8 Reasons to Be Terrified of the Bad Economy
Last week my teenage daughter and I visited the Magic Kingdom in Orlando. The Haunted Mansion? Really fun, but not very scary. Space Mountain? Pretty good, but compared to most roller coasters, also not very scary. That dude in the creepy Donald Duck costume who kept hugging my daughter even after I finished taking the picture? OK, that was a little scary.
But not as scary as the economy. It’s now going on five full years since we had a “good” economy. And, judging by a lot of the data, we’ve still got a long way to go. No matter what positive news we hear it’s almost always offset by something unsettling. Small-business owners know this. And we’re scared. Which is why we’re still not hiring and still not overly optimistic.
What are we so scared about?
1. Gross Domestic Product
Gross Domestic Product was recently revised upwards for the fourth quarter and everyone said that was good news. But can we all take a breather? That’s like saying the wait for Stitch’s Wild Ride is “only” 30 minutes. The attraction still sucks. For starters, GDP was three percent at the end of 2011 and is projected to be about the same for 2012. Meanwhile, China just revised their GDP downward to 7.5 percent. What a bunch of show-offs. A good growth rate would be between five and six percent.
2. Debt and Deficits
Currently our national debt stands near $15 trillion, which is about equal to the size of our entire economy (and the amount I spent on a half-day admission to the Magic Kingdom). We haven’t had a 1:1 ratio of debt to output since World War II. Greece, Italy and Portugal have higher ratios and look what kind of terrible things are happening to them. (This is why I avoided Epcot altogether.) Even Federal Reserve Chairman Ben Bernanke said we were heading towards a “massive fiscal cliff.”
To get deficits under control, small-business owners know that we’re looking at a combination of future tax increases and/or significant cuts in spending. We’re already looking at significant tax increases coming in 2013 as the effects of health-care reform settle in. And more cuts in defense, construction or other government spending programs will take money away from those small businesses that rely on those industries. The alternative is to keep spending, which is even less palatable. This would seem to ultimately result in the same fate that our friends in Europe are struggling with: lack of credibility in their governments, not to mention higher interest rates and a falling currency.
3. Inflation and Interest
Most of us are respectful of Bernanke’s success in staving off an economic meltdown when our banking system was all but collapsing. But just look at the Fed’s balance sheet: They have $3 trillion of assets on reserves, a huge jump over the past few years. This means that banks have the ability to inject massive amounts of money into our system, and they may do so if the economy heats up and credit-worthy businesses start actually asking for financing. And if demand does increase, the Fed’s strongest weapon to control this inflation threat would be to raise interest rates. The St. Louis Fed warned last week of a potential inflation inferno. Will Disney be forced to charge even more for a hot dog than they do already?
4. The Stock Market
Amazingly, the stock market has almost doubled from its low of a few years ago. As the value goes up our confidence goes up. We feel wealthier. We are more open to spending, hiring, investing. But, like our discovery that all those “shops” on Main Street were really just facades hiding one giant gift shop selling nothing but Disney souvenirs, this fast rise is a little … unsettling. We’ve seen our wealth go way up and then come down in a matter of days, and we no longer trust the bankers and executives who are running these publicly held companies any more than I trust that 15-year-old pimply kid “checking” the safety bar on my Space Mountain ride.
Gas prices continue to rise, and small-business owners are watching this trend fretfully. What’s most upsetting to my clients is watching our elected leaders (as well as those leaders trying to be elected) tell us that they can actually do something about it. These guys must have taken a few too many trips on Peter Pan’s ride. Drilling for offshore oil or building another pipeline to Canada may have an impact … in Tomorrowland. Higher energy costs affect small companies in just about every way. We find ourselves paying more for company cars. Our utility bills might rise, although (thank God for North Dakota) the declining price of natural gas should hopefully keep this in check. But so many of the products we buy for our businesses—materials for production, packaging supplies, equipment—are all reliant on petroleum-based ingredients.
You know those happy little European kids singing in “It’s A Small World”? Well, they don’t look anything like the rioting mobs I’m watching on TV every night. The Baltic Dry Index, a closely watched metric that measures the cost of freight through the Baltic Sea, fell to its lowest monthly average in the past 25 years. Here’s what’s scarier: Our super-smart economists have no idea why. The fate of Europe affects small businesses here. Even if the pizza shop guy isn’t selling pizzas to the French, he’s probably selling pizzas to customers who work for companies that are selling something to France.
Today, ADP reported that the country added 216,000 more jobs to the economy. That’s a good sign. Unfortunately, half of them were hired to clean up the mess left by the 17 million annual visitors to the happiest place on earth. And it won’t be enough to significantly impact our unemployment rate, which is expected to stay at about 8.3 percent when released Friday. We still have five million more unemployed people than we had back before the start of the recession. We would need to add 250,000 jobs each month for the next five years just to get back to pre-recession levels. When people aren’t earning, they’re not spending at small businesses. That means the companies that buy my products aren’t doing enough business to warrant buying more of my products—which has a lot to do with the current low rate of GDP (and my company’s revenue) growth.
8. Overall Business Conditions
Small-business owners know overall business conditions aren’t great. They’re not as scary as those talking, mounted moose heads on the wall that come alive before the Country Bear Jamboree. But things aren’t good. Which is why Intuit reported this week that our hiring has slowed. Although most regions reported growth in their manufacturing activity last month, the growth was tepid and still significantly behind pre-recession levels. Orders for durable goods declined substantially. Personal income and spending numbers were lackluster. Sure, consumer confidence was up, but is anyone really paying any attention to that number? A more telling statistic is the Restaurant Performance Index. That’s been dropping. I choose actual data on spending over surveys anytime. Want to really know what’s going on? Check out the recent Aruoba Diebold Scotti Business Conditions Index, which is calculated by our own Philadelphia Fed. It’s like the Tomorrowland Speedway ride … meh. And I haven’t even mentioned housing, have I?
I kid, but despite the downsides, I advise small-business owners who are seeking happiness to visit Disney for a day. Don’t expect to be scared though … unless you start thinking hard about the economy.