The Recession is Over, Right?
There is no question that we are seeing more and more positive signs in the economy. But these statistics also show that there are still many big problems that have to be solved before really meaningful recovery can take place. But there is a good chance that we are bouncing along the bottom and beginning to trend up, but that trend has got a long way to go before it begins to positively impact small business.
Looking at the list above, bank failures, while bad, are mostly disruptive to local economies and small businesses where their branches are located. The deposits are almost always insured by the FDIC so depositors are safe, and the banks are usually sold or taken over by other, usually larger, banks. The problem for small businesses can appear because the bank’s operations are temporarily frozen, branches might be closed, and then new loan officers not familiar with the customers of the old bank have to be dealt with. So while not disastrous to small businesses, it could slow down the flow of credit until the new bank team is in place – as if the flow of credit is not already slow enough.
The second – housing – is just a 400-pound gorilla still standing there. There is a very large supply of existing inventory already on the market plus the shadow inventory of some 2 million bank-owned properties that have already been foreclosed on and not yet put back on the market. The economy needs to see a strong enough upward trend to begin to see more people finding jobs to start buying houses. Sales are beginning to rise, but the gorilla has a long way to go before he starts to lose weight. Also on a positive note, the S&P/Case-Shiller Indices showed house prices rising in 20 major cities for the sixth straight month. One of the biggest concerns in housing right now is the fact that the market have been positively affected by the $8,000 tax credit which has now been extended through April. But if that turns out to actually be the end of it, there is concern that government withdrawal from the market may slow the housing recovery.
Finally, the unemployment rate is going to stay high through much of 2010 and probably only begin a slow decline in 2011. On Tuesday, Verizon announced that it was cutting more than 10,000 jobs in its fixed-line unit this year, after it had cut more than 13,000 jobs in 2009. So don’t buy any champagne yet. Manage in crisis mode and keep looking for opportunities. Things are not going to get better any time soon.
Could China Have Anything to Do With Your Business?
One World Trade Center in New York (also known as Freedom Tower), now rising at the site of the former World Trade Center, will top out at 102 stories. The glass for the lower 20 floors is being made in China. That is just one example of why American manufacturing jobs will not be returning to their former numbers. As much as politicians talk about jobs going overseas, they can’t stop it because they don’t run private companies. And private companies are going to do what is necessary to keep competitive and earn a profit, and if that means sending jobs overseas where their products can be made much more cheaply, they are going to do it.
Geopolitical conditions, and especially as they relate to a country like China, may have a trickle-down effect on your business at some point in the future. Think back over the last ten or fifteen years to two particular industries – furniture manufacturing and carpet manufacturing. These two industries were major players in the economies of the Carolinas and Georgia. Most of that manufacturing has gone overseas. Think about what effect that had on a lot of small businesses in towns and cities where these operations were centered.
Manufacturing jobs going overseas is a highly visible sign. Less visible is technology as it continues to increase manufacturing efficiency in this country, meaning that the same amount of product can be manufactured by less people – jobs that won’t come back.
During World War II, because the US government was cut off from normal information sources in Nazi Germany, it began to monitor everything that came over the radio waves. At first they tried different quantitative tools – such as how many times certain words or phrases appeared. But as that proved unsatisfactory, more and more analysts began to use intuitive qualitative interpretation – reading between the lines, with the result that some valuable predictions were made, sometimes based on clues in a single radio broadcast. You can do your own form of content analysis. Look around you. What is happening in your community? What do you read in the newspaper that might trigger something that you ought to explore a little more? What do you see in your travels? What do you hear in conversations? As you begin to pool these different observations, you may find something valuable that will help your business stay competitive or grow.
Look around you. Do you have any local competitors in your business? How are they doing, if you can tell? Are any of them out of business because of the recession? The economy is not going to be good for small businesses for the next two years, largely because of the unemployment rate which is probably going to stay around 10% this year and not too much better next year. And what is more important to small businesses than customers who have jobs, and therefore enough money to buy your product or service? And since joblessness is going to remain high, people won’t have as much money to spend, not to mention the fast-rising savings rate; so more small businesses are going to be closing over the next two years. Some of these may be your competitors.
There is a message there. The competitive landscape is changing all around us. Citysearch is now being challenges by Yelp which was founded in 2004 to let users leave reviews of local businesses. Again, for curiosity, I looked up car repair in Richmond on Yelp. There were dozens, some of which had reviews, but all of which had address phone number, etc. But what I found particularly slick was that on the right side of the page was the Google map which showed the push-pin location of each one, and moved with the list as you scrolled down. On the other hand, I was surprised that when you clicked on the name of the company it did not bring up their website address. It has a great deal of useful information, but not the website address – possibly because there wasn’t one. Amazing, but this is what is happening in our world today. Google, by the way, has been in discussion with Yelp to buy it for $500,000,000. Not a bad return in six years. It is ridiculously easy to have a good website for your business. As, or if, any competitors go out of business, people are going to be looking for somewhere else to buy what you sell. Not having a presence on the internet for people to find is a mistake. At least show up in the “Local business results” and have a decent site rather than just a name and address. It could generate business. It is a most basic example of e-commerce, and it is cheap when compared to the potential returns.
Since the banks are where the rubber meets the road with small business, most of the blame is falling on them for not doing enough lending to small business. But they don’t quite deserve all the blame that they are getting. Granted, many banks got over-aggressive as the boom rolled along and made commercial real estate loans that might not have gotten made under more conservative credit guidelines or a not-so-strong economy. But the economy was strong. Business was good. The most important thing that a bank usually bases loan decisions on is business tax returns, and businesses were showing good growth and profits. So, a lot of those loans that look over-aggressive now might not have been at the time. But that was then and this is now.
Many of those small businesses that were dong well have faltered and are either behind on or cannot meet their loan payments. In many cases it is not necessarily the owner’s fault because it could well be that he or she may have been doing an excellent job of managing their business, but suddenly customers that they were selling to have disappeared or are not buying as much. So the business owner can’t make or keep up with their loan payments, so the bank is getting burned. That whole scenario is probably not completely the fault of either one, but it is happening now.
The other thing that is happening is the disconnect in Washington between the branches of government. Surprise! There is the White House pushing everyone, especially the banks, to do more small business lending. Twelve or thirteen blocks to the east is Capitol Hill – Congress. There the halls echo with frustration, posturing for cameras, bloviating as usual, but at the same time, real concern and attempts to make something positive happen. But a little over a block west of the White House is the FDIC. The FDIC is the agency that insures customer bank deposits. It also examines banks on a regular basis to make sure they have adequate capital among other things. As a result of the current recession, more and more banks are failing because of bad loans which are charged against a bank’s capital. With the recession causing more banks to fail ( over 100 failed in 2009 and close to 570 are now on the FDIC’s Problem Bank List ) ) examiners are forcing banks to set aside more and more reserves to cover potentially bad loans, or to raise additional capital, which is expensive and time-consuming.
Money put into loan loss reserves is taken out of the bank’s equity capital, and since the amount of loans a bank can make is based on how much equity capital they have, it means less is available to lend even though they have it. But it is now locked in an account – loan loss reserves – and they can’t use it until a loan either defaults or is paid off. So banks are being more and more cautious about making risky loans, so the riskiest borrowers – the small businesses – are not getting financed. So on the one hand, we have examiners telling banks not to make such risky loans, while on the other hand politicians are screaming for more. So the banks are not totally to blame. Many banks would be willing to increase their small business lending, but choose not to to avoid running afoul of the bank examiners. Forcing banks to strengthen their balance sheets is good in the long run, but it is creating real problems now in the middle of a recession.
For small business owners seeking financing, either for starting a business or growing a business, the SBDC can be a major ally. The value of a business and financing plan prepared by the SBDC is that it will force the business owner to think through their existing or proposed business thoroughly in order to present the most complete information and to develop realistic projections. Also, the SBDC may have already done other plans or work in a particular industry for other clients which may benefit the present client. To find the SBDC nearest your location, visit the national association’s web site – www.asbdc-us.org. or the SBA website, www.sba.gov and look under counseling and training. For a treasure trove of articles on seemingly anything related to small business, many SBDC’s have articles on their websites. The Georgia SBDC has over 120 alone. Many of them also have success stories, which are great to show you what an SBDC do. On SBDC sites there is a tremendous amount to learn and nobody is trying to sell it to you.
85,000 Jobs Lost in December. Whoopee!
Last Friday’s jobs report from the Bureau of Labor Statistics showed non-farm employment decreasing by 85,000 (but 4,000 new jobs were created). But what it didn’t show was that 661,000 workers dropped out of the labor market. I would love to know how they can be so precise. Then again, I probably wouldn’t. A lot of those people will find other ways to make money, but not on a company’s payroll. As hard as the government is trying, and it is, the bleeding has not stopped. But because of it, it is almost certain that some form of new stimulus will be put into effect in order to try to create jobs, especially for small businesses.
There has been a surge in hiring of temporary help. There are mixed feelings among experts as to whether this is a precursor to increases in permanent hiring or not. I am sure of one thing. No one knows for sure. Manpower, Inc. does a quarterly survey to determine hiring plans for companies. Their survey, consisting of 28,000 interviews with employers in 201 Metropolitan Statistical Areas shows that for the first quarter of 2010 there will be no significant change – an equal number of companies plan to increase as decrease. New ways may have to be found for small businesses to weather the recession, because even though the media trumpets positive news whenever it shows up, the economy is not going to do it on its own fast enough to create a strong revival. As just one example, I read a story last week about a restaurant that had early-bird specials. They had always attracted a mostly older crowd. But recently, the owner said he had seen more and more families and young people coming in because if they were going to get out at all, they had to do it at lower cost. So as result, this restaurant owner has done some revisions on his menu to appeal to a broader dining population. But most restaurants can’t do this.
There is remarkable agreement among leading economists, business analysts and stock market analysts that as the economy begins to recover, job growth is going to be very slow. Some are predicting that the unemployment rate at the end of 2010 may still be in the 9% range plus or minus, but no dramatic improvement. Others are saying that even 2011 will not show strong growth.
Many large companies are beginning to rehire, but not very fast and some of the new hires are only part-time. Part-time workers are very likely to spend mostly on essentials and less on wants. Both types of workers are saving more than in previous years. America’s savings rate has already risen from near zero a few years ago to around 4% in 2009, and many predict that it will get back to close to 7% which had been the normal average since 1929. Great for the long-term health of the economy, awful for the near-term (today). Even if the small business customer still has a good job, if 7 cents out of every dollar is not being spent, someone – frequently a small business – is losing sales and making less profit.
Small business lending is the highest-risk lending that most banks do, so they are not likely to open the credit spigots to companies that are showing declining sales and profits even if the owner is doing a superb job of managing to keep the company in business and maybe still profitable. But banks use current and historical data to analyze loans, so in the current state of the economic environment, if companies are showing declining sales and earnings, small business credit is going to stay very tight for the foreseeable future.
“Improving” can be a relative term. Overall, the worst is probably over for the broader economy. But the “improving” that is being trumpeted is coming from the large banks, Wall Street, and government officials. But it takes real sustained long-term growth to work its way down to most small businesses, and here at the beginning of 2010, that is still a long way off.
But there are also strong arguments on the opposite side of the improving scenario, and they are probably more realistic than what is being reported in the press. There are some major land mines in the road – jobs being the biggest, and some of them are going to explode. More on these in a later post. Business lending of all kinds is based on profitability and cash flow generated to support debt service. If a business doesn’t show adequate profits and cash flow, a bank won’t lend in most cases. So if a small business is not yet benefitting from the improving economy by showing improved profits and cash flow, or at least a turn in a positive direction, it probably won’t get a loan.
If you own a small business, it is probably best to assume that the light at the end of the tunnel is still a train. There are some signs of real light, such as new SBA guidelines if Congress approves them, but overall, the good light is still very faint.