Stormy Weather in the Forecast

Clouds are building on the horizon. Beyond the horizon, there are reports of quite a storm. Though forecasts vary, in both the timing and the intensity of the storm, forecasters are coming into the agreement that we are in for some unpleasantness.

The elements of this storm are not wind, snow, and frigid temperatures, though all of those are also in the local forecast. The storm I’m concerned about is caused by the combination of increasing inflation, flat incomes, declining home values, and increasing gas prices.

Headlines about foreclosures, a credit crunch, weak holiday sales reports, and $3.00 gas are abundant. Read deeper than the headlines and you find forecasts of $100/barrel oil and $4/gallon gas in 2008. There are predictions that foreclosures will surge, the housing recession will deepen, and house prices will fall 20-30% before the market hits bottom in a few years.

All of this leads to talk of a recession, even a serious recession. Some forecasters think it has already begun. Others think it will begin by spring. More and more think it is unavoidable, a view few shared even a month or two ago.

As we all know, sometimes the forecasters are wrong. Sometimes the storm fizzles and we get an inch instead of a foot or rain instead of snow or it misses us entirely. The old joke goes that economists have predicted nine of the last five recessions.

Only time will tell. A few points are worth noting, however. The recent surge in retail development – in Geneseo and across the American landscape – happened because of an extended period of really favorable weather, a kind of economic global warming. As I’ve written about before, cheap gas and cheap money conspired to give us cheap prices in cheap buildings.

Those sunny days are over. Now we get to see just how much too much retail sprawl occurred. Expect slower retail growth and more vacancies. There are early signs of this in Geneseo, and the retail bubble has only started to deflate.

A more important point is that it is conditions like these that should remind us the value of smart growth. Growth that is planned, that provides for a mix of development, and that respects the character of the community in which it occurs is growth that is sustainable. No economy is recession-proof. However, an economy that supports local businesses, that understands that not every day is sunny, and that understands that people need places to make money and not just spend it, is an economy that will withstand the storm.

3 responses to “Stormy Weather in the Forecast

  1. I think the economic storm clouds may add to the argument for the Lowes project. With gas at approximately $3.22 giving folks less disposable income could make having a Lowes 30 miles closer with the ability to offer hardware goods at a lower cost a positive. I’m not sure it would hurt small stores that much. If I need a can of paint or some other hardware item I will still go to a small store first for a quick “in and out.”

  2. We had this same discussion in comments on this blog some months back (I realize this means I need some new column ideas; please submit your suggestions).

    Certainly higher gas prices make Lowe’s more convenient and Henrietta less accessible. However, I’m not sure this makes Lowe’s a good bet in the coming economy, for two reasons. First, higher gas prices (and, more importantly, higher inflation and falling home values and home equity) also mean less disposable income and therefore less spending, regardless of where that spending occurs.

    Second, higher gas prices for consumers also mean higher gas prices for producers and retailers. At some point, I think this means that big box retailers become less likely to support stores in smaller markets due to tighter profit margins (the economy of scale of big boxes is built, at least in part, on cheap gas), inadequate same store sales growth, and the higher costs of servicing those stores.

    Under these circumstances, I foresee big box retailers scaling back to their major markets and counting on customers to come to them.

  3. Bill

    If big box retailers may scale back the size of their facilities even in slow markets. Also, it helps them with zoning. I think that Portland, OR had banned big boxes from the City to try to encourage the redevelopment of neighborhoods with small groceries, etc and other walk-to facilities. However, WalMart in particular went to the drawing board to come up with smaller units to bypass the zoning. I hope they rue the day when they closed their smaller, user-friendly store here.

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