North Amercan Regional Update - January 2012

Economists analyzing the acceleration in the US economy over the final three months of 2011, say it was probably attributable to Americans increasing their spending and companies rebuilding inventories.
Gross domestic product - the value of all goods and services produced - rose at a 3 per cent annual rate after advancing 1.8 per cent in the previous quarter. Improved employment prospects made it easier for consumers - whose spending accounts for about 70 percent of the economy - to purchase new cars and buy more holiday gifts.
While a slowdown in Europe is a risk to US producers, a faster expansion may persuade Federal Reserve officials, meeting this week, to stay the course on monetary policy.
“The consumer has picked up,” said Scott Brown, Chief Economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “We’re still in recovery mode and the US economy still faces some headwinds, particularly from Europe, but the outlook is a bit more promising than it was a year ago.”

According to the Bloomberg survey median, household purchases increased at a 2.4 per cent annual pace from October through December, having risen 1.7 per cent in the prior period, therefore, the projected gain in spending would be the strongest in a year.

“The holiday season started off well,” Howard Levine, Chairman and Chief Executive Officer at Family Dollar Stores Inc., said during a January 6 conference call. Sales were also strong after Christmas and the Matthews, North Carolina-based discount retailer, expected “this momentum would continue through January and February”.
Auto Sales
Sales at auto dealers picked up at the close of last year. Cars and light trucks sold at an average 13.4 million, seasonally adjusted, annualized rate in the final three months of 2011, up from a 12.4 million pace in the prior quarter and the strongest since April-June 2008, according to figures from researcher Autodata Corp.

To meet demand last quarter, businesses placed more orders with manufacturers, who boosted production in December by the most in a year, recent Federal data showed. The increased output indicates that companies were probably re-building stockpiles at the end of the year, which will contribute to economic growth, having subtracted more than a percentage point from GDP in the third quarter.

Demand for durable goods climbed 2.2 percent in December after a 3.7 per cent surge the previous month, according to the median forecast in the Bloomberg survey prior to the release of Commerce Department figures on January 26. Orders for durable items, excluding transportation, may have accelerated last month as companies stepped up demand for business equipment.
Job Growth
Job creation has supported consumer spending. Employers added 853,000 jobs in the second half of 2011, compared with 782,000 in the first six months. In December, the jobless rate dropped to an almost-three-year-low of 8.5 per cent.

While consumer purchases boosted growth in the fourth quarter, spending lost momentum as 2011 drew to a close, prompting merchants such as Williams-Sonoma Inc. to cut prices to attract shoppers during the holidays. Sustained gains in spending depend on better progress being made in creating jobs as well as faster wage growth.

Federal Reserve Bank of Richmond President, Jeffrey Lacker, said the economy will expand at a “modest” rate this year as it works through “persistent impediments” in housing and labor markets. “My takeaway from 2011 is the lesson that the impediments to more rapid US growth are likely to be deeper and more persistent than we thought a year ago,” he said on January 13. “I am expecting only a modest improvement for 2012.”

Also, on January 24, President Barack Obama will present his 2012 State of the Union address. With this year’s Presidential elections approaching, Obama has proposed new ways to boost employment. The measures include issuing more non-immigrant visas to bolster the tourism industry and offering tax incentives for businesses that bring jobs back to the US from overseas.

Meantime, the housing market is showing signs of stabilizing. A January 26 report from the Commerce Department is expected to show that purchases of new homes have climbed to a one-year high of 320,000.

Builder shares have improved. The Standard & Poor’s Supercomposite Homebuilder Index of 12 builders has climbed 14 per cent since the end of 2011, compared with a 4.6 per cent increase for the broader S&P 500 Index.
ECM, BPM and BPO Market Effect
The news of continual slow growth is certainly positive! However, robust investment will not occur until the European issues are closer to resolution and the Euro crisis has wound down.
The majority of companies in the sector cited a growth rate that basically mimicked overall US economic growth. However, some sectors seemed to outperform others, with large gains seen in some SharePoint-related companies, some lower cost ECM providers and in the service markets. We forecast continued growth across all market sectors.

M&A Impact
While the economy is slowly gaining and improving, M&A activity throughout the sector and across the globe continues to increase. In a slow growing economy, industry consolidation is always seen and results for 2011 bear testament that this sector is no different.
2012 will see increasing M&A activity in all sectors. Some will be local deals, while many will involve global organizations. In fact, many analysts predict the most activity in mid-sized companies in the US.
Valuations throughout the sector should remain at or above historical levels.  In general, in 2011, as in 2010, we saw average valuations remain steady, despite the challenging economic conditions.  Indeed, we predict 2012 will continue the overall trend of very good valuations for buyers and sellers alike!
Read my article – Timing Your M&A Transaction – a sure path to failure – in this month’s Boss News.