Typically, either a recession or depression takes place every 45-60 years, while a recession happens every 100 to 120 months.
“That means we were due for one in 1995, but we didn’t get one because (former Federal Reserve Chairman) Alan Greenspan tweaked the economy, maybe too much,” said David Kohl, who spoke at the Sheraton Iowa City Hotel on Feb. 23.
Mr. Kohl, retired professor of agricultural finance, small-business management and entrepreneurship at Virginia Tech University, was the featured speaker for the John R. Hughes Lecture Series, a partnership between Hills Bank and Trust Co. and the University of Iowa’s business school.
“Eighty percent of economics is behavioral: fear-greed, fear-greed, fear-greed,” he said. “As a small-business owner, you’ve got to understand the cycles and manage through those cycles.”
He spoke of the economic recession and the status of recovery.
“The United States economy is at an inflection point,” he said. “We’re very, very similar to the early 1980s, in fact, back then, Japan was vying to be the world leader in the economy. You know what the United States did? We basically had our backs against the wall, we reinvented ourselves, we built small businesses and we re-emerged.”
If that doesn’t happen, the United States will no longer lead the world economically, he said.
“We’re either going to do that this time or we’re going to move toward a European-style economy; there’s nothing wrong with a European-style economy, but it’s going to come with a little more regulation, a little more structure and we won’t be the world leader in the economy,” he said. “In the meantime, China and Asia will emerge.”
China is making investments across the globe in food, oil and other reserves, while the United States attempts to shore up its economy, he said.
He blamed large, corporate banks for the current recession.
“If you look at the whole banking crisis,” Mr. Kohl said. “It wasn’t a lot of our community banks, you know what it was? It was a lot of the big-shadow banks.”
The American culture of “everyone deserves to own a home” led to loosening credit standards.
“If you really look at our problem, it’s been a shadow-banking problem and it’s only happening in about 63 counties in the United States; you aren’t experiencing it here in Iowa,” he said. “It’s 63 counties in God’s waiting room: Florida, Arizona, Nevada and California.”
He outlined six indicators for small business owners to watch when trying to predict how the economy will cycle next. The Conference Board Leading Economic Index is one of them. If the index is down 0.3 percent to 1 percent for three consecutive months or more than 1 percent over the period, a recession is three to six months away, he said. Between September 2007 and February 2008, the index values were down 2.9 percent over five months.
“If you’re a small-business owner and you see that happening, if you have a lot of accounts receivables, start collecting debts,” Mr. Kohl said. “If you have a lot of inventory, you move that inventory.”
Another tool is the Purchasing Manager Index, which polls inventory buyers about their future goods purchasing plans. Housing starts and is another important indicator, as well.
Factory utilization is another number Mr. Kohl watches. If more than 80 percent of factories in the country are operational, the economy is sound. If the number is below 75 percent, the economy is in trouble. Right now, factory utilization is at 72 percent, he said.
Unemployment rates are also key; the ideal rate is 5 percent. Interest rates are another indicator. The fact that interest rates are low is a positive sign, although the government won’t increase them until unemployment and other factors improve, Mr. Kohl said.
He said there is a lot of “sugar candy” in the economy, referring to numerous stimulus packages that are artificially propping it up.
“What’s going to happen if we take the training wheels off of this economy?” he said. “The economy is going to slog along because we’re going to need to make some structural adjustments in the economy.”
Besides lecturing on economics around the world, Mr. Kohl is part owner of Homestead Creamery, a dairy business in the Blue Ridge Mountains that turned down an offer by Walmart to be sold in stores across the East Coast. The decision was made because Walmart wanted Homestead to switch from glass bottles to plastic and increase its output by four times. Glass bottles are an important part of product quality, he said.
Mr. Kohl came on as a partner in attempt to transition the company from losing $40,000 a month to making a profit. The group achieved that within a year.
“Despite the recession on the East Coast, we were up 27 percent,” Mr. Kohl said of last year’s sales.