Public Policy, Economics and Entrepreneurship: January 2010 Archives

Several of the recent surveys of small business owners I have cited over the past weeks have been showing signs that confidence is improving.  Mind you -- it is not a robust rebound of confidence, but at least there seems to be a sense that the worst may be over.  Notice that I choose my words carefully --"...the worst may be over..."

A new survey of Silicon Valley VCs from the University of San Francisco seems to be telling the same story.  The Silicon Valley Venture Capitalist Confidence Index rose slightly again in the 4th quarter of 2009.

Kurt Keilhacker of TechFund Capital confirmed, "While there is some caution with macro employment problems and worrisome tax policies, there is guarded optimism in Silicon Valley." Tom Rodgers of Advanced Technology Ventures detailed, "The environment is going through a natural Darwinian contraction...We will see the stronger companies surviving and thriving and the more disruptive and resilient approaches will continue to be funded. This is good for the long-term health of the environment."

While such surveys are encouraging, we need to keep things in perspective.  This optimism is not due to an imminent  return to economic growth. 

Remember -- we are seeing results in these surveys that come from the survivors.  And even they are not optimistic because they see good times in the foreseeable future. They are a bit more optimistic simply because they have survived the last two years.

If employment does not rebound this optimism will fade.  And employment will not improve due to the Keynesian Folly we see coming out of Washington with massive increases in government spending.  It will come, albeit slowly, by turning entrepreneurs loose by putting more money in their coffers through tax cuts and getting government out of their way.

Any signal that we will face higher tax rates will surely kill much of this optimism.  And higher tax rates are clearly still on the table since the President was careful to say in his speech last evening that he has not yet raised income taxes.

I am pleased that the panic is over for now.  But any improvement in optimism is very fragile and tentative. 

Small business owners can breathe just a bit easier now that nationalization of healthcare is on hold.  Also, Cap and Trade and its crippling taxes seems to be frozen in its tracks due to a very cold winter combined with mounting reports of faulty evidence for global warming.

But even with these two budget busters off the table for now, the last four years of Bush and the first year of Obama have left the country with crippling debt due to massive government spending.

Senator Brownback highlights the impact in a recent op-ed in National Review:

After the recent binge of federal spending, our nation's gross debt is scheduled to surpass 90 percent of GDP this year, and to approach 100 percent of GDP by the end of the decade. And this does not even include Democratic plans to establish a massive new health-care entitlement and impose costly new energy mandates on business. If all of these agenda items are accomplished, it is a safe bet that the national debt will surpass 100 percent of GDP within the next decade.

So why should entrepreneurs worry about statistics such as debt as a percent of GDP?

The best case scenario of excessive federal debt is a wet blanket thrown over any hopes of economic growth and a recovery from the recession any time soon.  As this paper from the American Economic Review Papers and Proceedings explains, 90% is a threshold for this ratio above which growth in GDP, that is a recovery, is difficult at best.

Small business growth is at the heart of any recovery, so this means that small businesses will not see a significant recovery unless we get debt under control by massive federal spending cuts.

And the worst case?  Keep in mind that China is the main creditor for much of this debt, and as I wrote recently, they have their own problems right now.  Should they balk at funding more of our debt, or worse yet be unable to due to their own economic collapse,  prepare for a host of really bad economic outcomes.  Outcomes such as hyperinflation and currency collapse could push us into an economic downturn that would make the last two years seem like a pleasant memory.

Small businesses are already fragile due to two years of hunkering down.  Expect massive small business failure if this scenario comes to pass. 

Here is the response from Dr.Graboyes of the NFIB on my post yesterday about healthcare reform:

NFIB's approach over the past three years has been exactly the right one. NFIB did not suddenly "realize" anything we didn't know before. All the points I've made since 2007 still hold.

 

NFIB is must represent the interests of our 350,000 members, their millions of employees, and small business as a whole. That obligation does not permit us to retreat into our chambers and compliment ourselves on the purity of our vision. Contrary to your fear, no one ever co-opted NFIB. And you are absolutely, positively, totally, completely wrong when you say our efforts left small business "empty-handed." Our engagement with Capitol Hill (which still continues) paid off in at least three ways:

 

[1] Due diligence: The bills now before Congress will kill a substantial number of firms and throw their employees out of work. When angry constituents vent their anger at what has happened, no member of Congress will ever be able to say, "If NFIB had only told us, we would have changed the bill." Their votes on the bills have been noted, and they've had fair warning before the voters issue their judgment.

 

[2] Triage: As bad as these bills are - and they are ghastly - they could have been even worse for small business. My NFIB colleagues who work the Hill labored mightily to weed out the worst of the worst provisions. They often succeeded, and I have the highest regards for their accomplishments.

 

[3] Preparedness: If one of these bills (or some mutated version thereof) passes, the disasters that they rain on small business and others will force Congress to re-open the bill and begin stripping out the most damaging provisions. Senators and Representatives will rue that day. But when that day arrives, NFIB's tireless work means we are ready for those later battles, and Congress already knows what we will fight for and against.

 

Jeff, you're a good friend of small business, and we appreciate your support. I especially appreciate your helping to push our video. But let me be blunt. Had we followed your advice and either retreated into a fetal position or into self-righteous bleating in the wilderness, the bills now before Congress would not be one scintilla better. They would almost certainly be much worse. To repeat, NFIB does not have the luxury of choosing irrelevance.

 

Bob Graboyes

While we have been sounding the alarm about the state of the entrepreneurial economy in the US, its seems that the constriction of the small business sector has created even more dire circumstances across the pond in the EU.

From the Wall Street Journal:

As important as small businesses are to the U.S. economy, the problem may be even more acute in Europe. Companies with fewer than 250 workers account for 70% of the private-sector work force in the European Union, compared with 49% in the U.S., according to EU figures.

Like the US, about 99% of employers are small businesses, but the total employment in small firms represents 67% of the EU workforce, which compares to 50% in the US (data from the US SBA and the European Commission).

The article in WSJ goes on to point out that funding for EU small businesses is even tighter than the US:

Business also relies more on banks in Europe than in the U.S. where, at least for bigger firms, capital markets are an important source of finance.

A 2009 report from the European Commission highlights the concerns EU entrepreneurs have about access to debt financing.  This survey found that access to financing -- typical bank financing -- continues to be one of their top worries.

However, there are some glimmers of hope when you dig a little deeper into the EU survey.

Although 46% of EU small businesses report a deterioration of bank lending, 70% said that they were able to get all or at least part of the bank financing they were seeking.  Only 15% said that they were fully rejected.

Times are certainly tough for small firms in the EU, with about half reporting lower profits.

But, as in the US, there is evidence that EU entrepreneurs are hunkering down and doing what they need to do to survive the recession.

(Thanks to Joe Ormont for suggesting this topic).

The National Federation of Independent Business Index of Small Business Optimism lost 0.3 points in December, falling to 88.0 (1986=100) [1]. The Index has been below 90 for 15 months. Optimism has clearly stalled.
 
Since I made a resolution this year to look at the world from a "Glass Half Full" perspective, let's see what good news we can see in the details from this survey.

Employment

Ten percent of the owners increased employment, which was the highest reading of 2009.  That is encouraging, but the survey also found that 22 percent reduced employment.

The job outlook is also has some hopeful signs.  Ten percent reported unfilled job openings, up two points from November.  This is a good sign.

Those planning to reduce hiring still is about double the percentage of those planning to increase hiring.  However, over the next three months, the number of small business owners planning to reduce employment has declined slightly.  And those planning to increase their hiring is up one percentage point from November.   

Capital Spending

The frequency of reported capital outlays over the past six months was unchanged at 44 percent of all firms, holding at a record low level (data first collected in 1979). But, plans to make capital expenditures over the next few months rose two points to 18 percent.  Still near the record low, but at least it has started to move in the right direction.

Sales

When it comes to revenues, it becomes a little harder to see positive signs.  The net percent of all owners reporting higher sales in the past three months remained negative at negative 25 percent.  However, this is a six-point improvement over the dismal November reading. 

Earnings

Try as I might, I could not find a silver lining in the responses on profits.  Reports of positive profit trends were unchanged at a net negative 43 percentage points. For the 54 percent reporting lower earnings compared to the previous three months, 65 percent cited weaker sales, 4 percent each blamed rising labor costs, higher materials costs and higher insurance costs, while 6 percent blamed lower selling prices. Poor real sales and price cuts are responsible for much of the weakness in profits.

Owners continued to reduce compensation at a record pace, with 10 percent reporting reduced worker compensation and 9 percent reporting gains, unchanged from November. 

Credit

Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15 percent reported loans harder to get than in their last attempt, unchanged from November.

"Still that is not nearly as severe as the financial distress reported in the pre-1983 period," said NFIB Chief Economist William Dunkelberg. "Twenty-four months of recession have sapped the financial strength of many small firms." 

Look for the Small Victories

"2009 was a very difficult year for small business," said Dunkelberg.  "Continued weak sales and threatening domestic policies from Washington, have left small business owners with little to be optimistic about in the coming year."

Alright, so the big picture shows only slight signs of improvement in the economic conditions for small business.

Let's keep focusing on the small victories.  Let's keep our eyes on those entrepreneurs who are keeping their heads held high and finding ways to succeed in spite of the adversities they are facing in the economy and from the misguided policies coming out of Washington.

The Acton Institute has been working tirelessly at the intersection of entrepreneurship, faith, free enterprise and public policy for many years.  They empower people to become more effective church and community leaders, supporting free enterprise.  We have had one of their founders, Father Robert Sirico, to the Belmont campus in the past and have him scheduled again on April 13, 2010.

For four days each June, the Acton Institute convenes an ecumenical conference of 400 pastors, seminarians, educators, non-profit managers, business people and philanthropists from more than 50 countries in Grand Rapids, MI. With this week of fellowship and discourse, participants build a theological and economic infrastructure for the work of restoring and defending hope and dignity to people around the world. This is Acton University.

Registration is now open for the 2010 Acton University (AU), which will take place on June 15-18 in Grand Rapids, Michigan. This year's distinguished international faculty will once again guide participants through an expanded curriculum, offering even greater depth of exploration into the intellectual foundations of a free society.

Space and scholarship funds are limited.  Visit www.acton.org/actonu for online registration form along with complete conference information.

A great forum to join like-minded people looking to take positive actions to support economic liberty.

William C. Dunkelberg, chief economist for the National Federation of Independent Business, issued the following statement on December job numbers based on NFIB's monthly economic survey.

"Despite the holiday season, December didn't put small business owners in a hiring mood. Last month, small business owners reported a decline in average employment per firm of 0.5 workers reported during the prior three months, not much of an improvement from November's loss of .58 workers per firm.

"Ten percent of the owners increased employment by an average of 4.2 workers per firm, but 22 percent reduced employment an average of 3.5 workers per firm (seasonally adjusted).  Growth from new firms will provide a positive nudge to the macro BLS numbers. But overall, the job-generating machine remains in reverse.  

"A slowdown in firing will also help job creation, but there is no real strength in job growth because there is no real strength in spending.  It is picking up, but not returning to the levels that supported the employment levels of 2007.  Employment reductions have proceeded faster than the decline in GDP (thus strong productivity numbers), creating the possibility that employment could respond faster in the early part of the recovery than many expect.  However, there is no indication that job growth will be strong enough to dramatically reduce the unemployment rate.

"Ten percent (seasonally adjusted) reported unfilled job openings, up two points from November, a good sign.  Over the next three months, 15 percent plan to reduce employment (down two points), and 8 percent plan to create new jobs (up one point), yielding a seasonally adjusted net-negative 2 percent of owners planning to create new jobs, a one-point improvement, but still more firms planning to cut jobs than planning to add.  Not seasonally adjusted, net job creation plans were positive in the professional services and the wholesale trades, negative in all other industries."

I have been writing about how so many of our students when after assessing the current economy decide that they want to go it on their own rather that search in vain for a traditional job. 

Matt Nicholson passed along an article by Toddi Gutner in the Wall Street Journal that addresses this trend:

Andrew Levine knew he wouldn't find a job in investment banking when he graduated with an M.B.A. from the University of Miami in 2008. Wall Street was in the midst of a financial collapse. So instead the 24-year-old focused his efforts on launching a start-up. "I figured that starting my own company was the best use of my time while I waited for the market to thaw," says Mr. Levine.

Young adults ages 20-24 are facing unemployment rates of 16%.  No wonder those with initiative and motivation are bypassing the traditional job market and creating their own employment.

In my column for the Tennessean I offer the following suggestion for the new year:

With the new year upon us, I'd like to offer a resolution.

Support small-business owners with your business.

History shows us that it's small-business owners who have led us out of our past recessions. Entrepreneurs are the job-creating engines that generate sustainable economic growth.

But, they can't do it alone. They need us to give them a chance to earn -- and I do mean earn -- our business.

Here are just a few of the small businesses that have earned my business, and how they won my loyalty.

I get my hair cut every month at Genie's Barber Shop in Franklin. Genie offers quality haircuts for men at a great price. She is able to offer her customers a value haircut in large part by keeping her overhead low.

She has a simple little shop, no fancy décor, no plasma televisions and thankfully no ear-popping stereo systems. Genie earned my business through great quality at a value price.

When it is time to get service done on our cars, we go to Moody's Tire and Auto on Columbia Avenue in Franklin (www.moodystire.com). When we first moved to town we heard from several neighbors that if you need service on your car, go to Moody's.

Businesses that have customers willing to recommend their service to others through word of mouth are not all that common. It didn't take long to see why customers are eager to talk about Moody's, though. It comes as a result of its honesty and integrity.

Just as one example of its integrity -- on many occasions I have seen Moody's employees talk customers out of getting new tires because the tires on their cars still had plenty of life left in them.

We recently wanted to put in some new tile floors in our home, and replace carpet with hardwood. I asked people whom I trust in the construction business where to call, and the name Wilkerson Tile and Stone came up.

Communication is key

Beyond great quality at a fair price, Jim Wilkerson knows the importance of communicating with his customers. While this may not seem like a big deal, it's always a source of frustration for me when service providers don't communicate well or at all.

Running behind on the project before ours? Just let us know. Can't make it out today because of a scheduling conflict? Give me a call.

Wilkerson keeps us informed every step of the way -- a small thing that goes a long way with most customers.

There are many other small businesses that have earned my loyalty, such as Bongo Java Coffee, where I hold court several times a week; Evans Glass, which will be installing new shower doors in our home; and Lee Company for the quality of its service on heating and cooling systems.

I'm sure you have your own favorites.

I hope you join me in supporting entrepreneurs by making a new year's resolution to give more small businesses a chance.