Tour de Finance

Date: 8/13/2009

As I offer this view of the economic and competitive landscape facing private colleges and universities this year, I find myself comparing managing enrollment to riding in the Tour de France.

Both take place in often stunningly beautiful surroundings and both can be brutal. Different stages favor sprinters, climbers, and time trialers, but to make the podium you’ve got to be a GCer—good all around. There’s the strategic and the tactical, gamesmanship in the Peloton and both within and between teams, both power and technical riding—and the constant prospect of disaster.

Not to mention the fans, whose idea of support is often to run drunkenly in a Superman costume close beside a rider or to wave huge flags in front of riders, snatching the flag away just as the cyclist passes. And these are just the fans with advanced degrees.

You’ve got to stay cool.

Success is defined by completing the race, and it is altogether possible that the podium will include riders who did not win even one stage, one sprint, one time trial, or one climb. Neither Andy Schleck nor Lance Armstrong (second and third) won a stage.

Now to college recruitment: We warned, starting in winter 2008, that credit markets were tightening substantially and that this would diminish access to home equity and other debt and therefore dampen yield. This was on top of the precipitous drop in both housing values and stock prices.

We assumed that the 2008-09 recruitment cycle just concluding would take place in an economic environment in which the financial markets were deeply frozen and in which the answer to the question of “what next?” was profoundly uncertain.

Like a Tour stage through the Swiss Alps with several climbs beyond categorization, grades of more than eight percent for 15 miles, followed by a harrowing high-speed 20-mile descent with hair-pin turns, the 2008-09 enrollment cycle was beyond high anxiety.

2009-10 will be worse, though deceptively less anxious.

Here’s why:

While the 2008-09 cycle was the most fearsome year we’re likely to face for some time, it all happened so fast that parents did not have time to change the expectations they allowed their students to have when they began their search.

Yields for many schools dropped from the difficult 2007-08 cycle. Predictably, the public sector increased market share.

Last March, at our Enrollment and the Economy client summit, we were given a look into the cycle just ended by the affluent parents we viewed in focus groups. These parents were all from six-figure income homes. They included hedge-fund managers, physicians, and small business owners.

All had suffered precipitous drops in their investment portfolios and in nearly half of the families, one of the breadwinners had lost a job. But they gamely soldiered on, telling us they would stick with their child’s first choice school even as they steamed as we had never witnessed before about (in their view) the inexplicable and unjustifiable cost of (especially but not only) private colleges.

The financial markets had tanked so quickly and in ways beyond the economic comprehension of most people, that families didn’t understand just how bad things were, and had not adjusted their psychology.

Confidence is what you have before you fully understand a situation. Now parents have had time to adjust expectations in the family.

There’s plenty of evidence that the economy is worse than day-to-day indicator updates suggest. Regardless of political stripe, every economist I have queried believes we’re not going to see a recovery to pre-recession home or stock values, or credit standards, any time soon—and perhaps not for a decade.

As a “for instance,” watch my interviews with Chris Farrell, economics editor for Marketplace Money. Part One (12 minutes) paints the Big Picture, while in Part Two (two and a half minutes) Chris describes what the Big Picture means for families making decisions about college.

Families are saving and deleveraging, not spending. This is not unusual for recessionary consumer behavior in which there’s always a flight to value and frugality. The question is, how much deleveraging will restore enough of a sense of security to permit families to spend more freely.

There is a general consensus that any recovery will be a stagnant event in which employment is slow to recover. While the uncertainty surrounding the possible collapse of financial markets has abated, there’s a new uncertainty surrounding commercial real estate, about subprime mortgages in Eastern Europe, and importantly, the huge question of whether the burgeoning federal deficit will lead to inflation, an even weaker currency (which would be inflationary), and/or higher taxes. On top of these factors, there’s the impact of pending federal legislation on high-income individuals.

As long as the outcome of such significant pieces of legislation is up in the air, businesses and individuals will tend to defer investments and hiring. And if this legislation is enacted, there is the question of what impact they’ll have on the economy.

If I’m wrong, I’ll buy a round. OK, I’ll buy a round no matter what.

Just as the Tour rider knows it’s best to stay toward the front of the Peloton just because with fewer riders in front of you fewer bad things can happen, it may simply be your best path to a happy May to expect the worst now.

As we’ve all observed at one time or another, it’s better to cause a headache in the Housing Office than in the President’s office. (And who doesn’t take a little sadistic satisfaction in causing the housing guys to hit the ibuprofen?)