Forecasts from small firms

Nation's Business, Nov, 1986 by Herbert S. Braun

Forecasts From Small Firms

Small business chief executive officers are mildly bullish on the economy's prospects for the next year, judging by a survey of 500 of them. But the same CEOs are somewhat bearish on interest rates.

"Guarded optimism is the way I would describe my view of the economy," says John De Pasquale, 44, board chairman of The Direct Marketing Group, Inc., a New York City firm providing services to businesses that sell via direct response marketing.

Says Kim Raffee, of San Diego: "I'm optimistic about the economy. What is going to be crucial to retaining that optimism is that our elected leaders in Congress take some action on the deficit." Raffee, 30, is president of Design for Living, Inc., wholesalers and retailers of flooring, window coverings and security systems.

The survey was commissioned by Ernst & Whinney--a leading international public accounting, tax advisory and management consulting firm--and conducted by Angell & Company--an independent marketing research firm--for Nation's Business. The CEOs were chosen at random from a statistically representative sample of companies around the country with annual sales up to $40 million.

While more than three fourths of those responding express optimism about the economy for the next year--17 percent say they are very optimistic, and 59 percent say they are somewhat so--there is also a lot of uncertainty about the economy's vibrancy.

"My feeling is that the economy is very fragile right now," says Frederic F. Wiedemann, 63, board chairman of Wiedemann && Johnson Companies, executive benefit planning specialists in Dallas.

Thirteen percent of the respondents characterize themselves as neither optimistic nor pessimistic about the economy, 8 percent are somewhat pessimistic, and 2 percent are very pessimistic.

The Ernst & Whinney-Nation's Business poll is the first in a twice-a-year series measuring opinions of small companies' executives on the business outlook and economic issues. An Ernst & Whinney-Nation's Business index of small business confidence will measure and compare results of the surveys.

When the initial survey was conducted, the prime interest rate was 8.5 percent. Eighty-eight percent of the respondents think it will be higher than that in the coming year. Thirty-one percent predict a rate in the 9 percent range, and 34 percent say it will be in the 10 percent range. Twelve percent say the rate will be around 11, 6 percent say 12, and 3 percent say 13 or more.

Similarly, 88 percent of those responding to the survey believe inflation will be higher in 1987. But there is little fear that there will be a return to the raging rates of yesteryear.

The Consumer Price Index had an annualized increase rate of 2.2 percent at the time of the survey. Twenty-eight percent of the CEOs foresee a rate of about 3 percent, 26 percent predict 4 percent, and 22 percent say 5. Four percent put the rate at 6, and 8 percent say it will be above that level.

"I'm generally optimistic," says Foy Conway, 56, CEO of Conway-Milliken & Associates, a Chicago firm specializing in market research and consumer product development services. "To all outward appearances, inflation is under control."

Seventy-one percent of the executives expect their companies' net operating results to be improved in a year--as compared with 23 percent who believe theirs will be about the same and 6 percent who see profit drops ahead.

"Our company is doing very well, but it takes extreme effort," says Henry Lilleberg, of Chicago. Lilleberg, 64, is chairman of Flexan Corporation, manufacturers of molded rubber parts. "It's tough to be in the manufacturing business today."

The 71 percent who predict profit improvements include 48 percent who say their profits will be somewhat better and 23 percent who say they will be much improved. Among the latter, more than half attribute the projected improvements to marketing-related factors such as expanded sales, markets, product lines and distribution channels.

"Keys to improving our net operating performance," says Raffee, "are greater personal ties with our clients; more one-on-one efforts, primarily in the sales area; and expanding our client base through advertising."

Additional factors cited in explaining anticipated improvements include reduced overhead, better management, improved staffing and more efficient or increased production.

Surprisingly, perhaps, some executives say the repeal of the investment tax credit under Congress' tax reform package will have little effect on their capital spending. Says Bud Fisher, 54, president of Franklin Building Supply Company, Boise, Idaho: "In our business, you have to time your purchases to your needs, not the tax situation."

And Stuart T. Martin, president of Mount Mansfield Television, Inc.--operator of WCAX-TV in Burlington, Vt.--says: "We never pay attention to things like investment tax credits. They're extraneous to the purpose of the expenditure. If you need a piece of equipment, a reduced price or a discount of 10 percent isn't what makes you decide to buy. Your need does."