What’s Up With the Economy?
Every day, we hear all these economic statistics thrown around. How do they affect our small businesses? We are particularly focused on small business this week as it is National Small Business Week. Today, for example, there was a new release by the Federal Reserve. It didn’t contain very good news. The Fed now believes that the recession will continue in 2009 and the economy will further contract. They also believe that the unemployment rate will approach 10%. This news caused the stock market to drop by 52 points by the end of the session today.
What does all this really mean for small business? Other economic indicators have been released in the last few months as well. The Gross Domestic Product is the best indicator we have of recession. During the last quarter of 2008 and the first quarter of 2009, the GDP fell by a total of 12.4%. That means our economy shrunk by that amount.
The Consumer Price Index, which is the value of a market basket of goods and services, fell during the first quarter. That sounds like it would be good news, but not necessarily. It could mean deflation which occurs when consumers hold off on purchases in hopes of lower prices. This is not good news for small businesses.
The Producer Price Index, which is the wholesale price index at the manufacturer level, also declined during the first quarter. This means the same thing as the decline in the CPI. The PPI is usually watched closely by investors.
Stock prices have been holding steady or climbing. The good news is that stock prices are a leading indicator of the economy. They usually predict what is going to happen in the future. Stock prices may take a hit in future weeks, however, because investors will react to a few things happening in the economy. The price of oil, and the price of gas at the pump, is going up. Financial stocks are taking a hit due to the President’s credit card legislation. We may see at least a temporary decline in stock prices.
The unemployment rate has recently risen from 8.5% to 8.9% and the Federal Reserve expects it to rise further. The good news is that the unemployment rate is a lagging indicator of the economy and often continues to rise for awhile even after a recession is over.
All of these economic indicators will affect our small businesses. In a press release, the Senate Committee on Small Business and Entrepreneurship notes that small business pumps almost a trillion dollars into the economy and account for half of the nation’s work force. The banks still aren’t lending, though the Small Business Administration has been charged with opening its doors to lending to small business with relaxed rules and lower fees. The Senate Committee pledges its support to U.S. small businesses.
Rosemary Peavler, Small Business Finance writer/guide, bizfinance.about.com, a New York Times Company