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Don't get too excited about economic bright spots

Sure, there are certain parts of the economy that are perking up, but, overall there are many hurdles in Washington preventing full economic recovery...so says business contributor John Alexander.
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By John Alexander

As an advisor to emerging technology companies, I have noticed that the single most asked question has become, “Is the economy getting better?" This is short-hand for more personally relevant questions such as:

• “Is business getting better?”
• “Will I be able to raise or borrow money?”;
• “Are my sales likely to improve?”;
• “Can I start hiring again?”

With increased travel for clients over the last 6 months, I have been struck that this is not only true here in Minnesota but both coasts and throughout the country.

The question itself reflects only part of what I’m hearing. The tone of voice is often both hopeful and fearful. The questioner wants to hear good news but fears the likelihood of hearing the bad. I hate to be the bearer of bad news but my answer begins with “I think that it’s still very bad, has been going downhill for over 3 years and is not likely to improve for some time.”

This is the start of a longer conversation that continues…

Americans are by their very nature, optimistic. Since the founding of our nation it has been hard to keep us down. Our ancestors came here because of their hope for a better way of life – we self-selected optimism and the desire to work for a better future rather than accept limitations imposed on by Kings, Lords and other masters.

The United States has survived wars, scandals, tragedies and economic hardship. Our parents, grandparents and great grandparents created a country whose innovation exceeds that found elsewhere at any time and has created a level of prosperity which benefits the entire world. We feed the world.

Our technology lengthens the lives of people all over the world and facilitates communication of knowledge, ideas, and freedom. To paraphrase Sir Winston Churchill, never before have so many around the world benefited so much from just one country.

While I do see bright spots, they are more indicative of American optimism than a signal of a fundamental turnaround in the economy. For example, I count among my closest friends one of the top plastic surgeons in Minneapolis. His private practice, after more than 2 very down years where he sacrificed personally to keep all his employees, is now back to pre-2008 levels.

In discussing this very topic, he agreed that this increase in business is indicative of native optimism and his patient’s frustration at holding back purchasing services out of fear rather than an improvement in the economy.

Every so often over the last 2+ years, we have heard of improvements in the housing market, but then prices and demand fall again. Hope creates a momentary lift in volume and price of homes but then reality sets in and fear drives it back down to the current 1/3 of normal levels of turnover and reduction in prices.

Volatility in the stock market is another reflection of the optimism and fear. Many company values seem low on the basis of their performance but when stocks begin to move up concern that this might be premature kicks in and prices fall back down. While Apple and Bank of America are up dramatically, whole sectors of the market are at yearly lows.

The news media is touting reduction in unemployment to 8.3%. This doesn’t reflect what people know based upon what they see and experience. The rate the media quotes (8.3%) is based upon those who collect unemployment benefits – known as U3. The better number (U6) is the statistic that includes the range of people who no longer qualify for benefits, recent graduates and those who have just given up.

This more accurate rate is 14.9% at February 2012. Many companies fear taking on the obligations of new employees in the face of an uncertain regulatory future (ObamaCare being one significant part), difficulty in borrowing money from banks and poor prospects for new equity.

Heck, at the grocery store, sizes get smaller even as prices go up. This started with the increase in gas prices over 3 years ago and hasn’t abated. Times continue to be tough.

I hate to be the bearer of bad news but there are no quick fixes. Politicians are not dealing with underlying issues. At best, they combat the symptoms and (we) are whipsawed from crisis to crisis. As I write, the European finance ministers are considering raising bailout funding pool and Spain is about to unveil their new austerity plan. Europe is duplicating our TARP and STIMULUS programs. Spain gives every
appearance of being Greece on steroids with unrests in the streets from a population grown dependent upon gifts from the government and upset at the necessary austerity programs.

Our own government spends like drunken sailors [with apologies to the sailors]. They waste our money with Tarp and Stimulus, add regulations to commercial banks and then complain about why banks aren’t lending – blaming them. Most agree that government regulation created the housing bubble by requiring lending to unqualified individuals while using taxpayers to protect Fannie and Freddie’s losses – not that one could tell this from the finger pointing out of D.C. and the continuation of Fannie and Freddie’s lending practices.

Something has got to fundamentally change before people become comfortable that their jobs are not at risk (because of the economy) and they can spend for more than essentials and companies see stability in their raw materials and sales and can hire and grow.

Correcting the situation will require a long-term perspective, elimination of the entitlement mentality, sober action, maturity, time and just maybe different people leading us in D.C and St. Paul, and spending our hard earned tax dollars.

John J. Alexander is President of Business Development Advisors, Founder and Chair of the Twin Cities Angels, and business author of the Angel Investment Tax Credit.

Email him at: John@BusDevAdvisors.com

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