Dr Jeff Cornwall

2006 a Good Year for Small Business

Generally 2006 was a good year for small business and the economy, according to a report from the NFIB.
Here are some highlights from their summary of 2006:
Housing and Construction
In some parts of the country, housing was the hot ticket, especially condos. Construction boomed, fueled by low interest rates, strong employment growth and a flood of investment money (foreign and domestic) looking for an alternative to disappointing stock markets in 2001-2003, which have now reached record levels. Some parts of the country (Southern California, Las Vegas, Florida and coastal communities) experienced bubble-like increases in home prices, and a surge in new home construction.
“Most homes in the U.S. are built by small firms, not the well-known stock market darlings (now not so popular),” said NFIB Chief Economist Bill Dunkelberg. “Following usual historical patterns, the industry built houses faster than the growth in real owners and a glut ensued, contributing to the slowing of the economy. But overall, the housing market adjustments appear to be proceeding in an orderly way, posing little threat of major destabilization.”
Spending
The increase in home values helped fuel solid consumer spending throughout the year. Collectively, consumers spent more than their after-tax income all year (the so-called negative saving rate). Huge income gains at the top end of the income distribution produced heavy spending (tens of billions of bonus dollars were paid out by the Wall Street firms) that contributed substantially to GDP growth.
NFIB’s latest Small Business Economic Trends survey found that 26 percent of small-business owners surveyed expect to make a capital expenditure in the next three to six months. Still, factors like gas prices, currently averaging higher per gallon than last year, could have an impact on spending habits of consumers and industry-specific businesses.
Jobs
The most impressive development in the second half of 2006 was the strength of the labor markets. The unemployment rate has held at historically low rates (around 4.5 percent) and the percent of the adult population with a job is at a near-record high level (63.3 percent), exceeded only by readings in the dot-com quarters. Nearly one in five owners plans to increase employment at their firms going into the new year, and one in five has one or more job openings they cannot fill.
“This is a good problem to have,” said Dunkelberg. “It’s a sign that employment will likely remain strong in 2007. But another characteristic of a tight labor market is higher compensation levels, which may keep edging up, putting pressure on prices or, if firms can’t raise prices, reducing profits.”
The availability of qualified workers is so serious that one in ten owners reported this as their most important business problem. In the second half of 2006, more than half of the owners reported trying to hire each month, with more than 80 percent of these owners reporting few or no qualified workers for their open positions. As a result, the percent of owners reporting higher worker compensation has remained high all year. Labor costs will be boosted by the higher minimum wage if passed, affecting more than 10 million workers, mostly employed by small businesses. Firms will be paying more for the same work, costs which will most likely be passed on to customers.
Inflation
On the inflation front, performance has not been as good from the perspective of the Federal Reserve, although owners are always appreciative of any price increases they can maintain. The percent of owners raising prices (net of those cutting selling prices) rose to a high of 26 percent in April. Since then, the frequency of reported price hikes has declined to the mid-teens, good news for the inflation fighters, but not good enough to get the core inflation rate into the Fed’s desired target range (under 2 percent).
“In 2003, the inflation rate was 2 percent and the net percent of firms raising selling prices averaged 3 percent, way below recent readings of 17 percent,” said Dunkelberg. “Even with declines in construction prices, too many firms are still successfully raising prices to allow the Fed to declare victory. This leads many observers to expect further Fed rate hikes, although we are not in that camp.”
2007: Look Ahead
The economy has slowed a bit and spending rates are down. But spending plans remain historically solid and owners are fairly optimistic about economic growth moving into 2007. The numbers show no obvious signs of a recession in the small-business sector.
“Going into 2007, the good news is that none of the Small Business Indicators is ‘out of bounds,’ up or down,” said Dunkelberg. “That may be boring, but steady growth around 3 percent with modest inflation and solid employment will be welcome, adding 2007 to a string of good years building the current expansion.”
The report from the NFIB concludes with a caution about the cost and availability of employees and insurance, tax-related issues, as well as threats of business mandates.