09/ 26/ 2007
by Bill Dunkelberg
According to the Bureau of economic analysis, the output of the economy (GDP) grew only 0.7 percent in the first quarter but 3.4 percent in the second. It is hard to believe that the growth rate of a $13 trillion economy could increase five-fold in just 90 days, so let's just average the two numbers and agree that, as small-business owners told us in January, growth was slow and below potential in the first half of the year, not much better than 2 percent for the year.
The Price Is Right
The Federal Open Market Committee at the Federal Reserve, responsible for inflation management, is happy since the core Personal Consumption Deflator, which excludes food and energy, was below 2 percent, the top of its target range. But the Consumer Price Index inflation rate is 5 percent this year, and even the core CPI inflation rate is above 2 percent. Small-business owners confirm that the reports of the demise of inflation are indeed premature. One in five business owners reports increasing average selling prices—good news for the owners, bad news for the inflation measures since the inflation rate is highly correlated with the percentage of owners raising prices. In 2003, CPI inflation was about 2 percent, and the net percent of owners reporting higher selling prices was 3 percent, a long way from the net 19 percent of small businesses that increased selling prices in recent months.
With more than one in four owners reporting higher labor compensation, it's no surprise that so many firms are raising prices. Add to this cost the pressures from rising energy costs and higher health-care costs, and the pressure on profits is hot and heavy. If firms are unable to pass these costs on with higher prices, profits will suffer.
Small Business Dodges Credit Crisis
The papers are full of dire news about subprime losses and credit crunches. Well, the news is true if you are trying to buy mortgage portfolios by borrowing 90 percent of the purchase price, overpaying for a company in a private-equity deal and need to borrow cheap money, or running hedge funds with who knows what kind of leverage and bizarre derivatives. But if you are a small firm helping produce half of the country's private GDP, credit's no problem! Based on an NFIB survey, credit markets are the friendliest small-business owners have seen since questions about credit needs were first asked in the early '90s. When asked if loans were easier or harder to get, 5 percent said harder, which is about as low as this measure has gone in 15 years. The cost of short-term loans has risen since the Fed started raising rates, but credit availability has not changed.
Employment Nearing Capacity
The unemployment rate has stayed low despite the weakness in the housing market. Nearly one in four owners report unfilled job openings, and nearly 15 percent plan to increase total employment at their firms. Even in construction, far more owners are increasing employment than are cutting jobs, helped out by strong commercial construction. (A roof is a roof!)
Overall, the economy is looking solid, but not very exciting. There is no recession in sight, and rumors that the subprime losses will cause a recession are exaggerated. But inflation will continue to be too high and will keep the Fed on alert. The unemployment rate may rise a tenth of a point or two, but will stay historically low, and job growth will be steady.
Dr. Bill Dunkelberg, a nationally known authority on small business and entrepreneurship, has served as NFIB's chief economist since 1971.
