Awake at 2 o'clock?

That statement was made by Van Palmer of Palmer Technology Systems after a lengthy discussion about economic trends. It perfectly describes why we should be positioning our businesses differently from how we did it at the end of previous recessions.

Since World War II, the United States has enjoyed a growing number of working adults as a percentage of the population. This was an effect of both the baby boom, which added 58% to the US population in only 20 years, and the baby bust, the trough in birthrates that kept the number of children at a relatively low level through the 70’s and 80’s.

A rising tide lifts all boats. (I don’t know who first said that.) When the number of workers in a society is expanding relative to the economy as a whole, everyone prospers. One major reason for America’s rise to dominance in the 195o’s and 60’s was that our economy was relatively intact after World War II, and it outpaced those in Europe that were rebuilding from the war.

Have you noticed how many economic comparisons include the term “World War II?” The worse recession since WWII. The highest deficit since WWII. The longest sustained unemployment since WWII. That is because the last 60 years have been fueled by the Baby Boom. Each recession, or “correction” as we became fond of calling them, was followed by a new period of sustained growth.

The Boomers are the pig in the python of American history. (see my website www.theboomerbust.com ) As they age, they will once more transform the basic underpinnings of the US economy. Will it be better? Not for those who build their business plans on assumptions of  inevitable growth. Will there be opportunities? Absolutely.

That’s why I am undertaking this series on positioning your business to compete in a flat economy. It’s not because I’m a doom and gloom kind of guy. I’m not. But I do think that things have changed in the overall landscape of American small business. Those who recognize that change and adapt to it will do much better than those who don’t.

The rest of this column is going to list the reasons why we will be in this type of economy for quite some time. I believe it is like gravity. It’s there, and you have to deal with it. If reading this stuff depresses you, then skip it and wait for my next column. I feel that it is necessary to set the table for the thoughts on winning in this environment that will follow.

Inflation and Unemployment

 I’m not going to spend a lot of time on how the government has continually shifted the statistics to make them look better. Sometimes it makes me think of the old Soviet 5-year plans. Suffice to say that the U-6 unemployment rate, which includes people who have given up looking for work and those who are working part-time because they can get nothing else, stands at 16.2%. Many of the lost jobs are in finance and construction.

One analyst told me two weeks ago that using 1983 government standards of measurement, our inflation rate currently approaches 10%. I don’t know how he calculates that, but anyone who goes to the supermarket knows that the rate isn’t as low as the Feds say it is.

In finance, high employment was driven by the trading and debt bubble. At one point in the mid 2000’s financial companies accounted for 25% of the market value of the Dow. That was an anomaly, and we will not return to those levels in the forseeable future.

Construction is the largest single employer in our economy. The collapse of the real estate bubble, combined with restricted Federal and state budgets, doesn’t promise millions of new construction jobs any time soon.

There are other factors, including the Gini Coefficient (named for the Italian statistician), that measures the increasing shrinkage in the middle class, largely due to technology. Relatively low-skilled, high-wage jobs in office work and manufacturing are being disproportionately impacted by technological advances in productivity. Suffice to say that we can expect unemployment to be a continued drag on our markets for some time to come.

As an employer, we can expect more candidates for some jobs, and reduced expectations about what employers have to provide. That will take some regional evening-out, as many middle class workers are still chained to their devalued homes. It will happen eventually, although technical skills and sciences will remain in short supply.

Real Estate

Housing prices in many areas of the country have fallen by almost 50%. Assuming we return to more normal patterns of growth, that should increase by something like 4% to 5% annually. In the absence of another boom, that means it will take 7-10 years to clear out the negative equity and bad loans in the system.

As I noted in 2009, the amount of retail space built during the boom almost doubled square footage per capita between the late 1980’s and 2008. That was a function of easy money, both to build and for the consumers who bought on credit. This, too, is a market that will take some time before demand catches up with capacity.

Of course, if your company is growing and you need space, it will be a good time to shop.

Government Spending and Deficits.

Many people have campaigned for the end of the wars in Afghanistan and Iraq as wasteful and contributing to the deficit. Regardless of your political opinion, winding down the wars is shrinking spending on materials and services by several billion dollars a week.In the long run, getting the country on a sound economic footing is a necessity. In the short run, it will be painful.

Similarly, shrinking the government payroll is a favorite bugaboo of conservatives. The average Federal employee now makes more than the average private sector employee. Those employees, however, are also the epitome of middle class white collar workers. They eat in restaurants, buy new cars and have their clothes dry cleaned. Reducing that workforce will add to the pressures on the job market and consumer spending.

South America, Asia and Africa

The emerging economies and their increasingly prosperous workforces represent new markets. In many cases, they have become new markets for each other. China’s trade with South America will surpass its trade with the US this year. Much of what was formerly termed the “third world” is humming along without much help from us.

We will remain the wealthiest market in the world for at least the rest of my lifetime. China’s economy will inevitably outgrow ours, but it will still be spread over nearly 5 times as many people.

That doesn’t mean every small business in America has to become an exporter. There will be plenty of opportunity domestically. It does mean that we will have to be cognizant of new competition in almost every industry.

The Ageing Population

Back to the Baby Boomers again. As the largest generation in American history retires, there will be slower growth in the workforce (an issue in the Southern Mediterranean countries right now). Unless major steps are taken, and Obamacare did not take those steps, health care will become a major inflationary force, and draw from other areas of the economy.

The head of the S&P Sovereign Debt Rating bureau was questioned a few weeks ago about the lowering of US debt from AAA to AA+. He said that the average time for a first world nation (Canada, Finland, Australia) to regain their prime rating after a reduction was between 7 and 14 years. When asked if the US would have to wait that long, he ducked the question by answering “People have to realize that this country’s demographic peak was ten years ago.”

That demographic peak was the Boomer generation all between the ages of 35 and 55, their top of the productivity curve.

The recessions of 1973, 1981, 1990, and 2001 were all followed by periods of rapid growth. Part of that was technical. Financial recession like the ones in 1929 and 1937 take longer to recover from. Part of those recoveries were due to the Boomers driving increased productivity and consumption.

No country has ever seen as large a percentage of their population in active retirement as we will experience. The Boomers are relatively healthy, and have $10,000,000,000,000 (that’s trillion) in assets. Their productivity will be missed in the workforce, but some of that should be offset by their spending.

The ageing Boomers have changed the business landscape. They have driven cosmetic surgery, health clubs, vitamins, pharmaceuticals, athletic clothing, diet plans, work out videos, and high-end equipment from bicycles to running shoes.

How their spending will impact the economy of the next 15 years isn’t clear, but it is certain that they won’t be their previous, depression-scarred parents. They are not going to sit home and hoard their savings. The Boomers will continue to spend.

Gravity

There are a lot of other things on the doom and gloom front that the media will keep reminding us of. We will continue to deal with bank failures, a flood of mortgage foreclosures, default in Europe, and a debt hangover. These will all eventually be addressed, and we will work through them.

You can see a long way when things are flat, and we can look forward quite a distance. My point isn’t that this is the end of the world as we know it. I’m just saying that the business environment of the next 7 to 10 years will look a lot like it does right now. The problems we are dealing with can’t be disposed of in a year or two, regardless of how much we would like them to be gone.

We have one more area to discuss before we get to strategies for thriving in a flat economic environment. That is to recognize how our way of doing business is changing. Just as assumptions of inevitable growth are outdated, so may of our beliefs about customer relationships, value pricing and efficiency have to be adjusted. That will be next week.