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Psychology is important for small businesses

There's always a large psychological component to the economy.
/ Source: The Big Money

Last winter, in the wake of the financial meltdown and a corresponding steep decline in the advertising business, NewWest.Net enjoyed a couple months of exceptionally strong sales in our core online advertising business. In the early spring, we put on a successful conference in Bozeman — a town hard-hit by the real estate meltdown — and generally felt pretty good about our performance in light of the economy.

Then, in May and June, when business is usually stronger, we hit a soft spot.

What should we make of these counterintuitive fluctuations?

I think there are two factors at play: the psychological and the seasonal. It's hard to get your arms around such amorphous forces, but even a little bit of insight into them can help with the all-important but always-difficult task of business forecasting.

There's always a large psychological component to the economy, and I think that's more pronounced in times of flux. Even in a "normal" economy, business performance is measured not against an absolute standard but against expectations; a public company can report terrible numbers but still see its stock go up, if those numbers were just a little less terrible than anticipated. And vice versa.

A small business will experience something similar if it has taken measures that anticipate a weak period, and then the results turn out to be less weak than expected. Or vice versa.

My initial read on what happened at NewWest.Net this winter and spring was that glimmers of optimism had emerged in the winter once it became clear that the system wasn't collapsing. Larger, more stable businesses decided they could proceed with something resembling their baseline marketing plan, and they signed contracts accordingly.

But as summer approached, optimism gave way to the realization that consumer spending would not be bouncing back very fast. This, in turn, was partly a seasonal phenomenon: People tend to be optimistic in the springtime, expecting the best as the economy emerges from the winter doldrums and companies implement their carefully laid plans for the year.

One of the old saws in the technology business, for example, is that stocks tend to trade higher in the spring and then start to fade in the fall when it becomes clear that the projections for the year were a little too optimistic.

The summer is always a hard time to read economic trends, and that's especially true this year. People are taking summer vacations but not spending as much money. Real estate sales are happening, but only in the less-expensive segments of the housing market. Federal stimulus spending is keeping some people in work, but credit remains very tight and investment capital scarce.

The mood of the country is also a mixed bag. President Obama's popularity, which is based in part on the belief that he's the man to right the economic ship, can itself contribute to the righting of the ship. But if the backlash against dramatically increased government spending and the health care reform effort in particular undermines that popularity, there will be less optimism about recovery and therefore less recovery.

The trick for many businesses is to stay positive about where things are going but at the same time remain prepared if things don't go so well. If you give off gloom-and-doom signals, your customers and suppliers might lose faith in you and have second thoughts about spending and investing. But being a Pollyanna is dangerous, too; as one of my investors likes to remind me, hope is not a strategy.

I do think the slow-but-steady improvement in the economic outlook over the past six months bodes well for the fall; the stock market is recovering, the big banks are not going belly-up, European and Asian economies are on the mend, and the absence of disaster has improved everybody's mood.

Consumer spending and real estate sales are not going to rebound to pre-bust levels anytime soon, and plenty of small businesses are still on the brink. But for this season, at least, we can keep our expectations low and then beat them. That's the first sign of a true recovery and a good survival strategy for any company.