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Thursday, September 30, 2010

Midterm Races May Be Hurting the Economy

Over the past two weeks, consumer spending is running at about its slowest in 2010 and well below the same weeks of the 2009 new normal. At the same time, the unemployment component of Gallup's underemployment rate has been steadily increasing in hitting 10% for the 30-day rolling average ending Sept. 28. It looks like the economy could be taking another turn for the worse.

It may be that today's unusually high degree of economic uncertainty has consumers and small business owners pulling back on spending. In turn, this could be worsening an already dire jobs situation.

However, the midterm elections could also be playing a role. Often, political opponents disagree not only about what has caused the poor economy, but also on how best to get it going again. This political rhetoric may generate even more confusion and uncertainty as the midterm elections draw near and more Americans listen carefully to the political debates.

If true, this could mean the economy will get worse in the weeks ahead as political debate exacerbates economic confusion. Of course, whether it means things will get better following the elections is a whole different discussion.

Thursday, September 23, 2010

Helping Small Business?

Today the House passed a new $42 billion bill to help small business -- given its prior passage in the Senate, it is now ready to go to the president for signing. Wells Fargo/Gallup Small Business Index polling supports the idea that help is needed, with small business owners now more pessimistic than at any time since inception of the Index in August 2003. Right now, more small business owners expect the number of jobs at their companies to decrease over the next 12 months than expect them to increase.

The question is whether this is the kind of encouragement small businesses need to hire more people. Wells Fargo/Gallup polling also finds that even when small business owners are hiring, 34% admit adding fewer employees than needed. Why? Most are worried about their future revenues and cash flows, but concerns about healthcare costs and finding qualified people are also significant.

Maybe the new legislation will help since 25% of small business owners say they are more likely to hire if the tax credits for new equipment were to be extended. However, the real solution is to do something that will return small business owner optimism: convince them the economy and their operating environment will get better -- not worse -- over the next 12 months.

As entrepreneurs, small business owners are optimists by nature -- otherwise they wouldn't undertake all the risks associated with starting and running a small business. All they need to return to their optimistic roots is the feeling that U.S. policymakers are pro-business and pro-entrepreneur. Hopefully, the post-midterm elections environment will reinvigorate this pro-business perception -- the feeling that the private sector, not government, is the answer to U.S. economic success -- no matter the election outcome.

Friday, September 17, 2010

Consumer Sentiment Decline Not Unexpected

Bloomberg reports today in a story headline that the "U.S. Michigan Consumer Sentiment Index Unexpectedly Declines." However, the decline was not unexpected for those following the Gallup Economic Confidence Index. On Tuesday, Sept. 14, Gallup noted that the decline in economic confidence during the first two weeks of September suggested a similar decline in the Consumer Sentiment Index.

More importantly, consumers are more pessimistic now about the future direction of the U.S. economy than they were a year ago. Add in a probable uptick in the unemployment rate, and it is not hard to understand why a majority of Americans feel the condition of the economy will be the same or worse in a year.

It is essential that the Fed take these negative expectations on the part of many Americans into account as they deliberate next week. Otherwise, such expectations can easily become self-fulfilling.

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