Most small business owners are firmly focused on the day-to-day operations of their businesses, as well they should be. It takes a lot of time and attention to keep things on track, especially for sole proprietors or firms that are chronically short staffed, as many are in the current economy.
But astute business owners should also be like sea captains. They need to keep a constant eye on the horizon, looking for subtle -- and not so subtle -- indicators that a storm might be brewing. By storm, of course, I mean an economic storm that could lead to a downturn and possibly a recession.
We all know that the nation's economy has been slowing for months, yet it's also shown an unusual resiliency. In fact, many have pronounced it a "Goldilocks" economy; neither too hot nor too cold. In a column in March, I noted the contradictory economic signals but came down on the side of optimism about the economy's direction.
Many of the factors that I cited then are still evident. The jobless rate remains at 4.5 percent, which is tantamount to full employment; corporate profits are strong and the bull market continues its run on Wall Street. Meanwhile, the economy seems to be absorbing higher energy prices and the housing slowdown without too much pain.
At the same time I was expressing confidence in the economy, however, Merrill Lynch analyst David Rosenberg was issuing a disturbing note to investors calling for an immediate interest rate cut. His fear was that the slowing housing market would result in a drop in construction activity. That in turn would push unemployment over 5 percent by year's end and curb consumer spending. Under that scenario, he pegged the probability of a recession at "very close to 100 percent" unless the Federal Reserve cut rates by a full percentage point.
Since August, however, the Fed has held the line. After raising rates to 5.25 percent in 17 consecutive quarter-point jumps going back to 2003, it has left the rate unchanged in five straight meetings. In short, the central bank appears to be subscribing to the Goldilocks view of the economy. It sees continued "moderate" growth over the coming quarters.
But the latest economic data suggests that Rosenberg's analysis may be closer to the mark. While home building rose slightly in April, permits for future construction fell by the largest margin in 17 years. That suggests that the nation's housing slump is more likely to get worse before it gets better. Incidentally, the last time housing permits fell that much, the nation was plunging into the 1990-91 recession.
Another report issued by the Economic Policy Institute last week points to three ominous signs of looming trouble. The economy's anemic 1.3 percent growth rate in the first quarter is not enough to sustain job and wage growth, and some economists believe that figure will be revised downward to 0.7 percent -- a near stall. Persistently high energy prices are taking a toll on consumer spending reflected in disappointing retail sales for April. And job growth for the month was lackluster as well.
"We're not in the woods yet," wrote economist Jared Bernstein. "I hope the housing slump evaporates tomorrow, wages start to beat inflation again, and job growth comes roaring back. But you heard it here: the signs are pointing toward recession."
Small business owners already seem to be feeling the pinch. Their optimism about the economy continued to decline last month, according to the latest survey by the National Federation of Independent Business. Just 29 percent of owners plan to make capital expenditures over the next few months, down 4 points from March. That reflects "pessimism among owners about the prospects for economic growth," the survey noted.
When it comes to the economy, it really is like an oceangoing super tanker. It doesn't turn on a dime. If these dour predictions are true, then the Federal Reserve will need to act with an interest rate cut by no later than midsummer to have any effect on the economy by year's end. That seems unlikely at this point given its current position.
That's why it's critical to keep one eye on the horizon at all times. You should always be thinking 12 to 14 months out, and taking steps today to brace for possible economic conditions a year from now.
All too often, small business owners are so focused on the daily grind that they get blindsided by unseen economic forces or react to them long after it's too late to save their businesses from hardship or failure. Don't let that happen to you. If you'll need a credit line to get through a potential downturn, set it up now while business is good, the economy is awash in money, and banks are lending. And start tightening inventory now, even if sales are still strong. Better to be a little short than to be caught overstocked. As any old salt will tell you: Any port in a storm.
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