Mind Over Matter

March 25, 2010 - 12:13

Relative to the magnitude of historic economic downturns, the so-called Great Recession was not much more severe than the recessions of 1973-1975 and 1981-1982. However, economic recovery from this latest recession has started out much more slowly. For example, real GDP expanded by 7.7 percent in 1983 after unemployment peaked at 10.8 percent in December 1982, whereas GDP grew at a rather unimpressive annual rate of 2.2 percent in the third quarter of 2009. Although the fourth quarter is likely to show better numbers, there are no signs of an explosive recovery as with previous recessions.

The Slow Climb

There are several factors behind this tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the Fed. The confidence of bankers and venture capitalists has been shaken, and it will take time for them to recover from the financial turmoil of the past couple of years. The housing sector also faces a difficult period of financial retrenchment in the wake of the general collapse in home prices, overextended debt positions and high unemployment in certain regions of the country.

Additionally, while some elements of the $787 billion stimulus have served the stated purpose and helped to soften the recession’s impact, the overall package was not designed to foster a speedy recovery or even set the stage for long-term growth. Instead, the stimulus was oriented to sectors that the parties in majority believed to be deserving of federal help. This explains why much of the stimulus money is going toward education, health, energy conservation and other activities that would do little to soak up unemployed resources and stimulate the economy.

Other government proposals have also created greater uncertainty and risk for businesses and investors, thereby discouraging a rapid recovery. These include plans to increase greatly marginal tax rates for higher incomes, as well as the discussions at the Copenhagen conference and subsequent statements by the president to impose high taxes on CO2 emissions, which will likely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.

Congressional “reforms” of the American health care delivery system have gone through dozens of iterations, and the current markup of the separate bills passed by the House and Senate have provisions that worry some small businesses in particular. They fear their labor costs will increase because of mandates that might force them to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest in new equipment, expand or grow their business, or hire new employees ends up harming households as well because it slows down the creation of new jobs and the subsequent growth of labor incomes.

Several pieces of evidence point to this cautionary mindset on the part of businesses and households. A regular survey by the National Federation of Independent Businesses showed that recent capital expenditures and near-term plans for new capital investments remain stuck at 35-year lows. The same survey revealed that only 7 percent of small businesses see the next few months as a good time to expand. Only 8 percent of small businesses reported job openings, as compared to 14 to 24 percent in 2008 (depending on the month) and 19 to 26 percent in 2007.

Two Important Factors

Therefore, the speed of economic recovery in 2010 may hinge on two other factors: international trade and entrepreneurship. Most economists see stronger exports as a substitute for weaker consumer spending.Unfortunately, that depends heavily on economic growth and trade policies abroad.

By contrast, entrepreneurship is the sleeper issue that depends solely on Americans. If you doubt its importance, consider the fact that most net job creation from 1980 to 2005 came from firms that were five years old or less, according to a study by the Census Bureau. In any one year, that may not be true, but over time, mature firms lose more jobs than they create. Plus, it’s young firms, not small ones, that count the most. If the United States doesn’t continue to create new businesses (not just high-tech startups like Facebook but also construction companies, engineering firms, florists and restaurants) then the economy may languish.

The main source of economic growth, consumer spending, is continuing to show signs of recovery. Consumers ended 2009 feeling better about the economy than when the year began, buoyed by optimism that job prospects would improve in the first half of 2010. This was reflected in the better-than-expected holiday season sales that closed out 2009. However, the outlook for the spring sales season is mixed (as usual) depending on which prognosticator you are listening to.

A Parable

One thing is certain, however: If you expect things to be bad, that’s probably what you’re going to get. As my friend Carl Mays puts it, “It happens in the mind before it happens in the body.” An excellent illustration of this point is the parable of the man who sold hot dogs.

There was a man who lived by the side of the road and sold hot dogs. He was hard of hearing, so he had no radio. He had trouble with his eyes, so he read no newspapers. But he sold good hot dogs. He put up signs on the highway about how good they were. He stood on the side of the road and cried, “Buy a hot dog, mister?” And people bought.

So he increased his meat and bun orders. He bought a bigger stove to take care of his trade. He finally got his son home from college to help him out.

But then something happened.

His son said, “Father, haven’t you been listening to the radio? Haven’t you been reading the newspapers? There’s a big depression. The world situation is terrible. The domestic situation is worse.”

Whereupon the father thought, “Well, my son’s been to college; he reads the papers and listens to the radio. He ought to know.” So the father cut down on his meat and bun orders, took down his signs and no longer bothered to stand out on the highway to sell his hot dogs.

And his hot dog sales fell almost overnight. “You’re right, son,” the father said to the boy. “We are in the middle of a great depression.”

What is the moral of this parable? Don’t let the radio and newspapers dictate your mindset for this spring season. Make sure your value proposition (point of differentiation) is well defined, compelling and relevant to your buyers. Be aggressive in clearly articulating your value proposition.

 

About The Author

Charlie Hall is Ellison Chair in International Floriculture in Texas A&M University’s department of horticulture. He can be reached at charliehall@tamu.edu.

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