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American’ Small Business Vulnerability to a Slow Economic Recovery

For those of us that are advocates, supporters, and depend on America’s small businesses, we are all keenly interested in what the future economic environment will present, or what if any the “recovery” will be like in either the near and long-term.

Since World War II, history has conditioned us that recessionary times, especially those presenting deep recessionary attributes, have been followed by robust economic growth, including a significant lowering of unemployment, and increased spending on the part of both business and consumers. Generally all of the “steep” downturns have been followed by strong recoveries that overtime has overcome the effects of those downturns.

It is clear to us at the Ephor Group that the magnitude of recovery from this “deep recession” will not be the sharp  V- shape pattern we have experienced in the past.  

We believe that there are near-term factors that are specific to our current economic environment and several longer term changes to the fundamental infrastructure of the economy that will create a decade of slow economic growth.  Below we have outlined and provided a brief discussion on five (5) of the areas that will be weighing down the economy the near-term.

1. Commercial Real Estate: Members of Federal Reserve Board and the U.S. Senate Finance Committee for Small Businesses have cited that commercial real estate as a critical near-term barrier to near-term economic growth.  It is clear that weaknesses in the sector will be a significant drag on the economy in 2010 and beyond, as construction activities will continue to contract and lenders are forced to further write-down values.

In that commercial real estate loans are typically held by small regional banks, the good news is this sector does not pose the same systemic threat that was illustrated by the residential real estate sector.   However commercial real estate is almost always a lagging indicator of economy therefore the continued weakness in this sector will be a prolonged recovery inhibitor of the economy.

2. Small Business Spending: Historically small businesses have been responsible for nearly 60% of the GDP and nearly 65% of all jobs.  This deep recession has affected small business more so than any other Post War cycle.   Access to credit has obstructed small businesses ability to make new investments, therefore this limitation will continue in the near-term. 

With government borrowing huge amounts of money to finance bailouts, economic stimulus packages, and to support big government policies, there is simply less capital available for the private sector to borrow money.

This will result in businesses remaining cautious and unlikely to add non-critical jobs and perhaps even temporary workers even in the very near-term.   These forces clearly are within the realm of allowing a “double-dip recession” to occur which will only further stagnate economic growth throughout this decade.

3. Demographic Changes to the Population: As we all know the workforce is aging, and an aging population results in a workforce that will grow more slowly then in previous post war periods. Additionally history has proven to us that younger workforces are less productive than older workforces.

It needs to be noted that the number of people in their peak spending years (around 50 years old) will start to decline at an accelerating rate as the baby boomers age. Therefore this recession is likely to incent the baby boomers to postpone retirement out of necessity or promote the inclination to “preserve what they have,” therefore resulting in less time and desire to spend.

Longer-term we at Ephor Group are concerned that we will have a society where the elderly soak up huge amounts of public funds at the expense of education needed to enhance the skills of the younger and less productive workforce.  Therefore over the next decade we potentially will have “skill demand versus skill supply imbalance”, creating a significant barrier to economic growth.

4. Slower Productivity Growth: To reduce the deficit, and to deal with the increased regulation imposed by the current administration we will no doubt face higher taxes.  This married with the labor force growing more slowly and becoming less productive, results in the fact that any economic growth will have to be driven by non labor productivity enhancements.

Technological breakthroughs that could significantly increase productivity are very difficult to predict in today’s difficult economic posture. Innovation and technology especially in the productivity arena historically have come from small businesses that have been funded by venture capital and “other equity sources”.   Presently, as presented earlier, these “risk-taking” organizations are growth capital deficient, resulting in the question: How will our society overcome this need for increased productivity?

5. Changing Consumer Spending Habits: All the consumer spending statistics and studies are indicating that the American consumer is making permanent changes to their spending habits as a result of the past 2 years economic challenges, which could limit consumer spending for the next decade.

The basic question remains to be answered: Has the American consumer learned to not buy cars, houses and goods they cannot afford? In any event the “job crisis” that will prevail at least for the near-term will inhibit consumer spending thus creating a drag on the economy that was not prevalent in other recoveries.

In conclusion: it should be obvious the aforementioned presents a very pragmatic outlook that cannot be ignored, and clearly cannot be effectively overcome and managed by “legacy thinking” and “legacy management processes”.

The small business community’s “Bailout” will be a function of all of us having the courage to embrace the needed change and seek out assistance and additional skills; garnering a competent command of the issues presented here; examining and altering the strategies and our business models to reflect the “new economy”; make the commitment to our employees to provide the skills necessary for them and us to succeed; and finally alter our business processes and technology application to insure that we increase our productivity. 

This situation commands change, decisive and overt actions to be taken by founders, owners, investors and stakeholders in small businesses or the future existence of their organizations are at risk.

The time has come to not just “survive” ……… but to “THRIVE”!!!

 

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