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11.5.98  
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 foreign imports.

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, too.

By Julia Lichtblau in New York
julia_lichtblau@businessweek.com

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