Could the US face a second downturn?

There are some reports that are suggesting that the recovery may be right around the corner or may have even begun. Or is this just the eye of the storm?

Jim Young/AP/Reuters
U.S. Treasury Secretary Timothy Geithner (L) listens to remarks by President Barack Obama during their meeting with bipartisan Congressional leadership to discuss financial reform at the White House in Washington, as seen in this photo taken earlier in April. GDP growth seems to signal signs of recovery, but a second downturn could hit, some experts warn.

Intuit's April Small Business Employment Index, based on online payroll data from nearly 55,000 small businesses, finds:

* Nearly 300,000 new jobs created since mid-2009 and 66,000 new jobs created in April.

* Compensation grew by 0.5 percent in April and now is $2,607 per month, compared to $2,595 per month in March.

* Monthly hours worked were up by 0.5 percent in April, to 105.7 hours compared to 105.1 hours in March.

According to SurePayroll's Small Business Scorecard for April, optimism among small business owners jumped up 12 points over last month, with 67 percent of small business owners telling us they feel optimistic about the small business economy at this time.

But the authors of this report go on to point out:

"However, the monthly pay index decreased 0.1 percent over last, bringing us to a year-to-date increase of 0.3 percent. Bottom line for small business is that while some good things are happening, until more small businesses start hiring full-time workers -- and those workers spend with confidence due to perceived job security -- it's not time to declare a full recovery."

We must also keep in mind that other surveys of small business optimism are not showing signs of improvement.

Blogger Steve King, tells us to relax -- small businesses will soon get the "trickle down" of the economy:

"Small businesses in general are lagging behind large corporations in benefiting from the recovering economy. Larger firms have better access to stronger international markets, credit and government stimulus spending. Many large public corporations are reporting strong Q1 earnings, and raising their earnings estimates for the rest of the year.

"As the economy continues to recover, so will the the fortunes of small businesses. They will benefit from large firms increasing their purchases from small suppliers, and stabilizing labor markets will lead to improved consumer sentiment and spending.

"We expect this 'trickle down' recovery will gain steam as the year progresses and more firms participate."

King's Trickle Down Theory is not at all consistent with data from previous recessions. It has been new entrepreneurial ventures and existing small businesses that have led the growth out of almost all of our past recessions.

According to the advance estimate of the GDP released this week, growth in the 1st quarter was 3.2%, which is down from the previous quarter's growth. The deceleration in real GDP came from a deceleration in private inventory investment and in exports, a larger decline in state and local government spending (so much for the sustainability of the stimulus spending), and a downturn in residential fixed investment.

While I would like to join on "the recovery is here bandwagon", I remain very cautious. The GDP growth that seemed to signal early signs of recovery is sputtering.

There are growing concerns that much of the current positive economic news is based on speculation. For example, many I talk to in the real estate market quietly express continued concerns about a second downturn in residential real estate and what they see as the inevitable deep downturn in commercial real estate.

I still hold to my view that the best case scenario is a long period of economic doldrums.

My advice to business owners is to remain conservative in spending, especially with fixed overhead, and build cash reserves. Avoid debt whenever possible. Strengthen your position within your market to ensure your place when sustained growth does happen.

While we may have entered a calm period, sustained economic growth is not anywhere in sight. And we may simply be in the eye of the storm before a second downturn hits.

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