In our last update, we asked you to respond to a few questions about the economy.  The results were mixed.  On the personal side, we almost had an even split on those that are cutting back their personal spending and those that are spending more.  We also had an even split on those who believed the economy was getting better and those who believed the economy was getting worse.  On the business side, most businesses were better off than they were last year.  Some, however, have seen a slow down in the last few weeks.  Price increases – especially large ones – were primarily focused in the material and energy areas.  No one mentioned higher compensation costs – this is good as the largest part of most businesses’ cost is labor related.  With the recent drop in energy and commodity prices, we have probably seen the last of those large price increases for the year.  The responses that gave us some concern were those about the increase in government regulation that many of you are seeing.

Even though the economy is recovering, it is not recovering as fast as it has in past recessions.  The same thing occurred in the recovery after the Great Depression. Although we are in a different era now – especially from a monetary policy standpoint – it can be argued that, among other things, the Great Depression was exacerbated because of increased regulation.  Large companies usually don’t mind increased regulation as much as small companies.  Why?  Because large companies are in a better position to absorb the increased costs associated with such regulation while such regulation forces smaller companies out of business.  This gives larger companies more of a monopoly.  This happened during the Great Depression.

Although there are many elements to a successful economic recovery, most economists agree that one of the biggest keys to recovery is increased employment by small businesses.  We believe one of the key reasons for our anemic recovery has been increased regulation and the associated implications.  Government needs to do more to spur growth, not inhibit it.  Understand that we are not advocating no government regulation at all.  There is a place for limited government regulation.  However, we do believe that the pendulum has moved to a point of over regulation and it will need to move back in the opposite direction in order for the recovery to gain momentum.  In support of our belief, below are some of the responses we received from our clients regarding government regulation:

“Health Care went up 45% from last year.  Gas and thus freight is way up, pretty sure these have something to do with Obama Care and moratorium on oil drilling. And State Workman’s Comp due to allowing less of a group credit”

“Not that I know of.  Employees trying to claim Workman’s Comp benefits have been our biggest issue in the past year.  We spend a lot of money on employees who know how to defraud the system to collect money for questionable injuries.”

“Potential changes to the environmental laws concerning fly ash ponds may produce new markets to dispose of the fly ash and close the ponds.  Last year’s election results at both the state and federal level have reduced the likelihood these changes will be implemented any time soon.  This uncertainty has caused some potential investors to pull back or delay their financial commitments.”

“Government regulation has placed a huge burden on our industry to this point.  We will have to increase staff or place a larger work load on existing staff to keep up.  This will cause employee burn out or reduce our profit margins over the next several years”

“Lending is still a problem for homebuilding.  We are developers of a condo project that relies heavily on FHA financing.  We just found out today from our builder that FHA is going to allow only 30% of the loans within a project to be FHA beginning in the fall.  Right now the percentage permitted by FHA is 50%.  The project is currently at 45% FHA loans for the occupied units, so our builder will be unable to sell the product.  They said that virtually all of their sales last year were through FHA loans.  We’re looking into how to work around this.”

”The federal government is in the process of implementing a program called CSA, which is the most sweeping safety regulation in the past 40-50 years. This program is likely to and expected to take out 10% of the drivers in the transportation industry. The other regulation that is expected to be announced yet this year is driver hours of service. Today a driver can drive 11 hrs a day, the regulation expected to be announced later this year will restrict the driver to 10 hrs a day.  Both of these regulations will reduce capacity in an already challenged market.”

“I come from an agricultural family.  It is always interesting to see their view of our country.  They talk about actual food shortages our country could experience very quickly…they talk about crop failures.  They talk about government laws and regulations that are difficult to honor and even more difficult to put into practice.  They talk about the crop incentives and milk sheds that have distorted the market place.  They talk about a government that is well intentioned but uninformed”

“EPA regulations are building“

“Oil refining is suffering due to the moratorium on drilling.   However, refining on the east coast is going very well as Europe (due to Europe refineries unable to refine heavy crude) and China demand for refined oil is on an upswing”

Sincerely,

Your THOR Team