The Entrepreneurial Challenge – Saturday, Oct 24

Employment Update: Why Things are About to Get Much Worse

By Paul Zane Pilzer

Posted on Friday, Oct 23 at 3:16 pm

While the U.S. economy is getting better on Wall Street, things are getting worse on Main Street. Unemployment benefits are running out and small businesses are just now dealing with their prior losses.

This has created an immediate opportunity for those in the business of offering a business opportunity to the unemployed—an opportunity that could grow exponentially when Congress better understands the true nature of current unemployment.

U.S. home foreclosures, personal bankruptcies, and debt defaults are rising. This is creating enormous pain for many but also opportunity for those in the business of purchasing and reselling assets (houses, cars) from those in distress, or offering the unemployed a business opportunity.

“Dad,” I asked my father when I was 12 years old, “What the difference between a recession and a depression?”

“That’s easy,” he replied. “In a recession your neighbor loses his job. In a depression you lose your job.”

While my father’s description was not technically accurate, it is very relevant for us today. Other than a few economist types like me, people generally care only about “their economy” vs “the economy.”

How many people do you personally know who have lost their home or their car during the past 12 months due to the economy? Your answer probably is “no one” or “not as many as I would have expected.” Unfortunately, this may soon change.

The Great Crash of 2008-2009 began on September 15, 2008 with the fall of Lehman Brothers—causing an immediate widespread panic in the banking system. But people didn’t start getting laid off in large numbers until months later. Reported U.S. unemployment rose from 6.2% in September to 7% by December 2008, but then steadily climbed to about 10% today (about 16 million people). This is a level the U.S. has not seen since 1982, and before that not since the Great Depression.

These dates are important because unemployment benefits (including extensions granted by federal stimulus money) typically last between 46 and 79 weeks. The majority of people laid off since September 2008 are still receiving unemployment benefits—benefits which begin terminating this month. As these benefits run out, the number of home foreclosures, debt defaults, and personal bankruptcy filings will increase.

Moreover, the actual unemployment figures are much worse due to the way our government tracks and reports unemployment.

The popular figure reported by the press is for U-3 unemployment—this is the number released each month by the BLS (Bureau of Labor Statistics). U-3 unemployment is basically the percent of the civilian labor force who are actively looking for work. U-3 understates the true unemployment picture because it excludes people the BLS artificially decides are not actively looking for a job, and people who are working part-time but want to work full-time.

The more accurate number to watch is U-6 employment, which is basically the number of unemployed people who are ready, willing and able to work but can’t find a full-time job. This figure rose from 10.6% (16 million people) of the labor force in September 2008 to 17% (26 million people) in September 2009.

Thus, 26 million Americans, not 16 million, are currently unemployed, and their unemployment benefits are about to run out.

Congress is now considering a second extension of the time period for unemployment benefits. While this seems fair and just, it is actually doing a great disservice to most of the currently unemployed who are never going to get their former job back. Their former job doesn’t exist—it has been replaced by a new method or machine to accomplish their task, the product they used to make is no longer produced at all, or the product is no longer produced in the U.S.

What Congress should be considering is tying extensions of unemployment benefits to mandatory education and retraining programs. To receive unemployment benefits past a certain time period, an unemployed person should be required to enroll in courses or internships where they learn new skills or improve themselves in areas in which they are vocationally deficient. When our government does this, whole industries will emerge offering training and development programs, and employers of all sizes will offer internships giving unemployed people a chance to try out new vocations.

Separately from unemployment benefits running out, another area of grave concern today on Main Street is trade credit. Many small businesses stopped fully paying their suppliers around December 2008 when their sales declined.

Normally, when a customer doesn’t pay a supplier’s bill on time, the supplier stops shipping them new product until the customer brings their account current. But, over the past year, a majority of customers in some industries such as sporting goods, automobiles, and restaurants fell behind on their payables. Suppliers were unable to get tough since they themselves would have gone out of business if they had cut off supplying all customers who couldn’t fully pay for their supplies.

This de facto extension of trade credit has led to an enormous number of small businesses that simply cannot now pay their suppliers, and an enormous number of suppliers who don’t have either the management or financial capability to deal with their growing accounts receivable. In my anecdotal survey of local suppliers and friends who own small businesses, I find that businesspeople that typically only earn $100,000-$200,000 a year are behind on up to $1 million or more in trade credit that they have no idea how they will pay off.

If you, or a friend, is in a small business, you must carefully watch your accounts receivable everyday and be prepared for the most creditworthy of your customers to stop paying you at any moment. Congress and individual states may soon need bailout programs for small businesses just as they provided such programs to our largest banks and automobile manufacturers.

As more small businesses fail, even as the overall economy recovers, unemployment will grow beyond the 26 million Americans currently without a job. As I’ll discuss in future articles, our largest industry may soon be the retraining of workers and the offering of pre-packaged business opportunities to those who can’t, or who no longer want to, work for someone else.”

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–
Bob Spiro
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