As business owners, we spend most of
our time trying to pull the levers available to us: controlling
expenses, planning for future needs, improving quality of service.
While we do this work, we're glancing at the horizon to keep an eye
on the industry as well as economic conditions in general.
I've got to say in 15 years of being in
business, I've never seen an industry and an economy so hard to
predict. I'll outline a few ideas here
First, the good news:
Unemployment is at record lows.
The official rate is 3.8%. Even the
broader U6
measure which includes discouraged workers and people working
part-time for economic reasons is down to 7.3%
As my grandfather used to say:
“Everybody that wants to work is already working.”
More good news:
Productivity is rising.
More people are working, and those
people are earning their employers more money. Gross Domestic
Productivity, the total number of dollars paid for all goods and
services in the economy has been going up relative to the number of
employees working. In the broadest sense, increasing productivity
means the workers of an economy are working harder, faster, smarter,
and creating more innovation. That's good for business owners,
workers, and customers. (I like to think of business as a stool with
three legs-- if the business is run in such a way that the needs of
the owners, the workers, and the customers are taken care of, then
that business is probably going to be stable. If one of the legs is
short-changed, then the whole thing is going to be wobbly.)
Increasing productivity coupled with
low unemployment is the best recipe I know to decrease income
inequality. Put another way: an economy that produces jobs is going
to help raise people's standard of living faster than any government
program.
The
(sort of) bad news: We are now in a trade-war on multiple
fronts, so prices will go up as businesses pass on the cost of the
25% tariffs they're paying. (to get some deals on pre trade-war
straps, click here.)
People can argue back and forth about
how we got into this situation, and whether it is for a good cause or
not. The fact of the matter is: we're in it now. Material
costs are rising, and they're rising not only for straight up
imported products, but they're rising for stuff made in the USA,
because lots of products made in the USA have some imported products
as components.
The really bad news: This
could slow down sales of big-ticket items like cars and trucks, or
even trigger the start of a full-on recession.
With the current trade war with China
and the ones threatened with Mexico and Europe, the entire logistics
ecosystem is being upended. Whether this conflict is resolved in a
way that is favorable remains to be seen. In the meantime, the
tariffs act as a sudden tax jolt, as costs paid by importers are
passed on to distributors and ultimately consumers. With the complex
logistics of auto manufacturing, this could result in price increases
for vehicles that will start slowing down sales. That's bad news for
car haulers and people like me that want to sell stuff to car
haulers.
More bad news: Federal
deficits are skyrocketing, with US spending expected to exceed income
by over 1 Trillion dollars just for 2019 alone! This is on top of
the mountain of debt the US created in the aftermath of the mortgage
meltdown and Great Recession of 2008.
Most of this current deficit (not to be
confused with the aggregate US debt, which has risen over multiple
decades) came about as a result of the Tax Cuts and Jobs Act of 2017.
Normally, a tax cut would be a go-to
option for the government to try and stimulate an economy that is
already mired in a deep recession. It has never been done when an
economy is operating at full capacity with full employment. So we
are in uncharted waters here.
Some economists are beginning to
question whether such mountains of debt even matter. Other, more
traditional economists say that it does indeed matter, because if
there is ever more debt than there is appetite to purchase it, then
the yields offered on all that debt must rise until buyers are found.
Not a big deal if yield on the 10 year US Bond is 2.2%, but what if
it goes back up to 15.5% where it was back in 1980. The amount of
debt we're getting ourselves into could be similar to the trap some
families get into when they use too much credit on one of those 6
month 0% interest rate cards that snaps back to 24% compound interest
in the 7th month. By the time the interest rates change,
it's too late to take the stuff back to the store. Now imagine that
times trillions of dollars.
Worse news: Since
we've already used the stimulus of tax cuts during the boom times and
piled onto our already huge mountain of debt, it will be politically
and economically difficult to do future tax cuts in the next
recession. Also, if Congress decides to play a game of chicken with
the debt ceiling limit, credit ratings agencies like Moody's could
downgrade US debt issues, resulting in higher yields being demanded
at auction. Also: China, with whom we're currently in the middle of
a trade war, has historically been the biggest foreign buyer of US
debt. It is doubtful they would weaponize this debt by selling off
their $1.12 Trillion in debt, because this would drive the US dollar
down in value, which they definitely don't want to do right now. But
sometimes people don't act in their short-term interest if they have
a longer term goal or a point to prove.
Conclusions:
My conclusion
is that as business-owners, we have no choice but to make hay while
the sun shines. We don't get to decide what the government does or
doesn't do. We can only pull the levers we have in front of us.
Right now, economic conditions in this country are doing
exceptionally well.
