An Unrecoverable Recovery?

The schizophrenic news reports of the economy are starting to make us “lay economists” realize what we all believed all along is actually fact: The mainstream media and government officials are actually quite clueless to what small business owners are really facing. Business owners are dealing with continued stagnation while decreasing cash flow and limited credit sources.

We’re usually able to decipher a real story through the “political lenses” now commonplace from most news outlets. This is nothing new. For example, you may recall the news leading up to the 2004 U.S. Presidential election (Bush/Kerry) with reports stating that the (increasing) employment numbers (unemployment was at 5.4%) in the jobs reports were being called “the worst economy since Herbert Hoover” (President during the Great Depression). The mainstream media delightfully ran with this story.

This is a recovery?

It’s evidently clear to most non-partisans that the 2004 hype was nothing compared to today. We ARE in the worst economy since the Hoover administration. In fact, some would say things are even worse. Yet now the media is reporting that we’re actually in a recovery!

Yet according to the Fed, we are experiencing growth, low inflation and improving job numbers. (Has anyone at the Fed filled their gas tank or bought a gallon of milk lately? Gas and food, the two largest expenses, aren’t even included in inflation statistics!)

Why do I use the term schizophrenic? Well, it’s been several years since I relied on mainstream media for my news. According to recent polls, I am not alone. However, I want to think that at least the Federal Reserve would be reliable. Unfortunately, lead by the bullish Ben Bernanke, the Fed has members with very different opinions on what is really happening in the largest economy in the world.

The Truth Leaking From the Fed

This week a sobering report by Richard Fisher, President of the Dallas Federal Reserve Bank, painted a bleak and concerning picture regarding the potentially imminent “insolvency of the United States of America.” This isn’t a doom and gloom report like we see from Faber and Roubini, (both well respected); this is a report by a Federal Reserve official!

Yes, there are certainly some sectors that are seeing some incremental level of improvement. For example, large corporations and banks, many of whom benefited from bailouts, are now showing profits. Dividends are up, shareholders are pleased, and the stock market reflects their jubilance.

Factory orders have been slowly increasing (although today’s report shows otherwise). Unemployment is arguably improving. This isn’t simply due to people getting jobs, but also related to peoples benefits expiring and people having given up looking. Even with these numbers decreasing, the U-6 True UE# still sits above 16%.

National debt, U.S. credit rating & interest rates

You recall the saying “every dead cat bounces”? The sheer amount of capital invested into the economy through TARP, the Stimulus, Quantitative Easing I and II had to have even a minimal effect, which is all it appears to be. Minimal.

In the meantime, the U.S. national debt has exploded to over $14 TRILLION (almost $5 Trillion in the last 2 years alone) which equals the entire U.S. economy. This is causing concern with the U.S. credit rating. If our credit rating is downgraded, interest rates are likely to skyrocket, causing an already slow economy to virtually come to a standstill.

Meanwhile, small business owners do not have the luxury of bailouts, taxpayer subsidies, or the windfalls of polical earmarking. They are only as strong as their balance sheet and cash flow statements, which are suffering as you can guess. That means businesses have a much harder time qualifying for business loans. To make matters worse, they can no longer rely on backup lines of credit.

We applaud efforts to initiate lending through the SBA, although the promised $30 billion has yet increase levels of lending. Yet since many businesses have watched their business credit ratings drop due to their sales challenges and slowdown in accounts receivable, they’re unlikely to qualify for these loans either.

From our perspective as small business consultants, we are seeing nothing less than catastrophic results on the street. Many business owners are trying to find a way — any way — to stay solvent and meet their obligations to creditors. The livelihood of their employees depend on it.

Unfortunately, as residential and commercial loans continue to default, banks are continuing to close their doors and remaining banks remain skittish and unable to lend.

Valcor’s network of consultants all seem to agree: THIS story is the true representation of what’s happening in our economy. After all, over 80% of jobs are relying on small business to stay solvent. At this time, with slow accounts receivable, lending all but non-existent, and  companies still sitting on trillions in cash yet scared to spend, small businesses are not feeling the benefits of the attempts at recovery.

Small business owners may have to continue hunkering down for some time.