Eye of the hurricane(Read article summary)
Is the current economic optimism evidence that blue skies are finally stretching out before us – or just the eye of the hurricane? If the storm that is the great recession is not yet over, when will the back side of the eye wall hit, and how hard?
Space shuttle astronauts / NASA / File
Like every entrepreneur, I tend to try to find the positive in every situation. I guess that is one of the traits we develop to help us survive the trials and tribulations that are part of the entrepreneurial journey.
So it comes as no surprise to me that we are seeing glimmers of optimism among entrepreneurs right now. After all, they have survived the initial onslaught of the recession. And for several weeks leading up to the election it became clear that the rush to socialism might be slowed just a bit with the results of the mid-term election.
We see this hopefulness in the latest polling of small business owners. The latest NFIB poll shows that small business owners are feeling just a small bit more optimistic these days. The index moved up a couple of points in October. While still at levels indicative of a recession, the overall rating was at least heading in the positive direction.
But I believe that what is happening right now is just the eye of the hurricane. Yes, the sunny has poked out and the winds died down, but the storm that is the Great Recession is far from over. I fear that the back side of the eye wall of this storm will hit us, and hit us hard, some time in the next twelve months.
Part of my reasoning can be found within the details of the NFIB small business survey. Consumer spending and consumer sentiment remain weak, indicating that top line growth on Main Street will remain sluggish. The profit picture did improve, supported by increased reports of quarter-to-quarter positive sales trends. However, both sales Index components are still very negative historically. Remember that recent studies show that the improved profits are almost entirely due to cost cutting and bootstrapping. Small business owners have adapted to the new normal. And although the job loss among small business owners seems to have abated, there is little evidence that robust hiring is in our future any time soon.
A new study just released sees new barriers to higher potential entrepreneurial ventures. It seems that a form of indexed securities known as "exchange traded funds"--or ETFs--are distorting the markets to such an extent that they are threatening the growth of new companies by effectively curtailing their access to capital, according to a provocative new report issued by Harold Bradley and Robert Litan of the Kauffman Foundation. The authors warn that these securities "pose serious threats to market stability in the future."
Printing money only distorts markets and slows the recovery as capital is again misallocated as was the case in the housing bubble and the tech bubble before it. Remember that Chairman Bernanke told us from 2005 to 2007 that there was no housing bubble and that everything was fine.
In addition to the threat of new bubbles, there is the more immediate and visible threat of price inflation. The value of the dollar has fallen by 13% over the last 5 months. The September Producer Price Index showed that meat prices went up 5.2% and gas went up 6.1%. Meanwhile, interest rates are at historically low levels; for retirees and savers this has virtually eliminated safe interest income and forced people into more risky assets.
Finally, remember what my fellow bloggers said in the recent survey of us issued by Kauffman. Almost half predicted a double dip in the economy.
I am not sure exactly what the back side of the eye wall of the Great Recession will bring, but whatever it is will be tough on the entrepreneurial sector of our economy. Enjoy the sun while it shines. But remember -- this is only the eye of a very big storm.
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