A Snapshot of the Economy, July 2008
The state of the economy has been capturing our attention lately to say the least. It is hard to ignore the media and the seemingly never ending increases in gas prices. The effects of inflation are starting to be apparent in various places such as the grocery stores. While it is no doubt something is going on, how do we discern what is simply media hype and what is fact? And perhaps more importantly, what does it mean to us? How should we, as small business owners prepare or respond?
Let’s cover a few key statistics that seem to have the biggest impact on small business.
The Prime Rate
The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). It is used as a tool by the Federal Government to relieve pressure and stimulate spending in challenging economic times. The lower the rate…the cheaper the money…the more spending. In theory, more spending fuels investment and stimulates growth. The Prime Rate was at 8.25% in September, 2007…not that long ago. That was the highest rate since March 2001. The Fed started lowering the Prime Rate in September 2007 gradually. The last rate change was in May, 2008 when the rate was adjusted by a quarter of a percent to 5.0% (See table). The lower Prime Rate stimulates investment in business (equipment, assets, etc.), and can help businesses invest in new equipment or initiatives that can improve productivity. The lower rates also make business acquisitions more affordable.
Oil Prices
We see and feel the impact of rising oil prices every day as we drive down the road. The effect of this increase cost will be rippling through the marketplace throughout 2008 and arguably much longer. Oil prices impact so many factors in the production and distribution process in almost every industry the increased cost is impossible to ignore. The increased cost will impact profits for small business in the short-term. As the businesses are able to pass the increased costs to the end user the affect will be less dramatic. Ultimately, the rising oil prices will be reflected in higher prices to the consumer. On a slightly more positive note, domestic oil production and development of alternative fuel industries will be stimulated by the higher prices that can support previously unprofitable domestic investment.
The Housing Market
The housing market has taken a blow on the chin over the last year. New home sales have dropped on a national level in six of the last seven months. According to the Commerce Department, national new home sales dropped 2.5% in May compared to April, and the average price of a new home was down 5.7% from a year ago.
In the Kansas City area, the Realtors association reported that May’s sales of new homes were down 40% from sales in May 2007. The Kansas City Metro Area saw an 83.7% increase in the foreclosure rate between 2006 and 2007. According to RealtyTrac, 1.177% of all housing units in the region were in some stage of foreclosure throughout the past year. Kansas City’s 1.177% was less than the average for the 100 largest metro areas in the country (1.382%) but was higher than the nation as a whole (1.033%).
Unemployment
The national economy lost 62,000 jobs in June, the biggest loss in employment since March 2003. The grim outlook reflected six straight months of job cuts — a sustained slide that hadn’t occurred since 2001-02 — and an unchanged 5.5 percent unemployment rate, the highest level in four years. Nationally, the greatest level of national job losses occurred in construction.
Job seekers are becoming more and more disillusioned with the dependency on large corporate employers for their employment. Many are pursuing opportunities in small business to buy a business and have more control over their future.
Summary
This has been a very brief overview of some of the key economic indicators relevant to small business. There is no way we could adequately cover everything going on in the economy and how it could impact your unique industry. It seems apparent that the recovery is in the hands of the small business owner. The same entrepreneurial spirit that has built this country will need to come through as we dig out of this downturn. Paying attention to the marketplace and making adjustments to capture market share and profits will be critical as we navigate our way through the economic rapids. There are a number of reasons why buying a business could be the perfect move at the perfect time. Contact your advisor at ABMI to explore if the timing is right for you.
Let’s cover a few key statistics that seem to have the biggest impact on small business.
The Prime Rate
The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). It is used as a tool by the Federal Government to relieve pressure and stimulate spending in challenging economic times. The lower the rate…the cheaper the money…the more spending. In theory, more spending fuels investment and stimulates growth. The Prime Rate was at 8.25% in September, 2007…not that long ago. That was the highest rate since March 2001. The Fed started lowering the Prime Rate in September 2007 gradually. The last rate change was in May, 2008 when the rate was adjusted by a quarter of a percent to 5.0% (See table). The lower Prime Rate stimulates investment in business (equipment, assets, etc.), and can help businesses invest in new equipment or initiatives that can improve productivity. The lower rates also make business acquisitions more affordable.
Oil Prices
We see and feel the impact of rising oil prices every day as we drive down the road. The effect of this increase cost will be rippling through the marketplace throughout 2008 and arguably much longer. Oil prices impact so many factors in the production and distribution process in almost every industry the increased cost is impossible to ignore. The increased cost will impact profits for small business in the short-term. As the businesses are able to pass the increased costs to the end user the affect will be less dramatic. Ultimately, the rising oil prices will be reflected in higher prices to the consumer. On a slightly more positive note, domestic oil production and development of alternative fuel industries will be stimulated by the higher prices that can support previously unprofitable domestic investment.
The Housing Market
The housing market has taken a blow on the chin over the last year. New home sales have dropped on a national level in six of the last seven months. According to the Commerce Department, national new home sales dropped 2.5% in May compared to April, and the average price of a new home was down 5.7% from a year ago.
In the Kansas City area, the Realtors association reported that May’s sales of new homes were down 40% from sales in May 2007. The Kansas City Metro Area saw an 83.7% increase in the foreclosure rate between 2006 and 2007. According to RealtyTrac, 1.177% of all housing units in the region were in some stage of foreclosure throughout the past year. Kansas City’s 1.177% was less than the average for the 100 largest metro areas in the country (1.382%) but was higher than the nation as a whole (1.033%).
Unemployment
The national economy lost 62,000 jobs in June, the biggest loss in employment since March 2003. The grim outlook reflected six straight months of job cuts — a sustained slide that hadn’t occurred since 2001-02 — and an unchanged 5.5 percent unemployment rate, the highest level in four years. Nationally, the greatest level of national job losses occurred in construction.
Job seekers are becoming more and more disillusioned with the dependency on large corporate employers for their employment. Many are pursuing opportunities in small business to buy a business and have more control over their future.
Summary
This has been a very brief overview of some of the key economic indicators relevant to small business. There is no way we could adequately cover everything going on in the economy and how it could impact your unique industry. It seems apparent that the recovery is in the hands of the small business owner. The same entrepreneurial spirit that has built this country will need to come through as we dig out of this downturn. Paying attention to the marketplace and making adjustments to capture market share and profits will be critical as we navigate our way through the economic rapids. There are a number of reasons why buying a business could be the perfect move at the perfect time. Contact your advisor at ABMI to explore if the timing is right for you.
913-341-6300
posted by Dan Loiacono, CBI, CCIM at
8:20 AM
