October 21, 2004

Bullish on the Economy, but Only Cautiously So

By ELLEN L. ROSEN

Small businesses are bullish, albeit cautiously, about the economy.

That is the gist of three surveys released last week by American Express, the CIT Group and MasterCard International. Each company found that a majority of entrepreneurs expect either their businesses or the economy to improve within the next six months or longer.

"Small-business owners are an optimistic bunch," said Doreen Amano, a vice president at MasterCard, "even when thing are not looking good currently, they're thinking of ways to rebrand or to start a new business to adjust."

The MasterCard survey of 1,145 small-business owners "and financial decision makers" found that 33 percent expect a "substantially better year, and 42 percent expect a "slightly better" year for their businesses in 2005.

The American Express survey more pointedly asked 773 small-business owners and managers how they viewed the economy. Only 14 percent thought that the economy would negatively affect their businesses (although the numbers were slightly higher in the Midwest); 44 percent thought that business would grow no matter how the economy fared (with numbers higher in the Northeast) and 30 percent said they believed that the economy would improve and that their businesses would expand along with it.

Susan Sobbott, the president of American Express's small-business division, said the negative outlook was the lowest in the two years that the company had conducted the survey.

In CIT's survey of 448 small businesses, done with Business Week Research Services, 28 percent of respondents "strongly agreed" with the statement that they were confident about the future of the economy, while 40 percent said they agreed somewhat with that sentiment.

Despite the upbeat mood, the proof, at least in retailing, is in the inventory.

Pat Sorensen owns the Penn Cycle Corporation, a chain of six bicycle and fitness stores in the Minneapolis-St. Paul area. The company had a "flat year" Mr. Sorensen said, largely because of a rainy spring and an unusually cool summer. While Mr. Sorensen is "optimistic that we couldn't have weather as bad as this year, I'm basing my ordering on having a flat year."

Although his vendors, high-end bicycle makers like Trek Bicycle and Giant Bicycle, would like him to order at least six months in advance, he tries to order four months before the selling season that begins at the end of March. And if his business is better than expected? He hopes his status as a big client will assure additional deliveries.

In the notoriously fickle clothing business, store owners are showing signs of optimism, but are similarly placing conservative orders. Steven Roberts, president of the Echo Design Group, which sells scarves, other accessories and home products to both large and small stores, said orders from smaller specialty stores were up.

"Traditionally, stores buy anywhere from three to six months out, but increasingly, it's harder for retailers to predict that far in advance," he said. "As a result, people tend to be a little more cautious and buy closer to when the consumer is ready to make a purchase."

While some of the surveys included a breakdown of industries responding, none correlated levels of optimism with types of business. The toy industry, for example, seems less sanguine about the near future, particularly after the two giants, Mattel and Hasbro, posted disappointing third-quarter results. And those in the novelty market are also not expecting an increase in 2005 sales. Nigel Febland, whose company, the Febland Group in New York, sells seasonal and novelty products with an emphasis on Halloween to both chains and independent stores, finds that "consumers are coming into the stores and buying later" and says that retail sales are either "flat or down." He said that he could not predict next year's season until he received his "sell-throughs" for this Halloween, although he hoped there would be "a strong kick at the end."

Even those who have done well throughout the recent recession are not willing to predict that the future will be as sunny. Leigh Ballen, president of Developers Inc., a real estate firm in Chicago, said: "I think we've been riding a wave that others haven't had the benefit of. I have a new fear, because I don't know how long people will stay in the market when interest rates go up." His company, he said, "hedges by being in the starter market."

The residual uncertainty may emanate from the barrage of disparate economic indicators announced of late. A recent survey conducted by the University of Michigan, for example, showed that consumer confidence, buffeted by high gas prices, slow job growth and the war, had dropped slightly in September, although still ahead of last year's levels. Despite those uncertain results, the Department of Commerce, in figures released last Friday, found that retail and food sales were up 7.7 percent from September 2003.

The national employment picture, also lackluster, could get a small lift from some small businesses next year. American Express found that 35 percent of respondents plan to hire in the next six months, a drop from the April survey, but above the 26 percent that reported planning to hire in 2002. Similarly, MasterCard found that one-third of the small businesses it surveyed expected to increase staff, while 65 percent expected staffing to remain the same.

Mr. Sorensen of Penn Cycle, for example, said he planned to keep his staff at about the same level next year. But Gerry Hartung, president of Physician Practice, a medical publishing and education company in Glen Burnie, Md., said his company had been slow to hire and was "probably overworking our current staff." Still, he said, his company had hired 13 people this year and planned to hire four more and even more next year. "If we don't put people in place," he said, we "won't be able to take advantage of the economy."

A majority of small businesses plan on making some capital improvements in the coming year. According to the American Express survey, 61 percent do, virtually unchanged from last year but up slightly from October 2002. The CIT/Business Week survey found that 60 percent planned on investing in technology, but only 22 percent in their facilities or property.

"There is controlled optimism," said John Canning, president of the CIT Small Business Lending Corporation. "Businesses want to invest in the future, but it is not a huge expansionary time." Companies that have already experienced an improved market, however, are more likely to make capital investments.

Ellen Bruss, who has run a design firm in Denver since 1990, said: "A year ago, we were doing estimates, but people would take a long time and have a tendency to revise and retrofit to their needs. Now people are coming to us with clear objectives of what they want to get done" and want the work done quickly.

As a result, she has increased her staff and is planning to buy a larger building to house her expanding firm.

"I own the place I'm now in, but I am looking at a building that is twice the size, although I would need to lease some of the space," she said.

Those involved in leasing retail space have seen some increased activity based on "pent-up demand for decent areas," according to Brian Moss, the vice president of the Shopping Center Realty Corporation in Greenwich, Conn., which handles the leasing and property management of retail space. But expansion, he said, was "more the exception than the rule."

Nonetheless, those experiencing an uptick in business are willing to invest. Ken Giddon, president of Rothman's, a small men's clothing chain, for example, has just finished renovating his flagship men's shop in Manhattan.

"Over all, I have put more money into the business in the last year than in any year in the last 15," Mr. Giddon said. "I'm feeling more comfortable than I have in years." His company also has stores in Southampton and Scarsdale, N.Y.

Mr. Giddon said the men's apparel business was a "good barometer."

"The easiest thing for men to put off is buying clothes, because it's not high on their hierarchy of needs," he said. "When our business goes up, it's a good indicator for the economy. We have had an incredibly strong first eight months this year, although I have seen in the last two months a softening. But I believe that is related to the election."