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11.3.98  
Who's Still Smiling About the Economy? Hot High-Tech Upstarts
Closely held companies are more exuberant than their public brethren

Are we facing a global economic meltdown? Don't tell America's small high-tech companies. They are still grinning ear-to-ear, keen on their prospects -- and eager to bulk up their workforce and make capital improvements.

Those are the findings of the latest "Trendsetter Barometer" report from PricewaterhouseCoopers, a nationwide survey that contrasts the views of 208 executives of closely held technology companies with those of 132 officers representing large, publicly held technology companies. The report, due out Tuesday, Nov. 3, finds that 71% of small company respondents are optimistic about the U.S. economy over the next year, vs. 64% of their large company counterparts. The small fry are also convinced that things bode well for their businesses: They forecast total revenue increases of 27.1% in the next 12 months, vs. 18.5% projected revenue gains at larger enterprises.

One reason entrepreneurs may be so smug is that they don't feel very exposed to the currency crises and stock-market troubles rocking Asia and Latin America. More than half -- 56% -- of "Trendsetter" companies export their goods or services. That's significantly less than the 82% of large companies now exporting products and services overseas. "They all want to be in foreign markets," says Paul E. Weaver, director of global technology at PricewaterhouseCoopers who ran the survey. "But they realize they're in better shape because they're not international. It's one less thing for them to worry about."

With all this optimism, are these small companies heading for a fall? The latest gross domestic product figures released Friday, Oct. 30, showed the U.S. economy expanded at a 3.3% annualized rate in the third quarter. But the numbers behind this figure and other findings of the PWC report hint at some ominous trends. The GDP figures showed a sharp jump in the contribution of inventories to growth, often a bearish sign. The trade deficit also widened. The GDP figures showed personal consumption was up. But there have been signs of weakening consumer confidence since the end of the third quarter.

Against that backdrop, the report showed 84% of the small companies are still planning to add new workers in the coming year, vs. 60% for large companies. They are also prepared to pump cash into major capital investments -- 55% of small outfits plan big cash outlays compared with 47% of large companies. Moreover, the small companies are still most worried about finding talented workers -- 76% of the respondents said it was their biggest barrier to expansion, vs. 58% for large companies.

Another small-business pet peeve: Getting enough money to expand was a concern for nearly one in four of the respondents. The good news on that front, says Weaver, is that venture-capital firms are flush, though the market for initial public offerings has sharply curtailed since the big drop in the U.S. stock market in midsummer. "The money is out there, the markets are rich, and there are a lot of ideas," adds Weaver. "Guys who are slow on their feet are going to lose out." The question is: Will the nimble ones be overextended if a slowdown hits hard?

By Dennis Berman in New York
dennis_berman@businessweek.com

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