NFIB

How Small Businesses Can Adjust to a Slowing U.S. Economy: Part I
03/ 07/ 2002


With the long-expanding U.S. economy beginning to slow as the result of numerous Federal Reserve rate hikes during the past year, small businesses may be experiencing a changing economic environment that offers new challenges. Today's Workshop, by contributor Jeffrey Moses, addresses a few key points that can help ease financial tightening during the expected upcoming slowdown.

The Federal Reserve (Fed) began raising interest rates last summer in an attempt to cool down the economy and minimize the risk of inflation. The Fed's hope is that the slightly higher interest rates will produce a "soft landing" for the economy, meaning that inflation may be held in check without the country going into a recession. Fed interest-rate increases make corporate and public borrowing more expensive, and therefore reduce credit card and other purchases, home purchases, corporate expansion through borrowing, etc. The result is an overall slowing of business growth, with moderately decreasing sales revenues in most industries.

For small businesses, higher interest rates and lower sales volumes have significant and immediate consequences. As interest rates rise, consumer spending tends to fall. Small businesses may feel this, and would be wise to plan on somewhat reduced sales volumes when making short-term financial projections. A key component of overall consumer spending is public confidence in the economy. If the interest-rate hikes really do result in a "soft landing," consumer confidence may remain strong and spending could bounce back to healthy levels as early as next fall and winter.

Another significant consequence for small businesses is that borrowing maybe more expensive (i.e., interest payments on loans may be higher). This means that any loans you were thinking of taking out in the near future could be more of a burden to pay back (especially if sales volumes decline). Since it's unclear whether the Fed will further raise rates, or leave rates as they now are, it's a guessing game to figure out whether to take out loans now or wait until later. The best way for a small business to address the problem is to become even more prudent when taking on debt of any kind. Don't be caught with ongoing payments that may be harder to meet as sales dip slightly. And think twice about taking on adjustable-rate debt, which features variable interest rates that could climb if the Fed decides to raise rates later.

A small business may not be able to control its sales volume, but it can hold a tight rein over expenditures. One of the best ways to maintain profitability during an economic slowdown is to cut costs whenever possible. This may mean keeping a close eye on day-to-day expenses such as utility bills and maintenance fees, re-examining costs on long-distance service and other ongoing expenditures, and making sure that unnecessary purchases are eliminated. When a purchase of significant size is required, be sure to put it out to bid to make sure that you get the lowest possible price. (Please see the former Workshop article "Accounting 101: Put All Purchases Out To Bid."

Next week's workshop continues this discussion by describing how changes in the job market will affect small businesses.

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