It’s Still the Economy, of Course … [Part 1]

While puttering on various MAKEcation projects, I’ve continued to ponder the economy and how to relate to today’s conditions as a small business. Last week’s government report of continued job losses in December prompted me to get some of the thoughts down. These have grown to be a bit extensive, so for convenience I’ve broken them into two posts: the first regarding small business and the economy in general; the second a more specific perspective relevant to things at ShopBot and to ShopBotters.

Two Interests

I’m focused on the economy and small business for two reasons: First, the majority of our ShopBot customers are small businesses. We’d like to do our best to provide not only the right tools, but also support and resources to help ShopBotters move forward in these times. Second, ShopBot is itself a small business and while part of me says to just concentrate on making good tools and not obsess over an economy that is out of all of our control, I do believe in actively seeking strategies appropriate for the new conditions and whatever opportunities they may bring. I cover these in detail in Part 2, but first some realities.

There is probably one thing that can be said about our situation now — as if you didn’t know it already — we are not likely to see a surging tide of recovery that restores a pre-2008 type business activity anytime soon. And, when the recovery eventually arrives, I imagine that both your and our business landscapes are going to look a lot different than before the 2008 financial crisis and recession. As for the economy of the next year or two, even optimistic experts don’t forecast much growth. And while perhaps, despite yesterday’s news, unemployment may be stabilizing; we’ve got an impressively long way to go to get employment back to the levels that makes people feel good and creates solid demand. Take a look at the employment graph:

US Unemployment (data: Bureau of Labor Statistics)

US Unemployment (data: Bureau of Labor Statistics)

Our Economy

As far as the general economy goes, there may be additional shoes still to fall: additional de-leveraging may follow from the derivatives feast that led up to last year’s economic collapse; in particular, there may be more trouble from previous leveraged deals and private equity buy-outs that will need to be refinanced — a variation on the mortgage-derivative fiasco at the corporate level. And, we aren’t even past the projected collapse of many more mortgages with their resulting bank failures. At the very least, continuing foreclosures and short-sales will likely keep house prices down and limit home equity as a credit source for a good while, even if banks were loaning (I’ve heard stories from a couple of friends actually purchasing houses recently, that the reaction to the previous lack of discipline in writing mortgages has resulted in an overcompensation in the opposite direction … it’s now difficult for an ordinary person just to get through the paper work to buy a house, even when they can afford it).

All this means that the wheels of industry are not churning very fast. Our national production and utilization of factory capacity is impressively down. This depression of activity is the kind of thing that effects almost everyone. It’s useful to look at some of the details across category in it order to keep in mind how far we need to come back in order for demand to start flowing again at all levels of the manufacturing and employment food chain.

Production & Capacity Utilization (data: US Federal Reserve)

Production & Capacity Utilization (data: US Federal Reserve)

It is encouraging that there has been recovery in the stock market because positive signs here contribute some improved morale in the face of the huge losses that many people experienced in their retirement accounts in the months following the crisis. Unfortunately, studies have shown that while the major indices have recovered a large chunk of their 50% loss, the average investor did not have enough money back in the market to be able to take advantage of the rapid upswing during the spring and early summer — the average retirement account has recovered by less than 10%. Even this bull market may not last in a slow recovery given P/E ratios are already high, and earnings from trimming spending and related efficiencies have already been utilized.

From a practical point of view for us small businesses, this all means that consumer spending which had grown to be about 70% of the US economy, is going to be a smaller piece of the action for some time. And, the additional reality for many of our ShopBot customers is that residential construction and the work related to it is likely to lag even longer. It also means that, no matter what your politics or what the government eventually does, government spending is going to represent a bigger chunk of work that’s available — most likely with an emphasis on heavy construction, energy, health care, security, education, and other infrastructure elements.

So What’s to Be Done?

Well, who really knows! But I can share our perspective for our own business as well as our thoughts on what we are doing for existing and future ShopBot customers. These perspectives involve moving beyond the depressing raw numbers of the recession, as telling as they are, to recognize that while the economy is down, neither the economy nor business are static. The nature of peoples’ interests and wants changes; the nature of markets changes; our culture continuously re-organizes itself in new ways. And, there is probably a lot more going on now than is immediately apparent. Everyday is a new economy and one thing that is distinctly different now than in the tough times of the 1930’s is that things move quickly.

I’ve previously discussed some of the psychological factors suggesting that people’s purchasing patterns will be irrevocably changed as a result of last year’s financial collapse. It’s a confidence and perspective thing: when 30-50% of everyone’s nest egg has evaporated almost overnight, everyone now knows there is little that can be financially counted on — it’s an alteration in confidence that is producing a re-orientation of most peoples’ perspective on life. The New York Times last weekend reported on a poll they and CBS News had recently taken on the economy. Not surprisingly, in this poll people reported they were now spending less money and were planning to continue to spend less. What the poll also found though, was that people were actually “doing more” … more activities with the family, more outdoors activity, more entertainment, more hobbies and pursuing of personal interests. I previously suggested that new attitudes about values and lifestyle were likely to start taking hold and this seems to be the case.

[excerpted from previous column]

“There’s talk everywhere about a new appreciation of what we value and about fewer frills, less bullshit, and more substance … A context of environmental concern and energy challenge reinforces a new frugality. Respecting the environment with reduced consumption and transportation; carrying out production closer to where it is needed, using local materials, resources, and labor; and the evolving of new and varied energy sources all fit with greater attention to value, lifestyle choices, and attention to community. The expanding interest in gardening, food growing, urban homesteading, farmers markets and local restaurants – the ‘locavore’ movement — are clear examples of a new appreciation of the quality and advantages of community sources and local production … I’m not suggesting that we are about to see a tidal wave of change or that everyone will stop buying mass produced items from Walmart, but there is certainly a shift in the appreciation of items and the nature of our yearning … There’s a range of items that are customized, modified, or personalized that people care about: items that have an aesthetic, design, usage, or craftsmanship aspect that shows through; items that are sensitive or thoughtful; items that acknowledge the precarious environmental situation; items that are fun to acquire or produce real fulfillment; and, items that one has been involved in producing … Not everyone is a tinkerer, nor is it necessary that everyone gets involved in making their own stuff. But the Maker movement (e.g. see MAKE magazine) and today’s thriving, internet-fostered craft community reflect the growing enthusiasm for an understanding and involvement in the production of things, and shows the scale of people interested in creating rather than just consuming. It’s not withdrawal, anti-technology, or anti-science thinking but is about embracing new understandings and new ways of doing things by being involved in them … “

Such new lifestyle perspectives are likely to play a role in how markets and spending behavior evolve for quite a while.

Summarizing Market Opportunities and the Fit of Digital Fabrication

To summarize, the above considerations suggest that in the evolving economic landscape there will be two particularly significant areas of new production demand and opportunity: the increasing level of public spending with all its secondary offshoots; and demand generated by new personal priorities and values. Now, given these directions of potential activity and demand, what I believe should become the central orientation for us at ShopBot and for ShopBotters in general, is the way in which technology and specifically digital fabrication technologies mesh with the emerging areas of opportunity.

Internet and computer-related technologies have made possible whole new ways of doing business that are especially useful for small businesses and individuals. The advantage of immediate access to information, resources, logistics, distribution, analysis, communications, and customers now allows little guys to be competitive with big guys in many domains. And even more relevant for all of us, new digital fabrication technologies take the computing power off the desktop and move it into the real world of production. This makes it possible for small shops and manufacturers to be competitive in ways not possible 10 years ago. Not that a small shop is going to build automobiles, but the cutting, machining, and reproductive capabilities of digital fabrication tools make new and flexible approaches to small scale production, micro manufacturing, and distributed manufacturing of many items a practical and useful possibility.

Digital fabrication technologies are particularly attractive in that they afford a means to return production and good jobs to communities all over the country. Distributed production is consistent with changes in our economic perspective that favor the local production of items using local labor and materials. With respect to increasing government infrastructure investments, these will occur locally and create opportunities for digital fabrication in public construction, rehab, and energy use agendas among others. In consumer areas, small shops with digital fabrication capabilities can play into the expanding interest in customized products and work made to order. Local making, building, producing, and manufacturing are unlikely to be paths to quick riches. But they do provide satisfying and valuable work that can be fulfilling as well as financially rewarding and sustaining.

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