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World woe trickles down
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October 29, 1998: 11:13 a.m. ET
Global financial crisis can hit small businesses hard but also offers benefits
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NEW YORK (CNNfn) - If you thought Wall Street's wild ride was making waves only in large corporations, guess again. Small businesses are reeling from the ups and downs of the stock market, too.
"Small business owners have a great stake not only in what's going on in the stock market, but what's happening in the overall economy as a result," said Alan Skrainka, a market strategist with Edward Jones, in St. Louis.
When the stock market falls, the economy stalls. Companies don't produce as much, because people aren't buying as much. This is especially hard on small businesses operating on shoestring budgets.
"The last seven 'bear' markets -- if you measure a bear market by a 20 percent drop -- have quickly forecast economic recessions," said Skrainka. "For people with 90 percent of their net worth tied up in a small business, it bears watching."
The so-called "Asian crisis" is affecting American businesses to a greater extent than anybody realized, Skrainka says. "Problems in the Asian market affected the stock market, and the stock market influences the economy. So small-business owners have just as much a stake in this as anyone else."
Butter, cheese drain fat from profits
The recent fluctuations on Wall Street have been hitting Bill Leedy personally and professionally.
The co-owner of Tommy's Pizza, in Gettysburg, Penn., says he has suffered losses in his mutual fund investments "just like everybody else in the market has."
Although stock prices are down, dairy commodities remain high. And the rising cost of cheese and butter is squeezing profit margins for those in the restaurant business.
"We were paying about $1.50 a pound for shredded mozzarella," Leedy said.
"Now it's over $2 a pound. So far we haven't raised our prices, because you don't want to kill your customers. But I hope the price starts going down soon."
For Ken Wright, the dairy price hikes couldn't come at a worse time.
Wright recently moved Bulldog Pizza to a new location in Duluth, Minn., and doesn't want to raise his pizza prices at a time when he's trying to broaden his customer base.
"We just opened up in a new spot in June, so we didn't want to increase too soon," he said. "But we're going to have to have a price increase. And we have to reprint all the menus when we do that, so that's another expense."
Global acts, local effects
Leedy is thankful that the current economy hasn't affected the tourism trade, because his restaurant does a brisk business with crowds who come to see Gettysburg's Civil War battlefield.
If your small business is located in a town with a large company, experts say you should pay attention to how changes in the world market might affect that company.
This is especially true if the company employs many of your customers. If a big layoff happens, fewer people in town will have money to support your business.
Lisa Den Hartog says her home sewing business in Cedar Falls, Iowa, will take on a different pattern when Deere & Co.'s Waterloo, Iowa, plant undergoes a work reduction schedule this winter.
Although the agricultural equipment manufacturer is showing strong profits, a Deere news release says the worldwide decline in farm commodity prices means the company must cut back on production.
"My custom (dressmaking) work goes down when that happens," Den Hartog said of the layoffs and work shutdowns she's seen at Deere through the years. "But my alteration business picks up a lot. When times are tough, people don't buy new coats. They'd rather fix up their old coats."
Being flexible in the services she offers helps Den Hartog's local business weather worldwide economic tumult. Alteration work keeps the money coming in until the economy rebounds and people can afford custom-made clothing again.
"Even if (a bride and her wedding party) go to a store and buy their dresses, the dresses still need to be altered," Den Hartog said. "So even when times are tough, I don't totally lose out."
Secondary sources of income are crucial for small businesses in times like these, Skrainka said. If your business' primary source of income dries up in this economy, you'll need to find other ones.
"We may be entering a recession here," Skrainka said of the current situation. "So if I owned a small business, I would pay very close attention to controlling costs and develop a contingency plan."
Bad news, good opportunities
Despite all this bad news, some good deals are in the offing. If you're looking to update or expand your small business' computer system, now might be the time to do it.
Asian countries have stepped up exports of their products in an effort to boost their economies. This has brought an influx of computers and other electronic equipment into the United States -- and has driven down prices on these items.
"(U.S. companies) now have to compete against this flood of cheap Asian imports," said Skrainka.
American businesses are benefiting from this in a way, according to a member of the Federal Reserve System's Board of Governors.
"Exceptionally large price declines for computer equipment have made it relatively cheap for firms to invest in new equipment," said Roger W. Ferguson, Jr. "This has produced a remarkable boom in capital spending. Business fixed investment was up nearly 10 percent last year, and it rose at a still faster pace in the first half of this year."
If you're still reluctant about investing in an uncertain economy, Skrainka said you'll need to buck the trends a little bit if you want to do well.
"The easiest thing is to be bullish when the market is rising and bearish when the market is falling," Skrainka said. "But as we all know, that's not how to make money in the stock market." 
-- by Margaret Nowak for CNNfn
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