NFIB

A Look Ahead: Five economic areas that will affect small business the most in 2006
01/ 23/ 2006
by Bill Dunkelberg

2005 is in the bag, and although it will be months before the government gives us reasonably reliable information on the fourth quarter, the third quarter’s stunning 4.3 percent growth rate indicates the fourth quarter had to have been pretty good. During the holiday shopping season, the malls were packed, and early indicators show Internet spending doubled from 2004.

Job losses from Hurricanes Katrina and Rita were more than offset by job growth in the rest of the country. Two million new jobs were created during 2005.

Prices soared last year—bad in the case of energy, good in the case of houses, at least to a point. Overall, the inflation rate worsened, heading toward 4 percent for the year, driven mostly by energy prices that will fall in 2006. Consumers did the heavy lifting, accounting for a disproportionate share of the growth. Consumers saved little and borrowed much, and capital poured into U.S. investments from the rest of the world.

This year will look a lot like last. The five economic areas that will affect small business the most in 2006 are:

1. Consumer spending. Consumers will likely be a little less feisty, spending less on cars and new houses and adding more to their savings. For many small firms, this will mean slower sales growth. But government spending will pick up some of the slack, especially in the Gulf Coast area. Remember, it’s an election year, and lots of pork was authorized in the last budget. In the Gulf, new construction and cleanup will produce a lot of jobs and revenue for small businesses. Hundreds of thousands of houses were destroyed, and there was a similar loss of vehicles. Businesses and infrastructure must be repaired, which will add a stream of government and private spending that will last all year.

2. Energy. Energy prices will be lower, but not by much. Extremely high oil prices spurred producers to supply more oil, and supplies are rising. Refining capacity is mostly restored after trouble in the Gulf, so we can convert the oil to fuel (we burn 400 million gallons of gas a day), and we can import refined products. Plus, we did conserve a bit. With somewhat lower demand and a bump in supply, prices will fall. But in the long haul, our capacity to provide energy will be strained by strong world economic growth, and prices will not return to levels enjoyed a few years ago.

3. Tax cuts. Tax reform is on tap— some good could come from that, but inaction is likely due to the politics of the election and the number of scandals that seem to preoccupy Congress lately. Indeed, not much of economic significance is likely to get done in Congress.

4. Business spending. The business sector is awash in cash and a bit behind the curve in spending that money on investments. This is likely to pick up this year. Inflation could get a bit worse and interest rates a bit higher—both negatives for growth.

5. Labor. Overall economic growth will not be as strong as 2005, but it will be strong—expect another 2 million new jobs and tighter labor markers (i.e. higher labor compensation). These new jobs will help support consumer spending.

More economic news
Find the results of the monthly Small-Business Economic Trends report online at http://www.NFIB.com/research. Begun in 1973, NFIB’s Small-Business Economic Trends is the longest continuous survey of small-business optimism and conditions. Monthly surveys are sent to more than 2,500 NFIB members and quarterly surveys to more than 7,500 members.

Dr. Bill Dunkelberg, a nationally known authority on small business and entrepreneurship, has served as NFIB’s chief economist since 1971.

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