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JAMES FLANIGAN

Small Business Is Still Bullish on Economy

May 23, 1986|JAMES FLANIGAN

Will the economy really be strong in the second half of the year? The Memorial Day weekend is upon us, so you'd think the big experts would know by now. But the government gives us mixed signals, reporting a strongly growing economy one day and turning around the next to report that output of manufactured goods fell in April for the third straight month.

The big companies also hear no music. Hewlett-Packard sees no upturn, ditto IBM; AMR Corp. (American Airlines) tells its shareholders that profits probably will be down this year.

But hark the lark, the smaller companies are saying that things look good. Joseph Duncan--chief economist for Dun & Bradstreet, the credit-rating company--reports that companies with fewer than 100 employees plan to hire 2 million new people this year. That's two-thirds of an impressive total of 3 million new jobs that American business believes it will create in 1986, a 50% rise from last year's total of 2 million new jobs.

Database of 8 Million Firms

Not only new jobs but new businesses. Company start-ups are 13% ahead of last year--84,000 new starts as of April. In the same period, 20,000 businesses have failed. To top it all, says Duncan, he is getting highly optimistic readings on the outlook for sales and profits from his opinion sampling of almost 1,500 companies.

Duncan, 49, who was with the federal Office of Management and Budget in the 1970s, hears from small companies because he gets to pick his sampling from the D&B database of 8 million businesses--a file that includes practically every commercial activity in the country, including doctors and lawyers.

"You often get a very different attitude out of the small companies," Duncan says. "The businessmen of the big companies tend to be far more worried about competition, to be more pessimistic."

It would be pardonably smug to say that's why the small outfits create the jobs while the big outfits seem only to create the layoffs. But the true picture is more complex. One reason for the tremendous growth of new businesses in our economy, after all, is that the big companies are buying services from the outside that they used to perform in-house.

Healthy Growth Pattern

Look around, what do you see in U.S. business? The new, small outfit that does the big company's printing, the one that offers computing services or temporary help services--not only clerks but paralegals and paramedicals. And think of the army of consultants, many of them former employees of big companies who are now out on their own--willingly or otherwise--as big companies continue to cut their overhead costs. The work, in other words, is done in the small companies, but the business comes from the big companies. What we have going here is healthy growth and multiplication.

As has been the case for years, almost all of the new jobs are in the services sector, where 75% of the U.S. labor force now works. It makes us nervous to hear that figure, because we think that an economy without manufactured goods at its center is on the brink of decline.

But history shows that we are wrong. The great French economic historian Fernand Braudel tells us that the 19th-Century Industrial Revolution probably included as much growth in services as in manufacturing--shops and banks opening and new occupations, such as accounting, arising. And American Nobel Prize winning economist George Stigler points out that one of the characteristics of rising economic progress is that people find services to spend their money on. He cites a study of English families between 1797 and 1938: Expenditures on food declined, as prices fell, but expenditures rose continually on such previously unheard-of services as medical care, travel, insurance and entertainment.

And our own economy tells us as much as history. Worries about a service economy have been misguided. We have had a predominantly service economy for more than 30 years, yet manufacturing has not diminished in that time. It has been remarkably steady, accounting for just under 30% of the gross national product each year for the last three decades. Employment levels in manufacturing have been steady, too. But America's great growth in employment over the last decade and a half--well over 20 million new jobs--has been achieved through the services.

Today, Midwestern manufacturers are filling order books, the strong dollar is no longer a problem and inflation is low. They're looking for a pretty fair pickup in export business, and they're saying along with the rest of the vast number of small to medium-size American companies that the economy is going to be strong for the rest of this year and into 1987. The stock market, which bounded up Thursday, appears to have gotten the message, even if the experts haven't--yet.

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