It’s Not as Bad as You Think

Viewed from a distance, America’s economy is doing far better than Americans seem to believe.

Good Morning!

Here are today’s highlights:            

• People are still better than bots at sales. At least for now.

• Creative Repute has won an award for its 21 Hats Podcast cover art design.

• Ami Kassar explains how to build a healthy relationship with your bank.

• A startup offers small businesses a way to save on shipping.

THE ECONOMY

The Economist thinks America’s economy is doing far better than Americans think: “American economic declinism is a broad church. Voices on the right claim that big government has stifled the frontier spirit and that soaring debt has condemned future generations to poverty. The left worries that inequality and corporate power have hollowed out the economy. In a rare display of unity, all parts of the ideological spectrum bemoan the death of American manufacturing and the crushing of the middle class. There is just one snag. On a whole range of measures American dominance remains striking. And relative to its rich-world peers its lead is increasing.”

• “American preeminence is clear. America’s $25.5 trillion in GDP last year represented 25 percent of the world’s total—almost the same share as it had in 1990. On that measure China’s share is now 18 percent.”

• “In 1990 America accounted for 40 percent of the nominal GDP of the G7, a group of the world’s seven biggest advanced economies, including Japan and Germany. Today it accounts for 58 percent.”

• “A trucker in Oklahoma can earn more than a doctor in Portugal. The consumption gap is even starker. Britons, some of Europe’s best-off inhabitants, spent 80 percent as much as Americans in 1990. By 2021 that was down to 69 percent.”

• “The fact that America has problems hardly sets it apart. All economies do. The striking thing about America’s is that they have not noticeably slowed down its growth.” READ MORE

SALES

People are still better than artificial intelligence at closing sales: “The Nanit baby monitor uses a high-tech camera and software to track an infant’s sleep habits. It is like a $249 AI parent who stays up all night logging rollovers and breathing patterns, and doesn’t need coffee the next morning. So imagine shoppers’ surprise when they type a question into the Nanit website and get a response from a real person instead of a chatbot. ‘I have to reiterate: Hey, I am a human. My name’s Brookelyn, and I’m real,’ says sales representative Brookelyn Castro, who takes one-on-one video calls with customers from her home in Florida. Ms. Castro works on commission through a third-party company called Feel, a venture-backed startup with an off-trend pitch to retail clients: At a time when algorithms and artificial intelligence can offer product (and parenting) recommendations, human touch is still the best way to close a sale.”

• “Nanit Chief Executive Sarah Dorsett says 1 percent to 3 percent of people who browse her company’s website make purchases. When visitors speak with a sales representative, like Ms. Castro, that conversion rate is far higher at 10 percent to 25 percent.”

• “But even Feel is training bots to match the sales success of people—if they can. ‘Then it’ll be stupid to continue having humans and paying for them,’ says Oren Harnevo, Feel’s co-founder and chief executive.” READ MORE

DESIGN

Creative Repute, the Philadelphia design firm founded by Nile Livingston, has won an award for its 21 Hats Podcast cover art: “In one meeting with the client to review the initial round of production, it became clear that the most important elements to be included were the figure of the entrepreneur and the hats they wear. The name 21 Hats comes from the phrase ‘wearing many hats,’ to suggest that entrepreneurs are multi-skilled multitaskers, ready to take on almost any role the situation demands. Furthermore, a huge reason for the redesign was to call in a more diverse listenership. In centering a more generic figure of the entrepreneur where any personal identifiers were indistinguishable, the client hoped that businesspeople of all backgrounds would see themselves in the figure on the cover and feel at home in the 21 Hats community.” READ MORE

FINANCE

This will be a tough period for all but the biggest banks: “Even before last month’s turmoil rocked the industry, banks were passing on more of the benefits of higher interest rates to their customers. Now, an expected pullback in lending is likely to further dent profitability, while paper losses on banks’ bond portfolios could limit their ability to return capital to shareholders. The suffering probably won’t be distributed evenly across the industry. Analysts at Morgan Stanley cut their per-share earnings estimates for 13 of the largest U.S. banks by a median of 4 percent for 2023 and 15 percent for 2024. For midsize banks, the outlook is far worse: Morgan Stanley analysts cut their average 2023 and 2024 per-share earnings estimates by 17 percent and 27 percent, respectively.”

• “This earnings season is the most challenging one for midsize banks since the 2008 financial crisis, where ‘so much is heading in the wrong direction’ and a ‘jungle of potential pitfalls’ awaits, Evercore ISI analysts said in a research note last week.”

• “Deposits are banks’ lifeblood, and the threat of more of them disappearing has led many banks to hike the yields they offer to account holders. Meanwhile, uncertainty about funding means that bank loan officers will likely need to pull back on new offers of credit.” READ MORE

Ami Kassar, who counsels against running to the big banks, offers five suggestions for building a healthy relationship with your bank: “At the end of 2022, the 25 biggest banks in the country held 63 percent of all deposits but only made 28 percent of all small business loans and 13 percent of all SBA loans. With all their bureaucracy, these big banks are not structured to understand the needs of entrepreneurs and business owners. Yes, they will take your deposits, but will they be there for you if you want a loan or a line of credit?”

• “A healthy relationship starts with a sound financial institution. There are online resources to check on your bank or credit union, including Weiss Financial Ratings and Bauer Financial. These sites take a lot of detailed information from the FDIC and break it down into a grade or star rating.”

• “How do you compare to the other businesses your bank services? If you are one of their biggest loans, you are too big for your bank. But at the same time, you want to be important to your bank and not just a speck. Your account should matter to the bank.”

• “Every business should have a line of credit for seasonality, working capital, and emergencies (I recommend that your line of credit represent 10 percent of your annual sales).” READ MORE

The SBA is opening the door to fintechs: “The Small Business Administration appears poised to end a more than 40-year moratorium on new lenders within its 7(a) and 504 lending programs, according to a final rule scheduled to be published Wednesday in the federal register. The SBA has, since 1982, limited itself to its network of banking partners and 14 non-bank Small Business Lending Companies overseen by the SBA. The final rule awaiting publication will rescind limitations and end the moratorium on new SBA lenders, and the agency said it will bring on three new nonbank lenders into its lending programs. The nonbank lenders haven't been identified.”

• “For small businesses trying to navigate an increasingly choppy environment for financing, the rule could open up new avenues for securing capital.” But as you may recall, Ami Kassar is not a fan of this plan.

• “Sen. Joni Ernst, R-Iowa, said in a March 22 hearing of the Senate Small Business Committee that the rule changes may lead to predatory lending practices and open the program up to an ‘unlimited number of unregulated fintechs’ she claimed were responsible for tens of billions of dollars in Covid relief fraud.”

• “Sen. Ben Cardin, D-Md., chairman of the Senate Small Business Committee, also expressed concern about the new rules, including whether it could adversely impacted underserved borrowers.” READ MORE

HUMAN RESOURCES

To get people back to the office, some companies are tying pay to attendance: “Bosses have tried many different tactics to repopulate workplaces, from free pizza and bagels to live in-office entertainment. Many others wrote terse memos and office policy reminders, or threatened termination. Now, at least one prominent employer is trying a different approach, vowing that staffers’ pay could be affected if employees don’t comply with existing in-office attendance requirements. The law firm Davis Polk & Wardwell, whose clients include some of Wall Street’s biggest banks and other companies, has told staffers that those who don’t adhere to the firm’s policy to spend at least three days a week in the office could see their bonuses reduced.”

• “The shift reflects a desire among the firm’s leaders to see associates in the office on Tuesdays, Wednesdays and Thursdays, as is currently required.”

• “The moves by Davis Polk and JPMorgan signal a new willingness by companies to treat attendance as a performance measure. ‘We’re very focused on having our team in at the same time,’ said Neil Barr, chair and managing partner of Davis Polk. ‘The expectation is that you come to the office and you support the culture of the firm by being here in person.’” READ MORE

RETAIL

Cars are selling below-sticker for the first time in years: “The average amount that Americans spent on a new vehicle in March was $48,008, according to Kelley Blue Book — or $171 below an average sticker price of $48,179 (including luxury and non-luxury cars). For comparison, just a year earlier, consumers were paying on average nearly $1,000 more than the sticker price for a new car. That marks the first time in 20 months that car buyers didn't have to shell out more than a vehicle was listed for due to high markups on dealer lots.”

• “Brands like Chevrolet, Chrysler, Dodge, Ford, Hyundai, and more saw the average prices paid for their vehicles decline up to 3.8 percent in March, according to Kelley Blue Book, indicating incentives are also creeping back. Exceptions include Honda and Kia vehicles, which continue to sell for between 3 and 6 percent over sticker price in the non-luxury market.”

• “Used vehicles are a slightly different story. While the number of used cars going for more than they would new has declined, and prices overall are 8 percent cheaper than their new equivalent, several used models are still priced high.” READ MORE

The market for used clothing is exploding: “In 2022, the market for secondhand apparel grew 24 percent from the year before, to $119 billion dollars. The report from thredUP shows growth happening worldwide, with North America making up around 42 percent of the market. Worldwide, the market for secondhand fashion is expected to grow 127 percent by 2026 to $218 billion worldwide. Secondhand clothing is expected to make up $30.6 billion or 10 percent of all clothing sales in the U.S. by the end of 2025, according to estimates by eMarketer and Insider Intelligence.”

• “Together, these projections signal an evolution in the fashion industry and perhaps a tempering of fast fashion. Fast fashion produces clothing quickly, often resulting in lesser quality, with consumers often throwing garments away after 10 wears, and continually buying new clothes.”

• “The secondhand clothing market offers reuse of garments that last longer and can be resold multiple times. It’s an example of a circular economy in which there is less waste, a model that is gaining appeal among businesses with sustainability goals.” READ MORE

STARTUPS

Shipology helps small businesses save on shipping: “Keri Wytrwal was running her e-commerce business WetPlants, which sold and shipped live plants for fish tanks, during the pandemic. But because she wasn't selling enough volume to qualify for a discounted rate from other carriers, she used the U.S Postal Service, and with Covid-related shipping slowdowns, her plants were ending up dead on arrival to customers. So in an effort to solve similar shipping issues for other small businesses, Wytrwal and business partner Amanda Schermerhorn invested $1,000 to start Shipology in January 2021.”

• “It's a third-party fulfillment company that provides small to medium-sized e-commerce businesses with order fulfillment, inventory management, discounted shipping rates, packing consulting and transportation.”

• “Wytrwal and Schermerhorn use the power of the combined volume of their small-business clients to get better shipping rates on the business' behalf with large carriers like DHL and FedEx — and avoid situations like dead plants.” READ MORE

THE 21 HATS PODCAST

We’re Still Buying Inventory: This week, Jay Goltz tells William Vanderbloemen that even with an inventory glut, a cash crunch, and a weakening economy, he’s not going to stop buying goods for his home store. “It's kind of like cutting Samson's hair,” Jay tells us. “I don't want to mess with telling the buyer, ‘Stop buying stuff.’ Because that's the business we’re in.” All of which has Jay feeling the pressure, but he’s very glad he’s been maintaining a credit line equivalent to 10 percent of sales. Plus: William explains how hiring can go wrong even at a staffing company and how he managed to raise his prices without actually raising his prices.

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

Thanks for reading, everyone. — Loren