Published in The Houston Business Journal on April 22, 2016
NEXT RECESSION COULD RESTRUCTURE ECONOMY MORE, SQUEEZE SMALL BUSINESSES FURTHER
The sustained drop in the price of oil has inflicted considerable damage on Houston’s formerly robust economy. The energy industry can be cyclical, so the price of oil will eventually rise and the city’s economy will recover, although it won’t be the same.
Readers of this publication already know the city’s energy sector looks different than it did a year ago, and that change is likely to continue with more consolidation. The result will be fewer — but larger — players as the strong take over weaker competitors saddled with mounting debt and reduced revenue from low prices and overproduction. This will reduce competition and can affect future production – and will have ripple effects as more people lose jobs and fewer companies exist to hire vendors, rent office space and purchase equipment and supplies.
That same consolidation is already happening nationally as more companies find it easier to grow through mergers and acquisitions. Merger activity in the U.S. hit a record level in September and is now over $2 trillion for the year, according to Dealogic. It could increase when the United States goes into its next recession; as economic cycles are inevitable, history tells us, the question becomes when– not if — the next recession hits. So big companies will continue to get bigger and they will continue to make decisions based on what’s in the best interest of their shareholders, such as parking money overseas to avoid high
U.S. corporate tax rates (according to SEC filings, American firms hold more than $2.3 trillion of foreign earnings offshore). And unlike smaller businesses, they have the resources to hire the lawyers, accountants and lobbyists needed to fight increasing federal regulation and maintain their bigness.
One area where these corporations haven’t been the biggest has been in job creation. Historically, that role goes to the small business sector, also an important source of innovation and entrepreneurism. As job losses are part of any recession, it’s the job gains that are instrumental to any recovery.
What impact will the next recession have on small businesses? It is hard for them to operate now as they are faced with skyrocketing health insurance premiums (if they can afford that perk) and onerous regulation. Entrepreneurism in this country has taken a severe hit. The World Bank’s 2015 report about the ease of starting a business ranked the United States 49th out of 189 countries (for comparison, Afghanistan placed 34th). We Americans pride ourselves on our entrepreneurial and free-market principles, but perhaps that is more our history than our current reality.
The next recession could be a real knockout punch to American job creation and entrepreneurism and result in another restructuring of the labor pool. While headlines focus on the unemployment rate, that metric doesn’t tell the complete story. Houston’s labor participation rate has fallen and so has the U.S. rate of the population employed or actively looking for work. From 2005 to 2014, the national rate fell considerably from 66 percent to 62.9 percent. The next recession is likely to continue that trend, which will have severe long-term consequences for our economy.
Another shrinkage of the labor pool of qualified workers means businesses will have trouble finding the right talent to help them stay competitive. Compound that trouble if growth gets back above 3 percent — the shortage of skilled labor could stunt growth.
Information technology has had a shortage of qualified personnel throughout the country for several years with no expectation that the trend will reverse soon.
Retiring baby boomers and stringent federal limits on visas for educated foreign-born professionals to continue working here are making the problem worse. IT is fundamental to business systems and applications, so this affects a business’ productivity and rate of innovation. Putting new IT initiatives on hold because of a lack of talent will result in reduced American innovation, competitiveness and growth. And that will have a dire long-term impact.
When the next recession arrives here or abroad, no doubt we will turn to central banks for help. For some time now, central bankers have had to do the economic heavy lifting as a result of political dysfunction around the world.
But what should be clear from the performance of the economies in Western Europe and Japan, not to mention the United States, is that aggressive monetary policy cannot overcome the lack of sound fiscal policy as manifested by free markets with rational and competitive regulatory and tax policies. Central bankers are running out of ammunition to combat recessions and have long been in uncharted waters. The markets are losing confidence in their ability to affect outcomes and rightly so. Try explaining negative interest rates, much less how well they have worked in Japan. With this being a presidential election year, what better time to focus on the role, size and cost of the federal government in our society and economy.
James Thompson is CEO and president of The InSource Group, a technology staffing and placement company with offices in Houston, Dallas and Fort Worth.