Last week my teenage daughter and I visited the Magic Kingdom in Orlando. The Haunted Mansion? Really fun, but not very scary. Space Mountain? Pretty good, but compared to most roller coasters also not very scary. That dude in the creepy Donald Duck costume who kept hugging my daughter even after I finished taking the picture? OK, that was a little scary.
But not as scary as the economy. It's now going on five full years since we had a "good" economy. And, judging by a lot of the data, we've still got a long way to go. No matter what positive news we hear it's almost always offset by something unsettling. Small business owners know this. And we're scared. Which is why we're still not hiring and still not overly optimistic.
What are we so scared about? I can name 8 things right off the bat.
#1. Gross Domestic Product
Gross Domestic Product was recently revised upwards for the fourth quarter and everyone said that was good news. But can we all take a breather? That's like saying the wait for Stitch's Wild Ride is "only" 30 minutes. The attraction still sucks. For starters GDP was 3% at the end of 2011 and is projected to be about the same for 2012. Meanwhile China just revised their GDP downward to 7.5%. What a bunch of show-offs. A good growth rate would be about 5-6%. If my business were only growing at a 3% rate I wouldn't be so thrilled about it. Wait, five years since the recession and my business is still only growing at a 3% rate, which probably explains why I'm not so thrilled about the economy right now.
#2. Debt And Deficits
Currently our national debt stands near $15 trillion which is about equal to the size of our entire economy (GDP is also about $15 trillion) and the amount I spent on a half day admission to the Magic Kingdom. We haven't had a 1:1 ratio of debt to output since World War II. In Europe, Greece, Italy and Portugal have higher ratios and look what kind of terrible things are happening to them. This is why I avoided Epcot altogether. Who can watch such suffering? Even Fed Chairman Bernanke said we were heading towards a "massive fiscal cliff"...and he's not talking about Splash Mountain either.
To get deficits under control small business owners know that we're looking at a combination of future tax increases and/or significant cuts in spending. We're already looking at significant tax increases coming in 2013 as the effects of healthcare reform settle in. And more cuts in defense, construction or other government spending programs will take money away from those small businesses that rely on those industries. The alternative is to keep spending, which is even less palatable. This would seem to ultimately result in the same fate that our friends in Europe are struggling with: lack of credibility in their governments and a Disney park in France that sells alcohol for God's sake! Not to mention higher interest rates and a falling currency. Oh, and looting and rioting in the streets. Kind of like the scrum leaving Main Street after the fireworks show ended.
#3. Inflation and Interest
Most of us are respectful of Chairman Bernanke's success in staving off an economic meltdown when our banking system was all but collapsing. But just look at the Fed's balance sheet: they have $3 trillion of assets on reserves, a huge jump over the past few years. This means that banks have the ability to inject massive amounts of money into our system and they may do so if the economy heats up and credit worthy businesses start actually asking for financing, not to mention more parents willing to take their kids to Disney (for which they will need significant loans).And if demand does increase the Fed's strongest weapon to control this inflationary threat would be to raise interest rates. The St. Louis Fed warned last week of a potential inflation inferno. Will Disney be forced to charge even more for a hotdog than they do already? This is what's truly scaring us all.
#4. The Stock Market
Amazingly the stock market has almost doubled from its low of a few years ago. As the value goes up our confidence goes up. We feel wealthier. We are more open to spending, hiring, investing. But, like our discovery that all those "shops" on Main Street were really just facades hiding one giant gift shop selling nothing but Disney souvenirs, this fast rise is a little...unsettling. We've seen our wealth go way up and then come down in a matter of days. In fact, this happened as recently as last summer. We've become wary of these markets. We're concerned that all this money going into U.S. stocks is only because of the Fed's easy monetary policy and that it's a temporary safe haven from the current troubles in Europe. Aside from past unexplained drops, we no longer trust the bankers and executives who are running these publicly held companies any more than I trust that fifteen year old pimply kid "checking" the safety bar on my Space Mountain ride. When things seem too good to be true they often aren't. Or in the case of Disney, they cost an arm and a leg. The violent fluctuations in the markets over the past few years continue to scare us.
Gas prices continue to rise and small business owners are watching this trend fretfully. What's most upsetting to my clients is watching our elected leaders (as well as those leaders trying to be elected) tell us that they can actually do something about it. These guys must have taken a few too many trips on Peter Pan's ride. Drilling for offshore oil or building another pipeline to Canada may have an impact...in Tomorrowland. Higher energy costs affect small companies in just about every way. We find ourselves paying more for the cars used by ourselves and our key employees in our businesses and at home. Our utility bills are threatened to rise, although (thank God for North Dakota) the declining price of natural gas should hopefully keep this in check. But so many of the products that we buy for our businesses - materials for production, packaging supplies, equipment - are all reliant on petroleum based ingredients. Our employees, facing rising costs of living, may soon pressure us to increase their compensation. Can we pass these costs on to our customers? It's scary.
You know those happy little European kids singing in "It's A Small World"? Well, they don't look anything like the rioting mobs I'm watching on TV every night. But, like that stupid song that takes a full 24 hours to get out of your head, our friends in Europe won't go away as easy either. In fact, the Baltic Dry Index, that closely watched metric which measures the cost of freight through the Baltic Sea, fell to its lowest monthly average in the past twenty-five years. Here's what scarier: our super smart economists have no idea why. Hmm...could it perhaps be the banking and fiscal crisis that's affecting our major trading partners there? The fate of Europe affects small businesses here. The GDP of the European Community alone is about $18 trillion. That means less economic activity with us. And even if the pizza shop guy isn't selling pizzas to customers in France, he's probably selling pizzas to customers who work for companies that are selling something to France. Or in this case, selling a lot less of something to France. Which means that guy might be eating out a little less often, or at the very least cutting back on the pepperoni.
Question: Is anyone really paying $15 for a photo taken of them while on the Buzz Lightyear Space Ranger Spin ride? No way! Not with unemployment as high as it is. Today the payroll company ADP reported that the country added 216,000 more jobs to the economy. That's a good sign. Unfortunately half of them were hired to clean up the mess left by the 17 million annual visitors to the happiest place on earth. And it won't be enough to significantly impact our unemployment rate, which is expected to stay at about 8.3% when released Friday. We still have five million more unemployed people than we had back before the start of the recession. We would need to add 250,000 jobs each month for the next five years just to get back to pre-recession levels. That's about the same number of people who were on the monorail with my daughter and I on the way back to the Magic Kingdom parking lot. Besides the affect that this has on our family and friends who are out of work the business affect is that there are too many people not earning an income so that they can visit the mall and buy our stuff. Which means that the companies that buy my products aren't doing enough business to warrant buying more of my products.Which has a lot to do with the current low rate of GDP (and my company's revenue) growth.
#8. Overall Business Conditions
Small business owners know that overall business conditions aren't great. They're not as scary as those talking mounted moose heads on the wall that come alive before the Country Bear Jamboree. But things aren't good. Which is why Intuit reported this week that our hiring has slowed. Although most regions reported growth in their manufacturing activity last month, the growth was tepid and still significantly behind pre-recession levels. Orders for durable goods declined substantially. Personal income and spending numbers were lackluster.Sure, consumer confidence was up but is anyone really paying any attention to that number?A more telling statistic is the Restaurant Performance Index, compiled each month by those same guys who brought us Herman Cain. That's been dropping. I choose actual data on spending over surveys anytime. Want to really know what's going on? Check out the recent Aruoba Diebold Scotti Business Conditions Index, which is calculated by my hometown Philadelphia Fed. It's like the Tomorrowland Speedway ride....meh. And I haven't even mentioned housing, have I?
I kid, but despite the downsides, I advise small business owners who are seeking happiness to visit Disney for a day. Don't expect to be scared though....unless you start thinking hard about the economy.
Another version of this post appears on The Philly Post.