When Do We Reach Economic Recovery?

Cited: Apparel News

What will the future bring? All the economic indicators are confusing. Unemployment rates and gas prices are high as well as the stock market. Inflation and housing prices are down, but so are retail sales. What about bankruptcies, will they increased? When will the longest and deepest recession since the 1930s end?

Recently, California Apparel News Senior Editor Deborah Belgum caught up with several representatives from the financial industry to get their take on whether the economy has bottomed out and what apparel manufacturers and retailers can do to stay afloat until consumers start digging deeper into their pockets and spending again.

John Daly, President, CIT Trade Finance

Has the economy hit bottom or are we halfway to recovery? Why?

While it is not clear whether the economy has hit bottom, what we do know is that unemployment is stabilizing and interest rates are normalizing. This would lead me to think that the worst is over. Certainly, the rate of decline is slowing.

What should apparel and textile companies do now?

Apparel and textile companies should proceed with extreme caution. Make every effort to protect your capital and the integrity of your financial condition. Be very mindful of the risks you might be taking. If you are thinking about embarking on any new ventures, be sure to do so carefully and conservatively.

Don Nunnari, Senior Vice President and Regional Manager, Merchant Factors Corp.

Has the economy hit bottom or are we halfway to recovery? Why?

Paul L. Kasriel, chief economist at The Northern Trust Co., was quoted recently saying: “The worst seems to be over for consumer spending.”

However, unemployment is rising, even though at a slower rate. Unemployment is expected to rise to 9.2% nationwide, the highest since 1983. May retail sales numbers were disappointing across all segments, except for a few bright spots like Aéropostale and The Buckle.

What should apparel and textile companies do now?

Apparel companies have had to work much harder during this recession. Very difficult decisions have been made to manage expenses and inventories. The positive is that they have become much more disciplined, smarter and efficient. Providing outstanding customer service and “fresh” product to market are key to survival.

For the stronger companies, they have the financial capacity to create demand by greater product merchandising and brand marketing.

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Steven Reiner, Managing Director, Financo Inc.

Has the economy hit bottom or are we halfway to recovery? Why?

I think the honest answer is that no one really knows. With that said, I think there is a general sense that the rate of deceleration is slowing. Things are certainly challenging, but if they are getting worse, they are getting less so.

But I do not think that the economy has hit bottom yet. With unemployment still high and with retail sales generally weak across the board, with a few bright spots, it would be a little misleading to say things have hit bottom.

There are certain signs of bright spots in the marketplace. We have a number of clients, both wholesale and retail, who have seen modest upticks or at least stabilization in the business. There is a sense that at least people are starting to stick their heads out of the sand a bit. The consumer is extremely challenged, and gas is starting to move back up, which acts as a tax on consumers.

What should apparel and textile companies do now?

First, I think the view continues to be that people are cautious and are playing defense. That means if you are a manufacturer, you need to continue to be cautious with your retail client. You have to think about your cash position and opportunities to raise additional cash and solidify your capitalization. I think, as an apparel company, while there is a sense that things have at least bottomed out or are near the bottom, you have to be realistic and have downsize planning in hand and be prepared for this to get worse because it certainly can. We have seen in every sector that we work with that there are market leaders who have emerged or strengthened their position on a relative basis to their competitors.

Bret Schuch, partner, Goodman Factors

Has the economy hit bottom or are we halfway to recovery? Why?

I normally subscribe to the glass being half full, but it’s hard to be terribly convinced that the worst is behind us. May retail sales weren’t really bad—some would say they were relatively good—but speculation here is that it’s more a blip, perhaps driven more by rebate checks than a renewed interest in consumer spending.

Of particular concern to me are the continued loss in jobs, the proliferation of bankruptcies and the strain such will create upon the lending community, and the impending drop in the commercial real estate sectors. While residential home values have stabilized, due in great part to the available tax credit for first-time buyers and historically low fixed rates, the commercial market is showing great signs of weakness that may prove to be deeper than the residential side of things and won’t be nearly as easy to reverse. The markets seem to belie this concern, so perhaps I’m wrong. Hopefully, this is the case.

What should apparel and textile companies do now?

Apparel and piece goods manufacturers should focus on keeping margins intact, reducing overhead as much as possible, and avoiding customer concentrations and unnecessary credit risks.

Sunnie Kim, President, Hana Financial Inc.

Has the economy hit bottom or are we halfway to recovery? Why?

Unfortunately, there is no easy answer to this question. The negatives point to the stock market still being off by almost 50 percent since the highs of 18 months ago. There are still substantial toxic assets on bank balance sheets, retail numbers are still way off, unemployment data is less than encouraging, bankruptcies are in record numbers, and the latest General Motors and real estate crisis is far from over.

That said, there seem to be glimmers of recovery. The stock market has been up the last 60 days. Several banks have claimed to return to profitability for the last two months, and several economists, along with members of President Obama’s economic team, have hinted that even if we are not at bottom, the free fall has indeed slowed.

Consumer spending seems to be a major key. Thus far, consumer spending is down significantly. In prior recessions, we partially were able to spend our way into recovery. That seems to be a much more difficult task now. The U.S. savings rate has averaged 4.7% for 2009, compared with 1.8% in 2008, according to the U.S. Department of Commerce’s Bureau of Economic Analysis.

What should apparel and textile companies do now?

Apparel and textile companies must be diligent in watching their inventories, knowing their customers, taking orders with short expiration dates, reducing their expenses and selling basic goods.

Dave Reza, Senior Vice President, Western region, Milberg Factors Inc.

Has the economy hit bottom or are we halfway to recovery? Why?

I think we may be in the bottom. I don’t believe we are halfway to recovery because I think there has been a lot of job loss in the first quarter of this year and the last part of last year. Many people have had severances or benefits that are starting to disappear. Now they will have some issues if they haven’t found jobs. There will be people with disposable-income issues. The other thing is, you will have another round of significant job losses in terms of the major auto bankruptcies, their suppliers and dealers. I think there is a lot of pain to be felt in the automotive industry.

I go to the malls and see people in the stores, but there are stores that are promoting heavily to get customers or stores that are quiet. The better department stores’ sales are off significantly—like Nordstrom, Bloomingdale’s and Saks. Discounters are doing better. I think we are still in a flat bottom. It is not going to get worse, but we haven’t started the uptick yet. The stock market seems to have stabilized. Some banks have announced they intend to repay the money from the government they borrowed, which is a good sign. But are they paying that out of new equity they have raised or profits or both?

Dave Reza

What should apparel and textile companies do now?

If I were a manufacturer, I would try to target those retailers that are doing better. Can I get in front of them—even if it means I have to prepare a product for them that is not a garment I usually do? Companies need to be strict about managing their balance sheets and have self discipline. That means writing off assets they hope have value but don’t. Manage inventory relentlessly. As it gets old, mark it down and get rid of it and don’t take risks on retailers where the factor is saying no.

Ken Wengrod, President, FTC Commercial Corp.

Has the economy hit bottom or are we halfway to recovery? Why?

We see that job losses have slowed down, and that could be a good indicator of what is happening. A major indicator that I always look at is the spread between interest rates on junk bonds and Treasury debt. … What we just noticed is a high-yield spread has been reduced by 50 percent between those two indicators. That would tell us that in probably mid-summer we will start seeing the jobless claims probably fall.

The other thing I look at is collections. We have noticed over the last 60 to 90 days a significant improvement in collections. People are sending money in. It is not due to hard-core collections. That tells me they need new, fresh merchandise. That is an important indicator to our sector.

What should apparel and textile companies do now?

For the manufacturers in the apparel industry, the importers and the distributors, this is a time to regroup and shed their overhead, bring in people that are looking for jobs who are capable. You don’t have to pay a fortune for people. There is a whole correction to salaries right now.

There was a time that production pattern makers were making $80,000 to $100,000 a year and designers were making $100,000. Things are changing. Today, people have to re-examine what value they are getting and cut down to a core number of people and improve their productivity. But they cannot shed the heart of the company, which is merchandising and sales.

Consumers and retailers are looking for value today. How do you accomplish this? You look at your internal costs carefully, especially in design. Do you have excessive sample expenses?

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My Take: The one thing all these people forget when talking about cutting their” internal costs” is that some of their internal costs also buy their products. Reducing the number of people that they have working for them also reduces the number of people who can buy their product. Why not try increasing the number of sales instead? Increasing sales makes better sense and laying off employees.

I remember taking economics in college and studying the concept of supply and demand. If I remember correctly, you can easily increase demand by lowering the price of a particular product. Wal-Mart is one of the better examples of this; they lower the price of certain grocery and retail items to bring in customers. However, that does not mean that those particular items are the best quality.

If a particular industry such as fashion were to reduce the price of their clothing, which everybody needs, their sales would skyrocket. I can remember when the clothing items such as jeans did not cost more than $10-$15 and those were Levis. Now, you go to buy a pair Levi’s and you have to pay $30-$50 a pair. Just imagine how many pairs of jeans they could sell if they drop their prices back to what they used to be. They would make more money in the turnover than they do now.

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