepening. Employers slashed jobs by the largest amount in five years -- and hundreds of thousands of people dropped out of the labor force -- an ominous sign that the country is falling toward a recession or has already toppled into one.
For the second straight month, nervous employers got rid of jobs nationwide. In February, they sliced payrolls by 63,000, even deeper than the 22,000 positions cut in January, the Labor Department reported Friday. The grim snapshot of the country's employment climate underscored the heavy toll the housing and credit debacles are taking on companies, jobseekers and the economy as a whole.
"It sounds like the recession bell is ringing for the U.S. economy, although it is still faint," said Stuart Hoffman, chief economist at PNC Financial Services Group.
The worsening situation will prompt the Federal Reserve to cut a key interest rate deeply -- perhaps by as much as three-quarters of a percentage point -- at its next meeting March 18, or possibly sooner, to help brace the teetering economy, analysts predicted.
The shower of pink slips was widespread. Factories, construction companies, mortgage brokers, real-estate firms, retailers, temporary-help firms, child day-care providers, hotels, educational services, accounting firms and computer designers were among those shedding jobs. All those cuts swamped job gains at hospitals and other health care sites, bars and restaurants, legal services and the government.
"Losing a job is painful, and I know Americans are concerned about our economy; so am I," said President Bush. "It's clear our economy has slowed."
The big question: Just how much? The weak employment report pushed an increasing number of private economists into the camp that the economy is probably shrinking now. Under one rough rule, the economy would have to contract for six months for the country to be considered in a recession.”
 
Solombrino pointed out some past perspective. Even after the Wall Street meltdown of October 1987, the Savings and Loan crisis of the late 1980s, the brief recession of the early 1990s, and the trauma of 9-11, the chauffeured transportation industry eventually came roaring back and reached record revenues in the ensuing economic booms.
 

So don’t grab the Maalox just yet. Limousines and black cars won’t vanish. The temporary economic tumult will subside, and growth and demand will resume. There’s no need to change your line of work and run for the hills.

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