Years ago, when I was a business reporter for an Upstate New York newspaper, I wrote about a manufacturing firm that had just announced a doubling of its staff.
When I interviewed the CEO, he was one, big smile. As it turned out, a competitor had gone bankrupt, suppliers had cut prices in a bidding war, and the salesforce had landed a major overseas contract. “Sometimes,” the owner said, “the stars just align.”
That was a single firm, but today the economic stars have aligned for small businesses in general. Consider:
- Economic expansion is accelerating, and includes retail and wholesale business, manufacturers and exporters.
- Stimulus from the federal tax cut and an increase in federal spending—especially to the military—will further boost economic growth.
- Consumer spending is strong, and should stay strong, given rising wages.
- The unemployment rate is low and expected to get lower, increasing household incomes.
- Confidence among a variety of groups, from homebuilders to consumers to small business owners, is at or near record levels.
- Interest rates for loans are still below historical averages.
- Inflation is still below 2 percent, meaning that costs are under control for now.
A recent National Federation of Independent Business survey showed a record number of small business owners say now is a good time to expand.
“Small business owners are not only reporting better profits, but they’re also ready to grow. The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses.”
Juanita Duggan, NFIB President and CEO
Timing is Everything
The question is, how long can this optimal time to expand last? Some of the stars are fading already, but 2018 should stay in a sweet spot for most of the year.
Finding qualified workers is becoming more difficult, and wages are starting to rise to attract talent. You can expect the labor market to continue to tighten. But there’s still some slack in the labor force by some measures.
However, wage pressures will only increase as the unemployment rate continues to drop.
Current: 4.1 percent
Years’ End: 3.8 percent
If you need to hire, sooner is better than later.
Also, while business loan rates are still relatively low, rates will likely rise this year. The nation’s central bank – the Federal Reserve – is expected to raise its benchmark federal funds rate at least three times this year. Each hike is 0.25 percent.
The Prime Rate—the best rate offered to businesses by banks—moves with the federal funds rate. The Prime is at 4.5 percent now. The predicted hikes would mean it would top 5 percent this year. The first rate hike is expected when the Fed meets this month.
So if you need to lock in financing, again – the sooner the better.
Inflation is a trickier issue. Retail inflation is increasing, but at a slow rate. And it isn’t expected to top 2 percent — a least by several key measures — this year. However, producer prices—meaning prices paid by many businesses—are increasing at a higher rate.
So stocking up on inventory now may save small business owners some money, or it may not. But if you have the spare cash, it’s probably a good idea.
On the plus side the economy just got a boost from the tax cut and the increase in federal spending. How great the impact of those will be remains to be seen, but most economists have revised up GDP this year. It’s now projected to be about 2.8 percent. So no slowdown is expected in the economy this year.
There’s another factor that bodes well for the economy – and especially for businesses that export, or that supply exporters: The stars have also aligned in the international economy. Every one of the world’s biggest economies is now growing. This is a rare occurrence. Exports will increase for the foreseeable future, which is helped by the declining value of the dollar.
Plus, much of the increase in federal spending will go to the military. So military contractors and their suppliers should see increases in the number and size of contracts.
Our economic expansion has been long and relatively weak – until now. This makes forecasting when the next recession will hit especially difficult. But at this point it looks as though economy will grow at a near 3 percent rate in 2018 and 2019.
However, we probably won’t see favorable interest rates and inflation, or relatively favorable wage rates for many more months.
The sooner the better is a key theme here – for a reason. With all these factors considered, this year could be your year to expand.
About the Author: Robert Frick is the corporate economist for Navy Federal Credit Union. He holds a B.A. (Journalism) and an M.B.A. from the Pennsylvania State University, and was a financial and business journalist, including working as a newspaper business editor and senior editor for Kiplinger’s Personal Finance magazine. He was also editorial director of a financial publishing firm and is an expert in behavioral economics, having published more than 50 articles on the subject, and having worked as a researcher, writer and speaker for the Allianz Center for Behavioral Finance.