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A Case of the Aging-Expansion Blues?
Entrepreneurs get edgy about an economy that's still pretty robust

Are entrepreneurs losing their nerve? The economy is still going like gangbusters, but small businesses trust this rosy scenario less and less, the latest National Federation of Independent Business report shows. Consumer spending keeps chugging along -- witness May's 1% gain, but small-business optimism dropped sharply in the same month, as measured by the NFIB's optimism index. Entrepreneurial edginess erased the upturn seen in April. The May index hit 100, down from 101.4 in April and below March's 100.4.

"Can't go on forever," says William Dunkelberg, NFIB's chief economist, of the eight-year U.S. economic expansion. And small-business conditions are something of a leading indicator for the economy. The most telling sign? More hiring plans on ice. A net 11% of companies surveyed said they plan to hire -- an eight-percentage-point drop from April's report. (The net percentage subtracts the percentage that plan on cutting staff from those who plan on hiring.) Another flashing yellow light: A smaller percentage of entrepreneurs plan capital spending in the next six months -- 34%, compared with a 1999 average of 37%. The May monthly figure is down seven points from December's all-time monthly high for the 26-year-old survey. The NFIB tallied responses from 542 entrepreneurs. About 90% of all NFIB members are companies with 20 or fewer employees.

Not that the wolf is at the door just yet. A net, seasonally adjusted 7% reported higher sales, down only one point from April. And there's no credit crunch in sight, even with the bond yields rising in response to a spark of inflation and anticipation of a Federal Reserve Board rate increase to nip it in the bud. "The general economy is still unusually strong," says Selig Sechzer, senior international economist at Alliance Capital Management in New York, even though he expects U.S. economic growth to ratchet down to 3.75% for 1999 from its torrid first-quarter (annualized) pace of 4.1%, with 3% likely in 2000.

Entrepreneurs are apparently hunkering down for that relatively modest slowing. An unadjusted 21% of those surveyed expect the economy to weaken in the next six months, compared with 12% who foresee more strength. In April, 17% were bracing for a downturn in the next half-year, against 11% who remained bullish. And the percentage of small businesses expecting a rise in real sales in the next six months is at its lowest since 1993. "The falling off of hiring plans is consistent with the decline in sales-growth expectations," explains Dunkelberg.

As the economy slows, small business does risk getting caught in a bind -- with weaker sales, but still enough demand to keep pressure on hiring. The tight labor market remains the No. 1 complaint of small business, with 18% of entrepreneurs citing the lack of workers with needed skills as their biggest problem. That's down from last fall's record 23%, but it's still historically very high, says Dunkelberg. The percentage of companies with hard-to-fill job openings slipped in May to 27%, from April's record 33%. But this measure of labor-market tightness is already averaging 30% for the year, beating the 1998 NFIB survey record of 29%.

Don't expect much relief, says Alliance's Sechzer. "I would look for stabilization, maybe softening. Over the last six months, we have seen slowing in the pace of job creation. That'll continue. It doesn't mean that the U.S. won't continue to be the world's greatest engine of job creation." He adds that small business risks a pinch from higher interest rates, even if a slowing economy does take some of the pressure from the need to hire. On the other hand, small business should be able to meet some of its unsatisfied labor needs with new technology the sector is generating, he points out.

Dunkelberg says he's not worried about rates: "Interest costs aren't a big piece of most small-business costs," with the average small-business loan about $50,000. But he's not discounting the cloudier picture presented by the May survey. It's only one month, but it's not just a "sampling error," he cautions. The only inconsistent piece of the data was a surge in plans to rebuild inventories, not normally a fixture of an impending slowdown. That could reflect companies' stockpiling in anticipation of supply-chain disruptions late in 1999 from Year 2000 computer problems. Or it might just be a sign that "inventories were way below where they wanted them," avers Dunkelberg. There's no sign that entrepreneurs are hunkering down for a long, cold winter. On the other hand, they clearly don't expect these halcyon days to last forever.

By Julia Lichtblau in New York



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