Factoring Blog - For Small Businesses

Yes, everyone agrees, “it’s the economy.” 

In the news:

• Businesses Tightening Their Belts - The Washington Post (03/02/08) writes that businesses large and small and reacting to recent financial news by cutting back, although not nearly as drastically as in 2001.

• Small Firms Are Cautious About Recession - U.S. News & World Report (03/10/08) reports that businesses are becoming more cautious as a result of recent Fed rate cuts.

• Preparing Your Small Business for a Recession - U.S. News & World Report (03/07/08) quotes Jim Blasingame, noting that fear is our worst enemy in a recession.

As the saying goes, it’s the economy, stupid. 

But the question is, what should be done about it?

I think you should be a realist and optimist at the same time. As an article in smart Money points out, not everything is bad news with the economy.  February’s numbers were actually more positive than January 2008.

And, I recommend you to learn from the history and read Lawrence W. Reed’s article, The Times That Tried Men’s Economic Souls, pointing out that in the early years of the United States the financial situation was not the brightest.

During times like these, our first reaction is to want to get the government to do something — anything, we think.  

But perhaps there’s another solution to the problem – to take the government out of the situation and allow businesses to do their business unimpeded.  For more on this stance, read Yaron Brook’s commentary, To Stimulate The Economy, Liberate It.

Are stimulus packages good, or should the government just back off and let businesses work their way out of the current circumstances?  What say you? 

If you’re looking for information to stay up to date on the economy, I found a site that contains a list of economic forecasts and where to find them:  Economic Forecasts from ValuationResources.com. 

It’s a good list.  Most of the resources listed on the page are free — everything from the Congressional Budget Office reports, to the Federal Reserve Board, to Wachovia’s forecasts.   

I have to warn you, it could be a bit of a downer to read right now, given the state of the economy.  But I find it’s better to be forewarned, than to ignore the situation.  You’re in a better position to take action then.

Last week I wrote about inflation rearing its ugly little head and costing all of us more to live and run businesses, and resulting in less money at the end of the day in our pockets. 

This morning in the Wall Street Journal’s Real Time Economics blog I found this quoted statement by Charles Plosser, president of the Federal Reserve Bank of Philadelphia: 

Mr. Plosser said inflation expectations have been creeping up; he’s “not panicked” by the uptick but watching them closely. “We can’t wait too long for inflation expectations to materialize, otherwise you get behind the curve,” he said.

The economy has seen many periods when inflation has spiked up and then come back down, he said. “This issue of inflation is both worrisome, but also highly uncertain,” Mr. Plosser said. He said he’s concerned that price increases are showing up in more items than the typical areas like fuel. Determining whether those are transitory shocks or a signal of other changes is especially difficult now, he said.

It’s the kind of careful parsing of words you’d expect from a public figure. You didn’t actually expect him to come out and say “inflation is a major issue” did you?

But regardless of what the Federal Reserve says, many of us are experiencing inflation in a variety of ways. It’s very real when you see higher prices for gas, heating fuel, and materials.

I do agree that it remains to be seen whether inflation is a temporary situation that will even itself out.

Meanwhile, we continue to run our businesses and manage expenses keeping an eye on profit margins. Perhaps we can take comfort in the fact that there are lots of places in the world far worse off with inflation than we have it. We could be in Zimbabwe, with inflation over 1000%.

As the U.S. Presidential elections loom, and the economy seems to be weakening, the economy is becoming the center of attention.  And likely will stay that way for some time.

The New York Times The Board blog shows that paychecks (real wages) have been declining in real terms since last fall.  This chart tells the tale:

One of the culprits appears to be inflation.  As Felix Salmon of Portfolio notes:

“The chart doesn’t mention the main reason for the fall: unusually high inflation. Since inflation is running at a 4% clip right now, you’d need wages to be rising at the same rate in nominal terms just to stay at zero on this chart. If food and energy prices stop rising at some point, real wages will start looking much healthier.”

The candidates will be out in force to convince us how terrible the economy is and, therefore, what they can do to make things better. Some of that is typical electioneering — and lucky for us that it’s usually never as bad as the candidates paint it.

But that doesn’t change the fact that inflation has crept into our lives and into our businesses. Things are costing more. Not only are wages affected, but business profit margins too. As the costs of raw materials rise, and businesses have to raise the rates they charge others, everything gets “inflated.” Hmmm, I suppose that’s why they call it inflation.

CNN Money lists the unemployment rates for each state.  The stats are little outdated (as of the end of December), but not too much so.  And still interesting.

Idaho had the lowest unemployment rate at 2.7%, while Michigan had the highest at 7.4%.  That’s quite a variance.   

Do unemployment rates in your state impact conditions for your business?  For so long reports have been that small businesses have had trouble finding qualified help. 

The tax stimulus package is seen by many as a “quick fix” for the economy, but not addressing longer term issues.

But will it really fix the economy even short term?

In an article in U.S. News and World Report, Professor Cornwall suggests that a recession is likely despite the package.  Or in the alternative, we’ll see a period of high inflation.  He notes on his own blog about the stimulus package:

On the other hand, I am more worried that it will work. The pressures for a large burst of inflation are still out there — wage, healthcare and fuel price pressures and falling interest rates. If we over-stimulate the economy right now, we may end up in an even worse condition economically. Either way, be it a recession or a period of inflation, I see a tough period ahead for small business owners in America ….

He’s usually been an upbeat guy, so this is rather serious stuff coming from him.

The news is plastered with reports about the subprime mortgage implosion and the housing bubble.  It’s hard to avoid either subject.

While subprime mortgages affect big lenders more than they affect independent businesses — and your business may or may not be impacted by housing market troubles — one thing is clear:  home values affect your lifestyle and net worth.

Like most business owners, you probably own at least one piece of real estate — your home. 

Home values depend a lot on the quality of schools.  That’s why you may be interested in this interesting clickable map that shows high school graduation rates.  The higher the graduation rate, the better the school (in general).

Check out the graduation map — very interesting.

About a month ago I wrote about the economic outlook in the U.S. as “cautiously and tepidly optimistic.”  About the best you could say was that economists were avoiding predicting recession — so I guess you could call the outlook slightly positive as of early December 2007. 

Here we are a month later.  Is the news any different? 

The short answer: it’s hard to tell.  When you try to sort through the complex financial issues and the obfuscating language that most economists and financial commentators use, you find certain common themes.  First, there are the lingering effects of the housing market bubble.  According to an article originally published at Entrepreneur.com:

Don’t look for housing to return to prosperity before midyear, if even then. “There’s not going to be a real estate bounce-back,” says Gerald Celente, director of Trends Research Institute, a futurist study group.

That same article predicts that oil and gasoline prices will continue to rise (but you probably already noticed that from the gas pumps). And competition for good employees (and thus the need to pay higher staffing costs) will continue to rise, too.

So, the news is not so good from the sources cited in that article.

However, the latest NFIB Economic Trends report says, in effect, “hold on there, things aren’t that bad.” It paints a different picture, suggesting that there’s a big difference between Wall Street and Main Street, and that the issues Wall Street focuses on are not affecting America’s small businesses in the same way.

The Discover Small Business Watch for December 2007 tends to confirm the NFIB outlook report, suggesting that small business owners feel relatively optimistic.  However, that might change as the year end retail results are tabulated and the effects felt, says Sastry Rachakonda, a Discover executive:

“The mood remains cautious as fewer small business owners feel like economic conditions for their businesses are getting better. The mood could change either way depending on holiday receipts.”

So what are we are business owners to think?  Should we invest and expand?  Should we pull back and watch expenses? 

Well, no matter how you look at it, no one is suggesting it’s the wild wild west and that you should go full guns blazing into expansion mode.

On the other hand, it’s important to sort out the difference between what you hear Wall Street saying and what the conditions are like for main street businesses.  Wall Street doesn’t have the same interests as Main Street.

Whether yours is a technology business or you just use tech in your business, technology is crucial to running most businesses today.  If we were suddenly to have our technology disrupted or suspended, most businesses would come to a screeching standstill. 

PCWorld has an excellent rundown of how the U.S. Congress acted on key technology issues.  Among the highlights:

• Congress extended the moratorium on Internet taxes (a good thing). Of course, taxation is a tricky area. Your company may still be subject to taxes on certain transactions, so be sure to take your cue from your tax advisor.

• Patent reform did not happen (a bad thing). To date it’s mostly been large corporations that have gotten hit by claims from patent trolls, i.e., those who file broad patents purely for the purpose of suing. However, small businesses are starting to get ensnared and of course we all suffer when unnecessary litigation raises costs of doing business.

If you want to know more about how technology issues fared in Congress in 2007, read:  Congress Cools on Tech Issues in 2007. 

The Wall Street Journal’s Real Time Economics blog has a roundup of economists’ reactions to the jobs numbers reported by the U.S. government this week.   Overall the message can be summarized as:  “don’t panic.  It’s not a recession, although things have slowed.”

The housing market and subprime mortgage lenders are still having troubles, but according to the report:

“… [I]ncreases in services employment appeared to limit the risk of a severe economic downturn Nonfarm payrolls rose 94,000 in November, the Labor Department said Friday, down from October’s 170,000 gain. The unemployment rate was unchanged at 4.7%. Average hourly earnings increased $0.08, or 0.5%, to $17.63. However, that was up just 3.8% from a year earlier, suggesting that relatively tight labor markets are not putting much pressure on labor costs.”

The article goes on to give four economists’ reactions, all of which I’d summarize as cautiously and tepidly optimistic in the sense that they do not predict recession.  Funny how our expectations get set, and we think it’s positive if people just say there’s not going to be a recession.