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1.15.99  
Why 1999 Looks So Rosy to Small Biz
Despite predictions of a profit crunch, entrepreneurs are investing and hiring

John Burns lives with the paradoxes of the U.S. economy day-to-day in the office of the Columbus (Ohio) precision metal-parts company his family founded in 1911.

C.O.W. Industries Inc.'s export business "has been hammered for the last 15 months" by the Asian market collapse, Burns says. And Brazil's latest currency crisis has him wondering how clients there will pay. Still, he foresees a 15% rise in gross sales, to $15 million or $16 million, in 1999: "We have an outside shot at $20 million in the millennium year," Burns says. His biggest problem is finding qualified factory workers. With the local jobless rate at about 2.5%, he says: "If you find someone with skills, he probably has a problem."

So what makes Burns so optimistic? For starters, a strong demand for technology -- C.O.W. Industries supplies high-tech companies such as Lucent. What's more, the company made investments in the past few years that permit it to produce four times what it could six years ago -- with the same number of people. "We made massive investments in infrastructure," he says, and the company plans to plow back another $1 million in 1999.

Remarkably, Burns's perspective for 1999 dovetails that of small-business executives across the country and confirms survey findings with other entrepreneurs (see In Box, Jan. 15, 1999). The latest National Federation of Independent Businesses survey of 556 small-company owners, for instance, showed optimism rose for the third month in a row in December. This suggests that recession predictions for 1999 won't pan out, as companies continue to vigorously hire and invest in capacity as well as Y2K fixes. Forty-one percent of those surveyed by the NFIB plan capital outlays in the first half of 1999.

PRICE CUTS. Still, there are continued signs of a profit crunch ahead. Competition from cheap foreign -- especially Asian -- goods continues to make it virtually impossible for small companies to impose significant price increases -- as seen in the 1.5% inflation rate. The NFIB survey showed that a net 5% reduced prices in December, meaning that a higher percentage of businesses cut prices than raised them. "Never in the 25-year history of the NFIB survey has the percent reducing prices exceeded the percent raising them by such a large margin," the report says.

But a Duke University and Financial Executives Institute study found that companies with annual revenues of $24 million and less may have a little more pricing power, because they're in niche markets and are insulated from global competition. These businesses plan to raise prices by an average of 2.2%, compared with 1.4% for all the businesses surveyed and 0.4% for concerns with revenues from $1 billion to $5 billion.

Meanwhile, the dynamic U.S. economy keeps absorbing workers and pushing real wages up -- a trend that's expected to continue. "There's no 'relief' in sight in the labor market," writes William Dunkelberg, the NFIB's chief economist, in a commentary accompanying the report released on Jan. 15. "December hiring plans reached record levels again, and reports of 'hard-to-fill' job openings were just short of the record." Last year was the tightest labor market in the history of the NFIB survey, with an average of 29% of entrepreneurs reporting hard-to-fill openings.

LURING TOP TALENT. These findings ring true for Vennie Pent, chief executive of Spectrum Financial Systems Inc. in Charlotte, N.C., which sells and services ATMs for banks in the Southeast. The mix of skills for a manager may be harder to find than a blue-collar worker, "but you only need one chief, and you need 10 Indians," says Pent, whose company pulls in about $20 million in annual revenues and has 125 employees.

In the tight job market, entrepreneurs such as Pent have to bend over backward to make their companies attractive places to work. Spectrum offers a competitive benefits and pay package, says Pent: "[Yet] wages have not gone up that much because the cost of living hasn't." So, to keep his workers, Pent concentrates on "the intangibles": He spent $150,000 on Christmas bonuses, an infusion to employees' 401(k) plans, and a gala party for the staff, complete with bouquets of roses for the women. "You gotta do it," he says.

Where are the weak spots in this boom scenario? The stock market -- a plunge, of course, could unnerve consumers and halt their spending sprees. And the manufacturing sector, which is still under pressure from Asian competition. But as long as real wage gains and low interest rates keep consumers happy, small-business owners should be fine. If not, they'll be all beefed up with new staff and investments -- and nowhere to go. That would be a scary scenario.

By Julia Lichtblau in New York
julia_lichtblau@businessweek.com

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