Small Business Owners Exude Optimism

By Fayazuddin A. Shirazi
Small business owners are apparently confident of an early economic revival. At least three small business owners’ surveys have indicated that a sizeable number of small businesses feel American economy will moderately improve by the end of this year.

According to the Small Business Outlook survey of over 800 small business owners by PartnerUp, a Minneapolis based social networking community focusing on small businesses, 37 percent of the survey respondents believed U.S economy will revive at least to some extent by the end of 2009. The survey also found that small business owners expect to invest more in their businesses, with 68 percent of them planning to hire new employees in the next six months.

At the same time, the study revealed small business owners are taking measures to offset the economy’s impact with 10 percent of the survey respondents planning a workforce reduction, 32 percent are reducing unnecessary costs and 25 percent are lowering business travel and entertainment spending.

“Even in the current economic climate, the majority of small business owners are cautiously optimistic and confident,” said Brian Kennett, Director of Community at PartnerUp in a media release. “The results of this survey show that small business owners are taking proactive steps to weather the continuing economic downturn, while simultaneously preparing for the impending economic recovery.”

“Small businesses are a critical component of our nation`s economy, contributing to the creation of 70 percent of the economy`s new jobs,” said Steve Nielsen, CEO of PartnerUp. “These findings indicate that small business conditions are beginning to stabilize, but that small business owners still face significant challenges before the economy fully recovers.

Additionally, the National Federation of Independent Business, an association of independent businesses with less than 250 employees, also said its index of business owner optimism rose 2.1 points to 88.6 in August, an increase that NFIB chief economist William Dunkelberg called “a big gain.” The optimism, though, is about the future, as owners still have a dim view of current economic conditions.

According to experts, the gain was primarily a result of improved expectations for future business conditions and real sales volumes. The gain in the NFIB Optimism Index clearly signals that the worst is likely over, but so far there has been no “surge” in sentiment or in the important Index components directly tied to the Gross Domestic Product.

“Owners are feeling a bit more confident now because the economy is healing itself and is bottoming, so there are certainly few signs of improvement. Besides, stock market news is also helpful as it indicates growing optimism among investors and business owners alike,” William Dunkelberg told CE Online.

Meantime, a recent survey by Discover Small Business Watch also revealed a similar sentiment among small business owners. The small business watch, a monthly index of the economic confidence of the nation’s 22 million businesses with 5 or fewer employees, also said small business confidence rose to highest level in 18 Months.

According to the Discover survey small business owners expressed faith that the U.S. economy is on the rise and gave signs that they are more willing to invest in advertising and new inventory now than before. The index rose to 89.8, up 7.7 points from July and the highest level since 90.9 in February 2008.

“For the past few months, small business owners have shown rising confidence in the overall economy, as well as an increasing sense that the conditions for their own businesses are improving,” said Ryan Scully, director of Discover’s business credit card. “This month we have a few more signs that they may be ready to start trying to grow their businesses again, and that the worst may be over.”

The number of small business owners who think the economy is getting worse dropped to 43 percent in August, the lowest reading on that data point since the Watch`s inception exactly three years ago, a media release said. This month, 38 percent of owners say the economy is getting better, up from 30 percent in July; 15 percent believe that the economy is staying the same, down from 16 percent in July; and 4 percent remain unsure.

The juxtaposition between the increased optimism and the muffled plans for spending and hiring is because of the non-availability of credit, experts point out. According to a recent survey difficulty in getting credit is a dampener on spending and hiring for most of the businesses.

The recently released Duke University/CFO Magazine Global Business Outlook Survey revealed that credit problems remain with 56 percent of U.S. firms reporting they are adversely affected by credit market conditions, with higher borrowing costs being the biggest problem.

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The Economy: Glimmers of Hope in The Darkness

By Al Walsh

Although this pervasive recession/depression continues to hang over us, and I believe the worst is yet to come, there are small positive signs.  Following is a recap of recent observations; many of which I’ve previously shared:

• Commercial credit is showing signs of loosening up – although the “jury is still out” as to who will qualify.
• Durable goods orders are up – indicating some positive stirrings in industry.
• Housing sales are marginally up – although I expect more “dark days” ahead as people use up their unemployment benefits and more mortgage resets occur.  I’ve heard talk of Washington extending unemployment benefits further, which may help matters if they go through with it.
• Businesses have begun receiving federal funds for energy development.  So far, most of the money has gone to big business.  Not much help to entrepreneurs, but good for jobs and business in general.  Smaller companies may receive some indirect benefits via subcontracts from the major recipients.
• The “cash for clunkers” program is popular, spurring auto sales.
• The stock market’s shown signs of life, although I expect dangerous volatility ahead.
• Imports are marginally up, indicating some “fresh breath” in consumer spending.  This will help the shipping lines and common carriers.
• Headhunters I talk to tell me that they’re starting to see some increased hiring action. Nothing to get excited about yet; but a start.
• Consumer saving is on the rise.  The saving rate has been dangerously low for way too long.  The funds deposited with banks should help marginally ease the credit freeze by providing a base for new lending.  Let us hope the banks don’t just sit on it, like they did with the bailout money.
• The rate of IPOs (Initial Public Offerings) is slightly up, providing a positive sign that investment capital is starting to “come out of the woodwork”.
• Industry in general reduced inventories drastically; a mixed-blessing but one that provided cash flow for survival and which will provide a platform for ramped-up production as we come out of the recession/depression and demand increases.
• Consumers are going through the painful process of deleveraging from the high credit positions they’ve been in for years.  Of course many without jobs are increasing those positions for survival, but in general the nation is going through a forced shedding of some credit burden; which is a good thing.
• Other nations are starting to see signs of recovery, including the UK and China.

None of these factors are of great significance themselves, but together they offer some rays of hope.

Unemployment… Auto Sector… Retail Sector… Inflation Down the Road?… Credit Freeze… More Economic Stilumus?… Bank of England (BOE) Says No!

Chris Gaffney, CFA, Vice President, EverBank World Markets…

Weekly jobless claims released in the US yesterday morning fell below 600k for the first time since January but the continuing claims continue to rise, hitting another record. The slight improvement in the weekly numbers was distorted by the automotive sector. Car companies typically shut down plants in early July in order to change over to the new model year. Bankruptcy forced many of these plants to shut down much earlier than normal, and some temporarily started up production again during the past few weeks.

Chuck would have a field day with the jobless claims, as the government economists were hard at work ‘massaging’ the numbers to give everyone a more ‘clear’ picture of the data (why can’t they just report the actual number of people filing for unemployment?). As Chuck has pointed out, the Labor Department adjusts the figures using seasonal and demographic trends, creating ‘ghost jobs’. Since automobile plants typically shut down in the first weeks of July, the labor department expected a large increase in claims during this time. In order to offset these ‘seasonal factors’, the brain trust at the Labor Department added back a number of jobs in order to balance out the expected temporary layoffs in the auto sector. You would think the Labor Department would realize that most of these automobile workers were already idled, and therefore keep the adjustments to a minimum. But that would be too logical, so they just went ahead and ‘seasonally adjusted’ the claims as if this was a typical July for the auto sector.

The continuing claims illustrate a much clearer picture of the US job market, with unemployment spiking up to 9.5% in the US. The news from the retail sector was also gloomy, as the ICSC Chain Store Sales fell another 5.1% YOY during the month of June. Inventories also continued to shrink for a ninth month in a row in May to just over $400 billion. This is the lowest level since August of 2007, and raises some longer term inflationary concerns. Some of you are probably questioning this last statement, so I will explain.

Lower retail sales have forced stores to keep inventories down. I was in a local Walmart store the other day and noticed the shelves were emptier than what I have seen in the past, items weren’t stacked 5 deep and didn’t reach toward the ceiling. US consumers have been buying less and saving more, a very good thing! But stores have reacted by dropping the amount of inventory they are carrying (again a smart thing for retailers). Against this backdrop, the US government continues to flood the economy with cash, trying to get consumers to start spending again to jumpstart the economy. For now, the cash has been hoarded by banks and used by consumers to pay down some of their massive debt. Eventually the ‘all clear’ horn will sound, and consumers will start looking to make purchases again, but will find empty shelves. Inflation will follow, as too much cash will be chasing too few goods.

But our government has a much shorter term view, and continues to pump money into our economy with no real regard for future inflationary concerns. And some very smart economists seem to agree with the administration. Both Nouriel Roubini and Robert Shiller, respected economists, are calling for additional stimulus. In a radio interview yesterday, Roubini predicted the US recession will last another six months and be followed by a ‘shallow’ recovery. On the same radio show, Shiller said the economic crisis would continue despite the $12.8 trillion pledged by the US government and Federal Reserve.

The BOE shook up the markets with a surprise announcement not to increase its quantitative easing program. The Bank’s Monetary Policy Committee put the program designed to pump extra cash into the markets by purchasing its own debt on hold after announcing it would also keep interest rates steady at .5%. The move was a major surprise to the markets, and sent the price of gilts (the UK’s treasury bonds) falling and the price of the Pound Sterling higher. The BOE was the first of the western central banks to begin the controversial program in which it monetizes its debt; hitting the overdrive button on the printing presses by monetizing its debt. We’ve never been a fan of the Quantitative Easing programs, as they are short sighted with total disregard for the future inflationary pressures the exert on the economy. But several other central banks, desperate for a way to get cash into their economies have followed the BOE’s lead.

The move by the BOE was even more surprising given the fact that the Chancellor has authorized another 25 billion pounds to be added to the program. Perhaps the Bank’s Monetary Policy Committee is finally starting to realize all of the QE which it has done hasn’t really had the desired impact. Much of the extra cash being created by the program is simply being hoarded by banks and is not making its way out into the economy via loans. Sound familiar? We have a similar situation occurring here in the US, with banks sitting on a majority of the stimulus monies which they have received. They have used the funds to shore up their balance sheets, a good thing long term, but not what the central banks intended with the introduction of the QE programs.

Money Creation at the State Level

BUT GOVERNOR, YOU CAN CREATE MONEY!  JUST FORM YOUR OWN BANK.

Ellen Brown
May 26th, 2009

“I understand that these cuts are very painful and they affect real lives. This is the harsh reality and the reality that we face. Sacramento is not Washington – we cannot print our own money. We can only spend what we have.”
– Governor Arnold Schwarzenegger quoted in Time, May 22, 2009

Christmas comes early, Governor. You CAN print your own money. Fiscally solvent North Dakota is doing it . . . and so can California. Now!!!

In a May 22 article in Time titled “Billions in the Red: Fiscal Reckoning in CA,” Juliet Williams reports that since California voters have now vetoed higher taxes and further state government borrowing, Gov. Arnold Schwarzenegger has indicated that he intends to close the budget gap almost entirely through drastic spending cuts. The cutbacks could include laying off thousands of state workers and teachers, ending the state’s main welfare program for the poor, eliminating health coverage for about 1.5 million poor children, halting cash grants for about 77,000 college students, slashing money for state parks, and releasing thousands of prisoners before their sentences are finished. Schwarzenegger bemoaned the fact that the state could not print its own money but said it could only spend what it had.

But the state can create its own money. After all, banks do this every day. Certified, card-carrying bankers are allowed to do something nobody else can do: they can create “credit” with accounting entries on their books. As the Federal Reserve Bank of Dallas explains on its website:

“Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank . . . holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.”

President Obama has also acknowledged that banks create money, through what he calls the “multiplier effect.” In a speech at Georgetown University on April 14, he said:

“[A]lthough there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.”

Money in a government-owned bank could give us the best of both worlds. We could have all the credit-generating advantages of private banks, without the baggage cluttering up the books of the Wall Street giants, including bad derivatives bets, unmarketable collateralized debt obligations, mark to market accounting issues, oversized CEO salaries and bonuses, and shareholders expecting a sizeable cut of the profits. A state could deposit its vast revenues in its own state-owned bank and proceed to fan them into 8 to 10 times their face value in loans. Not only would it have its own credit machine, but it would control the loan terms. The state could lend at ½% interest to itself and to municipal governments, rolling the loans over as needed until the revenues had been generated to pay them off. According to Professor Margrit Kennedy in her 1995 book Interest and Inflation-free Money, interest composes, on average, fully half the cost of every public project. Cutting costs by 50% could make currently-unsustainable projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable but actually profitable for the government.

If all this seems too radical and unprecedented to venture into, consider that one state has had its own bank for 90 years; and it has not only escaped the credit crunch but is doing remarkably well . . . .

THE INNOVATIVE BANK OF NORTH DAKOTA

Only three of fifty states are now solvent, meaning they have the revenues to meet their state budgets; and one of them is North Dakota. It is an unlikely candidate for the distinction. It is a sparsely populated state of less than 700,000 people, largely located in isolated farming communities afflicted with cold weather. Yet since 2000, the state’s GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. The state not only has no funding issues, but this year it actually has a budget surplus of $1.2 billion, the largest it has ever had.

North Dakota boasts the only state-owned bank in the nation. The Bank of North Dakota (BND) was established by the state legislature in 1919 specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank’s stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. By law, the state must deposit all its funds in the bank, which pays a competitive interest rate to the state treasurer. The state rather than the FDIC guarantees the bank’s deposits, which are plowed back into the state in the form of loans. The bank’s return on equity is about 25%, and it pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the last decade, the BND has turned back a third of a trillion dollars to the state’s general fund, offsetting taxes. The former president of the BND is now the state’s governor.

The BND avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk, and buy down the interest rate. The BND provides a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. Guarantees are also provided for entrepreneurial startups, and the BND has ample money to lend to students (over 184,000 outstanding loans). It purchases municipal bonds from public institutions, and it backs loans made to new farmers at 1% interest. The BND also has a well-funded disaster loan program, which helps explain how Fargo, when struck by a disastrous flood recently, managed to avoid the devastation suffered by New Orleans in similar circumstances.

North Dakota has also managed to avoid the credit freeze, through the simple expedient of creating its own credit. It has led the nation in establishing state economic sovereignty. In California and other states, workers and factories are sitting idle because the private credit system has failed. An injection of new money from a system of publicly-owned banks on the model of the Bank of North Dakota could thaw the credit freeze and bring spring to the markets once again.