I’m trying to understand more about what’s going on with the economy. I figure that will help me make better plans with my business. Can you help?
There are many short and long term challenges that have come together to overwhelm our economy over the past several years. Throttling up the activity in small business can speed things up considerably. Like all boom and bust cycles, this cycle has already started to turn up and will continue to do so over time. And this won’t be the last boom and bust cycle we’ll see.
Where do we turn for opportunity to get out of this recession in the fastest, healthiest way possible? Small business. Small business is the acknowledged U.S. leader in job creation, job training, and entry level job opportunity.
Challenge #1: Remember the Reagan era economic policy of top down, trickle down? Increase cash available to the wealthiest segment of the economy, and their spending trickles down to stimulate earnings, spending and savings with lower levels of the US population. Redux in Bush 1, Double Redux in Bush 2. It didn’t work.
While tax breaks increased for the wealthy, that additional money didn’t trickle down the way it was supposed to. Tax breaks didn’t turn into proportional increases in revenue, savings or jobs for the masses. We have to reverse our tax policy to a more equitable system that creates funds to fuel growth in small business, training for the lowest level of our economy, and re-employment for larger numbers of workers. Partner the wealthiest members of the economy with small businesses that can create jobs and train the lowest levels of workers.
Challenge #2: In a recession, lending approval shifts from opportunistic to hard assets. Concerns about who will and won’t make it through the recession cause lenders to be more cautious about what loans they approve. Unfortunately, our economy is now 70%+ service based, and most service companies do not own hard assets such as real estate or equipment of any significant value. They have been minimizing earnings each year in order to avoid taxes. Their accounts receivable, after 2 years of recession/collection is unlikely to be significant enough to leverage. All of these factors make them poorer credit risks.
Small businesses will have to pay off existing debt and self funding expansion. Growth without additional debt will eventually turn into good news in the form of greater profitability without the need to service additional debt.
Challenge #3: The housing bubble has resulted in 19 million vacant houses, which will take years to absorb. There are also pockets of overbuilt commercial space. Construction historically has made up over 50% of the small businesses operating in the US. With a hard stop in new construction, workers and companies are going begging for income and opportunities to stay busy. This turns around only once we get excess housing and commercial capacity used up, which means selling and renting at significantly lower rates.
Challenge #4: Total jobs lost / uneven impact: We’ve seen in excess of 3 million jobs lost through this recession. Long term unemployment is nearly double that of any previous recession (45% at 27 weeks, vs 26% in 1980’s recession). At the end of 2009 15,267,000 people were out of work. The job engine is starting to sputter back up, but opportunities are uneven. College grads’ unemployment is only 5%. High School grads are at 10%, about the same as overall rate of 9.5%. Those without High School degrees are seeing 15% unemployment, and unlikely to get decent job offers until those in the previous 2 categories are fully employed.
There are some 6 million firms in the US with less than 500 employees, 5.4 million of those have less than 20 employees. Teach those companies how to increase revenue, operate and exit more profitably. Help those small businesses gear up by targeting work opportunities towards them.
If each small business added ½ person, we would replace all 3 million jobs lost. With only $75,000 in additional non-product related revenue a company can afford to hire that additional ½ worker. Fuel the growth of small business, such that each can afford to hire 1-2 workers, and we put half of the unemployed back to work. Give small businesses incentives to reach into underserved communities, create training programs and employment for motivated workers. Create affordable housing in communities with jobs, and incent small businesses for relocating into underserved communities.
Looking for a good book? Try Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective
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Andi Gray is president of Strategy Leaders Inc., www.StrategyLeaders.com, a business consulting firm that specializes in helping entrepreneurial firms grow. She can be reached by phone at 877-238-3535. Do you have a question for Andi? Please send it to her, via e-mail at AskAndi@StrategyLeaders.com or by mail to Andi Gray, Strategy Leaders Inc., 5 Crossways, Chappaqua, NY 10514.
