We have all seen the headlines… Bear Stearns and Lehman Brothers become insolvent… Citigroup trades beneath a dollar… and General Motors files for bankruptcy. Big firms have been dominating the news over the last 9-12 months, in fact, so much so that it is easy to forget how important small businesses are to the overall economic health of the United States.
Consider the following statistics from the U.S. Dept. of Commerce:
So how have small businesses fared during the recession? It has been a tough period.
With unemployment the highest it has been in many years, consumers today are focused on what they truly need versus what they want. That’s a negative for small businesses, which are much more sensitive to cost-cutting than large enterprises.
Making matters worse are tight credit markets, which make it tough for small businesses to extend financing to their customers or borrow against future earnings.
These factors, among others, have contributed to 2008-2009 being perhaps the worst period for small businesses in almost 30 years, according to the National Federation of Independent Businesses (NFIB), an organization that is some 650,000 members strong. Its April survey showed that optimism among small business owners – as tracked by an index – was the lowest it has been since 1980.
Comparing the current recession to that time period says a lot. Jimmy Carter was the 39th president from 1977-1981 and the U.S. had two quarters of negative GDP growth in 1980. The economy also had a particularly pernicious condition known as “stagflation,” a condition in which prices rise, but without the corresponding economic growth.
There were recessions in the United States in the years 1990-1991 and 2000-2001, but the early 1980s, with the Iranian hostage crisis and fuel shortages, was the longest and deepest since the 1970s and before that the Great Depression. However, the current recession is arguably tougher than past recessions on the small business community because the root of the problem, unlike a fuel shortage which affects everyone, is the availability of affordable credit, which is the lifeblood of small and growing enterprises.
In sum, for many small businesses, 2008-2009 has been the “worst of times” in recent memory. But, given the cyclical nature of economics, the stage is being set again for the best of times.
I grew up in China and came to the United States in 1985. In my first language, Mandarin, the character “wei ji” stands for both “crisis” and “opportunity.” That’s perhaps well known in business circles, but it is especially relevant fact for the small business owner today. Why?
The credit markets are tight, that’s true, but the employment base is excellent. There are many highly skilled, hard-working people who can help you start or build a business. Commercial rents are low. There is affordable space to start a new venture, and assets of all kinds are at lower prices.
Technology – information technology and the internet – continues to enable and accelerate the growth of new business. Consider how daunting it would have been to make a product in your home 15 years ago and then sell the product all over the world? With the help of the internet and global logistics and transportation companies such as FedEx, small businesses are part of the global supply chain like no other time in our history. In fact, given that more than half – 52 percent – of all small businesses are “home-based,” it is fair to say that people are now selling goods to the world market that they would have sold in the town market just 20 years ago.
With these factors in mind, here are five things to consider if you own a small business or are thinking of starting one:
There is talk about town and in the media of an economic upturn in the final quarter of 2009 – “banks are lending, consumers are buying, and companies are hiring.” While it is not possible to predict the movement of the economy with any level of certainty, and recent history has reminded us of this fact, it is important for business people and government policy makers to have some idea of what lies ahead.
The practice of reading omens in order to foretell the future has been employed since ancient times. In ancient Rome, priests known as “Augurs” would determine the will of the gods by studying the flight of birds, while other persons known as “Haruspices” practiced a form of divination which involved inspecting the entrails of sacrificed animals.Consider the following statistics from the U.S. Dept. of Commerce:
· Firms with fewer than 500 people account for about half of all private sector employees and pay nearly 45 percent of U.S. private payroll;
· Small firms have generated 60 to 80 percent of all the net new jobs over the last decade;
· More than half of non-farm private GDP is generated by small businesses.
So how have small businesses fared during the recession? It has been a tough period.
With unemployment the highest it has been in many years, consumers today are focused on what they truly need versus what they want. That’s a negative for small businesses, which are much more sensitive to cost-cutting than large enterprises.
Making matters worse are tight credit markets, which make it tough for small businesses to extend financing to their customers or borrow against future earnings.
These factors, among others, have contributed to 2008-2009 being perhaps the worst period for small businesses in almost 30 years, according to the National Federation of Independent Businesses (NFIB), an organization that is some 650,000 members strong. Its April survey showed that optimism among small business owners – as tracked by an index – was the lowest it has been since 1980.
Comparing the current recession to that time period says a lot. Jimmy Carter was the 39th president from 1977-1981 and the U.S. had two quarters of negative GDP growth in 1980. The economy also had a particularly pernicious condition known as “stagflation,” a condition in which prices rise, but without the corresponding economic growth.
There were recessions in the United States in the years 1990-1991 and 2000-2001, but the early 1980s, with the Iranian hostage crisis and fuel shortages, was the longest and deepest since the 1970s and before that the Great Depression. However, the current recession is arguably tougher than past recessions on the small business community because the root of the problem, unlike a fuel shortage which affects everyone, is the availability of affordable credit, which is the lifeblood of small and growing enterprises.
In sum, for many small businesses, 2008-2009 has been the “worst of times” in recent memory. But, given the cyclical nature of economics, the stage is being set again for the best of times.
I grew up in China and came to the United States in 1985. In my first language, Mandarin, the character “wei ji” stands for both “crisis” and “opportunity.” That’s perhaps well known in business circles, but it is especially relevant fact for the small business owner today. Why?
The credit markets are tight, that’s true, but the employment base is excellent. There are many highly skilled, hard-working people who can help you start or build a business. Commercial rents are low. There is affordable space to start a new venture, and assets of all kinds are at lower prices.
Technology – information technology and the internet – continues to enable and accelerate the growth of new business. Consider how daunting it would have been to make a product in your home 15 years ago and then sell the product all over the world? With the help of the internet and global logistics and transportation companies such as FedEx, small businesses are part of the global supply chain like no other time in our history. In fact, given that more than half – 52 percent – of all small businesses are “home-based,” it is fair to say that people are now selling goods to the world market that they would have sold in the town market just 20 years ago.
With these factors in mind, here are five things to consider if you own a small business or are thinking of starting one:
· Measure and examine the validity of your product lines and business. That, of course, is an ongoing process in good times and in bad, but now is the time to be realistic. Focus on what’s working.
· Think of the needs versus wants equation. We’re seeing a rebound from the low points, but consumers are still worried. For the foreseeable future, “must have” products and services are going to do better than the “nice to haves.”
· Leverage technology to grow and gain efficiency, but don’t block out the older consumers. Yes, younger generations are computer-savvy, but there is a large portion of the population that likes to buy things the old-fashioned way. Don’t ignore this pool of sales.
· Surf the curve. Look at the trends and see what is working at larger companies. If you are expanding a business or getting ready to start one, consider emerging opportunities with energy and anything “green.” While there are still skeptics, climate change is now considered to be real and serious by most. Small businesses focused on alternative energy and preserving our environment will likely prosper in the future.
· Think international. The internet and the general globalization of commerce have put small businesses on a launching pad. Look past your local boundaries and take advantage of the rising consumer purchasing power in countries such as Brazil, Russia, India and China, just to name a few.
As we look out ahead, there are specific signs that bode well for small businesses. In the first quarter 2009, 2.8 percent of the 6.3 percent decline in GDP was attributable to a reduction in inventory alone. This drop makes sense: consumers are buying less, so businesses are stocking less. But when consumers start buying more, inventory levels will need to catch up, so there is a good chance we will be heading into a re-stocking period this fall, which will favor small businesses.
Where we need to be watchful, however, is on the tax side of the equation and the cost of government requirements, generally. In fact, the same NFIB April survey showed, that concern over taxes is the highest it has been in two years.
Small businesses – because of their size – shoulder a disproportionately large burden when it comes to various government requirements. This dynamic is especially true of very small firms defined as fewer than 20 people. These firms spend 45 percent more per employee than large firms to comply with federal regulations…4.5 times more per employee on environmental regulations… and 67 percent more per employee for tax compliance, according to the U.S. Small Business Association (SBA).
We are now entering a period in which government intervention in business is as great as it has been since the 1930s following the Great Depression. In the same way that big businesses grab the news headlines, it is the large corporations that seem to get all the government attention. For this reason, it is probably the most important time in a least a generation, for small businesses to band together so their voice is heard loud and clear on Capitol Hill. And, one of the topics to be heard the loudest on is taxes and the cost of the government compliance. Every big business started out as a small business and when the entrepreneur becomes disincentivized because he or she is handing too much back to the government, then we are killing off not only the small business of today, but also the big business of tomorrow.
As we now approach the end of first half of 2009, it is clear from all the statistics and surveys that small business in the United States has experienced a difficult cycle. In short, we have seen the “crisis.” Now I hope, as we all do, that the cycle is turning. Normalizing of the credit markets… a return to general economic stability… the continuing rise of technology and the globalization of business… all these forces are favoring small business. And, before too long, it will be only the “opportunity” we see -- and seize
Where we need to be watchful, however, is on the tax side of the equation and the cost of government requirements, generally. In fact, the same NFIB April survey showed, that concern over taxes is the highest it has been in two years.
Small businesses – because of their size – shoulder a disproportionately large burden when it comes to various government requirements. This dynamic is especially true of very small firms defined as fewer than 20 people. These firms spend 45 percent more per employee than large firms to comply with federal regulations…4.5 times more per employee on environmental regulations… and 67 percent more per employee for tax compliance, according to the U.S. Small Business Association (SBA).
We are now entering a period in which government intervention in business is as great as it has been since the 1930s following the Great Depression. In the same way that big businesses grab the news headlines, it is the large corporations that seem to get all the government attention. For this reason, it is probably the most important time in a least a generation, for small businesses to band together so their voice is heard loud and clear on Capitol Hill. And, one of the topics to be heard the loudest on is taxes and the cost of the government compliance. Every big business started out as a small business and when the entrepreneur becomes disincentivized because he or she is handing too much back to the government, then we are killing off not only the small business of today, but also the big business of tomorrow.
As we now approach the end of first half of 2009, it is clear from all the statistics and surveys that small business in the United States has experienced a difficult cycle. In short, we have seen the “crisis.” Now I hope, as we all do, that the cycle is turning. Normalizing of the credit markets… a return to general economic stability… the continuing rise of technology and the globalization of business… all these forces are favoring small business. And, before too long, it will be only the “opportunity” we see -- and seize
Things have progressed a little since then. Today economists devine the future by examining “economic indicators”.
Economic Indicators
In order to assess the likely strength of the economy in the future, economists look at “economic indicators”.An economic indicator is any economic statistic (e.g. the unemployment rate, GDP, or the inflation rate), which indicates the current strength of the economy and/or the future strength of the economy.
Economic indicators are generally classified by reference to two attributes:
- Correlation with the strength economy; and
- Contemporaneousness with the strength of the economy (let me know if you can think of a simpler word)
1. Correlation
If an economic indicator is “correlated” with the economy, then we would expect a change in the value of the economic indicator to correspond with a movement in the economy. The correlation of an economic indicator may be described as procyclical, countercyclical, or acyclical:- Procyclical: A procyclical economic indicator is one that moves in the same direction as the economy. For example, Gross Domestic Product (GDP) is a procyclic economic indicator because it gets larger as the economy gets stronger.
- Countercyclical: A countercyclical economic indicator is one that moves in the opposite direction as the economy. For example, the unemployment rate is a countercyclical economic indicator because it gets larger as the economy gets weaker.
- Acyclical: An acyclical economic indicator is one that has no relationship to the economy and is generally of little use in predicting the future strength of the economy.
2. Contemporaneousness
Contemporaneousness refers to the timing of the change in the economic indicator relative to the movement in the economy. The contemporaneousness of an economic indicator may be described as leading, lagged, or coincident:- Leading: A leading economic indicator changes before the economy changes. For example, construction activity is a leading indicator as the level of construction activity usually begins to decline before the economy declines and improve before the economy improves. Leading economic indicators are the most important type of indicator for investors, business people and policy makers because they help to predict the future performance of the economy.
- Lagged: A lagged economic indicator is one that does not change direction until a few quarters after the economy does. For example, the unemployment rate is a lagged economic indicator because it typically takes at least two quarters to decrease after the economy begins to recover.
- Coincident: A coincident economic indicator is one that moves at the same time as the economy does. For example, Gross Domestic Product is a coincident indicator.
