Washington, DC, January 17, 2007--Last year was a good year for small business and the economy. Small-business owners sensed the pickup in economic activity even before the year started, as the Index of Small Business Optimism jumped to 103 (1986=100) in October 2005, a sign that the first quarter of 2006 was going to be very strong.
Growth in the first quarter accelerated to nearly 6 percent at an annual rate, nearly double the trend growth rate. The Index averaged over 100 through April, signaling a strong first half. Optimism faded slightly mid year, signaling a slower economy, with the Optimism Index averaging 98 in the second half.
In some parts of the country, housing was the hot ticket, especially condos. Construction boomed, fueled by low interest rates, strong employment growth and a flood of investment money (foreign and domestic) looking for an alternative to disappointing stock markets in 2001-2003, which have now reached record levels. Some parts of the country (Southern California, Las Vegas, Florida and coastal communities) experienced bubble-like increases in home prices, and a surge in new home construction.
“Most homes in the U.S. are built by small firms, not the well-known stock market darlings (now not so popular),” said NFIB Chief Economist Bill Dunkelberg. “Following usual historical patterns, the industry built houses faster than the growth in real owners and a glut ensued, contributing to the slowing of the economy. But overall, the housing market adjustments appear to be proceeding in an orderly way, posing little threat of major destabilization.”
The increase in home values helped fuel solid consumer spending throughout the year. Collectively, consumers spent more than their after-tax income all year (the so-called negative saving rate. Huge income gains at the top end of the income distribution produced heavy spending (tens of billions of bonus dollars were paid out by the Wall Street firms) that contributed substantially to GDP growth.
NFIB’s latest Small Business Economic Trends survey found that 26 percent of small-business owners surveyed expect to make a capital expenditure in the next three to six months. Still, factors like gas prices, currently averaging higher per gallon than last year, could have an impact on spending habits of consumers and industry-specific businesses.
The most impressive development in the second half of 2006 was the strength of the labor markets. The unemployment rate has held at historically low rates (around 4.5 percent) and the percent of the adult population with a job is at a near-record high level (63.3 percent), exceeded only by readings in the dot-com quarters. Nearly one in five owners plans to increase employment at their firms going into the new year, and one in five has one or more job openings they cannot fill.
“This is a good problem to have,” said Dunkelberg. “It’s a sign that employment will likely remain strong in 2007. But another characteristic of a tight labor market is higher compensation levels, which may keep edging up, putting pressure on prices or, if firms can’t raise prices, reducing profits.”
The availability of qualified workers is so serious that one in 10 owners reported this as their most important business problem. In the second half of 2006, more than half of the owners reported trying to hire each month, with more than 80 percent of these owners reporting few or no qualified workers for their open positions. As a result, the percent of owners reporting higher worker compensation has remained high all year. Labor costs will be boosted by the higher minimum wage if passed, affecting more than 10 million workers, mostly employed by small businesses. Firms will be paying more for the same work, costs which will most likely be passed on to customers.
