10 Economic Indicators That Mislead Small Businesses

04/18/2012 02:35 pm ET | Updated Jun 18, 2012
  • Gene Marks Small business management columnist, author, speaker, and business owner

When I was in school I would often get bored while sitting in class. So I would find someone else nearby and try to distract him. I figured that if I wasn't in the mood to get an education, why not deprive someone else of theirs as well? This week, I'm feeling a little blue. I played softball Sunday and made more than my usual number of errors in the field. So I'm figuring that if I'm feeling a little blue, I may as well make you feel blue too. OK?

So let's talk about the economy. Small business owners always hear plenty of economic data every week. And recently the news reports have been generally positive. Increased retail sales. Decreasing unemployment. A higher stock market.

But it's all relative. Let's face it, I'm not in my 20s any more. I'm still not a terrible player but compared to what... that 60 year old guy on my team playing third base? The same goes for the economy. Sure, we've been seeing better numbers lately. But compared to what? The recession? A lot of the economic news small business owners are hearing is more than a little misleading. Let me give just a few examples, using data and charts from the very excellent Calculated Risk blog written by Bill McBride.

1) Gross Domestic Product

Gross Domestic Product, or GDP, is a measure of a country's industrial output. During the recession, the U.S. had a negative GDP. So people are high-fiving each other when the Fed is predicting growth of 2.0-2.3% this year, which is up from the 1.7% growth recorded in 2011. This is not something to cheer about. China's economic growth has slipped to (gasp!) only 8%! India is growing at a 7% rate. Even Sweden, Sweden for God's sake, is predicted to grow at more than 3% next year. How bad are we doing? If our economy's projected growth rate doubles to 4% it would still be 30% behind its growth rate from before the recession and half of what it was back in the '80s.

2) Housing Starts and #3 Home Sales

Did you know that housing starts are about to cap their best quarter since 2008? Whoopee! But hold on a sec... let's look a little closer. Yes, the real estate and construction industries are slowly starting to recover. But for small businesses in those places you've got a long, long way to go. For example, that fantastic housing starts number? It's still at one-third the level of housing starts back in the mid-2000's. Yes, you read right: one-third. New home sales are hovering around 300,000 per month compared to 1.4 million (yes million) back in the mid 2000's. And today's existing home sales are about 35% less than they were back at the same time.

4) Unemployment Rate and 5) Weekly Unemployment Claims

People were slightly concerned the other week when it was announced that the unemployment rate only fell to 8.2%. We should be very concerned. Ask any economist and they'll tell you that a 'natural' rate of unemployment (where the supply of labor is near where the demand of labor is) should be about 6%. That's because there will always be a percentage of people unemployed -- seasonal employees, etc. Today, our unemployment rate is much higher than it should be. We still have more than five million people less employed than before the recession started. In early April everyone was excited because weekly unemployment claims were at 375,000... a four year low. That's really nothing to cheer. Before the recession, weekly unemployment claims were consistently below 300,000. Last month the economy added 120,000 net new jobs. At that rate, it would take 42 months to get back to the level we were at before the recession. That's three-and-a-half years!

6) Vehicle Sales

Annualized U.S. light vehicle sales came in near 14 million for March. The auto industry is definitely back. Selling more cars means more jobs and more business for the thousands of small businesses that supply the industry. Sales of new vehicles have been increasing significantly. But we still have a ways to go. Between 2006 and 2009 light annualized vehicle sales were running between 16 and 18 million every month.That means we're still more than 20% behind that pace.

7) Consumer sentiment

A report this week said "U.S. retail spending increased at a solid pace in March, an indication that consumer confidence is growing.." No it's not. Yes, retail sales did rise, and have completely recovered from the recession. But consumer confidence is a sketchy number at best. Most of the major media likes to report when the Conference Board releases this number on the last Tuesday of every month. It's based on a poll of about 5,000 consumers drawn from our population of... oh... 300 million. But whatever, I was never really good at statistics anyway. I prefer the University of Michigan's Consumer Sentiment Index. And this index is not good at all. Consumer confidence is certainly higher than it was back in 2007. But just to give some perspective, the University of Michigan's Consumer Sentiment Index has recently wavered around 70 as compared to its high of 110 back before the recession. That means that consumers are feeling almost 40% less confident in the economy than they were before the bottom fell out. Normal levels seem to be above 90. Consumer Confidence is in the toilet and has a long, long way to go before it recovers to normal levels.

8) NFIB Small Business Optimism Index

Of all the small business indicators that come out every month (and there are many), the Small Business Optimism Index published monthly by the National Federation of Independent Businesses gets (and deserves) the most media attention. Last month optimism fell. But take a look at this chart and you'll realize that's not even half the story. Optimism levels are certainly above what they were during the recession but are still way below what there were before the recession. Basically, we're about 85% as confident about the economy as we were back in 2004. But more interestingly, our confidence in the economy is still significantly behind our confidence levels during the last two recessions. Even then our optimism never lacked. Today, it does.

9) The Stock Market

The Dow has made an amazing recovery. Consider that it was at a high of 14,164 on October 9, 2007 and fell to a low of 6,547 on March 9, 2009, a 57% drop in under two years. Zowie. And now it's recovered back to about 13,000. But let's keep a few things in perspective. This average, so closely watched, is made up of just 30 industrial companies. Also, with interest rates at rock bottom, many economists credit the stock market's rise not to an improving economy but to the Fed's controversial rounds of quantitative easing, which has put easier money in the hands of banks and investors who in turn plow it back into the markets. I've got three kids heading to college so my 529 plans and I are not complaining. But honestly, we're still not back at the levels we were from FIVE years ago. Many of our investments remain in the red and we find ourselves hoping for factors beyond our control that will cause the markets to move into an area where we'll see an actual return on our initial outlays. None of this makes a small business owner feel warm and cozy.

10) Philly and New York Fed Manufacturing Surveys

This week these latest surveys are released. We've already learned that while manufacturing in the New York region continues to grow, the growth is slowing. Expectations in Philadelphia aren't expected to be much different. Check out the dotted green line on this graph which combines both regions. It's moving back up, thank God, and like so many other indicators is higher than recession levels. But the average is about 55 compared to the high 60s in 2003-2004. And what's really concerning is that manufacturing levels in 2011 were nearing those 2003-2004 amounts before dropping off again. Unfortunately we can't seem to sustain the pace.

Being a small business owner I'm an eternal optimist. And there are some good things going on in the economy today: low interest rates, low inflation, an explosion of energy-related opportunities just to mention a few. And I'm grateful that the economy is recovering and not stuck back at recession levels. But small business owners need to pay close attention when the media says that something "increased" or "got better." It's no different than when I compare my hitting to that nearsighted guy who always plays catcher for my softball team. Always say to yourself: "Better? Compared to what?"

Another version of this post appears on The Philly Post.