Through the Cycle - IBISWorld

14
Figure 2
$2,000
$1,900
$1,800
$1,700
$1,600
$1,500
$1,400
$1,300
$1,200
$1,100
Figure 3
15
10
5
0
-5
-10
-15
Profits Rise Amid Weak Job Creation
$1,000 2008 2009 2010 QI 2011 QII 2011
underestimate the underemployed (8.8 million part-time
workers seeking full-time work) and discouraged workers
(those who have dropped out of the labor market, probably
another 6 or 7 million people).
Unlike the fiscal stimulus provided by the American
Recovery and Reinvestment Act of 2009 (ARRA), federal,
state, and local governments are facing the prospects of
unprecedented austerity as the debate to contain growth
of public debt has taken center stage (Figure 3).
President Obama’s recent job creation initiative is a step
in the right direction, albeit a small one given the dearth
of fiscal ammunition the administration needs to prime its
governmental guns. To be sure, traction will clearly have
to come from the private sector as U.S. policy makers have
December 2011–January 2012 The RMA Journal
Corp Profits (B)
Unemploy (%)
Sources: Bureau of Economic Analysis and Bureau of Labor Statistics
Real Government Spending: Goodbye Stimulus?
Seasonally Adjusted, Annualized
Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011
10
Source: Bureau of Economic Analysis
9
8
7
6
5
Federal Defense
Federal Nondefense
State and Local
yet to find the Holy Grail that will pull the U.S. out of the
malaise.
Compounding jitters are problems brewing overseas,
including China’s fight to control inflation and the European
Union’s struggle to contain the region’s sovereign debt
crisis.
According to September’s National Association of Business
Economists survey, GDP growth this year will be a
paltry 1.7% and will then accelerate slightly to 2.3% in
2012. These forecasts are down 1% from the May survey.
Unquestionably, the likelihood of a deleterious double-dip
recession has increased.
So… Where Do We Go from Here?
An article in the December 2009-January 2010 RMA Journal 1
offered some suggestions for finding solid C&I lending
opportunities, which may be worth rereading since much
of that analysis remains relevant. As underscored above,
however, the economic landscape has changed dramatically
and several of IBISWorld’s banking clients recommended
that we revisit the topic.
Obviously, this article can’t possibly delineate all of the
lending opportunities or risks. Nonetheless, its aim is to
provide some insights and, in particular, offer a methodology
for seeking sensible opportunities. Our criteria will
identify sectors that:
• Are in the growth phase of their industry life cycle and
are well positioned to take advantage of a sustained, if
not spotty, economic rebound.
• Do not present inordinate risks should a double-dip
recession or shallow growth path result.
• Are not excessively volatile.
• Possess some attractive attributes regarding the level of
competition and barriers to entry (based on the work of
Anita McGahan and Michael Porter 2 ).
• Are capital-intensive, implying a large borrowing
capacity.
• Can be potentially targeted as small business or midmarket
clients.
• Have strong growth potential over the next five years.
Not an easy task indeed! But we believe we have a strong
algorithm that takes advantage of the winds of change to
clear the fog.
What Can We Learn from History and the Recent Cycle?
Although each cycle has its own unique characteristics, a
long-term analysis of past economic recoveries reveals a
concrete starting point.
Using real value-added 3 data at the two-digit NAICS
(North American Industry Classification System) level
from the Bureau of Economic Analysis and the timing
of recession troughs as defined by the National Bureau
of Economic Research, IBISWorld examined the last 10