Academic journal article ABA Banking Journal

Straight-Line Projections. Relic of the Past?

Academic journal article ABA Banking Journal

Straight-Line Projections. Relic of the Past?

Article excerpt

Since World War II, the pace and character of consumer spending has defined the U.S. economy. Going forward, will this all change and what are the implications? What about housing? Finally, has the era of California/Florida dreaming come to an end?

If the American consumer has truly changed her spots and become a greater saving, less credit-using, more bargain-hunting species, then what will be the character of this recovery and the longer-run pace of economic growth? With consumer spending approximately 70% of the economy, this issue is in the forefront of corporate strategy discussions.

Historically, corporate strategy for the year ahead has been a fairly perfunctory straight-line projection based on recent business performance. However, both the cyclical and secular character of consumer spending and housing are likely to be far different in the year(s) ahead and so straight-line projections are likely to lead straight to corporate underperformance.

Consumer spending is and will continue to be hampered by income and credit constraints and low consumer confidence. The jobless recovery has already started-we will see three-percent-plus growth in the economy for the third quarter along with continued job losses. In addition, the average workweek remains low and wage growth very weak. Thus, income gains are modest at best for most workers and will likely remain so for 2010, a sharp contrast to traditional economic recoveries and straight-line forecasts of a rebound in many corporate plans. …

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