Still not happy about the economy

Filed under: Contributed Columns |

The recession that started in December 2007 ranks as one of the longest and deepest. And it’s unclear when we’re going to feel like the recession is behind us.

Real gross domestic product growth in 2008 was an anemic 0.4 percent, followed by -2.4 percent in 2009. Last year’s decline was the largest one-year drop since the 1946 economy was readjusting after World War II. Not pretty.

But real GDP growth edged up by 2.2 percent in the third quarter of 2009, followed by 5.6 percent growth in the fourth quarter. That fourth quarter leap was largely about inventories. (The initial estimate for first quarter 2010 GDP growth comes on April 30.)

So, are we out of the recession? Are you feeling better about the economy? Many small business owners, to be generous, are less than confident.

The Small Business Watch survey conducted by the Rasmussen Reports for Discover Business card is a national poll of small business owners with fewer than five employees. Released earlier this month, the survey found that 53 percent of small-business owners say that economic conditions for their own businesses will be getting worse over the next six months, up markedly from the 37 percent who said that in February. Meanwhile, 20 percent in the March poll said things will about the same, with 20 percent agreeing that things will improve.

In terms of the overall economy now, 59 percent rated it as poor and 31 percent fair, while only 6 percent said good and 1 percent excellent.

As for where the broader economy is headed, 58 percent viewed it as getting worse, compared to 44 percent in February. As for those seeing improvement, that dropped from 31 percent in February to 22 percent in January. Those saying the economy would be staying the same declined from 24 percent in February to 16 percent in March.

This glum outlook obviously does not bode well for investing and hiring. Over the coming six months, 52 percent planned to reduce business development spending (up from 43 percent in February), 27 percent planned no changes and 18 percent expected to increase such expenditures.

The outlook for job creation points to stagnation. While 8 percent said they would be hiring more, 13 percent saw layoffs and 78 percent expected no change in their payrolls.

Everyone should be concerned since small firms are key sources of innovation, growth and job creation. It’s also troubling given that entrepreneurs, by their very nature, tend to be optimists. If they are down on the economy, just how bad are things?

In assessing these results, Ryan Scully, director of Discover’s business credit card, observed: “We’ve seen bigger month-to-month drops, but there is clearly a pattern here: Small-business owners don’t like what they’re seeing — both at home and in the larger economy — and they’re responding by pulling back, rather than just holding the line.” He added: “Tax season could be having an effect on the overall mood, especially because they’re still not seeing any relief from the government.”

Indeed, the tax issue should not be ignored. Not only are entrepreneurs not seeing relief, but instead, they are hearing about efforts at the federal level to raise taxes. ObamaCare, for example, will impose higher Medicare income taxes that reach beyond wages to capital gains, dividends and interest earned; an income tax on individuals (including the self-employed) who do not have health insurance; a tax on businesses failing to offer health insurance; and new taxes on insurers, pharmaceutical manufacturers and medical device makers.

The Obama budget calls for increased personal income, capital gains and dividend taxes on upper-income earners, along with resurrecting the death tax, which died at the start of this year. The president also favors higher energy taxes, including through a cap-and-trade emissions regulatory scheme.

Whether such taxes would directly hit small-business owners or not, these entrepreneurs understand the negative effects for investing, consuming and the overall economy, and therefore, for their own businesses, employees and families.

And do not forget that the big increases in government spending favored by Obama and congressional leaders would have to be paid for somehow. Over the coming decade, for example, the Congressional Budget Office in March estimated that the president’s budget plan would generate $9.8 trillion in budget deficits. As a result, talk circulates about imposing an add-on value-added tax like Europe has.

So, none of the tax talk coming out of our nation’s capital should buoy the economic hopes of entrepreneurs or anyone else. We might technically be out of the recession right now, but don’t expect to feel like the economy is truly healthy any time soon.

Raymond Keating is chief economist for the Small Business & Entrepreneurship Council. He can be reached at rkeating@sbecouncil.org.