Small Business Continues to Lead Recovery

Of course, not everyone believed it at the time, but small business was right again. Now, big business has joined in, creating new jobs and increasing capital spending along with the smaller enterprises that led the way. The more than 1.4 million new jobs created since last August didnt come from companies like GM or GE C they came from the nations small-business community. The most recent data from the Census Bureau indicated that from March 2000 to March 2001 firms with fewer than 20 employees created 1.1 million new jobs; firms with 20 to 500 added 40,000; and those with 500 or more lost 150,000.

The Fed has started raising rates again, but rates are still at levels equal to those in the 1960s. If investors believe that the Fed is timely, longer term interest rates wont rise much. But if investors worry that the Fed is behind the curve and a bout of inflation is about to emerge, long-term rates could rise substantially.

Many small-business owners have taken advantage of the low rates and lengthened and restructured their debts. Owners with variable rate loans will see their interest cost rise each time the Fed moves, but most wont notice higher rates until loans must be re-negotiated.

More than a third of the owners are reporting higher average selling prices, the highest frequency since the early 1980s. And, for the first time since the 1980s, more firms are raising prices than are raising employee compensation (a net 29 percent raised prices, while a net 23 percent reported higher worker compensation). This has been good for profits and cash flow. However, this is translating into inflation rates (based on the Consumer Price Index) in excess of 5 percent this year, compared to under 2 percent last year. This news will put frowns on the faces of the Fed governors if it persists.

Overall, small-business owners are optimistic. One in five think now is a good time to expand capacity, and nearly a third plan capital outlays. The economy, including manufacturing, is growing nicely.