Living with Market Turmoil

Turmoil is not currently exclusive to the boating market. Look at residential real estate, banking, equities, energy, IT, domestic autos, commodities, print publishing, and so on. Which business is predictable or more manageable as 2008 unfolds? As this is written in late 2007, many in the boating industry suggest a significant downturn has visited the sector, or it has reached bottom, or turned up. Some claim to have been unaffected. One thing is certain: speculation about the health of the U.S. economy is rampant and affecting consumer behavior.

In testimony before Congress last November, Federal Reserve Board Chairman Ben Bernanke reported solid third-quarter GDP growth of 3.9 percent — it was subsequently revised up to 4.9 percent. But consumer sentiment suggested household spending would grow more slowly, due to effects of higher energy prices, tighter credit, and continuing weakness in housing. Economic activity was expected to slow noticeably in the fourth quarter. Growth was seen as remaining sluggish during the first part of 2008, then strengthening as the effects of tighter credit and the housing correction began to wane. Bernanke voiced downside risks to this outlook, including, “In light of the problems in mortgage markets and the large inventories of unsold homes, house prices might weaken more than expected, which could further reduce consumers’ willingness to spend …”

Using this “clear as mud” prediction from the nation’s most noted economist, and mixing in input from impromptu conversations with those on the F&I side, here are some guesses for boating businesses (60 percent confidence factor):

Interest rates: No market-busting or -making moves. Longer (10-year) rates probably going down; rates on consumer boat loans will be stable or decline. Shorter rates, probably up a bit, affecting loans tied to prime, including inventory. If a recession is expected, the Fed will ease further and rates will continue down.

Credit availability: Just fine for those not in the subprime mortgage market. Boats have an excellent history of loan performance. If the prospective buyer has a clean credit sheet, deals will get done.

Inflation: Despite gas prices, cost increases are under control. If inflation remains benign, barring a major world or economic catastrophe, there’s little other pressure for interest rates to rise or availability of credit to tighten.

Tougher underwriting: Consumers with blemished credit will be examined much more closely. Oddly, the high-fliers wanting to buy McMansions, pricey import cars and possibly larger boats may be scrutinized. Most everyone in-between will not be put through hoops.

Stock market: Much of the feeling of wealth lately has taken a hit in all manner of investments. More volatility is ahead. Most investors have strong longer gains, but don’t feel as cushioned compared to only several months ago.

Housing prices and equity: Both are retreating almost everywhere, markedly in important boating markets such as Florida and Southern California. Homeowners with adjustable mortgages will see rates resetting upward throughout ’08, meaning higher payments.

Home equity lines of credit: Now that most homes have stopped appreciating, loans to tap the equity have dried up. It’s estimated that close to half of consumer spending in recent years was tied to home equity loans. Where will the spending money come from now?

Economists at several major banks serving the boating market, are in the camp with about two-thirds of so-called “Blue Chip Economists” who feel there will be no recession in ’08. Says Wachovia Bank’s Mark Vitner, “We are fortunate in that the economy had unusually strong momentum right as the financial crisis began to unfold during the third quarter. Global economic growth also remains strong, which should help sustain export growth. The current [4th ’07] quarter and early part of 2008, however, could prove to be uncomfortably rough, with the economy losing momentum and at least one quarter seeing growth well below a 2 percent pace.” Three percent is the average for sustained economic growth over time.

Dealers should touch base and review relationships with retail and flooring lenders, and other service providers such as insurance agents, surveyors, attorneys, show producers and remarketers. Keep these allies ready and engaged. Working together will warn of early trouble, insulate risks and provide a foundation for growth when the economy reenergizes.