Monday, April 26th, 2010
There is a large part of the U.S. economy that is not on investors’ radar screens. I am not referring to the underground economy or the barter trade economy or the money that is paid to illegal immigrants.
The invisible economy is much bigger than that. It is the vast part of our GDP that is not measured by stock prices on stock exchanges. I am talking about the “Ma and Pa” entities, the family run businesses, the real estate companies, the printing presses, the restaurants – companies not publicly held because they are either too small or because they prefer to remain privately held. They are the primary engine of job growth in this country. Many, many of them are profitable and well managed. Some of them are quite large. But most of them are small, and therein lies the problem.
As the banks continue to deleverage and shrink their over-bloated balance sheets, they must of necessity lend less. They are happy to lend to the Federal Government, which may have a dreadful balance sheet but is considered a good risk. They are even happier to lend to large, publicly traded and already well-financed corporate giants whose earnings have been improving. Fortunately, there are more and more of those companies these days which is good news. The banks are also increasingly lending to homebuyers, now that the risks have been mitigated due to lower home prices and increased down payments.
But left out in the cold are so many small companies with good business plans and positive working capital and profits. It is those companies that have been ignored or denied capital, as the banks have restructured their balance sheets. Without bank financing, many of them cannot carry on business, much less grow.
There is no lobby for this large and silent sector of the economy, no spokesperson to plead their case to the Government or to the banks for them. If they are left without access to capital, they will eventually fail and that will be a serious problem for employment growth and for sustained economic expansion.
The current burgeoning recovery in the economy is evident in the earnings of many our biggest companies in a wide array of industries, and their stock prices are reflecting the improved earnings and the stellar productivity gains achieved. But in order for the U.S. economy to recover fully, the great unwatched and unseen segment must also participate. Today much of that part of our economy is still in recession and without the banks serving them as banks should, they will remain there.