Trying to jump-start the economy by reducing interest rates even further is like pushing on a string. Despite the fact that the Federal Reserve has lowered the federal funds rate to 1.75%, its lowest level in 40 years, the Index of Leading Economic Indicators (the measure used to gauge the future health of the economy) has declined for four consecutive months. Why is the economy so anemic? One major reason is declining consumer and business confidence.
Think of it this way: Suppose you decide to make a major purchase, such as a house or automobile. If the price has been determined, two additional factors are likely to figure prominently in your decision to make the purchase. The first factor is the interest rate, which is nothing more than the cost of borrowing money. The second factor is how confident you are about your future earnings. For example, if you are concerned about job security, you are not likely to make the purchase, no matter how low interest rates might be. The same logic holds for business owners deciding whether to undertake a new investment. While interest rates are important because they affect the total return on capital invested, if business owners are pessimistic about future economic activity, even low interest rates will not be attractive enough to make them invest.
Over the past year, business owners have been more wary than consumers, so investments have lagged. Fortunately, consumer spending has carried the economy forwardeven though consumers are facing record levels of debt. But the situation has changed over the last three months. The growing number of job losses has caused consumers to become cautious. As a result, if the economy is to improve, investment must pick up. But low interest rates alone will not get the job done. Rather, the key index to watch is business confidence.
The Gazelle Index, a survey of 350 of the nations fastest growing black-owned businesses as measured by workforce growth rates, took a sharp drop, from 67.7 to 49.5, between the second and third quarters. An index value below 50 indicates that business owners are more negative than positive about economic conditions. Why is the index value important? When business leaders are concerned about the economy, they reduce hiring, which contributes to higher unemployment rates.
The ING Gazelle Index has identified several factors contributing to this trend. These factors include revelations about corporate fraud, gyrating stock market values, and the fear of a double-dip recession. As these factors improve, investors are likely to gain more confidence in the economy.
You can stay abreast of the changes in black business confidence by following the ING Gazelle Index each quarter. Log on to www.gazelleindex.com for the latest results.
Thomas D. Boston, who heads Boston Research Group in Atlanta, is a member of the Black Enterprise Board of Economists and conducts research for the ING Gazelle Index.