The economy according to small business - includes related articles

The Economy According To Small Business

Small business chief executives' confidence in the economy has declined since the first Nation's Business-Ernst & Whinney survey six months ago. And despite a slight easing of the liability insurance crisis, three out of four CEOs interviewed remain "extremely concerned" about the cost and availability of insurance.

The survey also shows that small business executives plan little change in capital spending and borrowing activities, and that they anticipate an upward--but not worrisome--drift in inflation and interest rates.

These results are based on telephone interviews with 500 chief executives of companies with annual sales up to $40 million. The survey, which is conducted twice a year, asked small business CEOs for their opinions about the economy, the performance of their businesses, issues facing their businesses and their jobs.

Ernst & Whinney, a leading international public accounting, tax advisory and management consulting firm, commissioned the survey, which was conducted by Angell & Company, Inc., a marketing research firm. Here are the findings:

The Economy

While nearly two thirds of the 500 executives surveyed are at least somewhat optimistic about the overall U.S. economy for the next year, they are not as optimistic as the 500 CEOs surveyed six months earlier (see chart 1). Over three fourths of the earlier group expressed optimism about the economy.

"After five years of economic growth, I'm a little concerned about what might happen next. But I'm cautiously optimistic," said Leonard Feldman, CEO of two Brooklyn companies, Modern Coupon Systems, Inc., a health care mail order company, and Professional Product Research, manufacturers of foot-care products and products for the mail-order industry.

Donald McCombs, president and treasurer of Pattison Supply company, an industrial supply house in Cleveland, also expects the economy to remain healty. "We're moderately optimistic about the economy. Inflation is moderate and interest rates are low. And the falling dollar seems to be making U.S. products more competitive in the international marketplace."

Most CEOs expect the prime interest rate, at 7.5 percent when the survey was conducted, to move higher by year's end (see chart 2). Fifty-six percent predict the prime rate will be 8 or 9 percent, and 20 percent believe that the rate will be 10 percent or higher.

More than half of the CEOs believe that the inflation rate, as measured by the consume price index for all urban consumers, will rise to 3-4 percent this year, up from the 1.1 percent increase last year (see chart 2). Even so, most executives see stability in inflation.

Said David Stolp, president and CEO of Moehl Millwork, Inc., a wholesale millwork operation in Des Moines: "I think we've got a pretty good handle on inflation, and it appears as though that should hold. I don't see it getting beyond a 4 percent figure."

Net Operating Results

The executives surveyed share a guardedly optimistic outlook about their own companies. Although they are slightly less optimistic than their counterparts were six months earlier (see chart 3), more than 60 percent of them expect their companies' net operating resluts to be improved in a year. Nearly 30 percent expect them to remain about the same.

Of the 20 percent who believe their net operating results will be much improved, more than half attribute the improvement to reduced overhead and expenses, better management or improved efficiency. The previous group surveyed put more emphasis on marketing-related factors, including expanded sales, markets, product lines and channels of distribution.

Capital Spending And Borrowing

Slightly fewer CEOs expect to increase capital spending than in the first survey (see chart 3). Roughly 60 percent now say they expect to maintain current levels of capital expenditures. Fourteen percent are anticipating a decrease.

As might be expected, palns for borrowing indicate little change, largely reflecting the CEOs' plans for slightly reduced capital spending. Over 55 percent of those surveyed expect their borrowing to be about the same this year as last year, 18 percent expect an increase and 25 percent foresee a decrease.

Planning For Near-Term Growth

The CEOs were asked to rate a number of management considerations important to their planning for near-term growth. As in the previous survey, attracting and retaining competent employees ranked as the most significant factor.

"I think the employee--that is, finding and holding key management employees--is the key to growth," said Feldman of Modern Coupon Systems, Inc.

Said David Jordan, president of Computer Resources Company, a computer retailer in Allentown, Pa.: "What's important to me is what's important to the employees." Jordan is implementing new employee benefit plans. "The key to everything is our people. If you don't have good people, you have nothing," he added.

Other considerations, in descending order of importance to the executives, included minimizing taxes, increasing sales of existing products, making greater production efficiencies, lowering overhead and developing new markets.

Liability Insurance

The cost and availability of liability insurance continues to be of great concern for CEOs. Almost all say they are concerned, with three fourths saying they are extremely concerned (see chart 5).

V. Harold Alesio, president of A-H Mechanical Contractors, Inc., a plumbing, heating, air conditioning and fire-protection systems company in Nashville, said that his liability insurance costs rose 340 percent last year. "This year they tell me it is going up 29 percent more for half the coverage," he added.

Said Garman Kimmell, president of Kimray, Inc., an oil and gas equipment controls manufacturer in Oklahoma City: "Our product liability insurance has gone sky high. I don't think we're going to see an end to it until we see some sort of tort reform in this country."

Primary Business Concerns

Government red tape again topped a list of other factors the executives believe could affect their businesses in the next year (see chart 4). Eighty-four percent say they are concerned about red tape--60 percent are very or extremely concerned.

"Bureaucracy is a significant frustration," said Ed Westerdahl, president of five companies in Oregon. "For instance, I'm making a small expansion at one of our plants, and the steps we have to go through to do that are just ludicrous."

How worried are executives about the recent federal tax law changes? Fifty-one percent say they are either extremely or very concerned (see chart 4). Uncertainty about the impact of the Tax Reform Act of 1986 still runs high, and many executives say they are deferring decisions as a result.

Over one third of the CEOs are either extremely or very concerned about foreign and domestic competition. approximately half also are at least somewhat concerned about the possibility of a recession, and the cost and availability of labor. Fear of renewed inflation ranked last one the list.

Balancing The Federal Budget

The survey also asked the CEOs to rate seven potential approaches to balancing the federal budget.

Improving the cost efficiency of governmental operations received, by far, the strongest support.

Said Westerdahl, "There is only one way you can bring costs in line in government, and that is absolutely no deficit spending. That forces government to live within its means ... as I have to as a businessman and as an individual."

Message ot Washington

Finally, the CEOs were given the opportunity to express any message they might want to send to Washington. Among them: "Put your own house in order"; "Live within your means"; and "Wake up on our position on international trade, because we are losing ground fast." These messages again indicate a strong concern about government administration, legislation and policies, and less concern about the health of the economy.

COPYRIGHT 1987 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group