From highschooler to retiree, everyone is wondering what is happening to the US economy. It doesn’t take a rocket scientist to see the writing on the wall in certain sectors, with the sub-prime mortgage industry probably being the most obvious. Now with the loss of confidence moving from the sub-prime market to the wider financial markets, auction rate securities are failing as nervous investors refuse to bid in the auctions and as a result the auctions fail. As a consumer and participant in the economy, albeit in a small way, I’m sitting here wondering what is going on.

As an entrepreneur, the headlines today are making me down right nervous. The strangest part is that I’m not worried about the fundamentals but that there is a growing lack of worldwide confidence in the US economy. I think, however, that the state of the US economy has to be broken apart and examined by sector in order to be understood in the broader context of market growth which is what we entrepreneurs worry about the most. After all, it’s much easier to build a new company when you don’t have to steal market share from entrenched businesses.

With that being said, let’s talk about specific industries:

Financial

Well we already know these guys are screwed… but let’s talk about some sub-sectors. Private equity is having a tough time as deal after deal is being put into a death hold (isn’t that what boa constrictors do to their prey?). The boa in this case is the debt financing from the world’s largest banks. Around the world, once trusty banks are finding out that they have higher sub-prime mortgage exposure than they thought and now auction rate securities are also failing. The irony of auction rate securities is that they were historically sold “as good as cash”. The claim being that any investor with auction rate securities could trade it weekly to get liquidity. We’re obviously seeing that this claim is not true as these securities are defaulting to their much higher interest rates of as much as 20% when the auctions to trade the securities fail.

So Private Equity is not in a good way, because without access to cheap debt, the industry is seriously hamstrung to close profitable acquisitions. Fancy talk for they can’t buy companies without big banks to give them tons of cheap debt. The debt is where private equity firms historically have made their margin on the buying and selling of companies.

Venture is arguably in a better position as these financiers solely use equity to conduct their transactions. The downside with this one of course is that venture capitalists invest in new ideas/companies that are financially instable and need new sales (which are hard to get in a recession). So the question remains up in the air as to whether or not this will affect venture capitalists through higher portfolio company defaults.

Mortgage companies - obviously these guys aren’t doing too well. Enough said. If you want a good synopsis of this mess see here

Investment banks are hurting as they need private equity companies and venture companies to give them businesses to sell.

Accounting - I think this is relatively “recession proof” if there is such a thing.  On to internet companies, the area close to my heart.

Internet/Web 2.0 Companies

I chose this first because I know the most about this space. I think companies in this space are lucky to be involved in the current “gold-rush” for internet advertising dollars. As DVR penetration continues and newspapers/magazines fold, massive amounts of offline/traditional media advertising are moving to spend online.

According to an IBM study, “Overall, 19% of respondents said they spend six or more hours a day on the Internet, versus 9% for TV. More telling, 60% reported that they spend one to four hours using the Internet, versus 66% who spend the time watching TV.” So this sounds promising.While the TV guys might be looking at a world of pain in the next few years, the Internet is finally seeing the great advertising gold rush that was supposed to happen in the 90’s and never did. On the other hand we have Bain&Co who says that TV is going to grow more than the internet over the next 5 years - yeah right, like I buy that one Bain

Well either way, we’ll find out the answer to this one over the next few years. I’m betting on the internet, but hey, I’m biased.

Tourism

As the dollar weakens, all kinds of foreign tourists will feel like now is the right time to visit the US. So at least these guys should do well.

Life Sciences

Drugs… well drugs are always needed… whether or not people can afford them. Now hospitals on the other hand, might have some problems as non-paying patients are apparently rocketing.

Manufacturing

Does this even exist in the US anymore?

What do you guys think, where is the fallout going to occur? Definitely interested to hear your thoughts…