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| Dr. Joe Webb - For Premium Access Members |
| Fridays with Dr. Joe: - Small Businesses Declining? I Don’t Think So. January printing shipments were reported to be $7.5 billion. This was +$238 million compared to January 2004, but up only +$22 million on an inflation adjusted basis. The chart below shows the three years of January shipments. On an inflation-adjusted basis, we’re down -3.3% compared to 2003. Are we treading water? This is the first true increase since the middle of last year. The beginning of 2004 was rather gruesome for the industry, I wonder if we’re still searching for a bottom. Recent casual, anecdotal reports I have received indicate that pricing is still quite ruthless, so flat dollar sales may actually mean we are shipping more physical volume. That’s not pleasant. | - | - | - |  |
Last Friday’s unemployment report was mixed. The business press, which is obsessed by the payroll survey, was mesmerized with a January revision that showed 8,000 more jobs than previously reported and 262,000 new payroll jobs in February. Readers of this column know that we focus more on the household survey, which was down -97,000 jobs. The household survey covers independent workers and self-employed persons. The unemployment rate went up to 5.4% because more people have been encouraged to look for work. That increases the size of the potential labor force (the denominator of the equation), which also helped the rate rise. It is not uncommon to see unemployment rates rise temporarily when employment prospects (as indicated in last week’s ISM reports) are improving. One thing that has confused economists was the fact that people have been exiting the workforce to stay at home with family or attend school; this latest uptick may be a sign that some of those people on their way back, looking for work. Another good sign: manufacturing overtime hours were up slightly. It’s important to always keep in the back of your mind the fact that employment is a lagging indicator. That is, employment can be increasing when the seeds of a slowdown are in place. This month is the five-year anniversary of the peak of the stock markets, when the Dow Jones average was over 11,000 and the NASDAQ was over 5,000. In March 2000, the unemployment rate was 4.1%, and actually became lower as the Fed over-tightened and slowed the economy by removing the monetary stimulus that was intended to cushion potential Y2K problems. The contraction of the money supply helped burst the Internet bubble and sent the economy into a significant slowdown by the end of 2000. The NASDAQ hasn’t recovered yet (it’s currently in hailing range of 2,100) and the Dow is only now getting back into the 11,000 territory. The ISM released its Global Services report, which showed continuing growth but a slowdown in the rate of new orders. The U.S. was the strongest growth contributor in February, and the only country that seemed to be slowing was Australia. Of particular concern was the following comment: “…the weak trend in new business in Germany, which showed contraction for the fourth time in five months and the fastest rate of decline since July 2003.” Small Businesses Declining? I Don’t Think So. This report from Direct Marketing News interested me, since it is opposite what Bureau of Labor Statistics (BLS) and other data sources plainly show, and what personal experience seems to indicate. It says, “The number of small businesses nationwide declined by about 300,000 from 11.6 million at the end of 2003 to 11.3 million at the end of last year, according to a study released last week by infoUSA.” InfoUSA is a list compiler, sourcing mainly from yellow pages listings. Many of you may remember it from years ago as American Business Lists. The company has grown quite considerably. All of the sources I mentioned, like the BLS, have some statistical problems, so it's always important to look for consistencies and inconsistencies. As a side note, I've always found it interesting that the definition of humor is "the recognition of an incongruity" which I think has been the reason why most of the supposed "data geeks" I know actually have great senses of humor, having ability to detect incongruities in many of life's situations. And the economic scene certainly presents a more than a few. The key statement I found interesting is not in the Direct Marketing News story, but in the press release (linked below): "The data includes only legitimate office and storefront locations, eliminating all home businesses." Like home businesses are “illegitimate”? Excuse me… I guess my joke about my consulting career as 18 years of gainful unemployment is more true than I suspected. I guess I’m not in business at all: I must have been unemployed all that time! Look at this report in terms of whether or not you would advise buying stock in a company like Staples: if the story is true, then you'd want to get out now. Home businesses are what Staples, and others, are built on. Credit card providers have had a grand ol' time in this market too, as affinity programs work hard to attract "the microbusiness" owner. Then the quote that made me laugh (because I recognized the incongruity of it) was in the press release: Vin Gupta, Chairman and CEO, infoUSA, commented, "Clearly our economy has suffered a slowdown over the past two years, as evidenced by the decline in number of businesses. This is valuable information for any company considering an expansion or contraction in these regional markets." What economy is Mr. Gupta looking at? Net new businesses, as estimated by the BLS, are now up to more than 71,000 per month on a 12-month moving average basis. Economic growth is ahead of historical average (see my column and blog about the "Rodney Dangerfield economy"). Technology in areas such as graphic imaging gives incredible power to sole practitioners working at home in their pajamas, whose idea of a business trip is to take their computer down to Starbucks, jump on the store’s wi-fi service, answer e-mails, instant message with other freelancers and clients, and handle financial transactions while sipping just one more latte. Home businesses are real businesses: technology has been firmly headed down the path of geographic independence for all businesses. As service/non-manufacturing grows, more and more of those businesses will be in cyberspace. It's even affecting employees of major companies through telecommuting. An article about "outsourcing" via telecommuting like JetBlue does (home workers handle their reservations work) can be found here . Here’s the takeaway lesson: technology and social change are in a constant collaborative tug-of-war, full of contradictions and countertrends. Not all of the effects can be immediately detected or understood. It’s the job of executives to understand the effects of those changes while they are still in their most subtle form. Change undermines the most basic market definitions, such as “what is a small business?” Rigidly adhering to a definition may lead to an incorrect assessment of the marketplace, which in turn leads to a misallocation of resources and potentially ignoring emerging opportunities. Seeing legitimate opportunities where others see none means that you often are swimming against the tide of common wisdom. But it is these opportunities out of which new successes are born. As I said earlier, infoUSA bases most of its lists on yellow pages listings. Many home businesses work by cell phone, and more will be using VoIP. Of course, yellow pages listings have always had problems. When Harrie Lewis used to test yellow pages lists to find new listings for the Blue Book, he would commonly find that they were 150% to 200% of actual market counts, and when he mailed on them, around 40% would have bad addresses. It was common for commercial printing listings to be heavy with print brokers who had no facilities, and there were other data cleaning problems as well. The process is a reminder that data base maintenance is not easy, and should never be taken lightly. Good database providers become more important every day. So, how many businesses are there? The best sources for counts economy-wide are County Business Patterns (based on Social Security tax records of establishments that have employees) and Non-employer Statistics (based on tax returns of people who pay their Social Security taxes with their annual returns, such as proprietors, partnerships, and S corporations without employees). Together, they give the best picture of U.S. establishments. In the 2002 County Business Patterns, 7.2 million business establishments are counted, having 112 million employees, with an average payroll of $35,000 per worker. The 2002 Nonemployer Statistics count 17.6 million other businesses with average receipts (before expenses) of $43,750 (remember: just like there are part-time workers, there are part-time proprietors, a trend that will continue to grow with an older, more educated workforce that is staying engaged in business through semi-retirement). Nonemployer counts have gone from 15.4 million in 1997 to 17.6 million in 2002. So that’s a total of 24.6 million business entities in 2002. No wonder Staples, Dell, and others have done so well. They’re ignoring the outdated metrics of market measurement and are tapped into a well-documented trend that others don’t seem to recognize. -- Click here to tell us what you think about this premium feature
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