What Entrepreneurs See in 2006

Our expert panel is generally optimistic about growth. Some big concerns: Finding great employees, plus rising energy and health-care costs

The economic issues affecting small businesses often mirror those that concern big corporations. But the former -- with their thinner margins -- often feel the effects of what's rocking the economy fast, early, and hard.

For insight into what the year ahead may have in store for entrepreneurs, BusinessWeek Online staff writer Stacy Perman spoke with several small-business watchers, including William Dunkelberg, chief economist with the trade group National Federation of Independent Businesses in Washington, D.C.; David Hennessey, global marketing professor at Babson College in Babson Park, Mass.; Michele Evanger, owner of franchiser Designs of the Interior in Barrington, Ill.; Susan Sobbott, president of OPEN, American Express' small-business network; and Peter Horan, CEO of Allbusiness.com.

Among the pressing concerns, issues, and trends they cited: a slowdown in consumer spending, increasing energy and health-care costs, and a tightening labor market. Still, overall most felt optimistic about the coming year. Edited excerpts of their conversations follow:

What do you see as a top priority for small businesses in 2006?

Dunkelberg: I'd say the most important thing is how the economy is doing and how many jobs are being created.

Evanger: As a franchise company, our primary mode of growth is adding stores, and we [plan] to add 15 new ones.

Hennessey: The top priority is to identify growth opportunities.

Sobbott: Growth. We interview our customers regularly, and what we saw in our most recent survey [October, 2005] was that half of the small businesses expect to grow into the new year, regardless of the vagaries in the economy.

Do you expect growth in the first six months of 2006?

Dunkelberg: Sure. There's lots of momentum. We do expect consumer spending to slow down, [but] the government will be spending, and [business investment in] certain areas like the Gulf will pick up. That will help some small businesses. But if customers back down, retailers won't do as well.

Evanger: Absolutely. Our industry, home furnishings, is an $8 billion industry, and it's really fueled by housing sales. I expect that to continue to be strong.

What do you see as the biggest concern that will affect the economy and small businesses going into 2006?

Dunkelberg: I think the real risk to the economy, in terms of growth, is a slowdown in consumer spending.

Evanger: I think it's the job market, especially as baby boomers age. Small businesses are very dependent on finding strong employees, and the smaller the business, the more important it is.

Hennessey: I think figuring out what's going to happen with immigration laws and how they will be enforced will be a big deal. A lot of small businesses rely on immigrants to expand their businesses.

Sobbott: We see several things. Small businesses are watching interest rates...and inflation, in terms of costs of goods for sale and pricing their own products. The housing market is something they will watch -- many of them are directly involved in it.

Horan: Managing good people, funding growth, and the cost of health care.

What do you expect in terms of capital investment by small businesses?

Dunkelberg: Our indicators show this will be one of the best periods for profits, [so] we expect capital spending to be stronger in 2006 than it was in 2005. More than one-third of our people [surveyed] say they are planning capital outlays in the first three months of the year.

Sobbott: [Our survey shows] 50% of small businesses plan on making capital investments moving forward. Another element they're talking about is that their concerns over cash flow are down over time. In our reporting, 50% are concerned, but that is down from 64% in 2002, and we see this as a positive indicator.

Horan: [We find] small and midsize businesses plan on adding floor space, hiring an average of seven people, and spending $5,000 on technology in 2006.

When you think about the number of small businesses, this adds up to [a] pretty good driver for the economy.

What trends do you see in hiring?

Dunkelberg: Labor markets are getting tighter, and it's going to be a challenge to find qualified workers -- both skilled and unskilled.

Evanger: Our business is a little bit different from most. The nature of franchising is to add new stores to grow. We are in a constant state of growth, adding stores, so we will be hiring more salespeople.

Hennessey: I don't think there will be a growth spurt in hiring. [There] will be controlled hiring until something really good happens. Small businesses do not want to take a risk, just like consumers, who are not spending money if they don't see an improvement in the economy.

Horan: In general there's a need for good people and a frustration at how hard it is to find and keep good people. Business owners are trying to figure out how to crack the code on that.

How might energy costs affect small businesses?

Evanger: In our industry, energy affects a huge element of what we do. Furniture comes on boats and trucks, and in the past year we saw an increase in transportation and delivery charges. It all rolls down to the consumer. I don't see how [increases] can't continue in 2006 -- that's the nature of the world we live in.

Hennessey: Actually, not as much as I would have thought. It does affect the cost of delivery, steel, and anything that uses a lot of energy in manufacturing. Last year the costs were passed through, although a lot less than I thought. It's surprising how people are more resilient to energy [cost increases] than in the past.

Sobbott: Many small-business owners are trying to absorb the rising costs in energy rather than passing it on in higher prices to their customers. One of the things we're hearing from them is that it's a priority to maintain or expand their business...[so] they're reluctant to do anything to rock their existing client relationships, and they're being careful as to how they manage their businesses based on the cost of energy.

What impact will health-insurance costs have on small businesses?

Dunkelberg: It's hard to say. We know that costs will continue to rise. It will affect what employers can pay workers in terms of the sum of their wages plus benefits. If workers want more wages, [employers] may give them less in terms of health care.

Evanger: Most small businesses find it very challenging to offer full, paid benefits. I think we will see the concept of outsourcing workers through a firm like Gevity, where we lease back the employees. Gevity has 100,000 employees, and they can take advantage of the economy of scale. I think more small businesses will do that -- it's a way to remain competitive and take away the headache of dealing with unemployment and health-insurance claims. I think this will be more the norm -- not a lot of small businesses understand that now, but it will be the way people will go.

Hennessey: Health-care costs are still one of the biggest employment issues. It's hard to get away from the fact that every year it goes up more than 10% to 20%. If an employer offers a 403(b) or 401(k), they can decide to put less money in it, but health-care costs go up. And either the employer or the employee pays -- either way it hurts. I don't see any magic formula for getting it fixed.

Sobbott: It's one of the biggest concerns of small businesses. Fewer businesses are offering coverage to their employees. That number is down: [Our survey shows that] 54% are offering health [benefits]. Last year 59% did, and 60% did in 2003. Nearly a third of [small businesses surveyed], 31%, are claiming that they want policymakers to do something about health costs.

What other trends do you see developing in 2006?

Dunkelberg: We are looking at around 3.5% growth in the GDP with quarterly fluctuations. The Fed will probably stop raising rates midyear, which means the stock market will take off, but consumer spending will be flatter. [We see] steady growth from quarter to quarter, but government spending will give a boost in the first half and then taper off.

Hennessey: We'll see a lot more funds flowing toward electronics and telecommunications, which give small businesses more and cheaper tools to communicate [with] and manage employees.

Sobbott: There are so many inconsistent signs the economy is sending that we'll see small businesses having a shorter-term outlook and watching what's happening before they take on too much over the longer term.

Horan: Small businesses over the last year have recognized the power of Internet marketing. And based on our research, we have found that 45% of small and midsize business plan to really use it in 2006.

Are you optimistic, pessimistic, or cautious about 2006?

Dunkelberg: Optimistic. It will be a good year.

Evanger: I'm an optimist -- I am an entrepreneur at heart.

Hennessey: I am between optimistic and cautious.

Sobbott: Our customers are saying that they are cautiously optimistic.

Horan: I am generally optimistic. I was more cautious months ago with the war in Iraq and Katrina and the prospect of paying for disaster recovery. As that has been processed, I [have] grown more optimistic, and Christmas sales were strong in a lot of categories. I think we are poised for another growth phase.

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