Public Policy, Economics and Entrepreneurship: December 2008 Archives

So what does 2009 hold for the economy? 

Andrew Tanzer at Kiplinger.com shares the views of many economists by seeing a rough time ahead:

The U.S. could be in for years of sluggish economic growth because it will take years to flush out the system. Among the main drags on the economy in 2009 (and beyond) is the savage deleveraging of the U.S. financial system and household balance sheets. Deleveraging -- paying down debts -- is an ugly word for an ugly, painful and strongly deflationary process.

 

The nation didn't reach this point overnight. U.S. indebtedness has risen relentlessly for 25 years, and the rate of increase went parabolic this decade, inflated by the mother of all credit bubbles. Wall Street firms, banks, insurers and hedge funds leveraged up with reckless abandon, and now the country's financial arteries are clogged with the sludge of bad debts.

James Pethokoukis of US News believes it might not be as bad as we think:

Let's all hope Barack Obama is wrong when he says that getting the U.S. economy straightened out "will take longer than any of us would like -- years, not months. It will get worse before it gets better." And let's pray that Joe Biden is way off when he says the economy is in danger of "absolutely tanking." But, to be honest, far more economists would pretty much agree with those pessimistic statements than the number that wouldn't. (Though that is a good contrarian sign.) Most regular Americans, too. Still, there are a number of reasons to think that the economy might, just might, shift back into gear faster than most of us think or hope. 

You can find the reasons for his slightly more optimistic outlook here.

 

Whether you believe the bleak forecasts or the "it won't be quite as bad as we think" forecasts the next year or so will be tough. 

 

Some small businesses will be relatively untouched by the recession over the coming months, particularly those that provide "value" as a key attribute of their product or service.  But, the majority of smaller businesses will have to shift from a strategy of trying to thrive to one of just trying to survive.

 

I will offer my outlook for 2009 in my column this coming Sunday in the Tennessean, which I will also post here at my blog. 

Until then, here is my Annual New Year Blessing to Entrepreneurs (with apologies to those in Ireland, to whom this may sound vaguely familiar):

May the market rise up to meet you.

May cash flow always be at your back.

May customers shine warm upon your face,

and opportunities fall frequently upon your venture.

And until we meet again,

May God hold you in the palm of His hand.

Here's to another trip around the sun! Happy New Year!

 

 

My friend Ben Cunningham with Taxing Tennessee writes about a new study that shows once again that it is entrepreneurs who create jobs, not politicians. 

I understand that [Tennessee Governor] Phil Bredesen and his fellow politicians want us to love, admire, revere and most importantly VOTE them for "creating jobs" but the facts show that jobs are created by small entrepreneurial start up firms. The same firms that go about their business without Phil Bredesen ever once showing up for a photo op. As these stats become more widely known, I am quite sure the politicians will try to take credit for them but, in fact, their best course is to stay the hell out of the way and blow their hot air elsewhere.

If government is going to get more involved with the economy -- OK, OK, since government is going to get more involved with the economy -- the new administration should take a look at the plan proposed by Bill George (former Medtronic CEO and now a professor of management practice at Harvard) published at Business Week.  George asserts that his plan "will jump-start the innovation economy by providing built-in long-term growth, redistributing wealth without punishing the wealthy, and creating millions of well-paying jobs."

Another survey of small business owners, this one from Wells Fargo, has found that entrepreneurs are losing confidence.  However, as with other recent studies I have posted about, most of these business owners do not perceive tight credit as their main business challenge right now.  From the Silicon Valley Business Journal:

Despite that decrease in optimism, the bank said four of five small business owners said they did not perceive credit as difficult to obtain.

We need more than interest rate cuts and new government spending programs to get things moving.  We need big tax cuts and we need them now to help revive the entrepreneurial base to this economy.

In his blog for US News, James Pethokoukis suggests that it is time for free market fans to organize:

[T]his the inaugural post of The Schumpeter Club. Joseph Schumpeter was the noted Austrian economist who analyzed the critical role of innovation in generating long-term economic growth.  (The transformational effect on business from innovation he termed "creative destruction.")

For my purposes, members of the Schumpeter Club are those folks who believe a crucial way to strengthen the floundering American economy is by unleashing our free-market, entrepreneurial, innovative dynamism through lower taxes.

Sign me up!

I have been waiting with some angst for the November NFIB survey of small business owners.  The results were released this morning.  Overall, these entrepreneurs are not optimistic about the near future, as indicated by the Index of Small Business Optimism which recorded the fourth lowest reading in the 35-year history of the survey. 

So what do the specific items tell us? 

While this is a significant recession, at this point it does not appear to be as bad as the two other major downturns of the past half century.

Employment

 

The reduction in work forces in these small businesses seems to have taken a pause.  The decline in average employment per firm dropped slightly in November, but was not nearly as bad as September and October.  43% of those surveyed hired or tried to hire. This seems remarkably high when compared to the corporate sector, where the news is about hiring freezes and layoffs.  Interestingly, even with the increase in overall unemployment in the US, finding the right people is still a problem.  72% of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. 

The outlook for employment in small business suggests that we have not hit bottom in this recession.  Over the next three months, only 6% plan to create new jobs, and 17% plan workforce reductions.  This yields a seasonally adjusted net-negative 4% of owners planning to create new jobs, one of the lowest readings in survey history. 

While this is not good news, these findings are not as low as occurred in the 1974-75 or the 1980-82 recession periods. 

Capital Spending

The frequency of reported capital outlays over the past six months rose two points to 56% of all firms, still at recession levels, but still not as bad as we saw in the 1974-1975 downturn. These entrepreneurs are spending a little more on new equipment and new fixtures and furniture.  They are spending a little less on new automobiles.   

Overall, spending is weak, but the frequency of outlays has improved for the last two months and there is a slight increase in planned capital spending over the next few months.

Inventories and Sales

Small business owners continued to reduce inventory levels to adjust to slower sales. 

Earnings  

The net percent of owners reporting higher profits deteriorated further in November.  Seasonally adjusted, those reporting declining earnings trends outnumbered those with gains by 38% percentage points

Profitability is the second worst showing in 35 years of survey history.

Inflation

Nothing tends to kill inflation like a recession.  Price pressures vanished in November.  However, many of the structural causes of inflation are still present, so we need to keep an eye on inflation as the economy rebounds.

Credit

As the economy weakens, loan demand from small business owners continues to decline. 

My Take

While this is a bad recession, for entrepreneurs there is no indication that it is any worse than the last two deep recessions over the past fifty years.  We survived these tough times and will survive this one.

Small business owners are approaching these tough times with a prudent hand: 

·          They are focusing on cash.

·          They are reducing debt.

·          They are tightening inventory.

·          They are being cautious about their overhead expenses.

While business failure will increase, the entrepreneurial spirit is still alive and well.  Our entrepreneurial core should keep us from falling into a deeper recession.  New venture formation will help lead us to the recovery that we can expect by early 2010.

Want to give the economy an entrepreneurial shot in the arm?  Immigration may be part of the answer.

Most studies find that immigrants are more likely to be entrepreneurs or self-employed than the population as a whole.  The Philadelphia Business Journal reports on yet another study that adds more support:

About 220 businesses, employing 900 workers, occupy the six-block stretch of 52nd Street between Arch and Spruce streets in West Philadelphia.

Overwhelmingly, they are immigrant-owned, reported the Welcoming Center for New Pennsylvanians, which hopes a study released this month will bring attention to the contributions being made by immigrants to the city's struggling commercial corridors.

Immigrants have accounted for nearly 75 percent of the area's labor growth since 2000 and, when compared to native born, more are employed (73 percent versus 71.5 percent) and self-employed (10.7 percent versus 7.9 percent), according to a new Brookings Institution study, "Recent Immigration to Philadelphia: Regional Change in a Re-Emerging Gateway."

Over the past several decades we have looked at immigrants as a source of cheap labor and our policy -- or lack thereof -- has reflected this. 

To help create jobs and growth we should open our doors to entrepreneurs from around the globe.  Current policy makes it difficult for entrepreneurs to enter the US legally.  We should be actively recruiting immigrants who want to come to our system of free enterprise to start their businesses, just as we did to bring in the scientists we needed in the 1950s and 1960s to help fight the cold war. 

The last great entrepreneurial economic boom was created in large part by first generation Americans and sustained by a large, but controlled, wave of immigration that helped to build an economy that last through most of the 1900s.

 

In addition to a "green card" for immigrants coming here to work, the US also needs another card (let's color it a "red card" for urgent) to support the flow of legitimate entrepreneurs looking for the freedom this country offers to business owners.