Small shops upbeat despite cost woesBy Kent Hoover
Nashville Business Journal
Updated: 7:00 p.m. ET Jan. 2, 2005Go ahead, pop the cork - it's going to be a happy new year for most businesses.
An index of small business indicators just hit its highest level since 1983, economists predict solid growth in 2005, and venture capitalists plan to invest again in start-ups and early-stage companies.
But don't go overboard on the bubbly. High energy prices and rising wage pressures could squeeze profit margins, and there are signs of overspeculation in unproven stocks and residential real estate. You don't want to party like it's 1999.
Many small business owners, however, were giddy in the wake of President Bush's re-election, according to the National Federation of Independent Business' most recent economic survey. A net 47 percent of small business owners expect the economy to improve over the next six months, 35 percent expect higher sales three months from now. And a record 29 percent think now is a good time to expand their business.
These strong readings fueled a 3.8-point jump last month in NFIB's index of small business indicators, which tied its record high of 107.7 set in 1983.
Most of the small businesses sampled by NFIB are Main Street-type businesses that employ only a handful of people. CEOs of fast-growing companies also expect the economy to be strong next year, but they are not as optimistic as they were three months earlier, according to a survey by PricewaterhouseCoopers.
About 70 percent of the CEOs of these privately held companies now say they are optimistic about the economy, compared with 76 percent the previous quarter.
"Weak demand is by far the greatest and fastest-growing concern," says Jay Mattie of PricewaterhouseCoopers. "Abnormally high energy prices are a contributor, draining cash and creating a hesitation to make purchase decisions."
Oil prices, however, likely will drop a little next year as China's economy cools, says Nariman Behravesh, chief global economist for Global Insight. If oil prices fall a lot, they could provide "a big boost" to economic growth in the United States, he says.
Labor costs, however, could increase as the demand for workers picks up. NFIB found that small business owners added a net 0.5 employees per firm last month - the largest monthly gain ever.
The restaurant industry, which is second only to government in the number of workers it employs, is concerned Congress will put additional pressure on labor costs by raising the minimum wage.
"We don't believe the government needs to do this when the market itself is doing a great job setting wage rates," says Lee Culpepper, senior vice president of government affairs for the National Restaurant Association.
Businesses also can expect higher rents next year. The National Association of Realtors expects increased demand for office space and retail space, leading to lower vacancy rates.
Large businesses, meanwhile, are well-positioned to expand their operations if the economy continues to grow.
"Corporations are sitting on a mountain of cash," Behravesh says.
New cash also is making its way into venture capital firms, a good sign for start-ups that have found venture funding hard to come by in recent years.
"Many venture capitalists will have fresh funds to invest," says Mark Heesen, president of the National Venture Capital Association.
This, he says, will prompt VCs to return to early-stage investing since they won't have to worry about making a quick exit. Venture capitalists, Heesen says, will "search for those seed, start-up and early-stage companies that have the potential to truly change the way we live and work in the next decade - the future FedExes, Intels and Genentechs."
Technology - particularly software and life sciences - will continue to attract the most venture capital, but energy and financial services also look promising, says the NVCA.
Stocks also are expected to perform well next year, says Kate Warne, market strategist for Edward Jones. But Warne is concerned about increased interest among investors in speculative stocks, such as initial public offerings and stocks of companies that have yet to make a profit.
Speculation also is growing in residential real estate, says David Seiders, chief economist for the National Association of Home Builders.
About 12 percent of home buyers are buying to invest, not inhabit, he says. In some metropolitan areas, the investor share of that market has grown to 20 percent or more. "I start to worry in some markets," he says.
msnbc.msn.com |
