Recently, Newsweek’s cover said that the recession is over. But is it really? Small businesses need specific information about the current economic situation in order to engage in financial planning and forecasting. Economic indicators help small business owners understand the economy. Economic data has just been released that will help evaluate the current situation.
Gross Domestic Product
On Friday, July 31, the Gross Domestic Product (GDP) for the second quarter, 2009 (April through June) was released. The GDP is the value of all goods and services produced in the U.S. economy plus exports minus imports. If the GDP is negative, that generally means we are in a recession. The GDP and other economic indicators are explained in this article if you want more information. Technically, the GDP has to be negative for two quarters for the U.S. to be proclaimed to be in a recession.
The current recession has certainly met those criteria. In the fourth quarter of 2008, the GDP fell by 6.3% and in the first quarter of 2009, it fell by 6.1%. Combined, or even separate, that is quite a drastic fall for production in the U.S. which is why we keep hearing that we are in a deep recession. From a production of goods and services standpoint, the recession does seem to be easing up. In the second quarter 2009, the GDP fell by 1.0%. That gives us a sign of hope for the rest of 2009 and into 2010. The freefall in our economic production may be over. Firms are producing and exporting goods and services again. A good sign.
Consumer Confidence
Unfortunately, consumers aren’t as confident about the state of the economy. The Consumer Confidence Index, which is an indicator of how well the average American thinks the economy is doing, dropped in June and dropped further in July. The consumer confidence index is determined by a survey of 5,000 households in the U.S. Right now, it seems to be heavily weighed down by the unemployment numbers.
The Consumer Confidence Index had jumped up a bit in the spring. But, when unemployment continued to worsen in the summer, it declined again and rather sharply. Consumers claimed that jobs are hard to get and are pessimistic about their income expectations. The percentage of consumers anticipating business conditions to improve over the next six months dropped to around 18%. The consumer confidence index is important because it is an indicator of whether or not consumers will spend money. If consumers are not confident about the economy, they will not buy goods and services. This will not help increase the GDP or the outlook for retail sales, home sales, or industrial production.
Consumer Spending
Consumer spending, another important economic indicator, seems to be in line with consumer confidence. Consumer spending fell at the rate of 1.2% in the second quarter compared to 0.6% in the first quarter. Some economists are curious about this since they see the economy as starting to recover. If you really think about it, it’s not curious at all. Jobs are continuing to be lost. Unemployment continues to rise. It makes sense that consumers have less money to spend. Until consumer spending starts to rise, any economic recovery will be slow and sluggish as business cannot recover until consumer spending recovers as consumer spending makes up about 70% of the economy.
Consumers are saving more than they have since 1998. They are saving about 5.2% of their income. This is a good thing as American’s have not been saving enough for a long time. The decline of their retirement nest eggs due to the Wall Street fiasco is primarily responsible for this statistic.
It is possible that the increase in the minimum wage to $7.25 per hour from $6.55 per hour may boost consumer spending. However, small business will find it hard to hire more workers or even keep the workers they have since they will have to pay a higher minimum wage so the effect may be muted.
Federal Reserve’s Beige Book Report
The Federal Reserve’s Beige Book report indicates that economic activity in the 12 Federal Reserve Districts is weak. One of the most concerning statistics in the latest beige book report is that bank loan standards were tightened in 7 out of 12 Federal Reserve Districts. If we want to get economic growth going, especially for small businesses, tightening loan standards is not the way to do it. The report indicated that the commercial real estate market was also weak.
The Beige Book also reported that there is a bit of modest improvement across districts in the manufacturing sector and the residential real estate sector. There is some indication that home prices are reaching a bottom and that sales have picked up. The new home buyer tax credit seems to be helping first-time home buyers with starter homes.
Consumer and Producer Price Index
Inflation seems to be under control, but the Federal Reserve reported in the Beige Book that deflation is still a concern. The Consumer Price Index increased 0.9% in June, but it has fallen 1.4% over the last 12 months. The unadjusted Consumer Price Index is the price of a market basket of goods and services including gasoline and food. The Producer Price Index is the price of a wholesale market basket and rose 1.8% in June with most of that increase due to energy prices. Both the Consumer and Producer Prices Indexes are calculated and released by the Bureau of Labor Statistics. Based on these figures, you can see why inflation is not a concern right now.
