Economic Trends
By Gene Koretz
Small Business Sees Blue Sky
The fears of experts that the economy was slipping into recession were recently soothed by news that consumer sentiment improved in early May. But consumers aren't the only ones with rising spirits. The National Federation of Independent Business reports that its small-business optimism index edged up to 98.4 in April, nearly two points above its January low.
"There's no question that small-business owners are currently feeling better--particularly about the overall economic outlook," says NFIB economist William C. Dunkelberg.
According to the NFIB's latest monthly survey, a net 10% of respondents felt that the economy would strengthen over the next six months, the highest number since November, 1997. By contrast, just a few months before the 1980 and 1990 recessions, the readings were a negative 37% and 27%, respectively.
The rise in optimism about the economy doesn't mean that the small guys think their own businesses are about to take off or that it's time to boost investment. Although their profit and sales performances improved last month, only 13% expect higher sales in coming months (vs. 20% in April, 2000). And just 10% think it's a good time to expand facilities, the lowest number since 1993. So far this year, both capital outlays and spending plans have been running below year-earlier levels.
Meanwhile, despite a perceptible easing in small-business job markets, labor demand remains relatively firm. Actual hiring rose in April after languishing for several months, and a net 12% of owners plan to expand payrolls in coming months. That's down from a high of 22% in late 1999, but it's still a respectable number historically.
Perhaps the most noteworthy development is the fact that the share of respondents with hard-to-fill openings came in at 26% for the second month in a row, after 17 months above 30%. The drop in this key labor market indicator, says Dunkelberg, strongly suggests that the unemployment rate will hit 5% by the end of the current quarter.
The news on inflation was positive. While a relatively high 32% of small businesses raised compensation in recent months, a mere 17% plan to do so in the next three months, the lowest number in over two years. At the same time, both reports of recent price hikes by owners and plans to implement future increases remained restrained.
On the credit front, the news was also encouraging. In spite of a reported tightening of lending standards, just 3% of respondents said they found loans harder to get, one of the lowest readings in the survey's history.
All in all, says Dunkelberg, the latest survey results should dispel fears of a near-term economic contraction. "For the next six months at least, modest growth seems assured," he says.
The Greenback's Foreign Service
Dollarization--replacing a nation's money with the dollar or another big-country currency--is a hot topic these days. Ecuador recently shifted to greenbacks, and El Salvador and Guatemala are doing so this year. Advocates of dollarization say it is better than simply making your currency convertible into another currency, as Argentina has done, because it allays fears that nations will resume printing their own money to finance deficit spending.
But the evidence of the gambit's merits is sparse. Only two decent-sized nations--Liberia and Panama--have ever adopted another nation's currency completely, and Liberia shifted to its own currency in 1982. The 11 other "dollarized" countries are flyspecks like Monaco, Liechtenstein, and Andorra.
Proponents often point to Panama, which has long used the U.S. dollar as money and boasts growth averaging 5.3% and inflation averaging 2.4% since the late 1950s. But a new study by Sebastian Edwards of the University of California at Los Angeles notes that Panama has also benefited from an almost uninterrupted series of International Monetary Fund bailouts since 1973. He finds that economic growth in Panama and smaller dollarized nations has actually been lower than in similar nations with their own currencies.
Edwards isn't necessarily against dollarization--he thinks it was the right step for Ecuador, for instance. But he feels its fans need to acknowledge their relative ignorance about it. "Advocating dollarization," he says, "is like recommending a new drug that has been subject to very limited clinical trials."
Fewer Seniors in the 1990s
Although the elderly's share of the population has been growing rapidly in virtually all advanced nations, it turns out that it has been declining a bit in the U.S. Based on last year's headcount, the Census Bureau reports that the 65-and-over contingent during the 1990s actually grew more slowly than those under 65 for the first time in the history of the decennial census.
The apparent anomaly reflects low birthrates in the late 1920s and early 1930s and a surge in U.S. legal and illegal immigration in the 1990s. But it won't last. Between 2010 and 2020, the decade in which baby boomers start to hit 65, demographers project a 35.3% increase in the ranks of the elderly--vastly higher than the increase in the under-65 population. The growth of the latter group is currently pegged at just 4.2% but will undoubtedly be revised up a few percentage points.
These numbers highlight the demographic honeymoon U.S. entitlement programs are enjoying. Within a dozen years, the budget surplus--if there still is one--will feel relentless pressure from the health and retirement needs of a tidal wave of seniors that will last for decades.
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Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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