Small firms' gains bode well for rest of US economy
Small business, a major source of new jobs in the United States, is enjoying another banner year. A just-released quarterly survey conducted by the National Federation of Independent Business (NFIB) found small companies' inventory building, hiring, and investment plans all at record or near-record levels.
''I see a strong expansion for small business this year,'' says Thomas Gray, director of economic reseach for the federal government's Small Business Administration (SBA). But he adds that ''I do see some clouds on the horizon.'' The most threatening cloud is the danger that higher interest rates will slow the economy and hurt sales.
The relatively rosy prospects for the nation's 14 million small firms - those with 100 or fewer employees - seem to indicate that the overall economy will remain strong for the rest of 1984. For example, small firms' plans to add to their inventories (goods waiting to be sold) are at their second-highest level in 10 years, the NFIB says.
That continued inventory growth ''translates into a very strong level'' of real or inflation-adjusted growth in the US gross national product in the current quarter, says William C. Dunkelberg, the NFIB's consulting economist. GNP is the value of the goods and services produced in the economy.
Due to small-business inventory building and other factors, GNP growth in the second quarter will be ''far stronger than the consensus of forecasters who expect real growth in the 1.8 to 3 percent range,'' Mr. Dunkelberg says. He expects growth of 6 percent in the second quarter.
The course of small business has a pronounced effect on the economy for a variety of reasons. Small firms employ about half of the nonfarm work force and produce about 40 percent of America's GNP. And, until recently, modest-sized companies outpaced their larger brethren in creating jobs.
During the recessionary period 1980-82, small firms generated all of the 984, 000 net new jobs in the economy. Job creation at smaller firms offset a loss of jobs at bigger companies. In the recovery year 1983, small firms added new jobs at twice the pace of older firms, SBA data indicate.
But during 1984, bigger firms will overtake small companies in the area of job creation, SBA economist Gray says. As a recovery starts, bigger firms get a slower start in the job-creating race. ''But when they do get off the blocks, they have a lot of momentum.'' he says.
Nevertheless, small firms' hiring plans rose sharply in the second quarter, the NFIB says, and reached the fourth-highest level in 10 years. One out of four firms plans to expand its work force this quarter, while only 1 in 20 plans employment cuts.
Despite the bullish immediate prospects for their own firms, small business executives are growing concerned about the outlook for interest rates.
''There is apprehension that I am hearing, that I did not hear before, that has to do with the cost and availability of money,'' says Ann Eskesen, president of the Innovation Development Institute in Swampscott, Mass. IDI provides consulting services on small business and technology transfer.
She notes that firms are worried about getting locked into borrowing that they could not afford if interest rates continued to rise sharply. In metropoltan areas, over 50 percent of small business loans are tied to banks' prime (or benchmark) lending rate, which has risen three times in the past two months. In April, 1 out of 5 NFIB survey respondents reported paying higher loan rates than they had before.
Only two out of five NFIB members report borrowing on a regular basis during the first three months of 1984. That was only one percentage point short of the 10-year low recorded in 1975.
Overall, credit demand in the economy has been rising, helping push up interest rates. However, it appears that this borrowing surge is coming from larger corporations, ''not among the millions of small businesses in the US,'' NFIB economist Dunkelbery says.
This cautious borrwing pattern may mirror the slight decline in optimism among small business executives. The NFIB's small business optimism index fell to 109.8 in April, down from its record high of 110.3 in January.
The decline means that small firms are ''saying things are not going to improve a lot'' more, Dunkelberg says. But the firms still feel this is a good time to expand to take advantage of current strong business conditions, he says.
In fact, small firms' investment plans are at a record high level, the NFIB says. Some 34 percent of the firms surveyed are planning capital outlays in the next six months. The median outlay is $13,000, and 1 in 20 is planning to spend
And the rapid pace of new business start-ups is continuing this year, says Jeffrey Shuman, director of the Small Business Resource Center at Bentley College in Waltham, Mass. Last year a record 600,000 new firms opened their doors.
''I don't expect it to turn down in the middle of a recovery,'' SBA economist Gray adds.