1988 forecast: smooth sailing - survey of small business executives shows optimism about the 1988 economy

1988 Forecast: Smooth Sailing By Herbert S. Braun, C.P.A.

Small-business owners remain bullish about the financial out-look for their own companies and the economy in 1988, according to the latest Nation's Business-Ernst & Whinney survey.

While anxiety about an eventual recession edged up slightly in the past six months, the number of executives who expressed concern about the prospects of higher inflation dropped significantly in the same period. And even though many CEOs expect a higher prime rate this year, the number of those who are worried about the cost of borrowing money declined from the level of six months ago.

In line with their overall optimism, a substantial number of small-business executives said they intend to hire more workers to meet the demands of business expansion.

Those are a few of the expectations generally expressed by business leaders in the fourth semiannual economic-confidence survey commissioned for Nation's Business by Ernst & Whinney, a leading international public-accounting, tax-advisory and management-consulting firm. The survey was carried out by Angell & Company, Inc., an independent marketing-research firm.

Telephone interviews were conducted with 500 chief executives of companies with annual sales of up to $40 million. The CEOs were chosen at random from a statistically representative sample of U.S. companies.

Most of the executives surveyed are 35 to 54 years old; well over half earn more than $100,000 a year with nearly7 one in five receiving over $200,000.

Current Conditions

Ninety percent of the executives of small businesses say their companies are in good to excellent condition. The largest companies in the group surveyed are particularly healthy - more than half of the CEOs whose firms had sales above $20 million said their companies are in excellent condition.

The executives think these good times will continue; 70 percent expect this year to be better than last. Although that is a small drop from the 73 percent of six months ago, it exceeds the 63 percent who were looking for improvement at the outset of 1987.

Another display of CEOs' confidence is found in their widespread intentions to expand employment. Half of the executives expect to do so - about the same level as six months earlier, and higher than a year before. The largest of the companies surveyed are slightly more likely than smaller ones to be hiring.

These expansion-minded executives feel assured about their own future. "We're going out there and getting new business," says Chicago advertising executive Edward Hammerman, president of Hammerman & Morse, Inc.

Herbert S. Braun is a partner in Erns & Whinney and is national director of its services for privately owned and emerging businesses.

The latest Nation's Business-Ernst & Whinney survey of small-business executives shows continued confidence in the economy. "We're picking up some good accounts and working hard to get more. For that, I need more people."

The executives also show about the same inclination to borrow funds as they did six months ago. And over the same period, those planning to increase capital spending grew to 37 percent from 33 percent.

California businessman Wesley Creswick says his decision on how to finance his major expansion will be based on the prime rate. Creswick, whose business is wholesale feed ingredients, operates the Central California Commodity Company, in Clovis. "If I thought the prime would go down," he says, "I would finance the expansion by external borrowing. As it stands now, I'll finance it internally."

Over the past six months, executives thinking about a public stock offering dropped from 4.6 to 2.4 percent - one indication that the stock market's troubles are affecting CEO's planning.

One executive still thinking of taking his company public is Jack R. Fairchild of Glen Lyn, Va. He says his firm's good track record should assure his success if he decides on a stock offering. His company, Fairchild International Inc., manufactures equipment for underground coal mining.

"We realize that the market for new offerings has dampened since the market drop," he says, "but we believe that our products and technologies, as well as foreign-marketing potential, will support a market for our stock."

As in past surveys, those who are most bullish on their own companies give the bulk of the credit to such internal factors as better management, reduced overhead and more effective marketing.

The General Economy

Optimism about the economy showed almost no change in the past year. Over the past three semiannual surveys, 64 to 67 percent of respondents have been either very optimistic or somewhat optimistic about the U.S. economic outlook for the year ahead at that time.

One such optimist is William Simpson, CEO of Atlanta's Simco Supply Company, an industrial-supplies wholesaler. "The prime rate remains steady, and unemployment seems fairly stable," he says. "Looking at those issues, I think they should carry us fairly well over the next year."

Nevertheless, a number of executives express concern that economic conditions will cloud the future for their companies. Although the CEOs' fears of inflation and rising interest rates are moderating, they are increasingly apprehensive about a recession.

Recession

Anxiety about an eventual recession edged upward over the past six months. Executives expressing some level of concern about a recession reached 65 percent, compared with 62 percent six months earlier and 51 percent a year ago.

"I think we're ripe for a recession," says Nelson Orlen, who heads The Policy Mart, a Princeton, N.J., company that sells commercial and industrial insurance. "We're going to be looking at a new administration at the end of the year, building has started to slack off a touch, and the real-estate market has plateaued as well. Although interest rates have stabilized, all things being equal, I'm concerned."

Inflation

Fears of inflation, which had peaked in the previous survey, dropped in the most recent tally, from 71 percent to 58 percent. That is still higher than the 41 percent registered a year ago.

As they have in each previous survey. key, the CEOs say they expect the inflation rate will rise during the year. Their current average prediction is 4.7 percent for 1988, compared with a forecast of 5 percent six months before. In the survey a year ago, executives of small business predicted a rate of 3.8 percent for 1987, a forecast that came very near the actual mark of 3.6 percent for the year. The annual inflation rate reflects the year-to-year change in the average of each year's monthly cost-of-living figures; each monthly figure is the rate that living costs were up or down compared with costs in the same month a year earlier.

Interest Rates

The executives prime-rate prediction of 8.5 percent on average for the end of last year also was relatively accurate, just under the actual percentage of 8.75. The average of the predictions this year forecasts the prime ending up at about 9.25 percent.

One CEO who thinks the rate will be even higher is A.J. Cantano, president of Northeast Electronics Corporation, a manufacturing firm in Milford, Conn. The prime will hit 11 percent, Cantano says, adding: "I believe we're going to have an economic reversal and a tightening of dollars."

Even though the CEOs expect the prime rate to rise, the percentage of those concerned about the rate they must pay to borrow money was smaller than it was six months ago. Fifty-eight percent now express at least some concern, compared with 72 percent a half year earlier.

Liability Insurance

The executives also have become slightly less apprehensive about finding and paying for liability insurance, although their concern does remain high. Cost of the insurance is a concern for 91 percent, and availability is a worry for 79 percent, down from 96 percent and 85 percent, respectively, six months earlier.

Wholesaler Simpson in Atlanta has had no problem obtaining insurance, but cost is another story. "The cost of everyone else being sued is directly affecting my costs, which have tripled in the last two years," he says. "I have a hard time handling those costs, too. It's being taken right out of the bottom line."

Other Concerns

Government spending, which has troubled executives in the past surveys, now has three fourths of the CEOs extremely or very concerned. Bureaucratic red tape is another perennial irritant, with three of every five executives surveyed saying they are extremely or very concerned about it. Says Kriss Hilborn 7of Beaver Distributors, a Farmington Hills, Mich., wholesaler of ceramic tile: "The federal government is spending money it doesn't have, creating the potential for inflation."

"Something has to be done to curb federal spending," says James E. Johns, president of Bloom Engineering Company, in Pittsburg. "There seems to be a lot of waste caused generally by the bureacracy. No one seems to be pushed to do anything. The higher the spending level, the higher the taxes required to support it."

Other factors worry executives to a lesser yet substantial degree. Sixty-three percent indicate that they are somewhat concerned about the cost of labor, and 44 percent are concerned about its availability.

Management Actions

In this survey and in the previous one, more than 90 percent of the executives rated the following management activities at least somewhat important to their near-term growth: increasing sales of existing products, minimizing taxes, attracting and retaining competent employees, and lowering overhead.

"Increasing sales will have the most effect on improving our operations." says Jack Fairchild, whose Virginia-based company manufactures mining equipment.

Pat Dutschke says good employees are essential to the health of her business, Texas General Insurance Agency, in Houston. "Our products are not different from those of our competitors. Our success comes down to quality service--and you're got to have great employees to give that service. Without good people I lose that edge."

Acquisitions

The number of CEOs who think they are at least somewhat likely to acquire another company is more than double the number who say they might be bought out themselves, according to the latest survey. About 37 percent of the executives say they are somewhat, very or extremely likely to buy another organization within the year. Only 15 percent consider it at all likely their own company will be acquired.

Jerry Perry, president of Grace Energy Corporation, in Carthage, Mo., is one of those who intend to purchase another company. He says it is probably the only way to grow in the largely saturated field of convenience stores that also have gasoline pumps.

"Internal growth through additional construction would probably only add to the problem of saturation," he says. "By buying another comapny we could easily add 25 to 30 percent to our size, making us stronger in the marketplace.

Keeping Current

Executives spend nearly an hour and a half each day keeping up with current events and the latest thinking in their own fields, according to the fourth semiannual Nation's Bussiness-Ernst & Whinney survey.

To stay on top of economics and politics, they read newspapers and business magazines and watch television news. They turn to trade magazines for more information abdout their own fields, management skills and technical topics.

More than half of the CEOs attend seminars to develop their management abilities further, and one third attend such sessions to hear more about technical developments.

CEOs of small businesses with the highest sales levels do spend significantly more time staying current--about 13 hours a week, compared with the average of 10 hours. Executives over 55 generally are the heads of the largest organizations in the survey, and those CEOs report they have less trouble keeping up with the flow of events. Overall, 45 percent of the surveyed executives complain they sometimes can't stay current.

Says Kriss Hilborn of Beaver Distributors, in Farmington Hills, Mich., "I run a business, I have 6 locations, 58 employees, 8 children and a husband, and right now I'm off to a basketball game. Somehow there's never enough time to stay up on the issue."

Expectations About Their Own Business

Level of Concern About Business Factors 1988 Forecast: Smooth Sailing

Plans For Business Activities During 1988 1988 Forecast: Smooth Sailing

Expectations Regarding The Economy

Inflation Forecast

Prime Rate Forecast

Current Financial Condition Of Company

Current Financial Condition Of Company Compared With Last Year

COPYRIGHT 1988 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group