I remember having a conversation with someone recently about the impact of higher gas prices on the Average American. My colleague believed that higher prices at the pump were having little or no impact on the economy and individual habits. I believe that consumers have changed their habits as $4.00 per gallon gasoline has taken a bite out of their discretionary spending.

An article in today’s USA Today highlights how much less Americans are driving this year. As a society we drove 9.6 billion fewer miles in May of this year versus May of last year. More people are looking to mass transit as a way of taking some sting out of higher energy cost. I can see evidence of this on my short drive to work through our small city.

It is important for us all to remember that fundamental economic shifts, such as rising prices or falling asset values, have a major impact on consumer behavior. Trying to wish that way will not make it so.

Several months ago I posted an article here about the credit crunch, and its eventual impact on business lending.  I have seen the problem firsthand with clients that banks consider to be in highrisk industries. I ran across this article in The New York Times, which seems to reinforce this issue; however, I am not sure how big an issue it really is.

I do believe banks are being stingy when it comes to lending, but I don’t believe lending has dried up. Companies or individuals with a strong balance sheet filled with solid investments, and some liquidity will still be able to raise capital from their local lender. If you can demonstrate that your opportunity is solid, with limited risk then your ability to borrow will increase.

One of your major challenges will be the overall health of your bank. If your bank was a big subprime lender, and has been taking some major writedowns, now may be the time to go shopping for a new financial institution. These lenders have seen an increase in the cost of funds, due to their own balance sheets, and are struggling with their own liquidity issues. Now may be a good time for business owners to start reassessing some of those business relationships.

The Rough Air Cost Index indicates that the overall economy is beginning to feel some inflationary pressures due to rising oil prices. With cost rising across the spectrum the U.S. Federal Reserve’s number one weapon in the fight against a slowing economy, interest rate cuts, is rendered neutral.

The Rough Air Demand Index indicates that overall demand continues to be soft. A tightening job market, a weak housing market, and nervous consumers are putting significant pressure on overall economic growth. Expectations are that economic growth will be slow for the remainder of 2008.

The National Association of Realtors reported that existing home sales fell 2.6 percent last month, well above the expected 1 percent drop.  The labor department reported yesterday that jobless claims rose again last week to over 400,000.  Although both pieces of data are only a snapshot in time, they continue to point toward an economy that is still in a sluggish mode.

I was watching CNBC this morning and Larry Kudlow was continuing to push his view that the slowdown in the economy is not a real slowdown, and is simply a mental recession brought on by a mainstream media that needs news.  Does the media highlight bad news?  Sure, that is how they sell newspapers.  Although it strikes me that Kudlow is pushing this idea because of his political leanings, and not because he has a plethora of solid data to back it up.

I talk to a lot of people and although some of our clients are doing great, some are not.  I know credit is tight because my friends in the banking world are telling me credit is tight.  If you are a small business owner looking to finance a deal, you better have something to bring to the table, the banks are being stingy with money.  The housing market is down, the job market is soft, and people are in a sour mood.  I believe if you accept the reality of what is going on around you, and commit to working through the problem, then you can move forward.  The longer you pretend the problem does not exist, the worse it will become!

Some of life’s most difficult decisions revolve around what to do in your professional endeavors.  Some people never figure this out, and some know all along.  I have been considering this question quite a bit lately.  It is not an answer which will come easily to anyone.

When deciding to be an employer or an employee you must decide between the perceived security of employment, versus the challenge of entrepreneurship.  Every town is full of stories of successful entrepreneurs who took a chance and made it big.  There are even more stories of entrepreneurs who risked it all, and lost it all.  The problem is there are no guarantees no matter which way you go.

There is also no right answer to this question, there is only what is right for you.  If you are one of those who must have control, needs to make the decisions, and wants to determine what to do when, then business ownership may be the right path.  If you need the perceived security of a continuous paycheck, and can’t live with the downside, then owning your own enterprise may not be the answer.

Before you jump, do your best to know yourself.  What is more important, independence or security?  If your comfort zone is being a team member of a large organization, or having the final say.  Make sure you ask yourself these questions before you take the leap.

My Dad was a successful corporate guy, he spent his career in banking.  I believe he had a satisfying career, and he is living a comfortable retirement.  My Father-in-Law was a successful business owner.  He made a decision early in his life that he wanted to do his own thing,  he wanted to be the guy with his name on the door.  Only you will know what is right for you.  Take the time to figure out before you jump in head first into something which does not fit, and becomes a lifetime of career regrets!   

The U.S. Federal Reserve released its beige book yesterday, a round-up of of reports from the 12 regional Fed banks.  The data suggest the Fed will be holding interest rates steady for some time as signs of inflation and sluggishness both exist.  The overall outlook suggest economic growth will be slight in the coming months.

The U.S. House of Representatives passed a mortgage rescue plan for about 400,000 homeowners along side a bailout plan for Fannie Mae and Freddie Mac.  Policy makers are hoping to stem the tide of foreclosures, and provide some support for the nation’s two largest mortgage holders so they can revitalize a stalled housing market.

Both stories highlight the major challenges facing business owners in the U.S.  Rising prices are putting many employers in the position of having to raise wages, although slow growth is holding down profits.  This is the environment we will face going forward! 

I ran across a couple of articles over the weekend that prompted me to revisit the challenges of the economy as they stand today, and how we got here.  The first article from The New York Times reviewed the bailout of Fannie Mae and Freddie Mac, and why they are too big for the government to just let them fail.  The second article, from The Wall Street Journal, asked why the current financial crisis gripping Wall Street has not been met with outrage from ordinary citizens.  The article points out that the government seems to be all too ready to bail out large organizations (and their executives), but falls short when finding ways to support ordinary Americans.

As I digested these articles I began to wonder, “How exactly did we get to this point?”  Here are my thoughts:

1. Change in banking laws – Beginning in the 1980s banking laws began to shift. The shifts allowed more financial institutions to act like banks, and provide regular bank services, like checking accounts, debit cards, and loans.  These laws also provided financial institutions more flexibility when writing loans.  The combination of more competition and greater flexibility led to aggressive lending practices.  Easier to find credit drove consumption, specifically in housing.  Over the last decade more Americans have been able to buy their own home.  This created a false bubble in housing which began to deflate as mortgage defaults continued to rise.  Rising default rates caused some financial institutions to become more risk adverse in their lending.  When credit tightened, housing tanked, and subsequently consumer spending stalled.
2. Globalization – The trend toward globalization and open trade agreements allowed many large organizations to take advantage of low cost labor for everything from manufacturing toys to handling customer support.  This shifting of jobs from the U.S. to lower cost labor environments has left new job growth moving at a pretty slow pace.  As we create fewer new jobs, we create fewer consumers which also impacts consumer spending.
3. No energy policy – The problem with high oil prices is an issue of supply and demand.  For the last several years our dependence on foreign oil has continued to grow.  As global supplies have tightened prices have risen.  We have to address both sides of this equation to fix the problem.  We have to increase U.S. oil production to help supply, and explore alternative energy options to lower demand.  A two pronged attack can have a major impact on oil prices.
4. Inability to recognize the problem – I remember in August last year reading articles touting the idea that any downturn in the U.S. economy would be minimal.  Many suggested the problem with the economy was the news media, and not fundamentals.  How folks feel about the economy generally lines up with their political affiliation.  If your party is in power then the economy is great, if your power is out of party then the economy is a wreck.  This mentality cause many of our leaders to be hesitant when recognizing challenges in the economy.  They tend to play up the good news, and play down bad news in hopes that setting the narrative in a positive light will make all of the challenges go away.  This results in an inability to recognize and accept the challenge!

The end result of all of this is that consumer spending gets impacted from four sides.  Lower asset values impacts consumer confidence, and tighter credit conditions give consumers less money for discretionary purchases.  Slower job growth also impacts consumer confidence, and causes many to go into a pullback mode.  Finally higher gas prices eat away at the consumer’s discretionary cash.  As consumers lose faith, and spend less the entire system begins to slow down, the ripple effect takes over and what was an isolated problem becomes a macro-economic issue!

The Financial Times ran a story this morning about the possibility of a double dip downturn in the U.S. economy. Some analysts are speculating that the stronger than expected first half will be followed by another pullback in the economy. The threat of a weak housing market, and higher energy prices are forcing consumers to keep money in their pocket rather than spending it on discretionary items. This may mean the U.S. economy is months away from a recovery.

I meet with many business owners, and I get very mixed signals about how they view the current environment. Some will tell me business has never been better, and they are thriving. Some will tell me they are feeling the real pain of challenging conditions. When I managed our family business through the last recession, our saving grace was our effort to structure our business for the reality of a soft economy. Business owners who take the time to push cost down in the rough air will emerge stronger when the economy eventually turns. Take the time to review your discretionary spending, and eliminate those things you really don’t need. Making that effort now will pay off in the long run!

I have always practiced the “Golden Rule” in business. I believe you should treat everyone you do business with in the same manner you wish to be treated. On occasion this can be a challenge, because you may get that phone call just when you are heading out the door, or perhaps you have to attend that event and mingle even if you don’t feel up to it. Murphy’s Law seems to dictate that a business slight will come back to haunt you.

I ran across this article in today’s Wall Street Journal and I wondered, if August Busch III had a chance to do it all over again would he make a better effort to leave the Modelo executives with a better first impression? Many times in my career I have made the effort to reinforce a positive impression of me and my organization. Whether that is something as simple as showing up on time for meetings (because I believe other’s value their time as much as I do), showing my appreciation when someone has done something for me, or treating everyone as though they are not an interruption, but an opportunity. I have always believed that the path to success is paved with small sacrifices that add up to big achievements. Never fall into the trap of assuming someone doesn’t matter, because you never know when they will.

An article in today’s Financial Times indicates traders are betting that the credit crunch will last until 2010. This is not good news for small business owners trying to secure loans for big projects, or homeowners trying to finance the purchase of a new home. It appears that we will have another 18 – 24 months of a difficult credit environment indicating that a quick return to strong growth in the U.S. is unlikely.