Joseph “J.W.” Williams’ business, Staircase & Millwork Co., provides high-end custom-made staircases, predominantly for upscale homes. Though a luxury item mainly for those with high disposable incomes, Williams still expects business to boom this year.
Staircase & Millwork’s creations sell for between $5,000-$25,000. “We bought the company two years ago,” says Williams, 33. “At that time, annual sales were about $5.5 million, and they’re still around that level. For 2004, though, our target is $8.4 million, and we could even top that if the economy improves.”
An expanding economy would put more money in the pockets of homebuyers and homeowners, who might decide to invest some of that cash in their homes. If that’s the case, Williams and his business partner, Eric Trope, are prepared.
“We’ve improved our production processes and upgraded our sales force,” says Williams, president of the Alpharetta, Georgia-based company. “From a low of 20 employees, we’ve increased our workforce to 35, mainly by hiring skilled craftspeople. We’re working on improving our manufacturing with both external consultants and employee training.”
Can Williams and other business owners get the economic surge they need to send profits through the roof? Members of the BLACK ENTERPRISE Board of Economists and other experts say national expansion will continue, although this year’s growth rate is far from certain. Inflation and interest rates are likely to remain low, experts say, and we might even see some job creation-most of which is good for businesses like Staircase & Millwork.
ON THE GROWTH TRACK
The economy is on track for a bit of growth-for a short while at least-with most of the major economic indicators looking up. But Thomas D. Boston, a professor of economics at Georgia Tech who heads the Boston Research Group in Atlanta, expects the economy to lose steam in 2004. According to Boston, the economy grew slightly more than 1% during the first quarter, 3.3% during the second quarter, and 4.8% during the third quarter of 2003. He expects the economy to grow by at least 5% in late 2003 and early 2004 before petering out by the end of next year, partially due, he says, to an extremely large federal budget deficit-projected at $500 billion-that will put upward pressure on interest rates and slow down growth and investment.
Some economists say problems may arise sooner, citing a continuously sluggish job market. “I think that will slow the economy in the first half of 2004. Consumers will cut their spending, reacting to poor job prospects,” says William Spriggs, executive director of the National Urban League Institute for Opportunity and Equality in Washington, D.C. The economist estimates growth in the 2.5%-3% range for 2004, mainly from increases in productivity. While not a recession, that range marks a slowdown from late 2003.
Bob MacIntosh, chief economist of Eaton Vance Management in Boston, is more optimistic. MacIntosh expects the economy to grow 4%-5% in 2004, as all the economic stimulus from tax reductions and interest rate cuts over the past few years start kicking in. “Business investing is picking up, showing that companies are becoming more confident,” he says, “and the revival of business investment is the key to this recovery.”
For the recovery to have solid legs, several things have to improve-not the least of which is lack of jobs. Here are a few important things to look for in 2004:
Unemployment: Boston expects employment rates to increase. “The economy will finally start growing fast enough to create new jobs and absorb the large numbers of unemployed workers.” But he cautions against expecting a hiring binge similar to that of the 1990s. In the past three years, the unemployment rate has increased from below 5% to around 6%, in October 2003, while official statistics show job losses in the millions.
Cecilia A. Conrad, a professor of economics at Pomona College in Claremont, California, says African Americans may face some difficult employment-related issues.
“We’ve had a weak economy for several years,” she says, “which has caused budget problems for many state and local governments. In some areas, even teachers are being laid off. African Americans make up a disproportionate number of public sector employees so these cutbacks will be painful.”
Inflation: A weak job market, in turn, may keep a growing economy from triggering much inflation, which could be bad news for retailers. “I think the overall price index will go up 1%-2%,” says Spriggs. “Poor employment prospects may lead to less demand from consumers so you might see continued discounting from auto dealers, for example.” Boston also says inflation will increase to around 2% in 2004.
Real estate: Buying a home could become less affordable if long-term interest rates rise, as many expect, because mortgage rates are likely to increase as well. But an increase in supply of rental properties could stabilize housing prices. “Some owners of vacant office buildings are converting office space to residential space. This would allow people who could not afford housing to be able to do so because of the new supply, which, in general, reduces the cost of housing,” says Dwight McRae, vice president of Kennedy Associates Real Estate Counsel in Seattle. “Vacancy rates will start to decline as the amount of available residential space decreases. Economic demand is not so robust that commercial rents are likely to spike.” For a business owner, this might be a good time to lock in current rents on existing space or to expand into additional space. Make your plans and negotiate with your landlord; you may get incentives such as free rent for a number of months.”
JOB INSECURITY?
For employers, Spriggs recommends restructuring debt. “Short-term interest rates probably will be much lower than long-term rates, so it makes sense to stay short.” Even though Spriggs has his doubts about 2004, he thinks a more robust economy is in the offing, perhaps in 2005. “While others are retrenching, this is the time for business owners to position their companies for the turnaround. Do whatever capital spending is necessary to strengthen your company’s brands. Work on developing new products and get ready to move into new markets,” he says.
For employees, the economists suggest staying put for the time being. “If you have a decent job, don’t walk away from it,” says Conrad. “Be prepared for benefit cuts, especially in health insurance.” And with insurance premiums on the rise, don’t be surprised if your company asks you for a larger contribution to your health plan.
Job hunters might do well to start with companies owned by African Americans. Each quarter, Boston conducts the ING Gazelle Index, a national survey given to 350 CEOs of the nation’s fastest growing black-owned companies. (www .inggazelleindex.com). Sponsored by ING Financial Services, the survey results indicate that while optimism has increased among both African American business owners and CEOs of the nation’s largest corporations, the former has increased sharply. Recently, 48.3% of Gazelle CEOs said they intend to increase hiring in the near future.
If hiring picks up, additional workers will have money for spending, saving, and repaying debts. Such a sequence could build confidence and encourage investing. This economic expansion has been more tortoise than hare.
The Cycle Turns to Cyclical Stocks
If the economy is on track for a continued expansion, what are the investment implications? Christopher Sheldon, director of investment strategy for Mellon’s Private Wealth Management Group in Boston, offers these insights:
Stick with stocks. “There is more opportunity in equities than in bonds, with interest rates as low as they a
re now,” he says. “If interest rates move up from their current low levels, bonds will lose value. Stocks can move higher if profits improve, and the market may be underestimating the profit growth we’ll see in 2004.” Therefore, you might want to tilt your portfolio a bit toward stocks and away from bonds.
Seek cyclical stocks. Tech and financial stocks did very well in 2003, so they may not have as much potential as other issues. Cyclicals are stocks that tend to rise quickly during an upturn in the economy and fall quickly during a downturn, such as housing, steel, automobiles, and paper.
Although Sheldon declines to name specific sectors, Wall Street’s list of cyclical or economically sensitive companies usually includes industrial equipment, chemicals, cement, paper, metals, and minerals.
Stay short in bonds. “The yields on money market funds and short-term bonds are so low that it pays to go a little longer for higher yields,” says Sheldon. “However, long-term bonds will lose more value if interest rates rise. Therefore, we think the ‘sweet spot’ in the bond market is intermediate-term-bonds with maturities from five to seven years.”
Sheldon says that Treasury bonds may be overvalued now so he prefers corporate bonds and mortgage-backed securities.
Emphasize emerging markets. Among international investments, Sheldon is modestly bullish on Japan. “Even slow growth there will be better than what we’ve seen in the past 15 years,” he says. “I think the fastest growth will be in emerging markets, particularly in parts of Asia. You may want to have a portion of your portfolio in such stocks.”