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Business Observer Friday, Oct. 19, 2007 14 years ago

WALSH: Review and Comment

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Arthur Laffer's supply-side sidekick sees the economy climbing from 1% to 3% by year end.

WALSH: Review and Comment

Forecast for 2008: Think '09

by Matt Walsh, Editor and Publisher

Arthur Laffer's supply-side sidekick sees the economy climbing from 1% to 3% by year end.

Now that summer is over and we're into the fourth quarter, many business owners and chief executives are in budget mode - that annual guessing game of how the economy is going to perform next year; how your industry is going to perform; and, most important, how your sales team is going to perform.

Should you raise your prices higher than the CPI? Will 2008 be as yucky as 2007? Or will it be better? Have we really hit bottom yet? At the very least, will we have a decent Snowbird Season?

In this, our annual economic forecast issue, we hope we answer some of those questions for you. Perhaps the most succinct answers are these:

• Rod Thomson, the Review's executive editor, summarized our editors' forecast reporting with the proverbial wishy-washy answer: 2008 will bring mixed results. It will depend on what business you're in (real estate sales: more blah, albeit noticeably improving; exports: full throttle). And it will depend on where you're located.

Thomson says one of the clear messages he gleaned from our reporting is that the farther south you go the gloomier the mood. Tampa Bay (Pinellas, Hillsborough) has weathered the real estate downturn better than all of the counties to the south. Lee County has perhaps the grimmest 2008 outlook.

And that makes sense. Lee County grew the fastest among Florida's Gulf Coast counties from 2003-2006, so it will take Lee the longest for the pendulum to swing back into equilibrium.

But we should all take solace and start to feel somewhat more optimistic. Here's the good news, compliments of economist Victor Canto, former president of A.B. Laffer, Victor A. Canto & Associates. That's Laffer, as in Arthur Laffer. Canto was at Laffer's side during those years when Ronald Reagan made Laffer's supply-side economics concept as widely known as supply and demand. Canto says in a recent forecast for his clients at La Jolla Economics:

"There is no recession in sight for 2008."

But that's about as buoyant as he gets for 2008. Canto also says:

"The combined forecast paints a disturbing picture for the remainder of 2007 and all of 2008. In the short run the inflation rate is expected to increase, while the real economy is expected to slow down. Not a good economic mix; slower growth and lower inflation. Then, looking to next year, we expect the inflation rate to decline as the economy also slows down, perhaps a good environment for bonds but not a good one for equities.

"Our forecast calls for a flat P/E ratio and, given our earnings outlook, investors must consider the possibility of a flat to down stock market in 2008."

What's more, Canto says, "If the Fed is on a price rule, as we believe, then the answer is simple: Our forecast calls for slower economic growth in 2008 and faster growth in 2009.

"Our model calls for the inflation rate, excluding food and energy, to increase steadily to 2.5% by the end of the first quarter of 2008 and then to steadily decrease to 2.0% by 2009.

"We expect the trailing four-quarter growth rate to decline to 2% during 2008," Canto says. "Although we don't quite see a recession, we expect the economy's growth rate to range from a low of slightly below 1% to a high of 3% by the end of 2008, and then to steadily increase to a 3% rate during 2009.

"The de-levering of the economy would result in slower growth in the near future," Canto says. "However, as 2008 progresses, the expiration of the Bush tax rate cuts will come into play. People will begin to accelerate their income recognition to realize their income and have it taxed at the lower rate that will expire after the last day of 2010. In short, the tax story suggests that the economy will get stronger the closer we get to 2010."

Moral of the story: Who can think about 2010? We need to get through 2008. For '08, remain focused on cost controls, operate conservatively, rebuild cash reserves, create inexpensive, new twists in your product lines to stay fresh and keep your sales team revved up as best you can.

+ Lulu leaders at work

Florida lawmakers - particularly at the leadership levels of governor, Senate president and House speaker - are making a mockery of themselves.

This most recent special session on property taxes only emphasizes the shameful situation.

Throughout last week, news stories came out of Tallahassee quoting various lawmakers how they were determined to approve a new property-tax constitutional amendment for the January ballot - even if what they approved was seriously flawed.

This, of course, defies the practices of respectable leadership. It's a pattern that is becoming an increasing problem in Tallahassee.

Lawmakers need a course in the business philosophy of the late Dr. W. Edwards Deming.

Many of you probably remember Deming as the father of the great economic miracle in Japan after World War II and one of the foremost gurus on quality control.

Japanese industrialists invited Deming to help them shift the world's perception that Japan produced cheap, shoddy imitations to one of producing innovative quality products.

Within his famous 14 points of managing and leadership, Deming preached a simple concept that made Japanese companies extraordinarily efficient, profitable and known for their quality:

Do it right the first time.

Legislators, take note.

When lawmakers go home after this latest special session, they will be leaving Tallahassee for the third time having crafted flawed and unacceptable property-tax reform.

This is extraordinarily costly. Not only are taxpayers bearing the Legislature's special, daily operating costs, but add in the costs of all of the lobbyists and others who must push and pull in the halls of the Capitol to protect their clients. Add in the cost of uncertainty as well.

This is a failure of leadership.

When the courts rejected the Legislature's original constitutional amendment, Senate President Ken Pruitt and House Speaker Marco Rubio should have acknowledged the Legislature's admittedly flawed ballot question. And they should have vowed that before the next regular session lawmakers would come to Tallahassee with a well-crafted reform package and that adopting high-quality reform would be the singular most important focus of the next session.

Instead, we get another legislative lulu. Jeb Bush, where are you?

ELECTION ECONOMICS

The table shows how the U.S. economy performed in GDP, with the boxes highlighting the year prior to and the year of presidential elections. The economy grew faster in election years than in the year prior in seven of the nine past presidential elections.

GDP Chg. GDP Chg. + / -

Year Current $ 2000 $ President

1970 5.5 0.2

1971 8.5 3.4

1972 9.9 5.3 + Nixon-2

1973 11.7 5.8

1974 8.5 -0.5

1975 9.2 -0.2

1976 11.4 5.3 + Carter

1977 11.3 4.6

1978 13.0 5.6

1979 11.7 3.2

1980 8.8 -0.2 - Reagan

1981 12.2 2.5

1982 4.0 -1.9

1983 8.7 4.5

1984 11.2 7.2 + Reagan-2

1985 7.3 4.1

1986 5.7 3.5

1987 6.2 3.4

1988 7.7 4.1 + Bush

1989 7.5 3.5

1990 5.8 1.9

1991 3.3 -0.2

1992 5.7 3.3 + Clinton

1993 5.0 2.7

1994 6.2 4.0

1995 4.6 2.5

1996 5.7 3.7 + Clinton-2

1997 6.2 4.5

1998 5.3 4.2

1999 6.0 4.5

2000 5.9 3.7 - Bush

2001 3.2 0.8

2002 3.4 1.6

2003 4.7 2.5

2004 6.6 3.6 + Bush-2

2005 6.4 3.1

2006 6.1 2.9

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