ECONOMIC OUTLOOK
ARE WE TALKING OURSELVES DOWN?
BY KEN MAYLAND, PRESIDENT, CLEARVIEW ECONOMICS, LLC.
The seemingly "perfect storm" of a deep cyclical decline of housing, subprime mortgage debt problems, the credit squeeze, and the stock market gyrations has left small and medium-sized businesses feeling uneasy. As these mega-events and big-font media headlines unfold, how can not one feel like a mouse as the elephants are dancing?! The "Optimism Index" of the National Federation of Independent Business (the leading small business advocacy association) has dropped to the low end of the readings seen over the last two decades. This does not correlate well with the official-determined recessions; it just says business is worried. The business expectations "six months from now (December survey)" were also down in the dumps.
Nonetheless, surveyed business owners reported in-line inventories, a slight pick-up of expected capital spending over the next three to six months, and moderate plans to hire additional workers in upcoming months. And despite headlines reporting BIG problems at a few banks, a high portion of surveyed businesses found that their borrowing needs were met while very few felt their borrowing needs went unsatisfied. Just be aware that one of the lessons of this whole credit episode is that credit standards were too lax. Hence, expect to see tighter underwriting standards and maybe higher credit risk spreads paid on loans. But these credit spreads are being levied on a lower overall level of interest rates, thanks to the Federal Reserve.
What else can small and medium-sized business do? In uncertain times, you must pay attention to The Basics. Do not let inventories pile up unchecked. Stay on top of accounts receivables. And practice conservative expense control. But I would not put off long-term projects that have clearly identifiable payoffs. Slowdowns, and even recessions, do not tend to last long. Productive projects could leave a company well-positioned once the inevitable rebound dawns.
Finally, do you want to play junior-economist? If you are willing to tract just one economic indicator in an attempt to get ongoing, nearly real-time readings on economic conditions, "initial claims for unemployment compensation" would be a good candidate. It is cyclical and moves "smoothly." These figures are released by the Labor Department every Thursday morning at 8:30am sharp (Eastern Time). Apply this rule:
- if weekly claims are < 350k, then the economy is healthy and payroll job growth should be more than trivially positive (the GREEN zone);
- if weekly claims rise to 375k, it is on the radar screen as a potential problem (the YELLOW zone); job growth tends to go flat but the economy can grow because of productivity growth applied to the existing workforce; and
- if weekly claims rise and sustain more than 400k, then this is the point where job growth goes significantly negative and a recession is threatened; this is not a happy situation (this begins the RED zone).
Here is a direct link to the U.S. Department of Labor site that posts this data:
http://www.dol.gov/opa/media/press/eta/ui/current.htm
Good luck, and remember: better times lie ahead!
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