Is the Economy Really Recovering?

Is the Economy Really Recovering?

After a rocky period, right now the US economy seems to finally be doing better. Corporate profits the first quarter of 2010 increased to almost $117 billion over the fourth quarter of 2009, when corporate profits were almost $109 billion. We don’t have the results in for the second quarter just yet, but corporate profits certainly seem like they’re starting to increase. Which means things are getting better.

However, everybody we talk to doesn’t feel like things are better.

Why is this happening? Why is it that we see these reports that corporate profits are up by billions and billions of dollars, but on an individual basis it still feels like the economy isn’t recovering? The easiest answer, of course, is that unemployment is still above 9%. Recessions typically last nine months, but this one we’ve just gone through lasted over two years. But the bigger deal could be what some economists are calling a two-tier recovery. Meaning large corporations are feeling a lot of improvement, while small business owners and individuals are not.

There’s a reason for this. Big businesses, I mean really large businesses, have access to capital that small business do not. If a big business needs to borrow money to buy supplies or increase their inventory, they can go to the bond market and access the capital they need. But if you’re a small business owner, you can’t borrow money from the bond market. You’ve got to go to your local bank — and odds are the local bank is still dealing with underwater real estate loans. Some estimates suggest it will take another 18 months for the banks to work through their bad loans and be in a position to really start making credit available to the small business owner.

But there are other reasons the economy is working better for some types of businesses than others. The percentage of big businesses who are being unionized is declining, which gives the larger employers more flexibility as far as hiring and firing and reacting to economic forces than they’ve had in the past. Another reason would be that the savings rate in America is increasing somewhere between the rate of 3% – 6%. And if people are increasing their savings rates, chances are they’re cutting spending in certain areas like going out to dinner, or going to the beauty parlor. On the other hand, if their refrigerator breaks, they’re still going to go out and buy a new one.

So the smaller, service sector businesses are getting hit harder than the larger manufacturers. Exports are helping too. Large corporations get a fair amount of their revenue and profits from exports for international sales. But if you’re a small business, chances are you’re not exporting to any great extent. So this is why, when we look at the big picture, things that look like they’re improving, and the numbers back that up. While on the local level it still may feel like things haven’t gotten much better at all.