Is Recession the Monster, or is Inflation?





The Bureau of Economic Analysis says we had a little over half a percent growth for the first quarter of 2008. The U.S. economy is actually growing, not moving backward into negative territory. In other words, no recession.

Now I remember why I don’t pretend to be an economic expert and know whether we’re technically in a recession or not. Because even the people in the know about such things can’t agree.

Carter Wood at the Shop Floor blog is unambiguous, declaring We’re Not in a Recession. He points to the Bureau’s figures, noting: “Nothing to burst out in joyful shouts about, but the reality is: Two quarters of growth in a row do not amount to a recession.”

James Pethokoukis at U.S. News and World Report, and someone who often appears on CNBC as an economic commentator, echoes it in Dude, Where’s My Recession? James makes the pithy observation, “Before you declare a recession, as many economic pundits have, shouldn’t the economy, well, actually recess a bit — if only for a quarter?”

But wait, there’s more. And they don’t all agree.

Barry Ritholtz, another smart guy and someone who also appears on CNBC, looks at the same numbers and concludes Congratulations! It’s a Recession! Barry’s point seems to be that if you adjust numbers for inflation, the U.S. economy would have met the technical definition of recession.

Whether you agree with Barry’s adjustment of the recession numbers or not, he raises an important topic: inflation.

I’m seeing inflation becoming a bigger issue affecting small businesses than recession, perhaps. Inflation means that running your business costs more. What that does, of course, is put pressure on profits. Profit margins go down.

Cash flow becomes a much more immediate concern, too, because you’re paying out more. Small businesses with inflationary costs, such as for fuel, raw materials and food (3 areas hard hit by inflation) typically respond by raising their own prices as soon as they are able. But there’s always a lag time between experiencing increased costs and being able to pass those on. That squeezes cash. And in the end, having enough cash to stay in business often becomes the deciding factor during weak economic times.

What about you? Are you experiencing rising costs affecting how you run your business?

11 Comments ▼

Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

11 Reactions
  1. It’s not so bad for me, since my major expenses are paper and ink. All of my tech seems to be running well (knock on wood). I don’t travel a lot. Not bad all together.

    (BTW, I just wrote an “adjusted for inflation” joke after reading this post. You’re a cartoon inspiration! Thanks!)

  2. The numbers I saw said that if you factor out increases in inventory, then growth was negative. That seems to suggest that companies are still making stuff, but customers are not buying.

  3. William Bingham

    Ok, so embarrassingly small growth == stagnation + inflation

  4. Labeling a condition does not change it. It is what it is. Successful entrepreneurs take market conditions add value or perceived value and extract profit…and that is the label for successful Entrepreneur.

  5. NBER, the national bureau of economic research, is the official arbiter on recessions and they usually don’t make their call until well after a recession starts. While the common definition of a recession is two quarters in a row of negative GNP growth, NBER’s definition is:

    “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

    By their definition we can have positive GNP growth and still be in recession. Economists have even talked about “growth recessions” in the past. Given the robust economic growth of the last few years, .6 could easily be seen as a “significant decline in economic activity.”

    But given the economic shocks – the mortgage crisis, oil and food prices, etc. – I think it is pretty amazing how well the economy is holding up.

    I agree with Anita on inflation. 2.5 billion people joining the global middle class puts a lot of price pressure on commodities. I also agree with William – stagflation seems to be where we are headed.

  6. It is impressive that the economy is keeping up despite the hits we keep taking. With all the rising prices and the homes being repossessed, it’s only a matter of time before it starts affecting the economy.

    Andertoons, I’d love to see your cartoon. Give us a link when you have it up on your site.

  7. Wonderful article and insight Anita.

    Inflation puts exponentially greater pressure on businesses in a slumping economy than in a robust economy where businesses can raise prices commensurate with the increases they’re facing. So whether or not we are in a “recession”, raising prices in this economy is extremely difficult.

    Due to rising costs, we are personally facing the to-increase-or-not-increase question today. I’m leaning towards a very modest increase of under 5%, otherwise we will be playing catchup. And handled correctly, this could be an excellent PR opportunity.

  8. One thing I learnt when I first started in marketing was each year we would have 2 projects for our brands and the company. There were profit and productivity improvement. Goals would be set and then we would work to improve in these 2 areas.

    I have carried these project ideas over to other companies I worked for and now use for our small business. You can still be faced with rising costs but hopefully each year you have been building up your margins and profit to ease the pain of inflation and a slowing economy. It also means you are not just reliant on increasing your prices.

  9. Martin Lindeskog

    Have you looked at the Purchasing Managers’ Index? As an old purchaser, I think it is a great indication on the direction of the economy. Regarding inflation, check if the printing press is still spitting out fiat money… 😉

    http://www.answers.com/topic/purchasing-managers-index

  10. during the height of the economic recession, our online and offline business in the US have suffered some major drop in sales. now our sales are getting slowly back to normal.

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