05/ 25/ 2006
by Bill Dunkelberg
With half the year almost behind us, 2006 is looking good. Small businesses are doing their part to create new jobs. Strong growth in the output of goods and services has pushed up worker compensation. More than a quarter of small-business owners have raised wages and benefits. This is good news for workers, but it worries the Federal Reserve since labor costs account for 70 percent of business costs. If labor costs rise, pressure on prices will develop. Currently, about as many firms are raising selling prices as are raising worker compensation, essentially passing on the rising cost of labor to consumers. This is what the Fed doesn't want to see, and raising interest rates is its only tool to cool growth and relieve some pressure on prices and wages.
Understanding the price of gas
The economy is doing well despite a very high energy tax. We say "tax" because roughly every dollar increase in the price of a barrel of oil is like a $5 billion tax increase. The price of oil has increased by $40 a barrel recently, which is the equivalent of a $200 billion tax hike. In real terms, gas that costs $3 a gallon today is about as expensive as it was in the early 1980s. The average worker has to work the same number of hours today as he did in the 1980s to pay for 10 gallons of gas. At $75 a barrel, the oil cost of a gallon of gas is about $1.80. Add to that an average of 50 cents a gallon in taxes, and the cost increases to $2.30 a gallon before the oil is even delivered to a refinery, processed, blended and trucked to a gas station. Obviously, the real winners are the owners of oil. But the next big winner is the government, collecting $75 billion in revenue, far more than the oil companies that everyone complains about.
What's ahead for small business
Fortunately, our economy has changed a lot, and we're far less dependent on oil than we were 30 years ago. We use about half as much oil today per dollar of gross domestic product than we did in the 1970s. But GDP is very large and growing. Complicating the energy picture is the unusual strength of global growth—it seems like everyone is experiencing a growth spurt at the same time. This puts great pressure on oil supplies and refining capacity, and it takes a long time for new oil supplies to reach market and match demand. In the interim, prices rise. And with political uncertainty and lots of hedge-fund speculation, gas and oil are expensive. So, in the near term, rising energy and labor costs will be pressuring small-business owners. Small businesses will either have to pass on these costs in the form of higher prices or see their profit margins erode. Eventually this will smooth out, but it isn't going to happen overnight, so hire carefully and manage energy use.
