The Economy from a Small Business Perspective
While the press gives us the view of the bailout of the Big Three and the Wall Street banks at the 20,000 foot level, let me tell you how the economy looks from the ten foot level.
This year started out like most other years, but it was pretty clear to us a year ago that the 4th quarter was going to tank. In fact, as we recently prepared our 2009 budget and revenue projections, I pulled out the budget guidance from December 2007, and found that we said we should expect a major downturn in Q4 of 2008. I don’t completely remember now why I thought that at the time, but I guess it was obvious to me that we were entering a recession and the economy was about to turn down, and would turn way down by October. So what’s the forecast for 2009? I’ll save that for another blog post. This one is about how it looks at the moment.
What we noticed late last year was that a couple of clients that depend heavily on donations from financial firms and major computer firms were having problems raising money. This was a strong indication of things to come. Some of those clients essentially went out of business by June 2008. Based on our experience in 2000/2001, we knew that the association and not-for-profit market would lag by about 9 months for seeing impacts of the business downturn, so I think we must have guessed that the early warning signs in late 2007 were going to hit us hard in late 2008.
What we didn’t really anticipate is the severity of the downturn in all sectors, particularly with banks. Each year is a learning experience, and this one is a rare chance to watch and experience what happens in the severe recessions, which may be a once in a lifetime opportunity to learn. (I remember the recession in 1974, the one in the late 80’s, and the more recent one in 2000, but don’t remember much about the others in my lifetime.) This one is definitely different.
Our banking clients are helping us understand the impact of the recession on their business. The crisis at the top end of the banking world is a very different scale than at the community bank level, and the bailout packages are not yet trickling down. In simple terms, the recession is being seen in things like dramatically fewer transactions at the teller line, just like there are fewer sales in the retail stores. People are getting laid off because there is simply less work to do, just like in a factory.
What compounds the problem for the community banks is the lending situation and real estate valuation situation. Since banks have to “mark to market”, the value of loans in their portfolios drops with the decline of the real estate market, which creates a trickle-down effect. For those banks with widespread loan problems, the story gets worse. For those community banks that invested funds in the stock of Fannie Mae, that money is gone. People are getting cut because you have to do it to slash costs, so that the institution can survive. Nobody would have ever thought that this combination of circumstances would happen.
For the services firms we work with, the impact is mixed. We have one client whose business is exactly dealing with complex and major problems with banks - this environment must be a golden opportunity for them. For other services firms, like the average small law firm or the mid-sized consulting firm, they are all wondering how bad things will get and watching their pennies. Fortunately - and we are all watching closely - but the services firms in this area seem to be doing better than OK so far.
For the retail firms we work with, business seemed pretty solid until about September. Then October looked pretty scary for them, and then November was at first dreadful, but by the end, not so bad. December is actually turning out to be better than last year, but not by a lot. So, for the retail firms, it looks like the worst is actually over. Let’s hope that is in fact the case.
For the construction businesses and developers we deal with, the smart ones saw this coming and hunkered down. Those firms are doing pretty well right now. For the not-so-prescient ones, time will tell.
For our own company, we are fortunate that we have a focus on different vertical markets so that the economic swings are smoothed out. Yes, when all markets are swinging up, we do very well, but there has not been a time, in the last recession or in the current severe one, where all markets were swinging down on the same cycle.
What is also interesting to watch is the whip-saw effect of commodity prices and currency prices. This is a new phenomenon for me to see, too. The last thing I expected was a sharp rise in oil prices, followed by a rapid rise of the dollar versus the Euro, followed by a sharp drop in oil prices. This is so crazy. Now I’m thinking, “so what is the most ridiculous thing that could happen next?” That’s how we’re approaching the 2009 budget.