Is Economic Reality Helping Drive the Entrepreneurial Movement?

This weeks contribution from our friend Gordon Hester.

There seems to be more and more people who are interested in owning their own business. While that has always been a common piece of the American dream, I was reminded once again this weekend that the current economic realities are fueling this process.

This weekend I read an article in Market Watch entitled “Why You’re Not Making More Money than a Decade Ago”. If you want to read the article click on this link, http://finance.yahoo.com=/career-work/article/110041/why-youre-not-making-more-money-than-a-decade-ago?mod=career-salary_negotiation. There are a few parts of the article that I feel are worth noting.

1. Median weekly income, adjusted for inflation, is lower in 2009 than it was in 2000 for both high school and college graduates. (Economic Policy Institute).

2. Between 2002 and 2007, wages fell despite the country being in a period of economic expansion.

3. Planned salary increases for 2011 are at 3% for clerical, supervisory, middle management and executive positions. That 3% gain is below the 4.5% to 5% increase seen at the beginning of the decade and the steady 4% from 2005-2008 (Hay Group, Global Management Consulting firm).

4. The last 3 years have seen the lowest salary increase that most employees have ever experienced.

For businesses, stagnant and decreasing wages can have a positive impact. It allows them to lower costs and hire at lower rates. It is important to remember that almost 50% of those unemployed have been unemployed for over 24months. That means employers now have a large pool of potential workers from which to choose. Also, the makeup of the unemployed has changed. In the past a lot of the unemployed were people that simply didn’t want to work. However, today that is not the case as more and more educated, experienced and hard workers are seeking employment. I thought it was interesting that one of the attached articles to this article was titled “Lowball Salary Offers – Take it or Leave it? In my opinion, it is simple macro economics. If there are more and more people (demand) looking for less and less jobs (supply), then wages go down (price).

What about the “Expense Side of Life”?

To understand the complete economic effect, you have to look at both the income and expense side of the formula. As noted above, the income side is stagnant and probably going to get worse. However, if expenses followed the same path, then the net difference would be the same. There in essence is the problem. From 2000-2010, the Consumer Price Index (how we measure our cost of living) increased by 27%. However, there were expenses that went up much more. For example, the average price of a home went from $134,150 (2000) to $263,400 (May 2010). That is an increase of 96% or almost 3.5 times more than the average cost of living expenses. Another example is gas. In 2000, the average price of gas was $1.26 per gallon. As of July 2010, the average cost of gas is $2.73. That is an increase of 116% over 10 years. Keep in mind that gas was close to $4.00 per gallon not too long ago.


The Entire Economic Picture Going Forward

There are 4 components of the economic picture that impact all of us:

Incomes are likely to go down. Deriving income is typically done from either (1) work, or (2) investments. In challenging economic times, both areas find it harder to create income than in good economic times. As for expenses, there are those we can control and those that are out of our control. You can only budget so far. It is the expenses we cannot control that will likely continue to increase (and at an alarming rate). This would include taxes, fees and inflation on items that everyone needs (fuel, food, etc.).

I think the other challenging aspect of the economic winter will be how the de-leveraging of our society creates change. I suspect we will continue to see decreasing values (deflation) with anything that requires debt for growth. This would include cars, boats, homes, and businesses dependent on using debt to survive and grow. Banks will likely drive revenue from fees vs. loan income (these are known as Zombie Banks). In the end, as society changes, you have to change in order to survive and thrive.

Taking Financial Control of the Future

Many new entrepreneurs are already taking steps to own their own business vs. depending on a job. For many, the business model of choice is a “Plan B” business. This allows them to work a full-time job while they build a part-time business. For many, this is the only way they can have a business because (1) they don’t have the resources to work a full time business, or (2) they are not prepared to take the risk of starting a full time business and quitting work. I would note that we are seeing a similar entrepreneurial movement around the world because the global economy is suffering from some of the same problems as the US. In closing, there is a very critical message in all this data. That message is that there has never been a time in our life where it is more important to take control of our financial future than right now. Those who are proactive and play the game right will be the ones that prove a lesson seen in economic history – chaos and adversity are often a catalyst for opportunity.