Bumpy road to economic recovery, executives say

The economy appears to be recovering from the worst recession since the Great Depression. Treasury Secretary Timothy Geithner said last week that the financial system is in “the early stages of repair.”

However, a recovery is expected to be slow, tortuous and geographically uneven.

The following Midlands business experts were asked what they foresee for their companies, their industries and the economy in general through the rest of 2009 and into 2010. Companies declining to participate were Cabela's, the Buckle and Google.

Bruce Lauritzen, chairman, and Daniel O'Neill, president, First National of Nebraska

They expect 2009 and 2010 to be difficult years for the economy, including for Nebraska and Omaha.

Lauritzen said First National's profits were down 75 percent in 2008, and this year will be difficult as well.

“Omaha and the state have remained fairly unscathed compared with other areas.” But the region's growth stopped and the last half of 2008 was “a very difficult time.”

First National's loan volume has decreased. “Consumers and businesses began to husband their money and not continue to spend. We're dealing with a recession that is now in full bloom.”

Of First National's problem loans, 85 percent are in its credit card business, which is nationwide but somewhat concentrated in the Midwest. The remaining 15 percent are in real estate and land development projects in Colorado, suburban Chicago and the Kansas City, Kan., area.

O'Neill said rising unemployment, which might peak at 10.5 percent next year, hurts the bank's credit card business because more people default on loans when they lose their jobs.

He believes the recession may be halfway over. Some business operators “are starting to give up,” and he gets reports of layoffs and closings regularly.

Steve Martin, CEO of

Blue Cross Blue Shield

of Nebraska

Corporate bonds, which are issued by businesses to borrow money from investors, are starting to stabilize. “The overall nature of the credit crunch is starting to go away,” which would restore stability to the financial transactions that underpin many business dealings.

The second phase will be when “consumers start loosening their pocketbooks a little.”

Martin said Nebraska has not had as many layoffs as some other parts of the country, which indicates that the economy is not suffering as much. “Nebraska in general has been fairly even.” Blue Cross in Nebraska has added employees over the past three years because its market share has grown and it has added new lines of business.

Martin favors reforming the nation's health care system but worries changes could come so fast they would disrupt the economy. If the government raises too high taxes to finance improvements, the financial burden on businesses could slow the recovery. And if payments to health care providers fall too rapidly, large employers such as hospitals might be forced to cut jobs and reduce services, he said.

Warren Buffett, chairman and CEO of Berkshire Hathaway Inc.

The head of the 246,000-employee holding company did not comment for this story, but he has said he doesn't know when the economy will turn.

He expects problems in the housing market to continue, and he said consumer spending has “fallen off a cliff.”

Several of Berkshire's manufacturing, service and retail companies are struggling and had to cut jobs because of declining consumer demand, and Buffett said in February that more job cuts may be possible in 2010.

He also has warned that inflation might accompany a recovery, causing higher prices and discouraging economic growth.

The global economy was largely to blame for a 9.5 percent drop in Berkshire's revenue in the first three months of 2009.

But he also stuck to his views that the U.S. economy will recover because its free enterprise system excels at “unleashing human potential” and encouraging growth.

“I think Americans will do very, very well in the future,” he said in a panel discussion last August. “Our children will live better than we do, and our grandchildren will live much better.”

Bob Batt, vice president of Nebraska Furniture Mart

While curtailed consumer spending has hit this Berkshire Hathaway retailer, the furniture store's conservative approach has helped it weather what Batt called the furnishings industry's worst period in 30 years. The company, which operates three stores in Omaha, Kansas City, Kan., and Des Moines, has not had to lay off any of its 3,000 employees, he said.

“We have no debt. We are able to live within our means with the way we operate. So consequently, the bank doesn't run our operation — we do.”

Batt said the company plans to keep inventories in line and advertise more in the coming months but plans no new store openings for the remainder of 2009 or 2010. It will move forward with remodeling the flooring division at its Omaha store, which has had stronger sales than its Kansas City store.

The weak economy will continue to force more furniture wholesalers and retailers to close, but “the worst is over” for NFM, the furnishings industry and the local economy.

“Last October, November, that was the absolute bottom. I think we're moving forward. I think we bottomed out a long time ago, and I think we're rebuilding.”

Jim Young, chairman and CEO of Union Pacific Corp.

Young doesn't expect to see much of a recovery in 2009.

“But I have to be prepared for a turnaround. Maybe there will be some pickup at the end and then the start of a recovery in 2010. You can get about eight different perspectives on the strength of that line. What I'm looking at is a pretty shallow line.”

The company has furloughed about 5,000 workers. By the end of 2010 perhaps three-fourths of them could be back to work, depending on the strength of the economy's rebound. U.P. would benefit from any uptick in the economy because it hauls such a wide variety of products, including cars, coal, lumber, food, furniture, toys and electronics.

“The rail industry is so critical, if there is any strength in the economy we will leverage it very nicely. We can handle a big increase with little increase in cost.”

Gary Rodkin, CEO of ConAgra Foods

“We will still be in fairly tough economic times for some time to come, through 2009 clearly.”

Housing prices and job losses must stabilize before a recovery begins. The country will experience a lasting change in the way people spend their money, Rodkin said.

“They will be much more discerning, looking for value, trying to save more than spend more. The right price and the right value will be very top of mind.

“This is one man's opinion, but it will be a fairly long-lasting change. I'd call it a rebasing.”

Rick Parod, CEO of Lindsay Corp.

“This year will continue to be relatively slow” at the irrigation and road safety equipment maker.

“Most of the domestic irrigation system is finished, the season is over. There is some renewal in the international market but it is still spotty and lumpy.”

Next year will continue to be a recovery period. “I can't say if it will be up or down from this year, but there are some positive indicators,” including strong commodity prices and farmers doing fairly well.

Biofuels production will continue to boost demand for grain, and countries like China and several in the Middle East are concerned about producing enough food to feed their people. Irrigation equipment helps produce more food with less water use, so those trends are good for Lindsay.

Parod expects demand to rebound more strongly in 2011.

“We'll start to see more resumption of growth we had been seeing in the past.”

Mogens Bay, CEO and chairman of Valmont Industries Inc.

Consumer spending accounts for roughly 70 percent of overall economic activity, so until that picks up, there will be no economic recovery. The financial markets might not recover to their previous highs for five years, maybe longer, Bay said.

Valmont makes irrigation equipment and utility poles and structures.

People are nervous and have begun to save more instead of spend. “As a country we have lived beyond our means for a long time. And the worst possible time to correct that is in a recession. ...”

Valmont expects 2009 revenue to decline but hopes to keep earnings within 10 percent of the $5.04 a share it earned last year.

Rex Fisher, Nebraska president of Qwest Communications Inc.

Things are looking up for the economy, including the telecommunications industry, though there is uncertainty for phone companies as they await federal decisions that could affect growth in a key area — broadband.

“I think everybody would say there are good signs in the economy. I don't think anybody is going to go out there and say, ‘Oh, gosh, things are kind of straight-line up from here.' ”

The 14-state area where Qwest delivers landline phone service, which includes Nebraska and Iowa, has only one state, Arizona, among the half-dozen or so where the sub-prime mortgage crisis decimated the housing industry.

Qwest “got off to a good start in '09.” Although customers continue to drop landline home phones, Qwest signed up 63,000 customers for its fiber-to-the-node video service in the first quarter and revenue from business services, which are sold nationwide, rose.

Broadband connectivity is the driving force in the industry, but how it develops hangs on federal decisions in two matters:

— One, $7 billion in federal economic stimulus money to extend the high-speed service to unserved and underserved areas. How expansion is implemented and who gets the federal dollars for it have not been announced.

— Two, whether Congress turns financing under the Universal Service Fund away from its emphasis on assuring phone service in rural areas to expanding broadband there.

Todd Becker, CEO of Green Plains Renewable Energy Inc., Omaha

The ethanol industry has turned the corner with Big Oil's entry into it. The recent purchase by Valero Energy, the nation's biggest oil refiner, of seven ethanol plants and of the development site of another bankrupt biofuels maker, VeraSun Energy, “is validation that ethanol is not going to go away.”

On top of that, the recent rise in the price of crude to $70 a barrel “makes people think again about our dependence on foreign oil.”

Those developments and riding out “six months of one of the hardest-margin environments we've seen in the industry” raises optimism for what's ahead in the next six months to a year.

Green Plains, which expanded its ethanol side with the acquisition of another producer last year and its own purchase of two VeraSun plants in Nebraska this year, plans to diversify further by expanding its agri-business, terminal and marketing sectors.

A “bottom has been formed” in the recession, both for ethanol and the economy as a whole.

“We're optimistic. We're seeing financing avenues open up on things we probably couldn't have gotten done six months ago. On lines of credit we're seeing multiple parties come to the table. We're optimistic that overall we're on a path to recovery. It's still going to be a long path.”

Michael Capellas, CEO of First Data Corp.

“We are in unprecedented times on anybody's ability to predict ... There is unprecedented lack of consistency or visibility on the markets. ... (But) my personal view is that we have come through probably the most chaotic, problematic side.”

By one measure, chaos may have given way to stabilization. The volume of same-store retail financial transactions that First Data, which has 5,000 employees in Omaha, processes has risen 5 or 6 percent recently and is starting to stabilize in that range. (Historically, volume increases have been 8 percent or 10 percent and even in double digits.)

Stabilization is part of the corrective action that is needed. Another part is the “personal de-levering” of the U.S consumer, meaning paying off debt.

“This crisis was caused by a long buildup of consumer debt.”

The personal savings rate, one-half of one percent in 2007, is now in the range of 5 percent.

“That is driving some behavioral changes we're seeing in consumer spending. That will ultimately serve to de-lever the individual. And that is what we have to drive through for structural corrections.

“The good news is banks seem to have found more stable ground and consumers have taken it on themselves to personally de-lever, and we're seeing the effects of that in the marketplace.”

The effects of this on the payments industry — and others — will be consolidation, which has been seen already in takeovers and mergers among major banks.

“Those who have the size and scale, particularly globally, will come out with market-share gains. ... I'm sure we will.”

Jim Clifton, CEO and chairman of the Gallup Organization

Gallup's management consulting business has shrunk over the last year as clients have cut spending because of the recession. “Everybody's really off right now and they've cut budgets.”

The consulting industry has been hit hard, but those consulting businesses, such as Gallup, that work with governments and health care have fared better.

Gallup expects “really good growth” in opinion polling for government and health care through 2010 as Fortune 500 consulting continues to decline.

The company experienced a first-quarter loss in 2009 over the first quarter of 2008 for the first time in the company's history. However, 2007 and 2008 were Gallup's best years to date.

Clifton does not expect what he called the American economic engine to rebound for several years. “American innovation and entrepreneurship” are the only things that will spur a turnaround in the economy, he said.

Short of a big invention that changes the world, such as the Internet, the economy could take as long as five years to recover, he said.

“It's not just going to happen.”

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