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by John R. Burgess

The economics of America

In the last issue I wrote about the increase in the 30-year mortgage rates causing a decline in single-family home sales and a decline in the overall economic conditions of America. Three months later, we have seen many of these impacts coming to pass.

On September 21, the Federal Reserve Bank in Philadelphia reported that manufacturing activity declined for the first time in three months--falling to -.04%. The previous month of August was 18.5%, an all-time high. Numbers below zero point to a decline in activity, while numbers above the line suggest growth. This is the first time that the index has been below zero since April 2003, when the start of the Iraq War shook business and consumer confidence. As you well know, the total number of housing stocks in the United States has declined dramatically over the last few months. This, coupled with high energy costs, has certainly caused the overall consumer confidence in America to wane and decline. A recent decline in energy prices has caused people to become somewhat giddy, but any potential subsequent political event could have a major impact on those prices. What does all this mean for small and medium-size business?

In any time of economic decline, the overall economic activity tends to flow more to the largest businesses such as the Fortune 500 companies as they fight to maintain and increase their revenue. A small and mediumsize business owner must become even more competitive by controlling the cost of goods sold and fixed expenses.

In order to control the cost of goods sold and fixed expenses, the average American small business owner must understand that the ‘business of the business’ becomes more important during declining economic times rather than during a boom. An economic boom is defined as the domestic product gains at least 3.5%, over the prior quarter on an ongoing basis. Any time economic conditions in America do not allow for 3.5% growth, assuming augumento a 3% inflation rate, there is virtually no growth. In other words, if the economy was to grow at a 2.5% clip and inflation was 3.2%, the overall economic gain would actually be negative .07%.

This may not seem significant, but it is. Assume there is a total workforce of 60 million people in the United States. A .07% decrease in overall economic activity would have a direct relationship on the total number of jobs available within the economy. A .07% decrease of the 60 million wage earners would mean a reduction in the workforce of 420,000 jobs. That number doesn’t appear to be cumbersome, but over three quarters would mean an increase of 1.3 million Americans out of work. The economy could not continue to grow at a pace greater than the inflation rate.

If the economy continues to grow at a rate greater than the inflation rate, it will establish new opportunities, encourage growth and allow the overall economic circumstances in America to increase the standard of living. Last year, interestingly, the average wage in America decreased in relationship to the cost of living. The average American had less discretionary income in 2006 than in 2005. Going forward, increased interest rates, lack of liquidity in consumers’ homes, increased cost for borrowing for business and potential increased energy costs will contribute mightily to this ongoing difficult cycle.

The overall economic conditions in America are primarily fueled by dramatic increases in the federal deficit. The positive aspect of the federal deficit is spending money that we don’t have. This means that with the multiplier of the total number of the gross national product, those additional dollars can be consumed by the economy. However, the negative impact of continuing deficits is that we must eventually pay the piper. At some point we have to pay back the unbelievable amount that the federal deficit has grown. If we were to calculate the total number of dollars that each wage earner, between the ages of 25 and 60 in the United States owes, we would be shocked at that numerical sum.

As we move forward during these uncertain economic times, small business owners must understand the ‘business of the business’ in order to increase profitable revenue and drive negative revenue away. In positive economic times, it is relatively simple to drive revenue forward and continue to survive as it relates to profitability, cash flow and ease of operation. In uncertain economic times, business owners must understand that luck is not a consideration. Luck is not on their side, nor does it determine destiny. The understanding, utilization and control of critical variables within the business are what determine economic success.