Article written by
Dr. Rick Harper, Director
University of West Florida
HAAS Center for Business Research and Economic Development

The economic outlook in March 2008 remains cloudy, even though unprecedented policy actions by the Federal Reserve and Congress should help stimulate spending by consumers.  The “economic headwinds” that households face across the U.S. are well known.  The average household now has a high debt load relative to household income, faces energy and food prices that are noticeably higher than they were last year, along with a weakening employment picture.  The losses associated with subprime exposure at major financial institutions have rocked investor confidence and stock prices, while the turmoil associated with the rising wave of mortgage delinquencies seems likely to continue for several more quarters.  Florida faces special risks from the current economic challenges, as many small business owners are only too aware.

Florida housing markets, particularly those on the Southern Gulf, added value much more quickly than most others in the nation over the 2002 – 2005 period.  Population growth at double the national rate made large price increases seem sustainable and stimulated construction and development activity.  During much of this time Florida was responsible for as many as 10 percent of all new jobs created in the nation, much larger than would be expected from a state with about six percent of the nation’s population.  As might be expected for a large state, Floridians opened small businesses in record numbers – only California and Texas claimed more new business startups during the first part of this decade.  However, Floridians also opened businesses at a faster percentage rate (per thousand existing businesses) than any states except Nevada and Utah over the 1999 – 2003 period.  Annual small business start-ups have risen from approximately 33,000 in 1999 to over 40,000 in 2003, representing a 21 percent increase in new business starts over the four year period. This rate is substantially faster than the overall rate of population growth for the state.  New employment due to small business start-ups increased from approximately 58,000 in 1999 to almost 72,000 four years later, for a cumulative change over the period of some 24 percent. Overall, the job growth data suggest that Florida provides a strong base for entrepreneurial activity and that the ensuing economic growth via new business start-ups encourages substantial job creation.

Many basic Florida business sectors are extremely healthy.  International trade, both in merchandise exports from our ports and in tourism services purchased by international visitors, are at record levels.  However, many Florida small businesses now face the challenges of sharply curtailed real estate development activity and all of the related business activities that support this sector, with problems compounded by a

slowing national economy.  Because of Florida’s faster population growth rate, construction may play a larger role in the economy than in other states.  The rapid run-up in Florida real estate values, while creating wealth for property owners, is likely to be followed by a worse housing hangover than will be experienced in other regions.  This suggests that the stimulus package recently passed by Congress (HR5140), along with interest rate changes by the Fed, is particularly important to Florida business owners.

As with most short-term stimulus packages, the operative mechanism is to shift spending into today’s economy by borrowing it from tomorrow’s taxpayers.  The Federal budget deficit must necessarily increase as the government borrows money to pass out to today’s tax filers.  The cost of the package is estimated by the Office of Management and Budget (OMB) to be about $152 billion.  Several analysts have suggested that the tax provisions will take the cost to the budget somewhat higher.  There are three basic features of the package:  tax rebates to consumers, accelerated depreciation on business equipment purchases, and an increased limit on expenses that businesses can deduct from income.  The impact of these features of the fiscal stimulus will be important.  The $152 billion package works out to about $500 per person in our 300+ million person economy, or about $8 to 10 billion in the Florida economy.  While this is clearly not small change, some analysts fear that it might not be enough to overcome the “economic headwinds” mentioned above. 

Economists suggest that tax policies such as HR5140 are likely to be more timely and effective than Fed monetary (interest rate) policies for increasing employment and output in the economy.  This is true even though the Fed can make interest rate changes almost instantly and Congress typically needs time to put economic policies into action.  Interest rate changes take more time to ripple through the economy because people have to change their spending behavior in response to a new lower interest rate.  A family has to decide, for example, that interest rates are now low enough to justify taking out a home-equity loan to redo the kitchen, and then do the planning that has to occur before paychecks start flowing to electricians and drywall hangers.  In contrast, a tax rebate, by putting a check in a taxpayer’s hands, tends to generate immediate new demand, as consumers spend much of the windfall almost immediately, creating new demand for the nation’s factories and service providers.  

These measures will clearly channel demand to Florida small businesses. Steve Preston, Administrator of the U.S. Small Business Administration, notes that “small businesses create 2/3 of the new jobs in our economy and account for half of non-farm GDP. It is vital for the nation that small businesses stay healthy and growing. HR5140 will give them a much-needed boost which will enable them to expand their companies and create new jobs…, we continue to urge Congress to proceed with other vital small business issues such as permitting health