Conversions and Economic Recovery

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2396

Knowledge@Wharton published an article yesterday that summarizes their discussions with a few professors, economists and company bosses in a range of industries on which economic indicators they plan to watch during the final quarter of 2009 and what they are waiting to see in 2010 that would convince them the economy is turning around. On the macro side, from retail to real estate, finance to factories, the central theme was "EMPLOYMENT". Retailers linked it to consumer confidence, real estate watchers to office space, bankers to loan losses, and manufacturers to product demand.

If we follow the logic of Susan Wachter (a Wharton real estate professor), high unemployment will persist thru 2010, impacting the real estate market. Now, although the residential real estate market is turning around, the commercial real estate market is the "next shoe to drop", and that isn't going to turn around until employment does. To quote Wachter: "Commercial is a lagging indicator, and it follows employment. Employment itself is a lagging indicator. Probably six months after we see employment improving we'll see commercial improving, and we won't see employment changing in 2010."

In business generally, one number we always tried to keep low was employee turnover. Of course, management accomplishes that with progressive employee relations policies that cause company loyalty and innovative thinking. However; low turnover can be an indicator of potential problems: as Arkadi Kuhlmann, president and CEO of ING Direct, pointed out to the K@W people, his company's annual turnover rate is usually about 18%. For the past year, it's been about 3%. Normally, 3% is great, but in this case it means that there aren't any jobs available out there. Now, Mr. Kuhlmann has other problems if his "normal" turnover rate is 18% - somebody calculate how long it takes his company to turn over 100% of it's population at 18% compounded - but the overall point is valid.

As we pointed out in a prior post, and K@W echoes, November's official numbers brought hope for an economic thaw. But, "jobs" are a lingering concern.

During the holiday season, the retail industry will be watching comparable store sales to see if shoppers spend more than they did in the same period last year. Retailers will also be watching "conversions": that is, how many shoppers who walk into a store actually buy something instead of just looking around.

So, during the holiday season, we have to get people into the malls, then get them into the stores, and then get them to "convert"! This is modern economics in America!