Small business owners have improved expectations for economic growth and a need to add to inventories according to the latest National Federation of Independent Business Optimism Index. Five of the 10 components of the index improved, led by a nine-point hike among those who said they expect a better economy in the coming months.
Seasonally adjusted, small firms produced solid growth in October, with 14 percent increasing average employment by 3.1 workers per firm, while 9 percent trimmed workforces by an average 3.5 employees. Fifty-five percent hired, or tried to hire, one or more workers. Twenty-seven percent reported unfilled job openings, another sign of tight labor markets. More than eight in 10 could find few or no qualified applicants for unfilled positions.
The top business problem for 15 percent of those responding was the availability of qualified labor, up another point and the highest reading since 2001. Normally, tight labor markets could renew concerns over wage driven inflation in the months to come if continues. However, the net-percent of firms raising average selling prices fell four points to 16 percent, seasonally adjusted. Since April, the net-percent raising average selling prices has declined 10 points. So far, small businesses have had to absorb their labor challenges and not pass them along in higher prices.
“Price pressures are fading, and it’s not just the construction sector that is bringing the pressures down,” said NFIB Chief Economist William Dunkelberg, “retail inflation is easing as well.”
The net-percent reporting earnings improvements lost six points from September, falling to the average for the year, no surprise in view of weaker reports of sales gains and a decline in the frequency of price hikes. A net 23 percent increased worker compensation, down five points from September.
Inventories, sales forecasts, and capital spending all remain strong. One-fifth of the owners surveyed said they believe the current period is a good time to expand facilities, up seven points from August. A net 11 percent expect business conditions to improve over the next six months, a 19-point gain over August. Owners are confident that the economy will continue to perform well in 2007.
Good News, Bad News of Unemployment Report
There is good news and bad news about this week’s unemployment report.
The good news: Unemployment is down.
October’s unemployment rate of 4.4% is the lowest in five years. 92,000 new payroll jobs were created. This is actually an under-count, as self-employed and new entrepreneurs are not counted in these figures. They are now 50% of the economy.
The bad news: Unemployment is down.
There are two concerns with this report. One is that the inflation worry is still out there, and tight labor markets could cause a sustained and difficult to manage pressure on prices. The second concern is that small businesses, which employ half of America’s workforce, are having a difficult time hiring.
The National Federation of Independent Business’ Chief Economist William Dunkelberg responded to the unemployment report with this statement:
An historically high 63.3 percent of the adult population has a job (higher only in the dot.com-Y2K years) and the unemployment rate is 4.4 percent in October. This does not sound like a labor market with deficient labor demand, but it’s showing clear signs of a mismatch between supply and demand, with clear shortages of qualified workers.
Job creation plans were also exceptionally strong, even though owners see the economy slowing down. Apparently there is a real hiring deficit in the small-business sector. Even with lower expected sales growth, more workers are desired, if they are qualified.
Labor markets continue to tighten. More and more small-business owners have been paying higher compensation, and the labor force participation rate indicates that labor supply has responded, though not sufficiently to keep the unemployment rate from falling.
Eminent Domain on the Ballot
There are initiatives on the ballot in twelve states to strengthen property rights, including eight states with specific proposals to limit the governments’ eminent domain powers (Florida, Georgia, Michigan, Nevada, New Hampshire, North Dakota, Oregon and South Carolina). Although many of us are frustrated by the candidates we have to choose from these days, I hope voters in the states where property rights are on the ballot get out and vote on this critical issue.
Here in Tennessee the issue of eminent domain is not on the ballot, but it is an issue that may become rather contentious as the city of Nashville moves to redevelop the land along the Cumberland River near downtown.
The Nashville Business Journal ran an article last week in which they examine the possibility of large tracks of land being taken away through the powers of eminent domain in the name of redevelopment.
As I told the reporter in this story, I hope that this will not be the case. Seizing land for developers to use to build condominiums is not the proper use of eminent domain. Let the developers use the free market to purchase the land that they need for their projects.
Carnival of the Capitalists
This week’s edition can be seen at Gill Blog.
Riding in Someone Else’s Wake
Do you wish you were the guys who came up with the idea for the Crocs shoe phenomenon? They weren’t the only ones to hit big with the ugly, but comfy footwear. Sheri Schmelzer, a stay at home mom from Colorado, had an idea to decorate her kid’s Crocs using the holes to her advantage. Soon her creative idea became a business.
From Fortune Small Business:
There are 26 million pairs of Crocs in the world, more than 80 percent of them speckled by holes, and many of those shoes are on the feet of accessory-friendly youth. Jibbitz, as the charms (and the company) came to be known, can be anything — peace signs, flowers, you name it — to please a demographic eager for variety.
Within weeks, the Schmelzers set up a website for sales. By the end of the summer, they were funded by home equity, with their parents working the assembly line in the basement.
A little over a year later they sold their business to Crocs for $10 million and an additional $10 million earn-out if they hit their earnings targets as a subsidiary of Crocs.
Why didn’t I think of that!!
Great Conference for Academics Interested in Entrepreneurship
The USASBE (United States Association of Small Business and Entrepreneurship) Annual Conference has become one of the premiere events for educators to gather around the topic of entrepreneurship. Any of you who teach and do research in any topic related to entrepreneurship, small business, and innovation should consider attending this event. I attended back in the 1980s when it was first getting started. When I got back into teaching in the late 1990s USASBE was the first group that I made sure to link back up with as I re-entered the academy.
It attracts attendees from schools of all sizes, with missions ranging from teaching colleges to research universities. The conference will be in Orlando, Florida from January 11-14, 2007.
I hope to see some of you at USASBE this year!
Small Business is Big Business for Shippers
I love to see free markets working at their best.
The big shipping companies, recognizing that we are moving further into an entrepreneurially-based economy, are finding creative ways to attract small businesses. From the Comumbus Dispatch:
FedEx has quietly become the nation’s second-largest producer of signs and banners, and it’s about to unveil a service aimed at helping entrepreneurs get into the direct-mail-marketing industry. DHL has begun a smallbusiness magazine and is funding micro-enterprise efforts….And UPS has become one of the top providers of Small Business Administration-backed loans in the country.
A big part of their move into retail operations, FedEx with their Kinko’s acquisition and UPS with their Mailboxes, Etc. acquisition, was to position their businesses to capture the exploding small business segment in the economy.
Family Owned Business Understand Power of Culture
Greg Mankiw’s Blog has a summary of the New York Times review of a new book on family business Dynatsties: Fortunes and Misfortunes of the World’s Great Family Businesses, by David S. Landes. The book profiles a handful of family businesses, some famous and some not as well known.
While it is interesting to note that “family” businesses in the Fortune 500 (no longer private family businesses, but still family controlled) outperform their “professionally managed” counterparts, their recognition of the power of a truly good corporate culture is what is most intriguing to me. From the New York Times:
There’s also much to be said for family “stewardship” — the sense that you have been entrusted with a multigenerational inheritance, not just a company. The Northeastern grocery chain Wegmans is now run by a fourth generation of family managers. Regularly voted one of the best American employers, it is known for the range and quality of its goods, its beautifully appointed stores and its knowledgeable and friendly staff. The buyout experts who snapped up grocery chains through the 1980’s and 90’s, firing workers and cutting benefits, would not have understood what the Wegmans are about.
The link to Greg Mankiw’s Blog came from Ben Cunningham, who raised the interesting point in his e-mail to me about what these businesses can teach us about the estate tax. These families not only build good companies, but profitable ones, as well. Is it not in the public interest to try and support these businesses rather than try to tear them apart through the burdens of the estate tax?
Debate over the Future of Micro-financing
The cover story in this week’s New Yorker (via National Dialogue on Entrepreneurship) is about the debate over the future direction that micro-financing should take. The evidence is overwhelming that micro-financing is a powerful tool to help people use free enterprise to pull themselves out of poverty. The debate is over what business model is best suited for the entities that provide micro-financing.
On one side of the debate is Nobel Peace Prize recipient Muhammad Yunus, who favors the non-profit model used in his Grameen Bank. This model argues that the goal is eradicating poverty and that a non-profit keeps the focus front and center on this objective.
The other side of the debate, favored by many cashed-out entrepreneurs such as eBay’s Pierre Omidyar argue that we should not be concerned with the form these agencies take. Whatever form works best in a given situation is what should be used.
I agree with the second approach. Let the each situation, dictated by local markets, populations, and economies, dictate whether a non-profit or for-profit is the best model.
Worst Case Scenarios and a River in Egypt
A common practice in writing business plans is to offer three scenarios: most-likely, best case and worst case.
When I see worst cases presented in most business plans, they are almost always not the worst case scenario. They are most often a less optimistic variation of what the entrepreneur thinks will actually happen. The real worst case should be this: if things don’t go as planned and the deal fails, what is the outcome for investors and lenders?
Entrepreneurs seem to operate under the assumption that if they don’t plan for failure, it can’t happen. If they don’t ever address the real worst case, investors and lenders won’t think about it.
I get push back on thinking and planning for worst case from my students. “Don’t you think my idea is any good?” That is not the issue here. Even good ideas can fail, as most opportunities come from a dynamic, changing environment.
All of this came to mind after a conversation yesterday with my father. We were talking about a potential deal, and he made the statement that he wants “protection” in a deal. That was an interesting word to me. After all, we aren’t a bank that can get a personal guarantee on debt. Any investment would be at risk.
But, he meant something else. He simply looks at every deal and imagines what it will look like if it goes bad. What can he hope to take away from it? He thinks this way because his generation saw the ultimate worst case — they lived through the depression. It is not that he is risk averse as a result — to the contrary. Rather, he is always soberly realistic that deals go bad, and we should understand where that will leave everyone involved. That is a perspective that we seem to be losing in our society.
Failure is real, and it can happen to even the best among us. So plan for it. Just in case it does happen, and hopefully the odds of that are slim if you have done your homework, you will be ready to move on to the next opportunity. You will have created a deal in which you have actually planned the worst case and have created a business where the worst case is not the end of the world for you — just for that deal.
And just so you don’t go in the wrong direction with this, your outcome in the worst case should not be to declare bankruptcy for the deal. That is a reputational scar you do not want in your background as an entrepreneur if you can avoid it. To plan for bankruptcy is in my opinion, unethical. Once in a while it unavoidable, but that should not be the predetermined plan.
Don’t be in denial about the worst case. Understand it. Plan for it. Make it an outcome you can move on from.