Many U.S. businesses reinvested in their enterprises in 2011, signaling economic recovery was more tangible than illusory. Mergers and acquisitions (M&A) also increased as companies sought to consolidate resources and increase market share. Despite cautious overtones, it appears the economy is trending upward. And for the payments industry, economic signs are promising.
During the recession, many job positions within the industry were in scarce supply. "Generally speaking, going back to 2008 and 2009, we saw sales and business development was the only real steady job category that we were filling," said J.T. Driscoll, President of Impact Payments Recruiting. Before then, more than half of the company's placements were typically in other categories.
In the second half of 2011, Driscoll noticed a dramatic increase in hiring. "Our third quarter was back to the best levels we had ever seen, back in 2007, before everything started dropping," he said. "What we're seeing from a real high-level view from last year, and certainly trending on this year, is a return to normalcy in the types of jobs we're seeing. What's coming in - and we take this as a good sign for our firm but more so as an indicator for the industry and the economy in general - are the big gallery jobs, the leadership positions."
Driscoll said that in addition to top executive positions, openings for project managers and support positions are making a comeback. "Technology is hot right now," he said. "We're getting a lot of needs for different types of programming. People are working on their infrastructure. They're reinvesting in their companies."
Driscoll also noted that top payment professionals are in demand, so they are not being forced to accept downgrades or make lateral moves. "The more senior, director level and above, where we tend to work, people are not taking jobs for the interim like you're hearing on the news," he said. "They're not taking a job beneath their skill level just to get by. They're very gainfully employed."
Another indication things are improving is the demand for qualified job candidates. "Our clients, the ones that are hiring, are doing as you would expect employers to be doing in a very strong economy, and that's making offers that are 15 to 25 percent above what the candidates are earning currently in order to attract them to their company," Driscoll said.
The Strawhecker Group's U.S. Economic Indicators Q4 2011 Report illustrates just how far the payments industry has rallied. In the latest report, the TSG Payments Index (TSGPX), which tracks quarterly performance of $100 invested in 29 leading payment-related businesses against the performance of companies in Standard & Poor's 500 Index (S&P 500), showed the TSGPX index closing the year at $161, while the S&P 500 dropped to $89.
"The compound annual growth rate for the TSGPX from Q1 2007 through Q4 2011 was 10 percent, compared to 8.5 percent at Q3 2011," said Bob Loewens, TSG Junior Associate. "The S&P 500 was relatively unchanged for the fourth quarter. Overall, the trend is that payment companies continue to outperform the market as a whole."
If historical correlations are any indicator, the payments industry is headed for a strong first quarter 2012. In January, the S&P 500 posted a gain of 4.36 percent, its best opening month since 1997, when the index rose 6.13 percent and finished the year up 31 percent.
Howard Silverblatt, Senior Index Analyst for S&P Indices, projected a modest gain of just above 7 percent for the S&P 500 this year, 10 percent with dividends included. Preliminary fourth quarter 2011 data for TSG's Merchant Portfolio Performance Study suggest strength for both signature debit and PIN debit transactions in the initial quarter following implementation of debit interchange regulation under the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
"Some of the stronger performing companies in the index within this quarter have been MasterCard, Heartland Payments, Cardtronics and Alliance Data Systems," Loewens said, adding that sector growth is being fueled by attractive margins and the continued shift to electronic payments.
Mike Strawhecker, Vice President and Director of TSG Metrics, said many investors waited to see how payment portfolios would weather the recession. "At this point it looks like it's going to be an active year in M&A in the industry," he said. "We're getting calls from large private investment firms who haven't really played in the space much before but are now definitely sniffing around."
Other leading economic indicators suggest the positive thread may continue. Advance figures from The U.S. Department of Labor showed the four-week moving average for initial weekly jobless claims in the first month of 2012 stood at 375,750, down from a weekly average of 429,750 the previous January.
Leon LaBrecque, Managing Partner and founder of LJPR LLC, a wealth management firm that manages over $420 million in assets, estimates that during the past 23 months, about 2.7 million jobs were created in the private sector. "There are additions in the private sector compared to what we see in the public sector, which is shrinking," he said. "The private sector is definitely the impetus."
The Conference Board, a nonprofit business membership and research organization, reported three consecutive months of growth in all three of its year-end indices for tracking leading, coincident and lagging economic indicators. (Leading indicators pertain to future events; coincident indicators occur at about the same time as conditions they signify; and lagging indicators apply to events that have already occurred.)
Following December's gain in its Leading Economic Index, TCB Economist Ataman Ozyildirim said, "The gain was widespread among the leading indicators, suggesting economic conditions should improve in early 2012."
However, TCB Economist Ken Goldstein cautioned, "This somewhat positive outlook for a strengthening domestic economy would seem to be at odds with a global economy that is losing steam. Looking ahead, the big question remains whether cooling conditions elsewhere will limit domestic growth or, conversely, growth in the U.S. will lend some economic support to the rest of the globe."
LaBrecque pointed out that the euro area is a consistent problem. "Europe is kind of doomed to put itself in a recession for awhile," he said. "I would say the European recession is probably not contagious unless something really dramatic happens. But the European recession is problematic to us. It probably takes a half point off of our GDP [gross domestic product]."
Retail sales are also a measure of economic vitality. The National Retail Federation projects retail industry sales - excluding autos, gas and restaurants - will grow 3.4 percent to $2.53 trillion in 2012, compared with 4.7 percent growth in 2011. The NRF estimates 3.6 million U.S. retail establishments employ 42 million Americans, about one in four U.S. jobs.
Research firm Autodata Ltd. reported U.S. new vehicle sales last year soared to 14.18 million, the highest annual sales in over two years. The firm's year-over-year data showed total vehicle sales for January were up 11.4 percent, rising to 913,287 from 819,795.
The National Restaurant Association's 2012 Restaurant Industry Forecast projects U.S. restaurant industry sales could hit a record $632 billion this year, up 3.5 percent from 2011. The association also forecasts the number of restaurant employees could reach 12.9 million in 2012, which represents about 10 percent of the U.S. workforce.
A recent First Research Gas Stations Industry Profile estimates the 22,000 gas station companies that operate in the United States generated nearly $115 billion in revenue during 2011. According to First Research, fuel accounted for approximately 90 percent of industry sales, which means gas station owners will continue to closely monitor fluctuating fuel costs.
The GDP, defined as the output of goods and services produced by labor and property, is another key economic indicator. The U.S. Department of Commerce Bureau of Economic Analysis reported real GDP rose 1.7 percent in 2011, compared with 3 percent in 2010. The BEA attributed the 2011 deceleration in real GDP to downturns in private inventory investment, federal spending, imports and exports.
The Federal Reserve Bank of Philadelphia's State Coincident Indexes report, which combines state-level nonfarm payroll employment, average hours worked in manufacturing, unemployment rate and personal income deflated by the consumer index, showed December 2011 index increases in 39 states. Nationally, the coincident index rose 0.3 percent in December and finished the fourth quarter up 0.7 percent.
Some analysts project the national elections could have a dampening effect on further economic recovery in the United States. Based on an extensive university study titled Precarious Politics and Return Volatility, researchers determined that countries with national elections tended to have more volatile economies largely because businesses do not like political uncertainty.
For the study, researchers observed stock market volatility in 18-month periods extending from six months before to one year after elections in 50 developed and developing nations, including the United States, from 1990 to 2006. The study measured volatility as the returns on stocks for either companies based in each country or companies based elsewhere that do significant business in a country.
The study found that mature democracies generally experienced greater market volatility in the six months prior to an election than did autocracies, and volatile markets didn't necessarily settle down in the post-election year. For the U.S. economy, this means we could see heightened market volatility from May 2012 to November 2013.
"What we found are industries that are exposed to international trade, for instance, are impacted more by political uncertainty," said Hitesh Doshi, Assistant Professor, Finance, C.T. Bauer College of Business, University of Houston, and study co-author. Although it is too early to determine the impact national elections will have on the U.S. economy, Doshi said that if the presidential outcome should become evident beforehand, as determined by polls, the election might not have much of an impact on the private sector.
Artem Durnev, study co-author and Assistant Professor, Finance, at The University of Iowa's Tippie College of Business, said that if political uncertainty remains high, businesses are likely to respond by putting off expansions, investments and new hires, thus slowing further economic recovery. Political polarization is another variable to consider, and should it persist, economic uncertainty will continue, he noted.
LaBrecque noted that on Jan. 1, 2013, weeks before the presidential inauguration, Bush-era tax cuts are set to expire, and shortly thereafter across-the-board spending cuts might be triggered in accordance with the Budget Control Act of 2011. He said once the government faces these budgetary issues, 2013 could prove to be even more favorable than the current year.
As any successful merchant level salesperson can attest, confidence matters. The same precept holds true relative to the direction of economic cycles, which places weight on consumer confidence as a leading indicator.
One source for measuring U.S. consumer attitudes and expectations since 1949 is the Thomson Reuters/University of Michigan Surveys of Consumers. Its Sentiment Index rose in January 2012 to 75 on a scale of 100, up from 69.9 in December 2011, marking the fifth consecutive month of upward movement.
"Although the current level of confidence has nearly regained its highest level since the recession, this is the third consecutive year that the confidence has mounted a comparable rally," stated Richard Curtin, University of Michigan Economist and consumer survey director. "All prior rallies failed when consumers concluded that the improvement they had anticipated had failed to materialize." He noted that recent gains have been critically dependent on job gains.
MerchantCircle's quarterly Merchant Confidence Index - which captures merchant sentiment among the 1.6 million merchants served by the organization, most of whom are in the one- to nine-employee category - reported that merchant confidence in the fourth quarter 2011 was down slightly from prior quarters, based on a November 2011 merchant survey.
"What we found is that merchants are really hesitant to say that they're going to start investing more in marketing and hiring," said Darren Waddell, Vice President of Marketing and Product Management at MerchantCircle. "They tend to lag ... in terms of putting dollars out there just because they want to be really sure, before they start investing, that the investment is going to pay off." If the hiring boom in payments is any indication, merchants just may decide 2012 is the year to begin investing anew.
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