With the increasing speed of knowledge and information transmission, people, whether consciously or not, are constantly forming and reevaluating their perception of the current state of the economy. Whether these opinions are formed through knowledge, which I would consider the tangible, quantified, statistical lens or from information, which is a less verified and more theoretical lens through which to view fiscal policy, these perceptions are consistently altered by everyday news. Rarely is a unified perception of the economy, which takes into account both knowledge and information, developed. Although I am not a psychology expert or communications guru, I can confidently assume that part of this deficiency in perception can be explained by the fact that people filter information differently and the same news can cause varying reactions, which leads to varying perceptions on the current state of the economy. As we have seen over the past few years, one of the many factors influencing public confidence in the economy is the perception of public political figures and the Fed.
My worry is that the varying perceptions of the economy and the lack of uniformity of knowledge and information may impose a ripple effect upon the small business community. Admittedly, quantifying the effect of perception upon small businesses is difficult and I am sure there are many scientific studies that can offer more empirical results to support this concern. Overall, though, the message I intend to convey is that the underlying sociological or psychological perceptions of the economy have a practical effect upon business and defining these effects might be best realized by considering the role of politicians or the Fed.
Picture the following scenario: Your small business is growing and in need of another round of financing. Unfortunately, the investors who are most intrigued by your business are also feeling a bit skeptical, consciously or not, about the overall state of the economy. For example, imagine Investor A being uneasy after a recent policy decision made by the Fed. A is, rightfully or not, convinced that this will have a dramatic effect upon the economy.
When it comes time for A to provide financing, his apprehension towards the Fed's decision might unfortunately play a role in determining how much, if any, capital he or she contributes. This is significant; for one, A might not be correct and his or her concerns might be unfounded, lacking a unification of knowledge and information. Part of this, of course, is due to timing. Had the Fed not proposed their new policy until after you needed your next financing round, any negative perceptions of their policy would not play a role in any awarded capital.
Moreover, this is totally out of your control. Not only do you lack influence over the Fed's new policy decision but you also have no command over A's reaction to the policy. What is perhaps most troublesome, though, is that the actual policy of the Fed may not be what is influencing the economy and the success of your business. That is, maybe this is a brilliant policy by the Fed; however, if it is perceived to be harmful, the investor's perception of the policy and not the policy itself may impose noticeable and negative effects. Thus, we are called to ponder how much the economy is subject to the true intent of, and not the perception of, a particular decision of a politician or the Fed.
Now it may be that certain members of society, such as Investor A, are incredibly accurate in assessing the economic effects of a political or Fed decision. In that sense, they are merely carrying out the wisdom, or lack thereof, of the particular plan. If the plan is indeed a poor one and it will negatively affect the economy, then by perceiving it correctly, Investor A may be speeding up the inevitable by failing to grant additional capital.
Of course, it is also possible for a misperception to work in your favor. If the Fed's policy is a poor one, but A is confident it will be practical and beneficial, you may receive capital at a time when other investors might not have been so willing to contribute money.
Note that this is not to suggest that public perception of the economy is the only or even a primary factor in aiding or preventing small business growth. The point is public perception may be yet another external, uncontrollable factor which may limit your small business' ability to prosper.
RCM Wealth Advisors
This article expresses the view of the author as of the date indicated and such views are subject to change without notice. The author has no obligation to update the information contained within the article. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on information provided by independent third-party sources. The author believes the sources of such information are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information.