One of the who-knows-how-many predictions about the new health reform legislation is that it could create a spurt in entrepreneurship.  The reasoning goes that there may be someone who working for a company that provides health benefits, who would like to start a new business, but may be loath to leave if they can’t get health insurance.  But because of some of the provisions in the new law, some of this risk is going to start to go away.

How many of these opportunities will happen because of access to health insurance can never be predicted.  But there is small business creation potential here and I don’t think it should be overlooked.  It may be slow getting started, but by 2014 when all the benefits start to kick in to make affordable health insurance available to more people, the economy should be growing making more capital available for startups.  So two of the major barriers – health insurance and financing may have been dramatically lowered.

Here is where step one – content analysis – comes in.   Whatever industry or business that you are in or want to be in, because of the power of the internet you can learn on a day-by-day basis what is happening in that industry.  As you begin to do that on a regular basis, you begin to form a body of knowledge that could be very valuable in determining how to successfully position your new business.  You are analyzing content.  A current example similar to World War II content analysis is beginning to happen with North Korea.  Little by little, cell phones are being smuggled into North Korea.  As tightly controlled as North Korea is in terms of everything, including the internet and cell phones, information is beginning to trickle outAs more and more information trickles out, a clearer picture of what is happening inside the country will begin to be pieced together.  It will be the absolute barest of information, but that’s how it started in World War II content analysis, with some incredible results.

Now to the creative destruction.  This is generally defined as innovation by entrepreneurs that destroys an industry that has not kept up with innovation.  Think Polaroid cameras.  So somewhere out there, there is an opportunity for someone to start a new business that as a result of being able to get health insurance could grow into a whole new industry and create hundreds or thousands of new jobs.  Jobs will be lost in the dying industry.  But more jobs may be created in the new industry that will bring great benefits to the economy.  Think Google.

As the economy begins to slowly emerge from the recession, there are increasing indications that we may be looking at the early stages of a jobless recovery.  This happens in the economy when gross domestic product (GDP) begins to increase but job growth does not keep up with it.  Automobile manufacturers are a classic example.  Production is beginning to increase as sales begin to pick up.  But the industry has shrunk dramatically.  Thousands who have been laid off from high-paying manufacturing jobs no longer have an industry to go back to now.  So from the current existing industry, we see GDP starting to increase, but nowhere near enough necessary to bring back many jobs.  Tied at the hip of the auto industry are tool and die makers.  Machines are used to put cars together – the bodies, frames, parts, everything.  Tools have to be made for someone to make those components to sell to the industry.  Many customers are now gone, so the tool and die industry is suffering – another industry that will not get back to previous employment levels.

In many applications, productivity and robotics are replacing people.  More products can be produced by less people – GDP increases, jobs don’t.  Simplified design which makes a product easier to produce and sell means higher GDP with no commensurate increase in workers.  Also looking at the current recession, because so many companies have made fairly severe job cuts, it appears more and more likely that many of these employers will start to increase hours of remaining employees before beginning to hire new ones.  And of course, there is the internet.  Think about all the things that can be done on the internet now that used to require an interaction with a person. 

Let’s take a clicks-and-bricks (as opposed to clicks-to-bricks) retail example.  Take books.  Everyone knows the huge success Amazon has had as a seller of books.  But a lot of people still love to go to a bookstore and browse.  Barnes & Noble has both bases covered.  Where there is sufficient population and the right demographic, they will put a bookstore.  But where there are not enough people, they have their website.  Clicks and bricks – more sales but without the commensurate increase in the number of employees that it would take if the sales were all being made through retail outlets.

At this time, the demand for workers in the economy is showing very little sign of major improvement.  Federal Reserve Chairman Ben Bernanke said Wednesday at a hearing “… the unemployment situation is very weak….”  Put a little less delicately, the economy stinks and isn’t going to be improving faster any time soon.  This means that for a lot of small businesses, their financial performance will probably deteriorate.  When a business, especially a small business, goes looking for financing, banks are going to focus probably even more strongly than in the past on the most recent year’s financial statements.  That does not bode well for future access to credit because even when banks begin to increase their lending, many small business owners will not be able to get it because their numbers have declined.  So we may find ourselves facing one of those “huh?” moments when there is money available but less qualified borrowers to borrow it.

The press continues to talk about the economy beginning to recover.  Looking at the stock market, investors certainly seem to think so.  And realistically, it is.  It’s not much to write home about, but there are signs of improvement across almost all economic sectors.  OK, but,

  • At the end of 2008 there were 252 banks on the FDIC’s Problem Bank List.  Now there are 702.  37 banks have already failed this year and predictions are that the number will be substantially higher than last year.  The large majority of these are smaller community banks serving local businesses.
  • The NAHB Builder Confidence Index declined in March.
  • Industrial production and capacity utilization increased slightly – 0.1% and 0.2% respectively – not likely to lead to any significant job creation in the manufacturing sector any time soon.
  • First American CoreLogic (the Fed’s favorite measure of house prices) showed that home prices declined 1.9% in January, the fifth straight monthly decline.  Housing is one of the two most critical components of an economic recovery, the other being jobs.  Housing is probably going nowhere this year, and job growth isn’t going to be much better. 
  • The underemployment rate, as classified by Gallup as unemployed or working part-time but wanting full-time work, increased to 20% on March 15.  That kind of number makes the likelihood of a jobless recovery seem a little stronger.

All this means that the overall outlook for small business is going to be a struggle for at least the next two years.  Home mortgages are going to continue to default this year pushing a housing recovery farther into the future.  Commercial real estate loan defaults are rising and are probably not going to peak until next year.  This is going to put more banks at risk because of loans in their portfolios going bad and negatively affecting their capital, and banks at risk don’t tend to make a lot of loans, especially to small businesses.  And, as pointed out in the recent survey by the National Federation of Independent Business (NFIB), lack of sales is generally the biggest problem facing many small businesses.  People without jobs don’t spend as much, nor do people trying to hang on to their houses for dear life.  So that lack of sales is going to persist, profits may be declining, and this makes for a less desirable borrower for a bank. 

So there we have a lethal combination – weak small businesses and weak banks – not a prescription for increasing loans.  Survival is going to be the byword for many small businesses over the next two years.

As the week begins, the overall economy continues to look favorable.  On Monday the Federal Reserve issued its February report on industrial production which showed a slight increase.  The manufacturing component fell 0.2 percent, but that was partially weather-related and to a slight decline in auto production.  But overall the news was good, with the index increasing for the eighth straight month, more evidence that we are working our way out of the recession.  Because capacity utilization is still relatively low by historic standards, the chances for increased inflation and the accompanying interest rate increases to combat it remain muted.  What this means is that increased factory output will be causing increasing hiring without greatly increasing the risk of inflation any time soon.

The not-so-good news is that the NAHB Builder Confidence Index declined in March.  Some of it was probably weather-related, but overall the near to mid-term future does not look too positive for the residential construction industry, and that is one industry in particular that is usually in the forefront of economic recoveries.  Housing starts also dropped substantially although starts in the eastern U.S. were definitely affected by a little snow that showed up last month.  The lack of optimism comes down to the usual one – unemployment, but also the fact that the government is beginning to exit the housing market with the support that it has provided through buying mortgages.  The other 800-pound gorilla is the tremendous overhang of distressed and soon-to-be foreclosed on housing units that continue to press down on any increase in housing prices or building activity.  A related effect to all this is that the large overhang of houses is holding down appraisals everywhere adding an additional layer of difficulty in selling homes even to qualified buyers with good credit and adequate down payment.

On a totally different note, and a surprise to me, is that a big chunk of the deleveraging now going on in the economy is a result of people defaulting on their mortgages and credit card debts.  I and many others have written about the positive effects of consumers paying down their heavy debt loads.  But people who are walking away from their mortgages and credit card debts are freeing up cash which will help the economy grow, while at the same time causing problems for more and more banks and credit card companies with bad loans on their balance sheets which means, especially in the case of banks, less money to lend.

For any small business owner who is forced to get out from under debt by defaulting, and it makes no difference whether it is business or personal debt, the long-term effects can be disastrous – a bad credit report.  So a business may start to grow again and eventually may need funds to support that growth.  But with a bad credit report loans from a bank are not going to be available for an extended period of time.  So the choice will either be go to a more expensive non-bank lender or simply forgo the credit and not be able to grow.

On PBS’s “Nightly Business Report” on Tuesday, March 10, there was a segment on a small restaurant owner in King George, Virginia.  It was a successful local restaurant that had survived the recession – not without difficulty.  The owner had needed a loan for a new freezer but could not get it from his bank.  He got financing from another source, but what struck me were his comments about how the recession had caused some of the tenants in this small strip shopping center to close, and two more were about to close.  He said that soon he and a few others might be the only tenants left in the center.

That is a microcosm of what is happening in the banking industry today.  A shopping center with not enough rent for the owner to make his mortgage payments; owner defaults; bank loses that income from the loan and is now stuck with a loan that they have to write off against their capital which means less money to make other small business loans; bank gets a little closer to insolvency.  The FDIC keeps a list of banks that are in danger, and the current list is at 702.  There is a website ( that tracks this list which many people keep an eye on, especially since it lists the banks and locations.  So if you are a small business owner that deals with a small bank, it might be worth taking a look to see if your bank is on it.

Why this could be important was brought out in a February report issued by the Congressional Oversight Panel titled “Commercial Real Estate Losses and the Risk to Financial Stability.”  Here is a direct quote from the report: “It is difficult to predict the number of foreclosures to come or who will be most immediately affected.  In the worst case scenario, hundreds more mid-sized and community banks could face insolvency.  Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend the already painful recession.”

Financial institutions with less than $1 billion in assets account for less than 12% of banking assets but make up almost a third of all loans of $1 million or less to businesses.  So if a smaller community bank has a fairly high percentage of commercial real estate loans in comparison to larger banks, they may be more hesitant to make small business loans because of the risk that one or two defaults on commercial real estate loans could seriously impair their capital.  The wave of commercial real estate loan defaults around the country has not crested and probably won’t until 2011 and 2012.  A great deal depends on the economy and the creation of jobs.  It is not a pleasant thought.

A report was issued on February 18, 2010 by Dennis Jacobe, chief economist of Gallup (formerly known as the Gallup Organization) titled “Consumers’ Spending This January Was Just Like the Last.”  Here is what he said in his next-to-last paragraph: ” However, Gallup’s spending data also suggest another important consideration: the spending new normal.  After the financial crisis and recession of the past couple of years, many upper-income and older Americans, as well as women in general, may no longer feel as secure or comfortable in spending as they have in the past. They seem to want to reduce their debt and strengthen their household balance sheets.”  Since Gallup has its pulse on the American people probably as well or better than any other organization, this statement should get a hard look by any small business owner who sells anything that their customer might just be able to do without.

Take, for example, an auto body shop.  That little dent that has been niggling at you for a while really isn’t hurting anything, and the couple of hundred dollars that it would take to fix it could probably be better spent paying down your credit card.  Or that dirt on your car that you would like to take to the car wash.  One more week of dirty won’t kill you.  How many thousands of decisions like that are out there every day?  How many of those decisions might affect your small business?  What are you going to do to give your product or service more value?  I predict that this new normal in spending is going to go on for the next several years or however long it takes the economy to be back to creating robust job growth, and that is nowhere on the near (two year) horizon.  And like siblings, the unemployment rate continues to pose a major obstacle to a housing recovery.

The Mortgage Bankers Association performs a quarterly delinquency survey covering approximately 44.7 million units, and roughly 80% of that universe has a mortgage – approximately 55.9 million.  Of that number, 4.3% were in some stage of default.  4.3%  is approximately 2.4 million units that will more than likely come back into the market.  Almost 4% are 90+ days delinquent, and most of those will go into foreclosure.  So there are over 4 million houses in a “shadow inventory” that is eventually going to come back into the market, many at lower prices.  So let’s go back to the new normal in spending.  Suppose an individual still has a job, and remember more than 9 out of 10 do.  But they can see what is going on around them across the country, so maybe they squirrel away some extra money to make sure they can continue to make their mortgage payments and not lose their homes.

 So can you keep selling what you are selling and survive for two or three more years?  Can you be better?  Can you make your “product” more valuable?  If you can’t, maybe you ought to think seriously about a Plan B.

We are seeing more signs that the economic ship of state is beginning to slowly move forward.  Among other things, GM and Ford sales are up; sales at many of the major retailers are up; consumer spending has shown a few signs of life.  But there is one great big anchor holding the ship back and that is unemployment.  The “official” number for the unemployment rate for 2009 was 9.3%.  The February employment numbers just came out, and they were a little better than most had expected with job losses at 36,000 and the unemployment rate holding at 9.7%.  Well, it’s nice that it was better than most expected, but we still lost jobs.  So while things are turning in the right direction, the hole we are in just got a little deeper that we will have to get out of.

But what you don’t see talked about very much in the national media outlets is the underemployment numbers which come from the Bureau of Labor Statistics (BLS) “Alternative Measures of Labor Utilization for States, 2009 Annual Averages,” – the U-6 report.  This is a much broader measure of unemployment, and one that the Federal Reserve keeps a close eye on.  This is the one that adds people who have given up looking or are working part-time who want to be working full-time.  So when that number is added to the official 9.3%, the final number for unemployed and underemployed comes out to a whopping 16.2%.  Now that is scary.  In three states – California, Michigan and Oregon, the number is over 20%.  In three more it is over 19% — Nevada, Rhode Island and South Carolina.

The constant drumbeat that is heard over and over is that this is not going to improve markedly any time soon.  Since the beginning of January, I have either read presentations or heard interviews with five presidents of different Federal Reserve Banks – New York, Kansas City, Cleveland, Dallas and Atlanta, where employment was mentioned.  The same sentiment that was heard from all five could be summed up in the words of Sandra Pianalto President and CEO of the Federal Reserve Bank of Cleveland.  In a speech to the Dayton Chamber of Commerce Governmental Affairs breakfast she said, “The gravitational pull of the severe recession that we have just experienced is still rather strong, and I think it will just take somewhat longer than usual before we see a more robust pace of job creation.”  Fed speak for it’s going to be painful.

Translate that to just one of the most critical sectors of the economy – housing.  With this kind of employment numbers, improvement in the housing market is going to be painfully slow.  And speaking of dragging anchors, there is Congress.  We see things like one Senator blocking a major jobs bill.  It was finally overcome on Wednesday, but the fact that one Senator with an agenda can stand in the way of help for thousands of people does not speak well for our elected representatives.  The country be damned.  We have an election year next year.  I am not optimistic for the economy.

Lack of sales is one of the major problems facing many small businesses today, one reason of course being that people without jobs don’t buy a lot of anything.  This one big giant fact continues to scream at small business that many are going to be facing two and maybe three years of bad economic climate in terms of sales growth.  A really hard look at your business is probably called for.  Can you survive in a slow-growing economy for two or three years?  Maybe it won’t be that long, but I wouldn’t count on it.

On the day after the Chilean earthquake, I was standing in front of a TV watching coverage on CNN.  The reporter was standing in front of a large screen on the wall beside her.  She was moving icons around with her finger, enlarging them and then shrinking them, making them bake cookies, etc.  I know that such technology is pretty common today.  Then there were more pictures from Facebook and Twitter taken only a few minutes before.  It was almost surreal.  Technology on steroids.

The day before in the New York Times on the front page was an article about a cell phone app that will allow a shopper to stand in front of a store window when the store is closed, and if they see something they can’t do without, point their phone at it an buy it.  Clicks-to-brick on steroids.  That mobile phone app that can allow you to buy that $4,000 diamond ring without even going into the store is not pie-in-the-sky.  Some large retailers are currently testing the technology.  One name you might recognize is Wal-Mart.

What really hit me in those two situations was how this astonishing mobile technology continues to drip farther and farther down the business pyramid from giant companies like Wal-Mart to the local one-store retailer (or restaurant, or ice cream parlor).  Because of this and many other things that are happening concurrently, there are more and more reasons that small businesses should look for ways to take advantage of it.  Most won’t, or won’t think that there is any way that it could benefit from them.  But who knows?  Businesses that come out of this recession stronger are going to find new ways to grow.  Yesterday someone was sitting at their computer looking for a restaurant that sells X.  Today they’re pointing their mobile phone at something.  They are pointing their phone at your kitchen to see which of today’s specials looks most inviting.  Tomorrow they are pointing at ….

Remember, the e in e-commerce is electronic – the internet, without which none of this would be happening.  So you may feel that you do not have an e-commerce-friendly product.  But you do have the internet, and you do have a unique value proposition (see my February 27 post) that it may be worth trying to raise the visibility of on the internet.  Somebody may be looking for you with their phone.

Welcome to the future.