The “4-Week Avg. U.S. Net Imports of Crude Oil” graph shows the U.S. has recently become a net exporter of petroleum products. Such has generated a lot of publicity and surprise of late, but one must keep in mind that this is NOT crude oil.

As the “4-Week Avg. U.S. Net Imports of Petroleum Products” graph shows, the U.S. remains a massive net importer of crude, the raw material used to create petroleum products such as gasoline.

Few of the pundits are small business owners. But the National Federation of Independent Business (NFIB) – the national, non-profit organization representing small and independent U.S. business – polls small business owners each week. One question in each survey asks, “What’s the biggest problem you face today?”

The biggest problem reported today by actual business owners? Demand.

Historical survey results are presented in the chart below. Since the survey began in 1986, “Taxes” has consistently held the top spot, surpassed just a few times by “Regulation” briefly in the mid 1990s and “Insurance” in the early 2000s. At the onset of the 2008 recession, however, “Sales” surged to number one for the very first time. It’s remained that way ever since.

Interestingly, “Interest Rates & Finance,” which we can safely assume includes access to debt and equity capital, has never been reported to be a problem. It seems the NFIB poll results debunk the common claim that “it’s a lack of capital.”

Why has “Demand” risen to the top and surpassed “Taxes”?

Sales suffer during slow economic times. When sales suffer, companies have a hard time booking a profit. When profits aren’t being earned, all other problems are trumped. Taxes are only a problem when there’s profit.

As one can see in the graph, the incidence of “Sales” being reported as the number one problem rises during each recession. See the rise of the “Sales” line in 1991/1992, 2001/2002, and 2008 through the present? Note that the official end of the most recent recession was in July 2009, but “Sales” remains the business owner’s biggest concern. Judging from the results displayed in the chart, the recession is not over for owners of small U.S. companies.

What can we do to spur demand?

Good question. Higher demand comes, of course, from higher spending. Unfortunately, we appear to have reached the end of the forty-year debt binge that occurred at all levels – government, business, and individual. The borrowing funded spending that could only be sustained with continued borrowing. Borrowing capacity is limited, however, and many have, or are now, suffering from excess debt (“leverage”). We’re in the hangover that follows the binge. How do we recover? Abstinence. Unfortunately, abstinence from debt and deficit spending is the opposite of what we need. It’s the problem.

Governments, companies, and individuals have moved, by necessity as well as by cultural shift, to debt reduction. Instead of borrowing money to spend more, each group is cutting spending and paying down debt. The result is reduced demand (buying) throughout our economy.

In addition, economic uncertainty is prevalent. People and companies save more and spend less in the face of uncertainty. So, the results of the NFIB survey are not surprising. And there’s no single person (or organization or group) to blame nor is there any easy fix.

Of course, so long as the U.S. government is willing and able to borrow and run deficits, it can prop up demand during weak economic times. How? By pumping up government spending. This is what it’s done in the past (at least since it learned a lesson during The Great Depression). The result has been shorter and shallower recessions.

In the current recession/economic slowdown, our government has again pulled this important anti-recession lever – that’s one big reason we’re running huge deficits – but it hasn’t worked. The demand gap is apparently too large. Also, our federal government is showing signs that it has reached its debt load limit. As such, going forward, our government will have limited ability to generate demand through spending, at least until it adds borrowing capacity by either paying down debt (“deleveraging”) or by increasing revenue (raising taxes or expanding the economy), or both.

This is the peril of our failure to pay off debt during the good times. Our only choice now may be to wait it out.  Over time, debt loads will be paid down, optimism will return, and spending will naturally recover.

How long might this take? Nobody knows. That’s why everyone remains cautious.

On September 15, 2008, the U.S. Treasury and Federal Reserve chose not to rescue Lehman Brothers, which was crumbling under a mountain of toxic mortgages and mortgage-backed securities. Lehman filed the largest bankruptcy in U.S. history. The Great Recession ensued, and this day has become known by some as “the day the economy died.”

Stock markets worldwide, which already had been declining, crashed. Fears of a global financial meltdown spread, and in less than 30 days the U.S. Congress passed and President Bush signed legislation authorizing the U.S. Treasury to spend up to $700 billion as it saw fit to stabilize the financial system. This, on top of a $400 billion federal bailout signed into law a few months earlier (July, the Housing and Economic Recovery Act of 2008) to “shore up” Fannie Mae and Freddie Mac.

These were immensely controversial pieces of legislation. Three years later now, the “bailouts” are an emotion-filled issue playing a major role in our political discussions and elections. It is time we clearly document the facts and result of these programs and expenditures.

Federal Bailout #1: Housing and Economic Recovery Act of 2008.

Signed into law by President Bush on July 30, 2008. Authorized the secretary of the U.S. Treasury to spend up to $400 billion to “shore up” The Federal National Mortgage Association (“Fannie Mae”) and The Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). Both entities were established by the federal government — the former in 1938 and the latter in 1970 — to aid and expand the availability of financing for residential home purchases. Making home ownership more affordable and accessible to U.S. citizens, and thereby expanding the percentage of people who own homes, has been a major federal economic policy objective since the Great Depression. Fannie Mae and Freddie Mac were created by the federal government and “sold to the public.” Both were publicly traded entities and had been autonomously self-sustaining for many years until the mortgage debt crisis of 2008, brought on by lax mortgage underwriting standards used by mortgage originators (who sold their mortgages to Fannie Mae and Freddie Mac).

A total of $162 billion was invested in Fannie Mae and Freddie Mac, less than half the authorized maximum. None of the monies have been repaid, per se, but the investments yield a return in the form of dividends that to date (through June 2011) have totaled $24 billion, according to ProPublica, a self-proclaimed “independent, non-profit newsroom” tracking “every dollar” of federal “bailout” money paid out and returned.

Dollars Spent: $162 billion

Dividends Received: $24 billion

Net Outstanding: $138 billion

There seems to be little hope for the near-term return of the entire amount invested by the government in Fannie Mae and Freddie Mac, but the eventual return of the funds remains possible, and the return of a material portion in the next few years is likely. In the meantime, the investment should continue to pay a dividend in the 6 percent range.

Federal Bailout #2: Troubled Asset Relief Program (TARP).

Signed into law on October 3, 2008 as part of the Emergency Economic Stabilization Act (EESA). Authorized the Secretary of the U.S. Treasury to use up to $700 billion in federal (U.S. Treasury) funds to provide liquidity and capital where necessary to promote financial market stability. The two primary means were the purchase of sub-prime mortgages (to provide liquidity to holders of large portfolios of the same, such as commercial and investment banks), and the lending of funds (via debt, equity or quasi-equity) to businesses and institutions deemed by the Secretary to be critical to the financial system.

On July 21, 2010, the TARP funds maximum amount was reduced to $475 billion as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama. The Treasury has obligated itself to $474.8 billion, and through June 2011 it had spent $411 billion. The largest recipients were AIG, General Motors, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. According to ProPublica, $312 billion has been returned (or earned), leaving $99 billion net outstanding under TARP. Estimates are for the net outstanding to fall to around $19 billion by the end of 2012.

Where we are today

Multiple groups track the bailout programs: Office of Management and Budget (OMB), Congressional Budget Office (CBO), U.S. Treasury and nongovernmental groups such as the New York Times and ProPublica.

TARP program loans continue to be repaid at higher rates than many originally feared, and TARP investments in companies such as GM and AIG are being exited at yields few thought possible. Most of the outstanding bailout money is in the form of equity ownership in troubled, or previously troubled, companies.

Should the government have intervened? Intervened to this extent? Was it necessary?

We will never know.

But what we do know is that very smart people at the U.S. Treasury and Federal Reserve believed at the time that massive federal intervention was necessary to avoid total collapse. Republicans and Democrats alike voted for both pieces of bailout legislation. Some $1.1 trillion in spending was authorized, but less then $600B was actually spent. The economy, although it remains weak, did not collapse. The stock markets have rebounded and the financial systems have continued to function. The $200 billion that remains outstanding is significantly less than the taxpayers’ cost of the savings and loan crisis of the late 1980s. The cost of that crisis amounted to 3.2 percent of GDP, while the GDP percentage of the current crisis’ cost is estimated at less than 1 percent. Further, there is good reason to expect the net cost to fall well below $100 billion in a few years, and potentially approach zero. This is because the monies were not “given out” but rather loaned (with repayment terms) or invested (in assets or equity).

As I look at the bailout today, I can’t help but be amazed — and relieved. The sky has not fallen and the monies are, to our surprise, being repaid.

• Profits continue to fall. Just 12% of owners reported higher earnings the past three months (4Q09) compared to the three months prior (3Q09), though 3Q09 was a terrible quarter for earnings.
• Owners reported lower revenue over the past three months and see no increase in revenue in the ensuing three months. The percentage of business owners reporting lower sales for the quarter remained near the record low reported in March 2010 and 51% of owners surveyed expect even lower revenue the next three months.
• Capital spending remains at a record low. Just 44% made a capital expenditure in the past six months (lowest level since survey began in 1979) and a mere 18% plan to make one or more in the next three to six months (just two points above the 35-year low).
• Owners continued to shed inventory and plan to shed more. The inventory index recorded its largest inventory decline since the survey began. This is shocking, given that small businesses have been shedding inventory since mid-2007. Moreover, more reductions can be expected as more owners plan to reduce inventory levels going forward than plan to increase.
• Owners became more pessimistic in December and overall optimism remained at historic lows.“Optimism has clearly stalled,” said NFIB. The Index of Small Business Optimism fell in December 2009 to its second-lowest reading since 1980 (the lowest was in March 2009).

The U.S. Federal Reserve tracks economic activity across a much broader group of indicators and includes data such as consumer spending, tourism and commodity prices. The January 13 Federal Reserve “Beige Book” reports a modest economic recovery throughout the United States. It also found some optimism among manufacturers, in apparent contrast to the recent NFIB report.

Lots of Fuel but No Fire

We are more than two years into this recession. One would expect inventories would have long ago been reduced to minimum levels (and thus a mild resumption of inventory purchases) and that profits would begin to rise due to prior cost reductions (both of which should stimulate economic growth).

• Interest rates remain at historic lows (an economic stimulus).
• The federal government is spending like mad (an economic stimulus).
• Federal and state taxes remain below historic peaks (an economic stimulus of sorts).

When will the recovery arrive for owners of small and midsize U.S. companies? Your guess is as good as mine, but historically recessions do end and it seems there can be nowhere but up from here. Of course, we’ve been saying this for months now and, according to the NFIB, we continue to be proven wrong.