By Michael McDonald
For the last twenty five years the national economy has been relatively stable and the success or failure of a local business was based primarily on filling local needs and fighting local competition – things the business owner was generally good at and could control. When a national recession did occur, the business owner simply waited for good times to return, which they usually did. This picture is changing.
When national economic events can suddenly cause local business revenues to drop 30% to 50% almost overnight, as well as bankruptcies in a number of local industries, it becomes vital for the entire business community to fully understand what is really going on. One must ask, “Is this a fundamental change or will good times come back?”
What I am about to tell you is not be a happy or “feel good” story but we believe your success is not founded in “feel good” stories, but in accurate assessments of exactly what you are facing. So here is what we think it is.
What’s really wrong with the American economy?
About fifteen years ago two negative trends began in the American economy; each potentially very dangerous.
The first was that the American consumer began living beyond his means. For 45 years he had always saved from 7% to 10% of his take home check. By 2007 he was spending every penny he made, plus a lot more that he borrowed. This excess spending was not small; it amounted to over 1 trillion dollars per year. Those additional trillion dollars (about 10%) generated a lot of business and employed a lot of people. It went on so long many businesses started to think it was the new norm. It was fueled by the so called “wealth effect” – the idea that because of stock market or real estate gains we were all rich and could spend beyond what we earned. It obviously had to end; the only question was “when?”
The second negative factor was America’s growing trade deficit with the world, which also grew to almost a trillion dollars a year. The dangers of having a trade deficit generally fell on deaf ears as many local business owners felt it had nothing to do with them since their business was local and the trade deficit was global. But this was wrong; the trade deficit is a domestic issue. Since 1985 America has lost 20 million productive jobs to overseas workers, and the trend continues. The reason we have a trade deficit and have to import so much is because these items are no longer made here. America has not been able to replace these lost jobs with equally productive new jobs.
For many years the first factor obscured the damage that was being done to our economy by the second factor. On the surface everything seemed OK. Now that consumers have cut back and are again saving about 5% of their income, the damage of global job loss is clearly visible i.e. high unemployment.
What’s in store for the local economy?
After all we’ve said you might find it surprising that we are rather optimistic for the Coachella valley economy for the next three years. Discretionary spending should pick up, not like it was, but more than the last twelve months. Quite often, in moments of fear like last year, people withdraw more than they should, then slowly reach out when things calm down. This will happen.
The government, with its stimulation package, is spending - almost dollar for dollar – what the consumer isn’t spending. This government money will not be spent like consumers would spend it, so it will come to Coachella Valley in different ways. But some of it will come here.
Valley businesses should use this quiet period and prepare: economize, train their staffs to be friendly and effective, take extra good care of their existing clients, and promote themselves as economically as possible. Things are about to get better.
We have time to fix things but only if we plan and act with correct foresight
My colleagues and I at Expert Business Solutions, Inc. think this recession was a major warning for all of us; the mistake will be in thinking that a recovery means things are OK again. The recovery should last long enough for businesses to plan and make major adjustments for this changing economic landscape. That’s because the Federal Government is currently able to borrow billions and billions of dollars, primarily from foreigners, at an astonishing low rate of 3%. As long as it can do that there will be political pressure to continue to borrow to stimulate the economy until unemployment comes down. But without productive jobs, as soon as the borrowing and spending stops, things will again collapse.
At the national level, until something is done to offset the continual loss of productive American jobs to overseas workers, little will change long term.
Remaking the business of the Coachella Valley
The fact that a large cross section of the valley’s leaders in business, education and the public sector have worked together with the Coachella Valley Economic Partnership for the past eight months to create a very ambitious Economic Blueprint for the region’s future is a great reason for optimism and a fantastic start.
It is our opinion the valley must diversify its business base so that it can offset some of the risk in having a large part of its revenue based on discretionary income. What new businesses can we attract to the valley that will be the growth industries of the next ten years? What incentives can cities offer? And what Federal programs and stimulus money can be used to further these ends? These are some of the issues we will cover in future columns.
And finally, we have a lot of youthful energy and the untapped brain power of all these golfing “retirees.” Let’s use it. America needs you (again).
Michael J. McDonald is executive Vice president of Expert Business Solutions Inc. (www.expertbusinesssolutionsinc.com), a business development company located in La Quinta. Its mission is to help Coachella Valley businesses grow and prosper. Mr. McDonald is also available for group talks. He can be contacted at mike@expertbusinesssolutions.com or 760-625-1090. |