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VOL. 113 | NO. 93 | Monday, May 10, 1999

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Economic exuberance Economic exuberance During boom times, smart companies prepare for the inevitable doldrums By DR. DAVID H. CISCEL Special to The Daily News The Memphis economy has become a boom economy. We are so used to being behind the other cities of the New South that it took a while to recognize the characteristics that spell our success. While we have achieved it more like the tortoise than the hare, we are there. Reading the business news in Memphis is a daily celebration one announcement after another tells of new buildings, new businesses or new employment opportunities. From the airport down to Olive Branch, the city seems to have become a vast warehouse. Wholesale trade, whether related to regional products and services or tied to the vast transportation and catalog sales capability based in Memphis, is growing like kudzu in July. Transportation has blossomed with significant new capacity at the airport, the reconfiguration of the regions rail yards and the development of huge truck parks in West Memphis. Medical facilities, from new hospitals to dozens of clinics, are open in every part of the city. One part of the boom we see every day is the incredible growth in residential housing starts. The housing boom has continued, with hardly a falter, for eight years. New homes in east Shelby County, in DeSoto County, and even Downtown are perhaps the most visible, but thats not all. A little boom in north Shelby and Tipton counties is being matched by the beginning of the movement of residential Memphis into Fayette County. With residential development new retail space soon follows. Malls, motels, office buildings, and business and medical services seem to pop up overnight. Whether along the feeder roads to Nonconnah Parkway or along Germantown Road, what was largely unused roadside a few years ago is now filled with signs of commercial progress. The area around Wolfchase Galleria is considered the premier development, but it is typical of what is happening throughout the newer parts of Memphis. All of these outward signs are part of the economic exuberance of the times. But, as we move eight to nine years away from the last recession, it is important to remember the lessons of a market economy. It is the lure of new sales, and the profits to be made from those sales, that act as the motive force for change and investment. Risk-taking, with the belief that things will be even better tomorrow, sits at the core of the business excitement in Memphis over the past decade. Each day will be better than the day before, and, sure enough, so far each day has been better than the day before. But, the invisible hand of the marketplace just does not care about the sales and profits of the individual entrepreneur. It offers the opportunities but it does not sound an alarm that is easy to hear as business risks begin to rise as the boom progresses. Stop and listen. There are two complementary risks that the wise business manager needs to heed. First, in exuberant times, investors build too much. In the old days, it was easy to see. As the factory over-expanded, inventories grew and warehouses filled. Today, in a service economy, it is slightly more difficult to see. New office and retail space continues to fill because it is shinier and nearer to the more affluent consumers, while older space is abandoned. The old space is empty, it seems, not because it is redundant, but because it is not nice enough. The result is the same the plague of excess capacity. Each new building, each new store, each new motel has helped to saturate the market, overreaching any potential for growing consumer demand, until, finally, we have a glut of marketplace capacity. Second, booms, particularly this one, tend to increase incomes near the top but leave family wages and salaries lagging. Since income growth goes only to those who take the greatest risk, there is a tendency for a widening inequality in income distribution. So, as business capacity to serve consumer desires grows, the ability of the public to buy products and services often slows. The aggregate demand just isnt there anymore. Sooner or later, it all ends in a downturn, as investors back off because new sales and profits evaporate, and businesses lay off employees, further reducing aggregate demand. Then comes the time of the test. What does it take to survive the times when there are too many stores and too few consumers? There are, in fact, three things a business can do to remain successful in a downturn. First, chart a clear path back to your core competencies. A boom is a time to experiment because the costs of failure are low. A downturn is a time to return to the things that originally drew loyal customers. Second, be careful of debt and interest rates. If you own the company or if the companys assets are based on common stock, then smaller profits just mean that the owners are unhappy. But, if the business is debt heavy, the interest must still be paid, and bankruptcy may be around the next corner. Third, hang on to your old employees. Someone who has worked for a business for 20 years costs more in salary and benefits than a new employee, but they are loyal. Old employees are usually willing to help the company through the crisis because the business is an important part of their life. During economic exuberance, businesses need to be getting ready for surviving economic doldrums. It always will be possible to make money in Memphis in businesses that are tied to wholesale and retail trade, to transportation and logistics, and to medical services. Even entertainment and gaming seem to be part of our regional business specialties. But, sooner or later, it will be more difficult because there will be just too many outlets and too few customers. The business that survives the downturn will be ready to take advantage of the next boom. Ciscel is a professor of economics at the University of Memphis.
PROPERTY SALES 74 196 20,828
MORTGAGES 86 244 23,989
BUILDING PERMITS 138 453 43,046
BANKRUPTCIES 64 174 13,354