Dr Jeff Cornwall

There is one bit of good news that we can take from history about recessions and even depressions.  They tend to be a time of major transformations due to the typically high levels Schumpeterian creative destruction active in the economy. 

Consider the following brief list of examples:

• GE was founded during the Great Economic Panic of 1873 
• Disney was founded during the Recession of 1923 
• The Great Depression saw the founding of both HP and Polaroid
• Trader Joe’s was founded during the 1958 recession 
• During the 1975 recession Microsoft was founded
• CNN and MTV both were launched during the 1981 recession 
• And in the 2001 recession iPod launched and Google finally got its market footing and emerged from its start-up phase

Innovations like these helped create ripples of new ventures and other innovations that were the major force in reviving the economy.

So why aren’t we finding ways to help spur entrepreneurship in our economy instead of being consumed with bailing out failing businesses and declining industries? 

I am blogging this morning from my father’s house in southern Florida where the recession seems to have hit particularly hard.

The NFIB has released an early summary of the job creation portion of their monthly survey summary due out this week, and it is also not very promising for the short-term employment outlook.

Seasonally adjusted, there was a decline in average employment per firm of 0.74 workers reported by small business owners in January, the second largest monthly decline in survey history (December was the largest at -0.86 workers per firm). Eight percent of the owners increased employment by an average of 3.3 workers per firm, but 23 percent reduced employment at average of 4.1 workers per firm (seasonally adjusted). The private sector is very weak, with the only job growth coming from education, healthcare and government.

Over the next three months, 9 percent of small business owners plan to create new jobs (up 1 point), and 14 percent plan workforce reductions (down 5 points), yielding a seasonally adjusted net negative 6 percent of owners planning to create new jobs, the third lowest reading in survey history and unchanged from December. Lower readings occurred only in the 1974-5 and the 1980-82 recession periods. Not seasonally adjusted, job creation plans were positive in all the service sectors, but negative in manufacturing and construction, retail and wholesale. Of the nine census regions, only in the Mountain states did more owners plan to increase employment than planned to reduce employment.

With reports of sales and profit declines more frequent than at any time in the past 35 years, firms have little choice but to reduce costs to survive, and for small firms, the major cost is labor (about 80 percent). Consumer spending didn’t revive, so employment adjustments must now be larger, since hoped-for gains in sales did not materialize. Firms are now cutting hours faster than sales are falling, a rare event. This will raise productivity (sales per hour) and mitigate the rise in unit labor costs. 

There is a bit of a silver lining in their findings this month.  It looks like firms are making adjustments quickly now, which the NFIB believes should bring the economy to a bottom sooner rather than later. The service sector seems to be finding its legs.

This week I showed the video Demographic Winter to both my undergraduate and graduate students. 

The video documents a chilling demographic trend that is not getting enough attention — the declining fertility rate that is occurring in about 70% of the countries around the world.

Here is a part of the synopsis of the film from their website:

One of the most ominous events of modern history is quietly unfolding.  Social scientists and economists agree – we are headed toward a demographic winter which threatens to have catastrophic social and economic consequences.  The effects will be severe and long lasting and are already becoming manifest in much of Europe.

A groundbreaking film, Demographic Winter: Decline of the Human Family, reveals in chilling soberness how societies with diminished family influence are now grimly seen as being in social and economic jeopardy.

Demographic Winter draws upon experts from all around the world – demographers, economists, sociologists, psychologists, civic and religious leaders, parliamentarians and diplomats.  Together, they reveal the dangers facing society and the world’s economies, dangers far more imminent than global warming and at least as severe. 

We had a rich discussion in both of my classes. 

We talked about the impact of declining populations on the future of the US and world economies.  The data presented in the film seems to paint a fairly bleak picture for the US and other western economies over the coming decades due to population decline.  Japan and much of Europe are already feeling the negative economic effects of declining fertility rates.  The US is expected to begin this slow economic decline beginning around 2010 — when Baby Boomers reach their peak spending age.

The graduate students, mostly Generation X, were stunned.  Our program is an evening MBA degree, so most of the students are working full-time.  They were concerned about their careers, their children’s futures, and their outlook for retirement.

My undergraduate students, who are mostly Generation Y, seemed to take it more in stride.  They reminded me that this is part of the reason why they are studying entrepreneurship, after all.  They understand that our economy will never look like it did even a decade ago.  They already know that it is up to them to create their own way in the world — the corporate career path of the past century is at a dead end in their minds. 

What is increasingly clear to me is that our post recovery economy will probably not be very robust.  The timing of this recession just at the time that Baby Boomers are reaching peak spending age is like, to use the words of one of my students, “the perfect storm.”  I believe the recovery will be slow, but that the long term will be a general decline over the coming decades.

Will there be opportunity in this world?  You bet.  But, you will need to be highly skilled at identifying more scarce market niches and a much more nimble manager as your business grows.  We will not see times when any fool can make money as an entrepreneur.  With softer markets only the best will thrive.

The film suggests that much of the boom of the past twenty years is attributable to one main cause — the Boomers reaching their peak consumption age.  Those times are over, and there is every indication that a long-term booming economy will not come again in the US for generations — if ever.

ADP Small Business Report for Janaury 2009 was released today.  It shows that the recession has deepened on Main Street.

 

• Total small business employment: -175,000

• Goods-producing sector: -74,000 small business jobs

• Service-providing sector: -101,000 small business jobs

 

This marks the third consecutive month of decline in the small-size business sector.  Although January’s number shows fewer job losses than December, the recession continues to have an impact on this space.  Although job declines have consistently been interpreted as mostly affecting larger corporations, businesses with fewer than 500 employees lost 430,000 jobs in the month of January.

 

It continues to be alarming how little Washington is paying attention to small business in their policy decisions.