A Slowdown Isn't All Bad for Small Business
It should take the edge off the labor shortage
A cooling economy could give small businesses relief in the one
area where the boom of recent years has brought them pain -- labor costs.
In a period of low inflation, small businesses -- at the bottom of the
economic food chain -- have had almost no leverage to raise prices. At the
same time, with the jobless rate at a mere 4.6%, they have been squeezed
by labor costs. That's especially true in high technology, where there
has been a large shortage of software engineers for several years. Indeed, a PricewaterhouseCoopers survey of small, hot high-tech companies
released this week showed 76% blame a shortage of qualified workers for slowing
revenue growth in the next 12 months. And it's hardly an abstract
problem, since 84% said they plan to hire more staff.
But the problem may not last long. "If they say they can't find [new employees],
they'll be around soon," says Bill Dunkelberg, chief economist
for the National Federation of Independent Business, pointing to layoffs
at several major high-tech companies -- Motorola, Hewlett-Packard, and Packard Bell NEC, for example. "Employment in high tech is
falling," he says. Companies in other sectors are cutting back, too. Among those joining the layoff trend this week: Amerada Hess, the oil company,
and Times Mirror, the media chain.
That should take some pressure off small-business wages. In September, the
NFIB found that 28% of those it surveyed reported
higher labor costs, three points below its record, while a net 2% raised prices
-- that's the difference between the percentage of those who raised prices
and those who did not. By contrast, in 1997, a net 6% raised prices on average.
Not that there won't be tightness in some regions and industries. Jack
Kyser, chief economist for the Los Angeles Development Corp. who watches
the region's small businesses closely, says, for example, that the
metal fabricating business -- which has many small manufacturers and benefited
from the laid-off aerospace workers a few years ago -- is now worried that
there will be a dearth of skilled replacements as they retire.
TO HIRE -- OR NOT? Of course, bulking up on employees before a slowdown may not be the
best idea, even if they do come cheaper than before. But Irwin Kellner,
an economics professor at Hofstra University in Hempstead, N.Y., and a former
chief economist at Chemical Bank, says he thinks small businesses will
be able to avoid being caught with too much staff, in the way major companies
do nowadays, by making do with part-timers and consultants.
Even if they do hire full-timers, Kellner doesn't see much risk.
He says the slowdown won't be nearly as cataclysmic as it was billed in
September, after the stock market had crashed, along with much of Asia
and most of the other emerging markets. "The second Fed rate cut calmed
the irrational fears affecting the markets," says Kellner. "It was clearly
a case of the tail wagging the dog," with the economy slowing because of
the stock market weakness rather than the other way around, which is more
common. He points to such positives as the weaker dollar, which helps
U.S. exports and takes the edge off the downward pressure on prices from
Dunkelberg agrees that the bogeyman of the credit crunch has apparently
been laid to rest, but he still thinks a slowdown is under way. "It's
very clear that manufacturing is being hit by three quarters of declines
in a row. Clearly, we have trouble there. In construction, there's a lot
of heavy-duty dirty stuff. Housing is strong, but it looks like we're overbuilding
again," he says. That should take even more heat off the labor market -- fine
for small business, so long as consumers don't get chilled,
By Julia Lichtblau in New York