What’s Taking So Long?? – and why this recovery is gonna take time – Part I

In the past, a return to prerecession employment levels commonly took several months. Yet, in more modern recessions – those since the 1990’s – the rebound time has increased, to 15 months in 1990, to 39 months in 2001, and to a predicted 60+ months after 2008, according to a McKinsey report released in June of 2011, “An Economy That Works”.

Others agree. In Real Estate Forum’s July/August article: Fighting Headwinds, (http://www.reforum-digital.com/reforum/20110708/#pg54) Rod Vogel, Managing Director of Equity Production, Principal Global Investors, forecasts six years for a return to unemployment rates between 5 and 6 %, and Mark Higgins, CIO of Cigna Investment Management, characterizes the next five years as ones of slow growth.

Indeed the current recovery has been called jobless. Corporations have record amounts of capital to invest. And with the Federal Reserve’s promise to keep rates down for at least the next two years, there is capital available, but employers and investors are still cautiously waiting to invest and hire. So what’s holding them back?

Uncertainty paralyzes corporations from taking risks. Against the backdrop of an economy which is “close to faltering” according to Fed Chair Bernanke, some of the big what if’s that CFO’s face now include:

- Uncertainty over international conditions – Capital is unsure of the degree of American exposure to a Greek default, and to the potential domino effect on Portugal, Spain, Italy, and the Euro in general. If Greece defaults, Italian and Spanish companies and banks already awash in debt, could be forced closed, affecting other companies which trade with them or hold their stock and other banks exposed to their debt. It is not over reaching to fear a dissolution of the European Union itself, given the lack of economic regulation that the political union has over its own member economies. Stronger European states demonstrate less and less willingness to picking up the tabs of their weaker sisters. A unified Eurobond is being considered, which would give confidence in European ability to repay debt, but would require unprecedented cooperation from the disputing member states.

- Uncertainty over tax reform – A national debate remains unresolved over whether taxes should be used to stimulate the economy and redistribute wealth, or be contained to cover a spare list of government functions and reduced to reduce the debt.

- Uncertainty over FASB lease accounting standards – According to a February 2011 Deloitte survey of real estate professionals, FASB accounting standards changes, which would eliminate operating leases and bring off-balance sheet leases onto the balance sheet, would have significant impact on corporations. These include: changes to debt and equity ratios, changing existing debt covenants, making it more difficult to obtain financing, making shorter lease terms preferable, and encouraging lessees to purchase rather than lease their space. Corporations will have to adapt their business processes and technology to implement the new standards properly, but 90% of companies were not well prepared to do so, and 68% of survey respondents did not know the tax consequences of the proposed new standards.

- Uncertainty over policy due to Washington gridlock – Among the reasons for S&P’s recent unprecedented downgrade of the US credit rating was the inability of the American Congress to agree on an elevation of the debt ceiling, which raised serious questions about the country’s ability to react swiftly to changing economic conditions and to create effective policy going forward.

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Contributor: Chris Campbell
Managing Director
Net Lease Capital Advisors
email: ccampbell@netleasecapital.com