Not too long ago, a certain president got elected by having an in-house campaign strategy – “It’s the economy, stupid.” It seems to be closer to the truth that his statement coincided with the explosion of the Internet and personal computing in general, so it got the intended result. But today the truth is the same regardless of the political climate.
Here are three important economic indicators that can affect your business and the people who work for you.
The Unemployment Rate
When is a lower unemployment rate bad news? When it comes in the middle of a do-nothing Congress and political apathy. The unemployment rate should be taken on its face value, not manipulated, minimized, or maximized for the convenience of political gain. If politicians have not yet noticed, there are people who not only work for a living, but need a job. Making the unemployment rate a statistic that has a definite value allows businesses and job seekers the ability to move forward with their lives.
The fact that the unemployment rate has been manipulated through the years is no secret. But what is more important for businesses is that the people who currently work for you and are under consideration for hire would like to know how stable their employment will be. One industry may flourish during bad times, while others will tank. Consider making sure your employees know what the bottom line of the company is, both numerically and competitively.
A note should be made about the relationship between the unemployment rate and the stock market. If 2007 showed the public anything, it was that the value of the stock market as an indicator of future business and economic performance was close to zero. Following the connection between the stock market and unemployment rate since 2007, the general rule is that lower unemployment rates are bad for business because hiring employees increases the amount of overhead costs. Talking heads cannot understand why it seems economic conditions are considered to be only fair seeing the rise in the stock market. This is one of the biggest reasons.
This is an area that can get very confusing and be very misleading unless you have the whole story. There are actually 3 different interest rates that make up what is commonly known as the Prime Rate. Two of these are rates set by the federal government – the Fed Funds rate and the Federal Discount rate. The third is the COFI, which will be briefly explained a bit later. These three create the Wall Street Journal (WSJ) Prime Rate, the one most often heard of and tied to the borrowing rates of business and consumers alike.
The Fed Funds rate is basically the rate charged by one bank to lend money to another bank or financial institution. Currently that rate is exceedingly low, and because of this banks can freely borrow money from one another for virtually nothing. When this rate goes up, banks will charge more to one another, which is then passed on to the businesses and people they lend money to.
The Federal Discount rate is the rate charged by the Federal Reserve for banks to directly borrow money from it. Currently this is at .75 percent. Note that difference between the Fed Funds rate and this rate is the Fed Funds rate sidesteps the government as a source of borrowing money. But in calculating the Prime Rate, the Discount Rate is added to the Fed Funds rate.
COFI is a bit of a strange animal in the rate arena, and needs a bit of explanation. Basically it is a rate calculated by the 11th Federal Home Loan Bank District that serves the states of California, Arizona, and Nevada paid to owners of checking and savings accounts. This may seem weird, but interest paid to account owners is an expense for the financial institution. The more interest paid on a checking or savings account, the greater expense to the financial institution and therefore a higher interest rate on loans must be charged.
Add the three together and you get the commonly accepted value of the Prime Rate. The current projections have an increase of the Fed Funds rate going up at the time of the early spring or mid-summer Federal Reserve Meetings. Should that happen, business borrowing costs will increase and the interest rate on most credit cards will also increase.
The Local Business Climate
Though you may have a business that is national or global, perhaps the best barometer of the economic climate that is relevant to you and your employees is the success of the small businesses that are silently part of your everyday life. Grocery stores, auto repair shops, and entertainment venues are all places that reflect the state of your area.
The case for making it an economic indicator can be made simply by creating a contrast in local economic conditions. A prosperous local climate in a depressed national or global economy will likely mean that you will find yourself attracting more potential hires because people will migrate to your local area for the jobs. In contrast, a negative local climate will result in employees potentially leaving for greener pastures, in fear of losing their jobs. A historical look at the auto industry illustrates the point.
More to the point, a bad local economy makes the national and global economies fairly meaningless. It does not matter if business is booming everywhere but you are laying off employees because business is bad. If you have a local business of the type mentioned above, a bad local economy will have a far greater impact on your company.
These three major economic indicators will definitely affect the state of your business and the morale of your employees. Decreased morale will lead to a decrease in productivity, and decreased profitability. The real world problem is that none of these factors are under your control, which is the reason you need to take special note of them during the course of the year.