You’d have to be living on another planet not to have heard rumblings about a recession in the United States or world markets. The financial news makes one gloomy pronouncement after another.
Are We in a Recession?
The funny thing about recessions is that you may not know you’re in one until it’s well underway. Or until it’s over. A recent MarketWatch article suggests it’s possible that the U.S. economy is already in a recession. However, in the end the article concludes “it’s inconclusive.” In other words, they don’t know.
Other articles hint strongly that we are already in a recession.
But again, not everyone agrees.
So, why is it so difficult to tell when a recession is occurring? For one thing, determining a recession is more art than science. Most economists look at a number of different indicators to determine whether recession exists. They don’t always agree on all those indicators. And measuring some of those indicators is not necessarily an exact science, either. Sometimes it takes months for all the data to come in.
What’s more, some visible indicators behave counter-intuitively. Take the stock market, which gets covered ad nauseum on the news. You can’t equate Wall Street performance precisely with the economy’s performance. Stock prices tend to fall before a recession begins. Stocks actually start going up again as the economy begins to climb out of recession. And then again, stocks rise and fall even when we don’t have a recession.
So, you may be wondering what my opinion is. Do I think we’re in a recession? Well, I’m not sure my opinion matters much.
I’m not a trained economist. I can only go by the reports I read. However, I do know that economies run in cycles. You can’t have robust economic growth forever. At some point things slow down for a while. So, recessions are inevitable at some point. And recession is looking more and more likely with each passing day.
But if recession comes I’m not worried. I’ll tell you why.
What History Tells Us
Lou Dobbs (commentator on CNN) spoke last evening about the U.S. economy on the brink of “disaster.” Hmmm. I’d hardly link this economy to a word like disaster. I think he overstates the state of the economy in an irresponsible way. He whips up fear. He withholds the perspective of history.
Take for instance, the subprime mortgage mess that you hear so much about. History tells us we’ve encountered worse — and just in my lifetime. When I first started out in business I worked in a bank. At one point I managed a nationwide foreclosure portfolio. Some of those foreclosures were the vestiges of home loans made during the early ’80s when average citizens like you and I had 12%, 13%, even 14% interest rates. I’ve seen housing booms and busts (and booms once again) come and go in markets like Texas and Southern California.
The other night I heard a local news story about a vacant house in Cleveland in foreclosure that had been stripped of everything of value, from pipes to carpeting to siding. The report implied some neighborhood catastrophe of a magnitude the world has never seen before.
Trust me, I’ve seen worse — entire apartment buildings that were totally stripped in the space of 30 days. Not pleasant, but a fact of life. And that was Houston, not Cleveland — in an area that’s since rebounded to be a beautiful upscale neighborhood.
I feel for anyone facing foreclosure and don’t wish to minimize the impact. But let’s put the current housing and mortgage situation in perspective. Just like we need to put the economy into perspective. These things run in cycles. And cycles come and go.
Don’t Let Recession Fears Spook You
Rather than obsessing about gloomy financial news, focus on how you conduct your business. What matters more for your business is your state of mind. I’m talking about the attitude between your two ears. If you let yourself get spooked and defeated, your business is done for — even in the best economy.
What also counts is your ability to make the right decisions for your business in the midst of the macro-economic conditions going on around you.
Joel Libava wrote here on Small Business Trends that even during recessions people and businesses spend. Life goes on.
Not long ago Tim Berry echoed similar thoughts about how the way you run your business matters more than macro-economic trends.
UPDATE: In a similar vein, Robert Mann sent me a link to his article pointing out why we’re NOT likely to have another crash of 1929 — well worth a read.
I would add this: don’t obsess on the economy, but don’t ignore the bigger economic picture, either. For instance, if you were considering making a huge purchase or hiring lots of new employees to expand, you might want to run the numbers again. Do what it takes to make sure you’re not overextending the business at a time when the economy is soft.
But otherwise, let it be business as usual. Whatever you do, don’t let the economy become an excuse for not trying to make your business successful. No cop outs.
This thread will probably start a healthy discussion on the role of economics in our lives. I will continue to do business as usual, but the problem with today’s situation is that the overall economy is changing more often nowadays due to the regulations and interventions. It will have effect on your your life and you better get information on how you could survive and strive in a downturn. As long as we let market be (semi)free as it is now, it will recover eventually. “Journalistic” speaking, I am a pessimist regarding the situation. People don’t understand the situation and they don’t see the whole (big) picture. It doesn’t get better with the so called experts on TV get totally hysterical and whip up the level of anxiousness.
I want to state for the record that I am not a trained economist, although I have studied economics in school (at an undergraduate level, Bachelor of Science in Business Administration). I had interesting discussions with my teacher in micro- and macro economics. I asked him why we didn’t studied the Austrian School of Economics. In some way it was a time constraint that you can’t study all of the different schools of thought, but a main problem with the studies of economics is that today’s member of academia take it for granted that the state should take an active role in the field of economics and that it is OK to intervene in different ways. The result: the “boom & bust” cycle is rolling on… Most of the students are indoctrinated on one level that everything starts with consumption and that Keynes has the answers to everything. I have a long experience from the manufacturing industry, working as a purchaser and cost analyst, so I take a different approach and start with the manufacturer, i.e. the creator of goods. This is the starting point in the supply chain. If you want to get some kind of clue if we are entering a downturn of the economy, check the Purchaser Management Index. I have heard that Alan Greenspan looked at these figures as an important measurement and guide for his policies. Here is an excerpt from the Institute for Supply Management :
“Growth of output eased in both the world manufacturing and service sectors in December. After improving slightly in November, the rate of expansion in manufacturing production slipped back to reach a four-and-a-half year low. This mainly reflected a worsening of conditions in the US, where output contracted for the second time in three months and at the fastest rate since March 2003. The rate of expansion in manufacturing production held broadly steady in the Eurozone, despite noticeable disparities in the performances of the major euro area economies, and strengthened in the Asia-Pacific region.” (JPMorgan Global PMI: Report on Manufacturing and Services – January 4, 2008.)
If I have to be wear a label in terms of economics, I would say that I am an “monetarist” who are in favor of going back to an objective money measurement, e.g., the gold standard. Coming from the manufacturing industry I would call myself a “supply-sider” with the additional remark that I am radical for capitalism (based on a moral foundation). I see economics as one part of a whole philosophical system of integrated ideas. I am a student of Ayn Rand’s philosophy named Objectivism.
In my post, Bearish US Economy, I have included a quote from The Economist and some interesting links for additional reading, for example a tip on a book with the title, “Markets Don’t Fail.”
Martin Lindeskog – American in Spirit.
P.S. National Bureau of Economic Research could be one resource on defining recession.
Here is the link to quote from the Institute for Supply Management:
I’m from Europe, but i’m doing business with US based companies. From what i seen lately, the US media is obsessed with fear, and probably this gets into the minds of the citizens. (some say fear is the oldest tool of power:)
If the US continues to fight wars it can’t afford, and everyone is spending more than they make, things will be bad, and it will affect the most parts of the planet.
It’s impossible to grow forever and it’s not natural.
Capitalism is the best economic system that humanity could invent, but it’s not perfect. We have a limited number of resources that will end at some point or another (the moment is not important, however the ideea is very important). We have to focus on sustainable growth otherwise all the great knowledge humanity has gained will go to waste. We have to get rid of this Louis the XVth “After Me the Flood” attitude, that i see everywhere lately.
Dawn Rivers Baker
Here’s an intriguing piece of information to add to the mix: in some ways, very small businesses behave in counter-cyclical ways.
I’m not an economist, either, but I suspect that is because microbusinesses pretty much can continue with business as usual while the big boys writhe in the aftermath of falling sales and lower corporate profits. Micros tend to run pretty lean outfits that are better equipped to weather the tough times because, to a degree, times are always tough. And, with their larger competitors focused on balance sheet damage control, the competitive landscape is improved for microbusinesses during recessions.
At least, that’s my theory.
Whatever the cause, I’d just point out that a recently established dataset from the Bureau of Labor Statistics established that the smallest employers were able to continue to create jobs almost all the way through the last recession. Firms with between 5 and 9 employees were creating jobs through eight of the twelve calendar quarter of the last downturn in 2001-2003. Firms with between 1 and 4 employees were still creating jobs for TEN of twelve quarters.
In fact, the data showed that those microbusiness employers were able to significantly soften the impact of the downturn on the labor market, which helped to shorten then length of the recession and make it milder than it otherwise would have been.
Will that happen again? Nobody knows; this was the first time we’ve had an opportunity to observe the phenomenon because the data set didn’t exist before. There were some peculiarities about the last recession that won’t exist during this one, such as relatively easy credit and rising home values, which gave people money to spend that they may not have this time around.
But I would be inclined, like Anita, to say that the current situation does not call for panic. Of course, trying to operate a business with your head buried in the sand is not recommended but I think it pays for small business owners to remember that, generally speaking, pundits who squawk about the impacts of an economic downturn on businesses are usually not talking about SMALL businesses.
Anita, I started my first business in 1989 and didn’t know that everyone else was freaked out about being in a recession. Since then, I’ve been through various business cycles as well as industry ups and downs. I’ve learned that the best way to make serious progress forward is to market heavily in a downturn – sounds counter-intuitive but it’s a way to get noticed and to position your company as a solid player.
Now, I’m starting another venture and I have no fears about the economy affecting its success. I know that I’ll need to work hard, satisfy customers and make sure that my offerings are right for my target market. So far, it’s been great.
In addition, I bought my first house in 1980 with an interest rate of 16.75%. Back then, everyone said we’d never see interest rates in the single digits again. Not so. It’s all about business cycles and being able to change with each phase.
You can talk yourself into a recession too !
I tend to agree with Dawn. Microbusinesses don’t follow the same trends as other US business, and certainly not big business.
My small firm (5 employees) will probably not feel any form of recession throughout the whole “incident”. If the incident even happens at all…
And my clients and I will probably never discuss how to avoid the recession. During my consulting with them, we will address the same topics as always… cost reduction strategies, capacity usage of time, earning power, market value of their pricing, timing on when to start entrepreneurial endeavors (or not), streamlining the Systems in their businesses, new diversified lines of revenue, etc.
Recesion won’t come up, because their issues seem to be “counter-cyclical”. Some may actually find this a time to “thrive”.
I’m not worried, and neither are my many nanobusiness clients.
Thanks, Jason M. Blumer, CPA
Martin, go capitalism!
Jan, it’s always interesting to hear perspectives from outside the U.S. I think a lot of that fear you mention is being driven by certain media outlets, which shape how we feel, whether we realize it or not. You can find positive outlooks, such as Larry Kudlow, who talks about the last 5 years of economic growth as “the greatest story never told,” but they tend to be outweighed by the negative voices.
Anita: Yeah, Laissez-faire! “Capitalism is an Unknown Ideal” (book title by Ayn Rand) in many ways. I agree that Larry Kudlow is one person with a positive attitude (influenced by Reaganomics), but I have a memory that he had a bit hard to reply on some hard hitting questions during a meeting with traders in New York in the end of 1990’s. 😉
I have added a funny video clip from the Daily Show on “Very Mad Money” with Jon Stewart. A great defender of capitalism, Jonathan “CapitalistPig” Hoenig is included in the clip.
Dawn, that is excellent information about microbusinesses operating outside of (or however you want to phrase it) the effects of recession.
What you say makes sense to me. And I agree that the pundits are generally not talking about SMALL businesses. I am a bit of junkie for financial news such as CNBC, but most of the problems they discuss focus on the woes of big banks, financial markets, Wall Street traders and the like.
Much of it has little to do with Main Street. Obviously there may be some impact on small businesses in selected industries, such as real estate due to the housing slump, but even that varies by geography. Not every part of the country saw the huge run up in housing prices, so they didn’t experience any bubble to collapse.
We are a small business as well and have also weathered some of the financial storms like the dot.com bust back when we were just starting out back in the 1990’s, then the aftermath of 911. Things worked out just fine back then and I’m optimistic today as well. Sharing optimism seems to help. I agree with the others who are saying Small business is somewhat different – not completely recession proof, but a little better insulated.
I wonder if any of the above comments still apply. History is in the making. Many companies are already gone and the big three auto makers are next on the chopping block. This is just 9 to 10 months after this blog started. So do we know if we are in a recession yet?
Things have definitely slowed for a lot of companies. I’m not sure if it’s more related to the psyche of business owners being damaged by all the politics and threats of more taxes, etc., the true reality of the general economic situation, or a combination of those and other reasons. I know I’m hearing of more and more even long term small businsesses talking about downsizing, closing up or changing their game significantly. We sell to a wide range of customers so it helps having that diversity. But ten months of the media bashing hasn’t helped. People are tightening up. Older people seem more worried than ever about their retirement funds and seem to holding on to their cash. I think it’s fear overall that’s hurting the most. Maybe all that talk of “change” has everyone second guessing their future too much! I know it’s made me second guess more than in years past.
On the up side, it always seems worse when you focus on the negative. If you aren’t in trouble and have some new ideas, it seems like a great time to unleash them and see if you can make your mark! It may be a bit less crowded than last year or the year before so you have a good chance of being noticed.