11/ 21/ 2006
by Bill Dunkelberg
As 2006 winds down, the economy is slowing from its surprising first-half strength. The slump in housing is certainly contributing, but less than many observers expected. Indeed, NFIB-member construction firms are still more optimistic than the average for all firms, although they are certainly less exuberant than they were earlier this year. Strong business spending is providing other options for using a hammer and saw. Here are some areas to watch in 2007:
- Inflation is still stronger than the Federal Reserve would like to see, but not on a rampage, leading the Fed to sit tight to see how much steam a weakening economy can take out of price hikes. Since April, the percentage of small-business owners reporting higher selling prices has declined from 26 percent to 20 percent--still too strong to get inflation down below 2 percent, but it's headed in the right direction. We must remember that these kinds of things don't get fixed overnight.
- Labor markets remain exceptionally tight, even as the economy slows. The unemployment rate is the lowest in decades, and the percentage of the population age 16 and older who has a job is at record-high levels (except for a few dot-com quarters). Every month, more than 50 percent of the small-business owners surveyed hire or try to hire one or more workers. About 10 percent succeed. Eighty percent of those looking for new workers report “few or no” qualified applicants. Except for the dot-com years, the percentage of owners citing “the availability of qualified workers” as their No. 1 business problem is at record levels. That's good news for 2007--employment is likely to remain strong. As a consequence, the percentage of owners reporting higher labor compensation may keep edging up, putting pressure on prices or, if firms can't raise prices, reducing profits.
- Capital spending has remained solid, producing little or no growth, and inventories are viewed as a bit excessive, producing some softness in new orders to wholesale and manufacturing firms. Profits are still looking good, even as more firms raise worker compensation. Price hikes are still helping, as are declining energy prices. Three-hundred million gallons of fuel are consumed daily in the United States. A price cut of 50 cents or more frees hundreds of millions of dollars to be spent elsewhere in the economy. Consumers seem to be taking advantage of these price cuts, as they continue to spend more than their take-home pay.
Overall, 2007 is shaping up to be a reasonably good year, with low interest rates, falling inflation, rising worker compensation, solid sales, a stabilizing housing market and strong government and business-capital spending. Economic growth will fluctuate quarter-to-quarter, but on average the economy should deliver a solid performance. For the near-term, the small-business sector of the economy will be quietly solid overall, holding up its half of the economy's growth outlook.
