03/ 31/ 2006
by Bill Dunkelberg
As a small-business owner, you hear lots of news reports on the nation's economy, predictions about what will happen in 2006 and what the latest reports mean. All you really care about is how it affects your business. Here is a look at what the news means for your business, along with some of our own predictions:
Why the fourth quarter of 2005 was weaker than expected: The fourth quarter GDP growth was low compared to that anticipated by the October Index of Small-Business Optimism survey. But weak government spending and a larger trade deficit contributed to the weakness, something not anticipated by small-business owners in the private sector. According to the first report, defense spending declined at a 13 percent annual rate and overall government spending fell, subtracting half a point from the growth rate.
Car sales were the other major weakness-Americans didn't buy as many wheels at the end of 2005. Two points would have been added to the growth rate if consumers had purchased the same number of cars in the fourth quarter that they did in the third quarter.
Weather took its toll, too. The hurricanes sucked an estimated 0.7 point off of the growth rate. Let's hope the weather is kinder this year.
One other consideration: We don't know everything yet. Revisions will be released that move the estimated growth rate substantially higher and more accurately reflect the true momentum in the economy. In the meantime, we'll continue to believe what small business tells us through the Small-Business Optimism surveys.
Outlook on employment figures: The economy continues to create new jobs. The unemployment rate dropped to 4.7 percent. It hasn't been that low since the crazy dotcom days (although some observers would argue that we are still in crazy days-this time a real estate mania). NFIB surveys anticipated this excellent job growth performance. The net percent of small-business owners planning to increase employment is historically high-more than one in four business owners have at least one hard-to-fill job opening. This points toward solid job creation and continued downward pressure on the unemployment rate.
Energy, interest rates and more: A mild winter in most of the country is mitigating the impact of higher energy costs on the economy; and as stocks of oil, gas and natural gas build, energy prices are beginning to soften.
Retail sales were stronger than expected early in the year, and housing starts strong as well. All signs indicate that government spending will increase, likely boosting the reported GDP growth. Oil imports could ease (there's no place left to store it), reducing the trade deficit.
The Fed may raise its target interest rate once or twice, but that should do it, at least for a while. This will slow housing a bit, but capital spending should be stronger, making up for a chunk of the softness in consumer spending that will likely emerge.
All in all, small-business owners like new Federal Reserve Chairman Ben Bernanke's forecast: 3.5 percent real GDP growth, 2 percent core inflation, an unemployment rate under 5 percent. All in all, 2006 is shaping up to be a pretty good year.
More economic news: Find the results of the monthly Small-Business Economic Trends report online at 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.
