Economic echoes of 2008

Banks teetering. Deals unraveling. New York business holds its breath, hoping this September isn’t anything like that September.

The economy is on the brink—again—and while officials overseas and in Washington try furiously to stabilize teetering banks, this time in Europe, business leaders in New York are beginning to fear the worst. Again.

“In my 30 years of business, this is the second-worst business environment I’ve ever seen, after the fall of 2008 and early 2009,” said Allan Tepper, co-founder of CFO Consulting Partners, which advises manufacturers and distributors. “Frozen is the word that best describes things.”

The bunker mentality is back. Companies are revising projections for next year and cutting back on new investments or hires, reining in discretionary costs such as marketing, and spending only on projects that promise immediate payoffs.

Many local businesses aren’t retrenching, of course. And today’s economic crisis differs in significant ways from the one in September 2008, when the housing bust drove Lehman Brothers into bankruptcy, nearly destroyed American International Group and paralyzed the entire financial system. Current events are less cataclysmic, at least so far, and focus more on the health of European nations and the viability of the big banks that lent heavily to them than on financial and economic problems centered in the U.S.

Still, while New York’s economy fared better than the nation’s in the recession that officially ended in June 2009 and recovered faster and more strongly, that outperformance ended this past June, when the Big Apple’s private-sector job growth suddenly trailed the national rate.

The city’s economy, ever-tethered to the financial markets, took further hits when stocks fell over the summer as Washington fought over the nation’s debt limit, Standard & Poor’s cut the U.S. credit rating, and Europe’s economic problems extended from Greece and Spain to Italy and even France.

It’s all been enough to spook recession-battered businesses and investors alike. In the past few weeks, Zynga, Groupon and Facebook have been forced to postpone their initial public offerings. Corporate merger activity declined by 18% last month, and more buyers are getting cold feet at the altar. Last week, Avis Budget abandoned its yearlong pursuit of Dollar Thrifty, citing market conditions, and fashion designer Tommy Hilfiger called off his $170 million acquisition of the Clock Tower, the landmarked office building overlooking Madison Square Park that he had intended to convert into a luxury hotel and condominium.

Meanwhile, many companies are finding it tougher to borrow money, particularly in the short term. Issuance of commercial paper, the ultra-short-term debt that some companies use to pay suppliers or make the week’s payroll, has declined for nine consecutive weeks.

“It’s a constant beat-down,” groaned market analyst Meredith Whitney at a conference last week. Moments later, Larry Fink, CEO of money management giant BlackRock, urged European officials to bail out their banks much like the U.S. did. “Can we trust governments to do what they did in ’08 and “09?” Mr. Fink said. “If we felt comfortable that Europe will do right thing … [we would] have a dramatic rally.”

Snip, snip, snip

The recent waves of uncertainty forced OwnEnergy, a Brooklyn developer of wind-powered energy farms, to start a cost-cutting program late last week. The directive is for the firm’s 15 employees to spend less on travel and conferences, while delaying spending on less mature projects. Cutbacks are required, said CEO Jacob Susman, because there’s less financing available for alternative energy and the slow economy has cooled demand for electricity.

 

“We don’t know how long this economic situation is going to last, so we have to be agile where we can,” Mr. Susman said.

Building sales are still getting done but are taking between four and six weeks to close, instead of the two to three weeks seen just a few months ago, said Robert Knakal, chairman of Massey Knakal Realty Services. He noted that lenders are now inspecting building boilers—something that is never done in more robust markets. “Buyers and banks want to dot every I and cross every T,” Mr. Knakal said.

The jitters extend to Broadway, already facing a long-in-the-making fall season that will see 15 shows open, compared with 21 two years ago (see “Chilly fall
season on Broadway,” this issue).

“I wouldn’t do a big musical at this time,” said veteran producer Stewart Lane, who is hoping to find backers for a new musical with songs by John Denver. He figures his production will cost around $6 million, much less than the approximately $16 million for a major show.

Marketing and public-relations efforts are also heading for the wayside as corporate giants streamline.

“I’ve spoken to clients who say they’re going to have fewer PR agency partners next year than this year; that’s going to be true of marketers as well,” said Tom Morrissy, executive vice president of client solutions at Synaptic Digital, a video communications company whose clients include General Motors, Google and American Express.

Consumers are also hunkering down. Nat Wasserstein, a crisis manager at restructuring advisory firm Lindenwood Associates, said that retail clients aren’t replenishing their inventories as quickly, while some are slower to fill back orders because that would require them to spend money for supplies. Times are toughest among sellers of housing-related items, such as plants for landscaping or windows. But even businesses that are not in trouble are more cautious than in the past.

“People are so risk-averse, it’s clogging the engine of growth,” Mr. Wasserstein said.

The city’s hospitality business appears to have avoided the economy’s wrath and the euro’s summertime meltdown, at least so far. Tourism remains strong, thanks in part to the weak U.S. dollar and also to the fact that more moderately priced hotel rooms can be found here now than in 2008, said John Fox, a senior vice president at PKF Consulting.

High-end restaurants appear to be thriving still. Drew Nieporent, founder of Myriad Restaurant Group, which owns the Tribeca Grill, Nobu and others, insisted it’s “business as usual.”
“We have a very busy party season now,” he said. “That bodes well for the holiday season.”

Contributors: Theresa Agovino, Lisa Fickenscher, Matthew Flamm, Daniel Massey, Elaine Pofeldt and Miriam Kreinin Souccar

Correction: Tom Morrissy is executive vice president of client solutions at Synaptic Digital. His surname was misspelled in an earlier version of this article, originally published online Sept. 18, 2011.

A version of this article appears in the September 19, 2011, print issue of Crain’s New York Business.

As seen: http://www.crainsnewyork.com/article/20110918/FREE/309189977