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How entrepreneurs see 2006's second half

A panel of entrpreneurs talked to BusinessWeek Online about the economy's prospects for the second half of this year.
/ Source: BusinessWeek Online

At the start of the year, BusinessWeek Online assembled a group of entrepreneurs and small-business watchers to discuss the economic issues that they believed would most impact entrepreneurs during the year ahead. Although mostly optimistic, they cited worries over consumer spending slowing down and the increasing cost of energy and health care.

At the year's midpoint, Businessweek Online reconvened the original participants of our virtual roundtable to reassess how their concerns were shaping up. The participants: William Dunkelberg, chief economist with the Washington-based trade group National Federation of Independent Businesses (NFIB); David Hennessey, global marketing professor at Babson College in Babson Park, Mass.; Michele Evanger, owner of the franchiser Designs of the Interior in Barrington, Ill.; Susan Sobbott, president of OPEN, American Express' small-business network; and Peter Horan, Chief Executive Officer of

Edited excerpts of their conversations follow:

At the start of the year, one of the biggest priorities cited was growth; does that still hold true at this point in the year?

Dunkelberg: For small business, it remains getting sales in the door and finding employees to meet the demand of the customers.

Hennessey: I still think identifying growth opportunities [is a priority].

Evanger: Growth is still a top priority for us. Our [goal for 2006 was to add 15 new stores] and we are more than halfway there — we have already added nine franchises.

Sobbott: Growth continues to be the No. 1 priority for small businesses.

Horan: The top economic priorities for small business are rising fuel prices and rising interest rates.

Has your economic priority shifted since the start of the year?

Dunkelberg: Our major concerns are being able to meet strong demand [as well as] what it is going to be like at the end of the year if there is a [drop-off].

Hennessey: I think along with identifying growth opportunities, there is the whole issue of innovation, either to use in [NFIB members'] own businesses or [through] new products or services.

Sobbott: Among [our members], 68% said that they are seeing growth opportunities over the next six months. That is down slightly from the fall when it was 71%, but the net [result] is that growth remains high with strong opportunities for hiring, investing, and strong cash flows.

Horan: The change from six months ago is that I am surprised that fuel prices haven't eased up more. ... If they go much higher, they will hurt small businesses. ... I don't think it will become a huge issue yet, but if the Fed continues to use interest rates to fight inflation, it will slow down the economy.

What are your thoughts about growth, now looking at the second half of the year?

Dunkelberg: Looking forward, I'd say the same [as my predictions for the first half of 2006]. We are stunned at consumer spending in the first quarter. Spending is much stronger than expected, [and] we keep thinking consumers will start saving. [At the same time] government spending is up and planned equipment and capital spending is strong. Most [business] owners don't think it can continue.

Hennessey: I think entrepreneurs are waiting for consumer confidence to come back. ... There are also major political issues like Iran, Iraq, and immigration policy. Like everyone else, I think entrepreneurs are concerned about what is happening with our federal government. And there's an interesting statistic by Sure Payroll, a group that tracks small-business trends. [According to them] hiring and pay rates have been [basically] flat over the last three months.

Evanger: Although there is a housing slowdown, the great thing about [the] home-furnishings [area] is that [homeowners] are always working on something.

Sobbott: We still assume that there will be growth in the second half of 2006.

In terms of the biggest concerns on the economy and small business, have the issues changed since January or do they remain the same?

Hennessey: An important [issue] is interest rates. The Fed has raised the interest rates and [as] mortgages go up [so] does the cost of capital. Most small businesses have credit lines and [their] cost is going up.

Evanger: The job market is still a huge issue for small businesses. It's becoming increasingly challenging to find and entice good people.

Sobbott: Everyone is watching interest rates for a signal for opportunity. This is more prevalent today than it was six months ago. From a macroeconomic perspective, there is still great confusion in predicting where the economy is going to go.

Horan: Managing good people, funding growth, and health-care costs are still the top issues. I got a health-insurance bill for my company and it was up 12%. Because health care is viewed as an important benefit, it is linked to the ability to recruit and keep good people.

How have your expectations regarding capital investment and small business panned out?

Dunkelberg: It's the same thing and [it's] of course tied to energy. I'm still not sure ... how much consumers can ignore it. Whether they will cut back on spending to pay for [increased] fuel [costs] remains a major uncertainty. There are still fundamental concerns about spending and the gross domestic product. [But] money in the door forgives a lot of mistakes and problems, including higher energy costs.

Hennessey: I personally don't think there will be significant increases in capital investments, because there are too many unknowns right now about interest rates and gas prices. My friends who are entrepreneurs ... are concerned about [maintaining] their current level of business.

Sobbott: We're seeing a little bit of a positive indicator with 58% of small businesses increasing their investments, which is up eight points from six months ago. Also, when we asked in general about making new capital investments in the next six months, 64% said yes.

Horan: We are seeing small businesses invest in hard technology, computers and networking systems, Internet marketing, hiring, and [additional] floor space.

Have your thoughts on hiring trends shifted in the first six months?

Hennessey: People are concerned about maintaining their current business and keeping current employees. That's one of the reasons they may be paying a little bit more [in salaries] than in the past.

Sobbott: Hiring plans are flat from where we were in the fall. We're seeing that 39% of small businesses plan on hiring in the next six months, just up from 37%. Most businesses say that they plan on hiring to accommodate the growth or volume in their business, but the No. 1 issue they have is finding good staff.

Horan: We are seeing more and more demand for ideas about how to use Internet job boards like and more efficiently. [Businesses] get hundreds of résumés but almost all of them are garbage.

Energy costs were a big concern at the outset of the year. How has that played out and how will it continue to impact small businesses?

Hennessey: [Gas] is now 50 cents higher in price. I think it's hitting people more now than before. And when you look at all the costs together: gas, higher capital, and any [increased] borrowing [rates]; it's not clear that [small businesses] can pass it on in higher prices.

Evanger: Manufacturing prices have increased across the board. To cover that [increase], sometimes the [result] is that the quality can suffer. In the past seven years manufacturers haven't really raised prices on furniture, but over the past year and a half we've seen prices going up every six months.

Sobbott: Small businesses are definitely feeling the impact of energy costs. They are still very careful about passing along the expense. They are looking to other means to accommodate the increase in energy costs. The number of small businesses [that told us] that they reduced their energy usage was up 12 points to 42%. Last fall it was 30%.

Horan: It has affected small business in two ways, and they are both negative. They feel it on the [incoming] revenue line and they have a hard time passing it on to customers. They are being squeezed on both ends.

Where does health insurance now stand?

Dunkelberg: It continues to be a problem. The cost of coverage is not rising as fast [as it was], but it is still the No. 1 problem facing businesses today -- [above] anything else, including gas prices.

Evanger: It is a constant struggle for a small business [with few employees] to be able to provide competitive benefits. Yet small businesses employ a huge percentage of the [workforce]. Why it is so challenging to [allow us] to band together is beyond me. This will change as more people become employed by small businesses [because] our voice will be [louder] and politicians [will have to] listen.

Sobbott: It continues to be one of the toughest things to deal with, and it relates closely to hiring plans and being competitive in the marketplace. We're seeing the number of businesses offering health care remaining flat at 56%, up from [only] 55% in the fall.

What trends do you see emerging?

Hennessey: I still see [funds flowing toward electronics and communications]. Small businesses are pretty quick to use ... the Internet [for] communication or sourcing materials, new ideas, or just keeping up to date.

Sobbott: Businesses are getting used to dealing [with a state of] limbo. They are focusing on trying to control what they [do know] and how to be more competitive and [are] zeroing in on customer service.

Horan: We are seeing the move toward Internet marketing really happening. Small businesses really like [its] efficiency [and ability] to drive their businesses.

Looking at the second half of 2006 are you still optimistic?

Dunkelberg: I am still optimistic.

Hennessey: I am more cautious now.

Sobbott: We're still cautiously optimistic. I don't think we've seen anything dramatically shift from the last time we spoke.

Horan: I remain generally optimistic. If [Federal Reserve Chairman Ben S. Bernanke] announced he was through with rate increases and there was some relief in oil prices, I would move to being very optimistic.