Small Business
Main Street reins it in
December 19, 2000: 4:04 p.m. ET

Small business to delay spending plans waiting for lower rates, experts say
By Staff Writer Steve Bills
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NEW YORK (CNNfn) - If you are in business for yourself, you might want to rein in your spending until the Federal Reserve actually cuts rates and consumer sentiment improves, small business experts suggest.

With interest rates likely to head lower next year, your borrowing costs are likely to be lower if you can wait to go visit your banker, economists said Tuesday after Fed policy makers voted to hold interest rates steady but to shift their concern to the slowing economy.

Of course, that stance may contribute to the risk of a recession.

"People will tend to stand pat," said Raymond J. Keating, chief economist of the Small Business Survival Committee, based in Washington, D.C. He pegged the chance of a slowdown at 40-to-45 percent, calling the current economic environment "another instance where the Fed has overshot its mark."

  The feel is much more sour than what the underlying numbers would dictate.  
  Martin Regalia
U.S. Chamber of Commerce
If companies do put off expansion plans and put the brakes on capital spending, "that may even do some additional damage to the economy," he said.

By the time the Fed does cut rates, likely in the first quarter of 2001, it will be fully half a year after the slowdown began in the third quarter of 2000, and the impact won't be felt for months after that, as the rate move percolates through the economy, Keating warned: "That makes a tax cut even more imperative."

A 'conciliatory' tone on economy

Other experts were more sanguine about the prospects. Martin Regalia, vice president of economic policy at the U.S. Chamber of Commerce, found the Fed's statement "a little bit more conciliatory to the economy than we had anticipated."

Regalia had anticipated a policy shift to balanced concern about inflation and recession. "They didn't go so far as to cut rates, but they went as far as they could go without cutting rates."

The economy is still creating new jobs, and unemployment is historically low, around 4 percent, he noted.

"We don't have large volumes of individuals out of work. People's incomes are still pretty solid, but the prospects are nowhere near as euphoric as they were eight months ago or a year ago," Regalia said. "The feel is much more sour than what the underlying numbers would dictate."

Some sectors of the economy are already shrinking, and employers in those areas are in a tough spot, he said: They would like to reduce shifts or cut jobs, but they fear the workers would take jobs elsewhere. In today's tight labor market, "you can't then expand if the situation improves."

'Perspective skewed by prosperity'

Perhaps the calmest response came from William Dunkelberg, chief economist of the National Federation of Independent Business, who projects economic growth of 2-1/2 percent-to-3 percent next year.

"By historical standards, that's a good rate, but we're used to 5 and 6 (percent growth) now, so it's going to feel bad," Dunkelberg said. "Perspective gets skewed by prosperity."

Small-business owners are scaling back their expectations, he said, noting that the outlook has dimmed throughout 2000. Early in the year, as many as 28 percent of respondents in the NFIB's monthly survey thought it was a good time to expand; now that number is down to 12 percent.

"We're going to rein it in," Dunkelberg said. "Caution should be the watchword." graphic


Fed changes stance - Dec. 19, 2000

Survey: More slowing on Main Street - Dec. 15, 2000


Small Business Survival Committee

U.S. Chamber of Commerce

National Federation of Independent Business

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