New for '97

An Inc. senior writers looks at what small businesses can expect in 1997, regardless of economic forecasts.

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Forecast

What small companies can expect in the coming year, no matter which way the economy moves

Read enough periodicals at this time of the year, and eventually you'll run across these economic auguries (and similar variables) for 1997: the GDP will contract or expand; the G-7 will agree or disagree; no layperson will be able to define the difference between M-1 and M-2--or will care; the CPI will hold steady if the PPI doesn't overheat. The surest forecast of all: economic forecasts will tell you everything--and nothing.

Rather than joining the inexact multitude trying to make sweeping predictions about the whole economy, Inc. asked several practitioners to try to identify new trends and developments that small-company owners in particular should be alert to over the next 12 months. The responses focus on six areas that are bound to influence the conduct of emerging companies in 1997 for better or worse.

Credit When You Need It

On the favorable side of the '97 ledger is the availability of credit. Ever since the savings-and-loan scandal, banks have been stowing away so much in reserve that now, for a change, they'll lend to small-business owners when they actually need to borrow.

Most Fed watchers predict that, faced with the prospect of wage-triggered inflation (more on that later), the Federal Reserve Board will tighten credit in '97. And, as usual, not much good will come of it, holds Dennis Gartman, author of "The Gartman Letter," a daily advisory letter on practical economics. "No question the Fed will err in moving interest rates higher going into 1997," he predicts gloomily, "and then it will be slow to bring them back down again."

The board's more-often-than-not out-of-sync actions usually bode ill for small business. Not in '97, however. For once, small business will be the apple of lenders' eyes. For one thing, bank margins have been unusually generous in recent years, says Kathleen Camilli, director of economic research at Tucker Anthony Inc. At the end of 1996 the spread between the banks' cost of funds and their return in lending was about 300 basis points, an uncharacteristically wide gap, which gives banks plenty of room to maneuver if they're faced with Fed-mandated increases in costs. And banks aren't likely to run out of resources anytime soon. "The global flow of capital has been a beneficial force to economic expansion in the industrialized world," Camilli explains. "It helps lower the overall cost of credit for anyone who wishes to borrow." Might foreign banks close out U.S. investment in favor of some other country and cause interest rates to skyrocket? "Inconceivable!" insists Camilli. "We have the largest, most liquid debt market in the world."

For all their robust balance sheets, banks have increasingly fewer customers to lend to. As big corporations have been forging their own global financing channels, and downsizing companies have less need to borrow, says Wayne Ayers, chief economist at Bank of Boston, "the banking system is not that relevant anymore to middle-market and large corporations." Well, ain't that a shame! Like many large commercial lenders, Bank of Boston disdained small business until recently. Now the shoe is on the other foot. "Not only are we ready, willing, and able to lend to small business," Ayers says, "but we're anxious to." And if a downturn should hit in '97? "Small businesses with well-thought-out business plans in place and inventories under control," he says, "still could entice banks to extend them credit."

Labor, More or Less

Although the trained-labor force may continue to shrink, small businesses no longer have the disadvantages they suffered earlier. Indeed, thanks to downsizing among big corporations over the past several years, small business may gain the upper hand. "It used to be that a bright young man or woman starting on a first job tended to favor a large company, where there was job security, even though the odds of getting to the top were small," observes Dennis Gartman. "Now the choices have balanced out: big businesses aren't providing the security they did before; consequently, small businesses, which still offer a crack at the brass ring, can compete for talent on at least an even footing."

Making that footing all the more level, technology eases even the smallest business's need for workers. "Today a cabinetmaker who once drew his plans and cut his wood by hand weeks ahead can wait until the day before the customer needs those cabinets," Gartman says optimistically. "Then he puts them through a computer to design them, to analyze the best use of the wood, and to speed up production. And he can do the job with probably 20% less labor."

But that kind of labor reduction may not be enough. Late last year help-wanted signs were hanging in shop windows throughout New England, where five of the six states boasted unemployment rates of less than 5%. The last time there was a labor crunch in that area, hamburger flippers were offered twice the minimum wage by desperate business owners--and they snubbed the jobs. Without clerks, cleaners, orderlies, and assemblers, many small operations are literally helpless. Even skilled temporary workers who had been casualties of downsizing that were forced into job-placement agencies are now moving back into full-time situations, causing a shortage of part-time accountants, telemarketers, and other small-business white-collar staffers.

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