Does the Economy Affect Your Business?

I love this quote from Paul Krugman in a breakfast speech a few weeks ago.

“The Financial Industry rolled along extending credit to everyone, until they had their Wiley Coyote moment. You know how that works. Wiley Coyote runs off a cliff, but according to the cartoon laws of physics, he doesn’t fall until he looks down.”

That is a pretty good description of how the world financial system failed. In fact, the US economy was already in its third quarter of recession, and pundits, including the Long Johns of Britain, had brilliantly predicted the outcome for financial companies seven months before the collapse of Lehman Brothers.

If you read the contrarian economics websites, they are still looking for the next crash. Whether it is the surging foreclosure numbers, the resetting of Alt-A mortgages (which peaks in mid-2011), the withdrawal of Asia from the US bond markets, oil prices at $150 a barrel, collapse of an overheated real estate market in China, Quantitative Easing by the Federal Reserve (QE2) or the surge in commodity prices, there are plenty of potential scenarios to keep the doom and gloom crowd active.

In the meantime, my January prediction of recovery in South Texas seems to be coming true very quickly. Our February Board meetings were full of record sales, and the need to start hiring again. Should business owners jump on this as soon as there is evidence, or should they hold back in fear of another meltdown?

That depends on your business. If you are dependent on financing (as in commercial construction) or on capital expenditures (such as manufacturing) what happens on Wall Street can clearly affect what happens to you. If you are part of the local economy (retail, restaurant, services) then you may see an impact in your market, but you don’t have to see one in your business.

I know a restaurant whose pre-recession growth was between 8% and 10% annually. During the depths of the recession, it fell to 3-4% growth. No decline, just a minor slowing in the rate of increase. Other restaurants I know in the same area fell by almost 20%. Was it the recession, or were they just less able to compete in a tougher market?

A lawn service company I know grew 40% between 2008 and 2010. Scores of lawn maintenance companies in the area went out of business in the same time frame. A packaging distribution company grew over 20% during that time. An accounting firm by 18%. A construction company by 10%.

These businesses didn’t exist in a vacuum. Their customers didn’t have new sources of discretionary income. These owners were subject to the same challenges as the rest of us. They didn’t have massive cash reserves to market or advertise when everyone else pulled back. They did have excellent management, a focus on their customers, and systems to maintain profitability.

I typically meet (for the first time) between 20 and 30 business owners a month. Believe it or not, through the end of 2007 I still heard poor business performance attributed to “The effects of 9/11.” Now I’m sure those same owners are shaking their heads knowingly and saying “It’s the recession, you know.”

In the meanwhile, other small businesses continue to grow and thrive in the face of all indications to the contrary. Some 53% of our clients had record years in 2010. That isn’t nearly as good as in prior years, but it isn’t bad, either.

We might have another economic shock, or we might not. One thing is certain: our businesses have been tested, and we are supposed to have learned from the experience. If you are just now surfacing from survival mode, it is time to put the lessons to work. Make your business a ruthless and formidable competitor. Things will slow down again someday, and you want to be one of the success stories the next time.

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