Future of US Economy

Paul Maidment,

Good news for America's entrepreneurs: Growth is still relatively brisk this late into the business cycle, and looks set to continue for the rest of this year.

True, the economy overall will not grow faster than it did in 2006, when real gross domestic product expanded 3.4%. If anything it will slow a tad: Consensus forecasts peg the 2007 figure at around 3% for the economy as a whole. On a regional basis, Mountain states such as Colorado and Idaho will see the fastest growth, and those in the northeastern quadrant of the Midwest like Illinois and Michigan will suffer the slowest.

This has been an unusual business cycle. The return to normal growth rates after the previous recession took longer than usual. Business owners, scared by the bursting of the stock market bubble in 2001, were cautious about resuming investment in people and equipment.

In Pictures: U.S. Regional Growth Forecasts Through 2008
At the same time, the so-called cheap revolution wrought by the Internet continued to spread to every corner of the economy, big and small, letting small fries compete with larger and more distant enterprises than ever before. Meanwhile, investment and new hiring remain healthy and stable. And collection of U.S. federal tax receipts, a reliable indicator of the economy's health, grows apace.

Whither Consumer Demand?

American consumers drove the latest recovery. How much they continue to spend--and to remain willing to stay deep in debt--will hinge on a few factors.

The big one is housing. A sputtering housing market could crimp home equity lending, and in turn slow spending. Another is energy prices. A third is the stock market. Too many hard corrections, such as the one we saw a few weeks ago, could dampen consumers' general sense of economic well-being.

Jobs

Thankfully, job creation is strong, especially this deep into the business cycle--a sign of health among small businesses as they are the big job-creation engine in the U.S. economy.

Of the 2.2 million net new jobs created by the U.S. economy last year, just three sectors--professional and business services, health and education services, and leisure and hospitality--accounted for 1.5 million of them. All three have significant proportions of small firms.

Tighter labor markets, though, mean upward pressure on wages and increasing competition for staff. One survey said that finding and retaining new talent was the No. 1 concern for three out of four small business owners in the coming year. Hence the importance of health insurance initiatives, both Federal and state, that are increasingly coming into the spotlight in a pre-presidential election year. (For more on this, see "The Future Of Universal Health Care.")

Access To Capital

The rise in interest rates--17 hikes in six years--has had little impact on small businesses' ability to access capital. The cost of a small business loan has risen about one percentage point over the past year, but bank lenders report no significant change in the number of loans being made.

With rates now back to historical norms, insensitivity to interest rates may no longer hold true. However, few economists expect the Federal Reserve to raise rates for the rest of the year.

The global background is also benign. Energy and commodity price rises have stabilized worldwide; Asia, Europe and the Americas are all growing; and there is no sign, at least at this point, of a global tightening of liquidity, most likely triggered by higher real interest rates in the U.S.

The Big Boom

The other big influence on small business in 2007, and beyond: Baby Boomers--and not just as consumers of health care and leisure services. According to the Kauffman Foundation, Americans aged 55 to 64 form small businesses at the highest rate of any age group.

That spells a future of unprecedented growth and diversification of small businesses.

Source:
http://www.forbes.com/home/entrepreneurs/2007/03/28/moodys-small-business-ent-manage-cx_pm_0328outlookgrowth.html