If You Ask Small Business Owners, the Economy Is Improving

[HenryTo]

From the NY Times. Since small business hiring is not reflected in the jobs report, there's a chance that jobs creation is being understated here. This has been the stance (in particular, for income growth) by TrimTabs for the last 12 months.

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SMALL BUSINESS
If You Ask Small-Business Owners, the Economy Is Improving
By EVE TAHMINCIOGLU

Published: April 7, 2005

Ted Farnsworth, founder and chief executive of XStream Beverage Network, has grand plans this year for his company in Fort Lauderdale, Fla., a maker of products like Yohimbe, an energy drink that sells for $2 a can.

He expects to add 40 workers to his staff of 67 and invest $200,000 in technology, and he projects an increase in revenue, to $30 million, from $9 million in 2004 and $3 million the year before.

"The recovery is picking up speed," Mr. Farnsworth said. "I believe the economy is better than people think it is, especially here in South Florida."

If it is, then small and midsize companies like his are playing an important role. Though job creation in the United States has recently been weaker than expected, and higher oil prices and rising interest rates are raising red flags, the economy is continuing to expand strongly.

One reason is the growing optimism of small businesses, backed up by hiring and investment spending.

In a survey released last month by American Express, 85 percent of 627 small-business owners and managers questioned said they saw growth opportunities in the next six months, up from 72 percent in a similar poll a year earlier and 56 percent in 2003. Fifty-seven percent said they expected their sales to outpace last year's, and 66 percent reported plans to make capital investments within six months, up from 59 percent in 2004.

In another poll in February by SBTV.com, an online television network for small-business owners, 77.2 percent of those questioned said they planned to invest in new technology this year.

"During an economic cycle, small businesses are one of the principle drivers of a rebound, since they account for a large portion of hiring and increasingly, a larger portion of total business investments," said Mat Johnson, an economist for the investment bank ThinkEquity Partners in San Francisco.

To a large extent, he said, that is because they are nimbler than larger firms, which have huge inventory management concerns and layers of managers, making it harder for them to react to trends in the marketplace. In addition, he said, because they are often suppliers of goods and services to big corporations, they are the first to enjoy an upsurge in orders.

Kevin Greaney, chief executive and co-founder of Children's Progress, a New York educational-testing company, says he plans to spend $1 million this year for technology and infrastructure, twice last year's outlays, to accommodate an expected threefold to fivefold increase in revenues, from $1 million last year. The gains, he says, are the result of "four major contracts coming into play."

Children's Progress will also move to more spacious office quarters and add 12 people, from software programmers to sales staff, to its current 7, he said.

"We see the economy is rebounding and that's good news for everyone because America's backbone is small business," Mr. Greaney said.

Small businesses are also getting a boost in their expansion plans from a loosening of the purse strings over the past few months by venture-capital firms, banks and other providers of capital. "I think right now there's an awful lot of money on the sidelines looking to be deployed," said Neal Verfuerth, founder and president of Orion Energy Systems, a maker of energy-efficient lighting systems in Plymouth, Wis. Orion Energy is now entering its fifth round of private financing in four years, he said, and expects to raise $10 million, double its previous record of $4.8 million in late 2004. He says he is already making preliminary plans for an initial public offering.

"If you look back, everything is cyclical; there's always a boom-bust, boom-bust," he said. "I think the next dot-com type thing is going to be energy and the environment."

Mr. Verfuerth says his company has doubled sales every year for the past three years, to $24 million in the fiscal year that ended March 31, and expects to do the same in the year ahead. It has also increased its work force to 110, from 18 three years ago, and plans to hire 50 more this year in Manitowoc, Wis., where it bought a 260,000-square-foot plant six months ago to supplement its existing 22,000-square-foot factory in Plymouth. The new location will be used for manufacturing, warehousing, distribution and research and development, and will cost about $3 million to buy and upgrade, he said.

Entrepreneurs in the West and South exhibit the most optimism in the country, according to the American Express survey. It showed, for example, that 56 percent of small-business owners in the West expected to hire more staff in the next six months, compared with a 44 percent national average. Those findings were backed up by a survey in February by Union Bank of California in San Francisco of 1,941 small-business owners in the state. More than 70 percent of the owners said they expected business to improve this year.

Jeremy Shepherd, president and owner of Pearlparadise.com, an on-line seller of pearls, has no doubt about it. His company moved into a 1,500-square-foot office in Santa Monica because it was bursting at the seams in a space about half the size. He also spent $25,000 on computers last year and plans to spend an additional $12,000 this year.

"Business is growing astronomically and there really isn't any end in sight," Mr. Shepard said. Sales came close to breaking $5 million in 2004, up from $280,000 two years earlier, he said. "People are actually buying jewelry again," he said. "We had someone in December buy a $23,700 set of pearls online, the highest we ever sold."

To meet demand, Mr. Shepherd of Pearlparadise.com has been adding 1 to 2 workers a month and now employs 35.

The picture on hiring plans is not uniformly upbeat. The 44 percent of respondents to the American Express poll who said they planned to hire was down from 46 percent in the spring of 2004, though sharply higher than the 35 percent who reported such intentions last October. On the other hand, 90 percent of the 175 small businesses surveyed in February by International Profit Associates, a management consulting firm for small- to medium-size businesses, said they would maintain or increase the size of their staffs this year. Of that number, 42 percent said they planned to hire workers, up from 36 percent last August.

Joseph Bushèy, owner and founder of POS World, a supplier of bar code systems in Atlanta, plans to double his staff of five employees this year. He projects his company's sales of $13 million in 2004 will top $14 million this year. "I think the time is right for small businesses to gain market share from the larger companies because they can't compete as they did before," he said.

Two dark clouds are hanging over the otherwise sunny small-business world - soaring health insurance premiums and increased competition from China. To keep expenses down, only half of the businesses surveyed by Union Bank provided health benefits, and of those, about 20 percent had shifted more of the cost to employees last year. The American Express poll also found employers transferring costs to workers; the proportion that offered paid vacation fell to 52 percent, from 56 percent in 2004; the portion that offered paid holidays fell to 50 percent, from 57 percent, and the number that provided 401(k) plans fell to 20 percent, from 28 percent.

Mr. Bushèy of POS World said his big worry was the impact of free trade, especially from China. "It's a major problem small businesses are going to face," he said. "It's pretty scary."

But he maintained that forethought would give him the edge, pointing to the $100,000 he spent on equipment last year and the $100,000 he plans to spend this year. "That's why I'm spending more money now," he said, "bolstering our services so we can add more value to our customers and keep expanding our customer base."