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Private Businesses Are Improving, But a Big Unknown Lurks

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Like a glacier, once the U.S. economy starts moving in one direction, it tends to keep moving that way. It takes many events to move it in another direction, and this usually takes some time.

For months, we have reported that privately held companies have higher revenues, better margins and profits and more operating efficiency, based on the financial data we get daily from business owners. While polls that track consumer and businessperson optimism should be considered by analysts of the economy, the actual facts of economic data will hopefully trump how people "feel."

In general, over the long run, when revenues rise for private companies, these businesses tend to hire people. There are 27 million privately held companies, which historically account for up to 70 percent of GDP and 80 percent of new jobs. Conditions are improving, and there is little objective data to refute this fact.

The last jobs report seems to add to the positive view of current trends. GDP is growing; inflation remains controlled; and interest rates are still low, at least for now.

That's especially encouraging, considering the economy's glacier-like movement, which we've seen
throughout American history. For every four years or so of expansion, we've had about a year of a recessionary economy. You don't see one year up, one year down or two years up, two years down. It is important to remember that the economy does not act like the financial markets, which can and do vary significantly in the short run.

Of course, we don't know for sure what will happen in the current cycle. Business owners are real people, with families to feed, workers to pay. And they're clearly not moving very far with their planning so long as Washington isn't providing coherent and consistent information about future costs.

Even so, the glacier-like nature of the U.S. economy gives me confidence that things are getting better.

So what could melt this cheerier outlook for the U.S?

Some economists worry it could be the European debt crisis or the value of the U.S. dollar. Those are important issues, but they are not the largest drivers of economic activity. The largest drivers are always around whether revenues are increasing and whether people are making more money in their businesses. If they are, business owners will hire more, buy more and perpetuate the positive cycle.

Once again, there is a tendency for some to lump financial market analysis with "Main Street" analysis; yet the relationship of these two is dubious at best. Now, the complicating fact here is that it is true that all factors probably affect one another, which is why it is so important to look at the big picture and the very few factors that business people look at when hiring: Am I generating more revenue and more profits? If so, is this trend in my business likely to continue?

However, for sport, I will rebut my own analysis because I do believe there is one economic risk that could make previous economic cycles less reliant as a predictive basis for seeing into the future. In my view, the single issue of most concern is the national debt.

As any entity borrows more money, the risk of that entity goes up, and the cost of borrowing will eventually go up. Our national debt continues to grow in spite of the ad hoc attention it gets in Washington. Politicians tend to pay attention to this problem for a while and then other issues arise that take the focus away from it. At some point, we have to reconcile that, if you don't have the money, you shouldn't spend it, because you can't borrow endlessly. This seems so simple, yet Washington is very good at taking the simple and making it complex and taking the complex and creating the endless loop.

There seems little doubt that our lenders will and should look at us differently because of our debt and rightfully view us as a higher risk, which will have the effect of increasing interest rates. (Does it really matter how S&P rates us? Just look at the facts.) This will cascade to higher mortgage rates, higher car loan rates, and higher commercial loan rates, among others. Because interest rates are typically among the top costs for private companies, any increase would have a very negative and quick effect on the recovery generally and on hiring specifically. I'm really concerned about this, as interest rate cost is a leveraged expense that has a material effect on the profits of most businesses and on the savings of almost all people.

Clearly, since the 1960s, neither political party has had spending discipline, as the national debt has grown almost uninterrupted for 50 years. I don't know how we'll get there. Will it take a third-party system? Term limits? We don't want a crisis to necessitate change as increases in interest rates will be very difficult to reverse if there is an impression that we cannot manage our finances.

A major obstacle to Washington getting that discipline lies within each of us. We're all for cutting government spending until it comes to something that would affect our own budgets in our own districts or from our own pockets. A nonprofit doesn't want its funding cut. Someone living near a major military base doesn't want to feel the effects of cuts there. A person working for a government agency does not want a cut in that agency's budget. Nobody wants cuts in Medicare, etc. A private company with government contracts...

Until we get to the point as a nation, as individuals, where we say, "Yes, you can cut my personal budget," nothing's going to happen. It is easy to blame politicians but it is important to remember that they are a rough proxy for us as citizens (emphasizing "rough").

Are the best years of the United States behind us? I don't think so, but the national debt will remain the biggest threat to this glacier of an economy.

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