This is the first installment of the semi-annual economic outlook published by the BCEDC. This paper will recap the first half of the year, relay the consensus forecasts for the second half of the year and highlight observations and programs that he BCEDC has in place that may be of assistance with your company's performance.

The first half of 2005 began just where the second half of 2004 left off, rising oil and energy prices and continued US involvement in the War in Iraq. The first six months also brought the troubling suicide bombings in London and a deepening corruption scandal in Brazil. The Federal Reserve continued its stated plan of incremental interest rate increases which has resulted in the prime rate increasing from 5.25% in January 2005 to the current 6.5% as of July 2005. We have witnessed even greater increases in the 1 month LIBOR rate as it has risen from 2.58% in January 2005 to its current 3.51%. Since most adjustable rate financing is based on some form of the LIBOR, the increase in LIBOR is somewhat of more concern. (The BCEDC bases its flexible rates on prime).

However, all was not as dismal as the aforementioned would indicate. The US economy continued to expand in excess of a 3% annual growth rate, productivity increases were stronger than forecasted in the early part of the year with a slight tempering during the second quarter. The labor market has continued to be volatile but overall indicated that US firms added jobs at a fairly aggressive clip during the first six months of 2005.

On a local level, Bucks County firms continue to struggle with finding adequate help indicating tightness in the local labor market, especially among lower skilled labor. Based on conversations with a wide industry base the increase in energy prices is secondary to the labor issue. There appears to be some tightness in the labor market in Bucks County owing to the strength of the overall economy and the strength of the economy in South Eastern PA in particular. Real Estate has continued to demonstrate strong gains in both the commercial/industrial and residential segments. There has been some indication that the residential market, while continuing to remain healthy, has slowed somewhat owing to increased borrowing and carrying costs. On the industrial and commercial side the largest constraint remains the availability of buildings. On this front we have witnessed several larger facilities that have been or are in the process of being condo'd into smaller units thereby facilitating sales of properties within the 5,000 to 20,000 square foot range.

What we will do now is highlight several of the aforementioned issues and results with potential effects on the economy and Bucks County in particular. We will first address the macro-events already mentioned and then narrow the focus to potential effects on Bucks County Firms.

Increased Energy and Labor costs will eventually squeeze margins to where companies will have to pass those costs onto consumers. As of yet, companies have been relatively stoic in their efforts to not raise prices on the finished product. As increased energy costs filter through the economy the price effects will eventually be evident in higher interest rates, and higher intermediate goods prices. The Federal Reserve has been vigilant in maintaining constant money supply which will stave off any major inflationary effects, however, when one price increases, say oil, other prices must fall in order to maintain constant or nearly constant inflation. When you combine increased tightness in the labor market, which will eventually cause increased labor costs to firms as they are forced to offer higher wages to attract competent employees, with increased energy costs, the only two options firms have are either A) pass increased costs onto their customers or B) produce more with less, i.e. increase productivity. So far, firms have been relatively successful increasing productivity. Increased energy and labor prices will also show up in increased interest rates, which in turn will weaken margins to companies that are not otherwise protected from rising rates. Rising rates will also result in either lower or delayed capital expenditures. BCEDC expects slower growth into the fourth quarter of 2005 and through the first and second quarters of 2006 somewhere in the 2.2 to 2.6% range. While this is still positive growth, it is somewhat slower than the forecasted 3.1 to 3.25% growth for 2005. A warmer than expected winter could also add slightly to that growth as heating oil costs relax from their recent high levels.  

So far, the economy in general and Bucks County in particular, have been very adept at managing these challenges. What firms do need to be very careful of is the management of these increased risks. A major unforeseen event could have major material adverse effects on the business environment, whether that event be another terrorist attack, weather related or major political event. Such event, on a large enough scale could cause a structural break with the current expansion path causing economic hardship. Basically, what this means in common language is, the economy is fine, companies are making money, and unless something comes along to upset the apple cart, things should continue as they are. It also means that since there are some events worth taking note on the business horizon, companies have to be extra careful to make sure the apple cart does not get upset. Companies can manage these risks primarily by just managing their businesses better, be twice as diligent regarding credit collections, build a cash cushion, opportunistically expand the business and take new customers. Keep in mind however, that a customer that does not pay, is not a customer, and now may not the time to extend more than favorable terms to what may appear to be a major new customer. Favorable terms, cost money and decrease the ability of the offering company to manage unforeseen business risks. Let someone else have the companies that are slow or no pay. We all know who these companies are and they tend to not be supplier loyal or very good customers, however tempting it may be to have them as a potential client. There are many customers out there make that are better customers of your competitors. Identify them and drive them to the competition. What companies really need to be focusing on in this current environment is protecting current relationships. Be twice as diligent in making sure that the existing relationships are strong. Cull weak performers, and manage the top performers. The sky is not falling, the world is not coming to an end, companies need to be prudent in their expansion plans.

BCEDC can assist in several ways. First off, BCEDC acts as a resource clearing house of sorts. Through our extensive network of partner agencies BCEDC can refer your company to the proper channel in order to address particular issues, whether that be technology (Ben Franklin), lean manufacturing (DVIRC), International Trade (BCITC and the World Trade Center of Philadelphia) or financing (BCEDC and its network of banks). One area touched on earlier that is an offset to the increasing costs is increased productivity. One way to achieve greater productivity other than managing your existing processes better, is to purchase more efficient equipment. BCEDC, through the Small Business First Fund, SBA 504 and the BCEDC's Revolving Loan and Business Builder Loan Funds can assist with equipment purchases that are more energy efficient and provide greater productivity. For example, if you have been delaying a major equipment purchase for whatever reason, it may behoove you to accelerate that purchase if the new equipment will utilize either less labor or energy. Now don't get me wrong, BCEDC is in the business of retaining and creating jobs so one might ask, "How does more efficient equipment allowing fewer workers, fit into that mandate?" Well, if a company is not efficient and as a result goes out of business, 100% of its employees are lost, however, if a company retools with more efficient equipment despite losing an employee or two or more likely, delaying the hiring of additional employees, well then, BCEDC has just retained jobs. If your company can upgrade to more efficient equipment and shave 10 to 15% off of energy costs, while maintaining labor costs and increasing production, you have just financed new equipment via the savings. This is a topic for an upcoming article and will not be expanded on at this time. Suffice it to say that the savings on new equipment quite possibly could finance itself when purchased using the fixed or rigidly adjustable loan programs of the Bucks County Economic Development Corporation. For a complete overview of how BCEDC's programs can assist your company during these times, contact one of BCEDC's financing experts directly at either 215-348-9031 or via email at rfc@bcedc.com or del@bcedc.com.