Economic Forecasting
Each year since 1994, the staff has developed financial assumptions as an initial phase of the program planning process. In order to facilitate the process for developing the 2002 Association Program Plan and the FY 2002 Budget, staff has identified financial assumptions for the organization as well as the related programs and activities. The assumptions incorporate trends, forecasts, planning documents (i.e., the long-range financial plan), and economic outlook information received from the Congressional Budget Office, Merrill Lynch, and Kiplinger.com. The Finance Committee reviews and considers the financial assumptions in approving the association's budget.
The generic assumptions which relate to the entire organization are revealed below. Since it is difficult to make economical projections with any certainty, many of the assumptions contain expectations pertaining to 2001 and the effect of such on 2002.
Economic growth will slow in 2001, sliding to about half of the FY 2000 increase of five percent. For the year as a whole, a recession seems unlikely in 2001, as the Federal Reserve will step in with timely interest rate cuts, starting by the end of January. Lower rates would help ease some of the ills that are building. These include growing consumer debt, tighter credit, rising bankruptcies, weakness in manufacturing, and softer sales of cars and other retail merchandise. Lower rates would also breathe life into the stock market, where falling prices this year will put a crimp in both consumer spending and business investment. Stock prices in 2001 likely will match the rise in corporate profits of around 8% to 10%. In turn, that will underpin growth in business spending, which should increase about 9%. Relief will come also from a drop in energy prices after the winter heating season, providing a boost to consumers and businesses in the second half of the year and into 2002. Export growth will give a lift too, as companies in Canada, Mexico, Europe and China buy American aircraft, high-tech gear, and services. The biggest risk is slower growth itself. When gross domestic product (GDP) is increasing around 2.5% or less, the economy is much more vulnerable. The Urban Consumer Price Index for 2002 is projected to rise 2.7%. The AIMS Association Financial Index is projected to increase nearly 4.5%. This will relate to an across-the-board increase in operational expenses.
Congress is likely to extend its moratorium on new Internet taxes in 2001, but there is less of a chance in 2002 that lawmakers will be able to fully resolve the contentious issue of how to collect sales taxes on Internet purchases. However, states will take the lead on the sales tax question, devising and implementing a simplified collection system in the next few years. It is anticipated (or shall we say hoped) that non-profits will retain their e-tax exempt statuses at least for the short-term.
Businesses will still expand and create new jobs and recent college graduates are a natural choice to fill many of the new positions. In some cases, firms will go after new graduates more actively than in the past because other hiring strategies have been exhausted in this tight labor market. Another big reason for the college-recruitment spike is the impending retirement of the baby boom generation. According to the Labor Department's Bureau of Labor Statistics, 25 million people will leave the labor force between 1998 and 2008. All but three million of those will be 45 or older. Realizing just how many workers they will lose when this starts to happen, employers are acting now to ensure that they have enough new employees to make up for the loss of more-experienced workers. Engineering, computer science, and business majors will be most in demand, but liberal arts grads will also be a hot commodity, especially as firms realize that students with strong academic records can often perform a variety of tasks. Average starting salaries for new graduates will increase between 4% and 6% in 2001, but they could go even higher if the competition really heats up. While 45% of employers say they will use signing bonuses to attract workers, a greater number will offer incentives that enhance the work environment, such as training (74%), relocation reimbursements (69%), a casual workplace (67%), and flexible work hours (53%), according to a survey by Michigan State University's Collegiate Employment Research Institute. SLA's staffing costs will increase by 7% to 8% to fund the salary administration plan, including the upgrading of three to five administrative positions and the updating of the salary adjustment program.
The overall benefits costs will increase by nearly 10% to accommodate the needs of the varied workforce. A growing number of women in the workplace will require benefits that support their roles as primary care givers. The aging segment of the workforce will cause increases in health care and training. The younger workforce will find greater value in bonuses and technological upgrades. Employer costs for health insurance will jump in the coming year, with premium hikes entering double-digit territory. Increases of 11% are expected on average, although smaller employers are likely to face hikes of 20% or more. Similar cost increases are likely to continue for at least the next two years. The 2001 rise marks the fourth straight year of increases that exceed the rate of general inflation. The increase was 6.2% in 1998, 7.3% in 1999 and 8.1% in 2000. The average cost per employee rose from $4,097 in 1999 to $4,430 in 2000, according to a new survey of employers by William M. Mercer Inc., a benefits consulting company. Costs also vary by region, with the highest cost per active employee reaching $4,959 in the Northeast, $4,474 in the Midwest, $4,287 in the West and $4,129 in the South. Soaring prices for prescription drugs are the chief culprit in the return of health care cost inflation. Drugs now account for about 14% of total medical plan cost. Employers saw an average increase in drug costs of 17.5% at the last renewal of their health plans. For 2001, the increase will go up to 20%.
Travel and lodging costs will continue to increase approximately 5%. The flight delays and congestion that made 2000 a nightmare for air travelers are likely to continue into 2001 and 2002. A number of factors converged in 2000 to make the year the worst on record for flight cancellations and delays. First, the booming economy brought a surge in the number of people traveling, straining the nation's aging air traffic control system. Labor skirmishes at three of the largest airlines led to work slowdowns, refusals to work overtime and lots of sick calls. Finally, there was unusually stormy weather nationwide. None of these circumstances will change significantly in 2001 or 2002. While a softer economy will brake the rate of increase in air traffic, more people than ever will be flying in the coming year. Steps to ease the congestion problems, such as new air traffic control technology and airport expansions, are at least two to three years away. Major contract disputes at most of the largest carriers will continue into 2001 and 2002 as well.
E-commerce will hurt some trade shows (those where floor sales are significant), but the overall trend in conferences is upnearly 70% in the last five years. This trend is expected to continue as there is no substitute for face-to-face interaction and networking.
Although high-tech stocks that have been hammered recently, companies that are strongly profitable, category-leading firms will have profits that continue to grow robustly in the years ahead, even if at lower rates than during the past few years. Over the last half century, the large-capitalization stocks of the S&P 500 have given their investors an average annual total return of about 12% and there is no reason to believe they will do any less in the decades ahead. This record of equities has outperformed all other asset classesbonds, cash, real estate, etc. The sharp market drops of the past few months actually increase the odds that stocks will get back on the plus side in 2001 and 2002. The markets seem to be assuming a recession in 2001, however, investment advisors believe it is more likely that the expansion will continue, but at a very slow paceabout 2.5% for the year. Corporate profits are expected to grow by a high single-digit figuremaybe 8% or 9%and it would be reasonable for stock prices to rise by this margin, roughly in step with corporate profits. Only once in the last half century has the S&P 500 declined for nearly two years, and that was in the severe recession of 1973-74, when soaring oil prices ignited high inflation and worldwide recession. Conditions then were a far cry from the mild economic slowdown that is likely next year. SLA's portfolio takes a balanced equity approach and we can expect returns in the 8-10% range.
Further technological advances and implementation of the virtual association will enable SLA to provide more products and services in the digital format, offering potential sources of additional revenue. However, the initial period of changing any delivery method causes uncertainty. Staff will continue to be faced with the challange of offering both digital and print formats in undetermined quantities as the initial demand may be somewhat vague.
The membership base is projected to reach 15,000 in 2002. The growth will be sustained by placing valuable member benefits and services behind "closed doors"the members only site and by creating brand identity with new segments of the information profession. While the projections represent a 3% to 5% growth rate over the 2001 projections, the shortfall from the aggressive FY 2001 budget will be 1,000 members or $120,000.
The USPS projects losses for 2001 and the losses could worsen as mail volume starts declining, largely because of the growing use of e-mail and e-commerce and even consolidations among banks that traditionally have been major Postal Service customers.
Staff will continue to monitor and revise these assumptions as necessary as the Association Program Plan for 2002 is developed. Any revisions will be reported to the board in the program plan.
For more information,
contact Richard Geiger, SLA Treasurer (geigerr@sfgate.com)
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