While not many people are looking, there are very real signs of an economic recovery in the making. While the unemployment rate is stubbornly high, even though there are signs of an economic recovery, I would suggest that this is the result of structural and political issues. I’ll get to those in a minute, but first let’s take a look at some promising data that have been released.
An economic recovery takes many forms. Sometimes it is led by consumers; other times it is led by companies. When companies see the long-term potential, they start to use their excess funds to drive capital expenditures, and this ultimately drives the economic recovery to lower the unemployment rate. That’s the theory; but why aren’t we seeing that?
For several reasons. The first is that even though U.S. companies have never been in such a strong shape and there are small signs of an economic recovery, they’re not hiring due to massive levels of uncertainty. They are making record profits and are extremely lean, but an economic recovery with a lower unemployment rate cannot occur with uncertainty. Now we’re getting data from the Institute for Supply Management on both manufacturing and services.
The ISM Manufacturing Survey showed that the sector expanded in September, coming in at 51.5. A number above 50 denotes expansion, which is needed in an economic recovery. Many comments by business owners included the fact that U.S. business was up but international business was down, and there was uncertainty regarding new legislation. The real bright spot was a strong move up for new orders, with an increase of 5.2% from the previous month, to 52.3!
I can see the concern in the minds of business owners as inventories are decreasing. This means that, while business picked up in this economic recovery, the business owners are uncertain about the future. This translates into less capital expenditure and a high unemployment rate. You certainly wouldn’t expand if you were uncertain about the future, even if the current environment shows promise.
The ISM Non-Manufacturing Survey showed even stronger growth and more signs of an economic recovery than the manufacturing side, coming in at 55.1. New orders were also up a strong four percent, with the index reading 57.7. Once again, inventories are down.
What this shows is that, in spite of the massive level of political uncertainty, the economy has strong potential for growth. With one of the most important elections in decades and the fiscal cliff approaching, this overhang is preventing businesses from hiring and lowering the unemployment rate.
I believe that, once the election is over and the fiscal cliff is averted, business owners will, once again, have some certainty about how best to plan their businesses, and the economic recovery will accelerate, finally lowering the unemployment rate.
It makes no sense to go on a massive hiring spree just a few months ahead of these momentous events. The smartest action for every business owner right now is no action—to just wait and see.
Some might wonder how bad it can be. Think about some of the ridiculous policies that France has enacted in the misguided hope of lowering its unemployment rate. For example, once a business has over 50 employees, there are a ton of new rules and regulations that must be met. Guess what, they have thousands of businesses with 49 people and a high unemployment rate.
When will people learn that placing more rules and handcuffs on businesses actually means preventing an economic recovery and supporting a high unemployment rate? If having massive government intervention in all parts of the economy worked, then Europe would be massively successful—but it’s not. In fact, the ultimate conclusion is that the former Soviet Union should have been an economic superpower, but it wasn’t.
Businesses need the freedom to expand where they see market demand with certainty for the economic recovery to continue and eventually lower the unemployment rate—we all know this is the correct path. Of course, this means bureaucrats could lose their “importance” in the system, which is why they continually try to convince you that they know more about your business than you do!
Since I’m not a political expert and can’t predict if the politicians in America will enact such job-killing measures, we can only wait and see. But the truth is that the underlying economy is on the verge of breaking out, and if pro-business policies are enacted, we could have a stretch of extremely strong economic growth over the next few years.