Posted by: dstieglitz | January 28, 2012

WHEN NOTHING CHANGES

     Why Put Off to Tomorrow What You Can Put Off to 2013.  Don’t expect Congress or President Obama to do anything to help the economy until after the November election. After wasting 2011, they’ll avoid making any tough decisions in 2012 and continue dancing around the issues trying to make each other look bad. Inaction is a tragedy for 14 million unemployed Americans when Congress could easily create jobs by supporting small business, setting up an infrastructure bank, or building a pipeline. Unfortunately, while nothing changes in the U.S., the world moves ahead and leaves us further behind. 

     The Unpopular 212th Congress.  Ignoring the job they were elected to do – but still accepting full salary and life-long benefits – both parties have punted the country’s challenges to the people to decide. Congress has its peaks and valleys, but today they’re in the pit of the Grand Canyon with the lowest approval rating (16%) in history. Similarly, President Obama’s approval rating in a recent Gallup Poll was 43% – tied for the worst of his presidency. I don’t recall a time when both ends of Pennsylvania Avenue were so out-of-touch with the needs of the people. Even their best ideas are so mediocre that passing them would really be a defeat in terms of how much needs to be done to help the country.

     Compound Gridlock. Taxes and spending aren’t the only areas where the country’s challenges will go unaddressed. Jobs, energy, infrastructure, helath care, immigration, housing finance, and financial regulation policies are also likely to remain gridlocked in 2012. For example, Obama disapproved the Keystone XL pipeline which pleased environmentalists, but angered union supporters who desperately need the construction jobs. Similarly, uncertainty in U.S. oil and gas drilling decisions and the budget impasse over infrastructure delay construction projects while millions of workers draw extended unemployment. 

     Stuck in Their Job.  Among Americans who are employed, a Gallop poll reported that only 46% are happy – down from 60% in 1990 – as people cling desperately to unfulfilling paychecks. From office buildings to malls, few are willing to tell their boss to shove it. According to Business Week, since 2009 an average of one million fewer Americans per month have quit their jobs than in previous years – that means over 20 million Americans are stuck in jobs they ordinarily would have left. Combine that with 14 million unemployed and you have a lot of disgruntled Americans. If President Obama wants to keep his job, he’s got to find a way to provide better jobs for voters. 

     Speculation About 2013.  Guessing what will happen in 2013 will be 2012’s favorite topic. After the election, the lame-duck 212th Congress will once again face the $3.8 trillion increase in income, capital gain and estate taxes that will take effect January 1st if the Bush tax cuts expire. The tax strategy will also affect how Congress deals with the $1.2 trillion in spending cuts that kick in automatically in 2013 because of the Super Committee’s failure. Unemployment is likely to increase as government shrinks and uncertainty pushes small businesses into bankruptcy. Unfortunately, a close election – the most likely outcome – won’t decide anything and will leave the 213th Congress with the same problems to resolve and the same political chasm to cross. At best it will be at least 18 to 24 months before we’ll see any stability in the federal government – and then it will be time for the 2014 mid-term election.

     The Washington Area Economy.  President Obama promised to change Washington – and he has certainly done that. Unfortunately, the changes weren’t what anyone wanted: the three largest budget deficits in history and coast-to-coast outcries for cuts. The once-booming Washington economy will feel the impact of the cuts more than other regions. After leading the nation in job growth in 2010, the Washington area dropped out of the top-10 fastest growing metropolitan areas in 2011. Pay freezes and workforce reductions have caused anxiety among government employees. Some federal agencies are cutting-back in anticipation of budget cuts, so government contractors are reducing staff through early retirements and layoffs. Economists predict the Washington economy will about grow at about the 2% national rate – but that growth will reverse in 2013 when the federal cuts take effect. Since the area gets about 15 cents of every dollar in federal spending (it has less than 5% of the population), it can expect to be hit with 15 cents of every dollar reduction. 

      Government Contracting Outlook.  In 2012, uncertainty will have a bigger impact than declining budgets – the big cuts don’t hit until 2013. Several factors will cause the government contracting industry to shrink and consolidate. First, of course, across-the-board budget cuts, including defense, make organic growth difficult. This has reduced valuation multiples for government contracting firms significantly. Second, government spending actually will grow in niche sectors like cloud computing, cyber-security, identify management, and health care – which makes small businesses in those areas prime acquisition targets. Third, the owners of some companies may conclude that they would rather exit than continue operating in what will be an austere and highly competitive market. 

     What Can You Do?  First of all, vote in November according to the policies you want to see. In the meantime, set aside your fears and take action to thrive in 2012 even as Congress does nothing – you don’t have the luxury of doing nothing since you can’t borrow $15 trillion to live. In light of the tax changes likely in 2013, it would be prudent to consider that 2012 will have the highest deductions and lowest overall tax burden in your remaining life. For those who manage a business, it would be wise to:

  • Ramp up customer service – help them succeed despite budget cuts
  • Reduce operating costs wherever possible, and invest only in areas with positive cash flow
  • Focus on products and services with growing demand – phase-out ones whose demand is waning.

These are good things for businesses to do at any time, but they are survival tactics during times of contraction like the Washington area will face in 2012-13. Good luck!

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