Rising Rates Spell Prosperity for Small Business
The expected rise in rates for 2004 will have a positive impact on small to medium sized business.
BUFFALO GROVE, IL (PRWEB) May 26, 2004 -
– While business owners have come to fear rising interest rates, their reaction should be to greet them with anticipation and enthusiasm, not fear. The expected rise in rates for 2004 will have a positive impact on small to medium sized businesses — unless they allow fear and emotion to control their decisions.
“Recent comments by Federal Reserve Chairman Alan Greenspan trumpet the near-term entry to a year of prosperity for small business fueled by increasing factory orders and retail sales,” said Gregg Steinberg, President of International Profit Associates, Inc.
(IPA-IBA).
After three years of continual reductions in interest rates to levels not seen since 1958, U. S. central bankers are poised to raise their target for short-term interest rates. The last rate cut occurred in June of 2003 when the Fed reduced short-term rates from 1.25 percent to 1 percent. Historically, well into the first year of the beginning of a tightening cycle the economy and business profits grow at a very rapid rate. The rise in the stock market has averaged in excess of 14 percent during tightening cycles since 1983. This cycle will be no different.
Thomson First Call reported that 454 companies in the S&P 500 have announced first-quarter results, and their earnings are up 27 percent over last year. For 2004, Wall Street analysts expect S&P 500 profits to rise 17 percent on average. This optimism is influenced by the recent overwhelming positive economic data, especially factory orders, retail sales, employment data, and an economy growing at a rate of 4 percent. The increase in nonfarm payrolls for March and April were well above the most optimistic forecasts, and the best back-to-back months in four years. “A rise in interest rates in the coming months is a clear sign of economic health and a growing economy. This trend will benefit small to medium-sized businesses in general, but particularly those poised to seize this once-in-a-cycle opportunity,” Steinberg said.
It has been 10 years since the Federal Reserve engaged in a program designed to raise interest rates. What differentiates 2004 from 1994 is that today inflation is much lower and productivity growth is much higher. During his recent testimony to the Joint Economic Committee, Greenspan told lawmakers, “When you have the benefit of a very significant increase in output per hour, it means that you can go in a much more measured pace (in raising rates) than you would be required to go in the past.” “This bodes for a more gradual approach by the Fed, which translates into a more prolonged period of short-term prosperity than we have seen in past cycles,” stated Valerie Ramsdell, Executive Director of Survey Services at IPA-IBA.
IPA-IBA foresees the first rate hike by the fed to occur at the end of June, but in no event later than mid August, and anticipates it will be one-quarter of a percent. The timing of the initial increase will be influenced by the rate at which reported economic numbers, particularly jobs and CPI, continue to increase. There are five remaining opportunities for increases in 2004. The Federal Open Market Committee meets June 29, August 10, September 21, November 10 and December 14. Over the next year and a half, IPA-IBA anticipates a series of small increases that could boost the fed funds rate to a minimum of 3.25 percent, up to a maximum of four percent, by the end of 2005. Irrespective of whether or not there is an increase at the June meeting, IPA-IBA believes the fed will announce a shift in policy to a tightening / inflation fighting bias.
During the past three years, Americans have become far more willing to acquire debts and banks are far more willing to allow this trend. Household debt increased at twice the pace of household incomes from the beginning of 2000 through 2003, according to data at the Federal Reserve. IPA-IBA believes a series of small interest increases will have little, if any, impact on this consumer trend. Economic sectors such as basic materials, which are extraordinarily sensitive to the economy, are reporting accelerating profits, as are blue-chip technology and consumer-driven stock sectors. “A rise in interest rates reflects a change in focus by the Federal Reserve. Fed policy will shift its emphasis from
Economic stimulation to maintaining growth without significant inflation. The purchasing appetite of Americans is sustainable near-term, which translates into sustained profit trends for businesses near-term,” said Ken Sweet, Executive Director Consulting Services at IPA-IBA.
IPA-IBA sees the benefits to small business owners of a moderate rise in interest rates over the next twelve months to include:
• The initial phases of a series of small increases in interest rates confirm a US economic recovery is underway.
• Factory orders will continue to remain strong for a number of months.
• Retail sales will continue to remain strong for a number of months.
• Lenders will be much more willing to lend money to those who need it to purchase goods or expand business operations. Also, historically, inflation fears motivate Americans to save more and spend less, thus increasing the available capital pools of lending institutions.
• A short term increase in housing market activity may result from a push by consumers to purchase new homes (locking in fixed interest rate mortgages prior to further rate increases), and a fear on the part of sellers that the pool of available qualified buyers is drying up. As we progress into the short-term cycle there will be a shift from new home purchases to the less expensive remodeling of existing properties.
• Higher interest rates will strengthen the dollar, which will result in imported goods being considerably less expensive, both to consumers and to manufacturers importing raw materials and components. These savings will drive increased profitability for businesses positioned to take advantage of such cost savings.
• A combination of sustained demand and measured increases in interest rates will support reasonable price increases, a portion of which will contribute to increased profitability.
•Wage and benefit costs will remain at low levels, or continue to decline, as long as worker productivity remains high. Inflation should remain at tolerable levels as long as labor costs remain low.
• As we reach the maturing stage of this short-term cycle, the rise in interest rates will cause a consumer shift from new home purchases to a combination of savings and other disposable income nondurable goods purchases, thereby prolonging the trends of strong retail sales and factory orders (in certain sectors).
International Profit Associates, Inc. ( IPA-IBA ), the largest privately-held business development company for small and medium size businesses in North America, is a leading authority on small business. With nearly $200,000,000 in annual revenues, IPA is the 8th largest management consulting company in Chicago, and the 59th largest consulting company in the world. IPA offers a wide range of proven and innovative methodologies to help businesses grow and prosper in both good economic times and bad. IPA and its related companies, including Integrated Business Analysis, Inc. ( IBA ), International Tax Advisors, Inc. ( ITA ) and IPA Advisory & Intermediary Services, LLC ( IPA A&I ), provide comprehensive business advisory services and tax strategies to companies in the United States, Canada and other locations worldwide.
Additional information is immediately available by visiting http://www. ipa-iba. com (http://www. ipa-iba. com), http://www. iba-usa. net (http://www. iba-usa. net), http://www. internationaltaxadvisors. com (http://www. internationaltaxadvisors. com) and http://www. aiservices. com (http://www. aiservices. com). The Public Relations Department may be contacted at: telephone (847) 495-6786; facsimile (847) 495-6773; or email pr@ipa-iba. com.
###
