As various markets in the economy plunge into an ocean of slumping numbers, experts are forecasting minimal relief for 2008. Meanwhile, businesses and consumers are shouldering the burden of this financial slowdown, and perceptions are mixed on how the payments industry will be affected.
"Many folks in the industry today have never been through a recession," said Ken Musante, President of Humboldt Merchant Services. He suggested the industry will need to analyze trials and errors from others who have seen decline such as those who weathered the 1995 to 2001 dot-com boom and bust.
According to the Federal Reserve Bank of Chicago's annual economic symposium, the Chicago Fed Letter, "the nation's economic growth in 2008 is forecasted to be roughly in line with the pace recorded over the past two years, with inflation moving lower and the unemployment rate edging higher."
Experts blame the slump on mortgage defaults, which have roiled large segments of the financial industry, as well as higher fuel and energy prices. With oil at a record high of $100 per barrel, consumers are more concerned with how to make ends meet rather than homeownership.
A slowing housing market plagued 2007, and experts aren't expecting it to pick up anytime soon. The Chicago Fed Letter stated that for the first 11 months of 2007, housing starts averaged 1.37 million units at a seasonally adjusted annual rate, nearly 25% below 2006 figures for the same period. And the real estate market is expected to dip dangerously lower for 2008.
"The struggling housing sector is not predicted to reach bottom until near the end of 2008, with residential investment predicted to fall by an additional 4%," the Chicago Fed Letter stated.
And according to the Commerce Department, 2007 saw a 2.9% decline over 2006 in building material sales, the largest slide since February 2003.
ISOs and merchant level salespeople (MLSs) who deal with merchants in the housing industry will need to pay close attention as the economy shrinks, according to Musante. Merchants who distribute supplies in the housing industry, such as light fixtures and carpeting, could be vulnerable.
"A poor economy will have an impact on merchants even though they were well-intentioned," Musante said. "Those [merchants] will need to be monitored closely."
The retail climate is also taking a dive, with retail giants such as Best Buy Co. Inc. preparing for a decrease in consumer spending. In December, Circuit City Stores Inc. reported an 11.4% slide in sales, indicating consumers were already feeling the financial pressures during the 2007 holiday season.
Recently released Commerce Department retail sales figures for December 2007 show a 0.4% decline from the previous year - the first such retreat since June. Economists measured retail growth in the fourth quarter 2007 to be approximately 1%.
Some consumers resorted to putting bigger purchases or paying bills on their credit cards. But that is also having a negative effect on the economy - delinquencies and defaults are soaring.
According to Discover Financial Services' U.S. Spending Monitor, 39% of consumers said in December that they expected to have no money remaining after paying their monthly bills. "Of those who had money left over, 27% had less left over than the previous month, [which is] a Monitor high and a number that has also increased four months in a row," the study stated.
With more consumers facing financial hardship, debit card popularity might decrease. According to Musante, a small portion of consumers will slowly transition from debit to credit cards.
According to David H. Press, founder and President of Integrity Bankcard Consultants Inc., that could actually improve prospects for ISOs and MLSs. "People tend to use more credit when they perceive times are bad or they're going through a rough patch," he said. "I think this will only help merchants and, in turn, the payments industry."
Airlines also saw gloomy numbers in 2007, which will affect the travel sector in 2008. Southwest Airlines Co. stated in early January that it would start cutting flights in May from Oakland and Chicago to add more flights in higher demand markets such as Denver. The company hopes this move will help it weather a summer of high fuel prices and fewer passengers.
"Southwest Airlines is concerned about slowing economic growth, and we want our flight schedule to be built around flights that are in high demand," said Gary Kelly, Southwest Chief Executive Officer.
ISOs and MLSs can be proactive no matter what happens in the economy. Musante advised them to conduct a secondary review or an underwriting review on their merchants; not looking at those doing business in weak markets - whether the individual companies are struggling or not - would be a mistake.
Although the economy is in a downturn, some in the industry aren't worried about the future. "I don't speculate on unsubstantiated rumors about what may or may not happen," Press said. "I see what affects my clients every day, and they all report higher earnings and more merchant sign-ups than ever before."
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