Published in November 2008

Rough Ride Out
By David McNutt
A perfect storm outlook for 2009.

We are the world. Our economy affects every other, and every other economy affects ours. We are interconnected: a global network of finance, markets and investments. Our economies borrow from each other, sell to each other and invest in each other. This became painfully clear the past few months to even non-believers in the global village, when our economy faltered and froze credit markets. Within days, and in some cases hours, economies in Europe and Asia froze, as well.

The attempts to stabilize our economy have been late and not of sufficient scale to correct years of bad regulation, minimal oversight, and lax and predatory lending policy by some unbridled, often greedy corporations. More than that, these policy moves fail to target the root cause of the problem that has penalized many Americans and, in some cases, rescued and rewarded those who were part of the problem in the first place.

Our political leadership displayed an unprecedented lack of understanding of our government, our economy and the current situation, resulting in the most panicked string of one-off, uncoordinated, unrelated policy decisions seen in 75 years. Hundreds of economists warned about these conditions over the past few years and fought hard against passing these initiatives in the past few months (particularly the bailout, as it was accurately called), as did much of the general public, although for different reasons.

Economists insisted that these were not the measures to fix the problems; the public resisted simply throwing money at it. Our leadership did not listen, and now that we have thrown lots of money at it on more than one occasion, we are told it will take a long time before we see any real effects. It was not until the EU governments announced direct investment into the banking industry that the US began to think that this has merit, which, of course, it does. We still have to get this right.

The toughest realization for ordinary citizens is that there is no way for us to see or hear an approaching train. Much of the needed information is old and historical, and much of that is not published in the general press. So, when a condition or crisis does occur, we’re the last to hear about it. It is an unfortunate fact that much of the loss in value over the last two months was probably not necessary. The flashpoint of the crisis was not a reason to withdraw from investments. The market dropped because of an irrational fear among institutional and individual investors caused by a lack of trust in the government and political leadership rhetoric. We are in for a rough ride out and this affects the outlook for next year.

The freezing of the credit markets (meaning large banks in trouble and wanting to hold onto their cash instead of lending it to other banks or businesses) has affected every economy and will negatively impact our industry in the coming months and years. Normally, when there is a drop in consumer spending—the largest portion of our GDP (Gross Domestic Product)—our industry often is unaffected because we are more closely tied to capital investment and government consumption spending. So, this year, most of our industry has remained steady if not strong. But, because of this financial crisis, this may not remain the case.

For the first time in a long time, the economic slowdown may become manifest in both consumer consumption and capital investment sectors of GDP. Gross Domestic Product data from the second quarter of this year suggests that this slowdown was already in progress before the credit freeze in early October. The slowdown, together with tight credit, will result in enough cutbacks in the sector to slow our business significantly next year. In fact, in early October, many companies began stating in their investment guidance that, in order to preserve capital, they planned to halt expansion, readjust capacity and cut back on planned investment spending. These decisions will directly affect construction and technology spending, the two key drivers of our business.

In fact, the construction industry has already reported declines this year by as much as 15%, largely due to the drop in residential construction. As a result, many companies in the residential contracting market (home theater, structured wiring, etc.) have seen their business drop by as much as 40%.

The planned cutbacks and the decline in the construction industry are being felt in the architectural community already. A report from the American Institute of Architects (AIA), the Architecture Billings Index, tracks the combined gross billings of its member firms on a monthly basis. This index has seen a steep decline in monthly billings for most of this year and, in February, the index indicated its largest decline in 12 years.

This barometer of the architectural workload is a leading indicator to the audio and video consulting and engineering firms that serve our industry and have an eventual effect on contractors. In August, the pace of this decline slowed slightly, but I would suspect the next few reports to show continued declines.

The most somber perspective comes from the IMF. The International Monetary Fund has been researching the global economy for many years, and studying the effects of financial stress on economic activity. It is a unique outside perspective that is worth mentioning.

In recent research, the IMF studied the effect of major national financial stress of 17 countries over the past 30 years and the resulting effect of that stress on economies. The data from the current financial and economic crisis in the US and Europe was compared against the complex findings of this research. The results suggest that the economic impact of current financial stress likely is to be greater in the US than in Europe because of the type of financial stress and the fact that it is asset-based in the mortgage market. The report states that the predicted US economic downturn may worsen and could evolve into a recession.

The past few months have seen some extraordinary events, the full impact of which remains to be seen. The government has huge challenges ahead to apply policy that can help the economy operate efficiently again and we must help by continuing to raise our voices. In the meantime, most indicators suggest we should be careful and cautious in our undertakings, and wary of the looming perfect storm.


A member of Sound & Communications’ Technical Council, David McNutt has more than 35 years of experience, covering live sound engineering, marketing for well-known manufacturers, audio system design and consultation, and fixed installation contracting. McNutt holds a Masters in Telecommunications and an MBA in Marketing and Strategy. He can be reached at dmcnutt@testa.com.
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