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1.4.99  
A Strong Economy Means Fewer Startups?
The NFIB/Wells Fargo survey shows a 4% drop in business starts in 1997

What drives entrepreneurs -- prosperity or adversity? A recent decline in business creation supports the notion that when the economy is cooking, people see less reason to leave their jobs and embrace the risks of entrepreneurship.

An annual study by the National Federation of Independent Businesses and Wells Fargo Bank shows that the number of U.S. business starts dropped 4% from 1997 to 1996, and down 17% compared with 1995, the first year the groups began this survey. In all, Americans launched 2.9 million businesses from scratch last year and bought an additional 700,000 existing operations, according to data extrapolated from a Gallup Organization poll of 36,000 households.

William Dennis, the NFIB research fellow who wrote the study, says the decline is a classic phenomenon when jobs are plentiful, as they are now: The U.S. unemployment rate is a minuscule 4.4%. "With the job market being as good as it is, some people are deciding 'Gosh, things are pretty good right now. I'll wait,'" Dennis notes. Past economic research on new business starts has shown that the number tends to rise during hard times and fall during good times, he says. Dennis expects the number of new business starts in 1998 to be similar to those from 1997.

Only 6% of the new businesses surveyed were started by people who were out of work. Seventy-five percent of the new entrepreneurs were employed. An additional 18% said they were "in the labor force." That could mean they were semi-retired or students, Dennis explains.

The survey also reveals that, despite the propitious economic climate, entrepreneurs who launched businesses last year did so cautiously. Seven of ten people who began companies from scratch started them in their homes. What's more, just one in five new business owners said they hired -- another sign of the difficulty to find workers.

EMPLOYEE'S MARKET. Signs of tight labor conditions abound across the economy, which has rebounded sharply from the midsummer market plunge brought on by the emerging-market crisis. After years of flat wages, staffing firm Robert Half International predicts a total 3.1% salary boost across all companies during 1998. On average, 222 small technology firms surveyed by PricewaterhouseCoopers plan to increase their work forces by 15.6% over the next 12 months.

"The demand for skilled employees has never been higher," says Patty DeDominic, CEO of PDQ Personnel Services in Los Angeles and former head of the National Association of Women Business Owners. DeDominic claims her clients, many of whom are in high-tech businesses, are paying wages that are 10% to 20% higher than two years ago.

Entrepreneurial activity fell most sharply in the upper Midwest, where the number of business starts dipped 12%. Labor markets in that region are tighter than in the U.S. as a whole, according to the latest U.S. Federal Reserve Beige Book. But Dennis says such sharp regional disparities in business creation reflect a confluence of economic factors and can't be attributed solely to labor market tightness. In the Southwest, there were just 2% fewer startups, also a region where job markets have been strong.

HEALTHY OUTLOOK. The NFIB's Dennis stresses that even with a business-start slowdown, the impulse to create new companies is hearty. "There is still an enormous amount of this activity going on," says Dennis. "People from all segments of the population are dipping their foot in and giving it a try. That's a healthy sign."

DeDominic says she sees the tight labor conditions encouraging workers to become self-employed consultants. "People are more willing to leave their jobs to go independent. They know if it doesn't work out they can also find another position with a company," she adds.

Indeed, the NFIB reports that most new business starts were in the service industries. Fewer than 20% of entrepreneurs said their upstarts were in manufacturing, construction, and agriculture. About one in four were in wholesale and retail trade, once traditional small-business strongholds.

"We still very much have a society interested in doing it on its own," affirms Dennis. If, as many predict, the U.S. economy slows and the job markets slacken next year, will 1999 see a rebound in new company starts? Stay tuned.

By Dennis Berman in New York
dennis_berman@businessweek.com


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