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More business owners embracing economy: High fuel costs, personal debt dampen some optimism

August 22, 2005

Business owners are beginning to show signs of completely emerging from a recessional slumber, although some holdouts remain unconvinced an economic recovery is in full swing.

The confidence exuded by the state's massive manufacturing sector could be sending the most optimistic signal. From 2000 to 2003, manufacturers in Indiana were stung especially hard by the soft economy, shedding 75,000 jobs. While many of those positions may never return, employment levels have at least stabilized.

That seems to have provided enough solace for companies to make investments that could lead to employment growth, said Brian Burton, vice president of marketing and member services for the Indiana Manufacturers Association.

"We are seeing more optimism than we have in the last number of years," he said. "There's a sense of stability here in Indiana, which raises the confidence level to make those investment decisions."

Overall, employment for the Indianapolis area is on the upsurge, as key economic indicators point to a nationwide recovery.

The unemployment rate in June was 4.5 percent, below the national average of 5 percent. And employment rose in the metropolitan area to a record high of 894,100 jobs, according to the U.S. Department of Labor.

The figures echo what is occurring on a national level. U.S. employers added 207,000 workers in July and wages grew at the fastest pace in a year, the Department of Labor reported in early August.

There appears to be no evidence of a slowdown, either. Economist Carl Tannenbaum at LaSalle Bank in Chicago said the outlook is excellent for both hiring and business spending.

"Both of those trends are the result of a very strong economy and very strong corporate profits," he said, "which give companies the cash flow needed to add to their human and physical capital."

Companies so far, though, are spending conservatively as they become profitable, Tannenbaum said. They eventually will need to add to capacity to satisfy demand, he noted.

Locally based Just Marketing Inc., the city's fastest-growing private company last year, according to IBJ research, is constructing a 27,000-square-foot building at 106th Street and Michigan Road to replace its Georgetown Road location.

The motorsports marketer founded in 1995 by CEO Zak Brown has accelerated rapidly, growing revenue from $1.5 million in 2001 to $10.6 million in 2003. While Brown attributed much of his success to the deals he has brokered within the wildly popular NASCAR series, the rosy economic outlook contributed to his decision to invest $2.5 million in a new headquarters.

"I definitely have a lot of confidence in the future," Brown said. "Things seem to be going forward and not backward. That made the commitment of constructing a building much easier."

Business lending is strong, buoyed by a fiercely competitive environment that is benefiting borrowers, said Bill Cafaro, senior vice president and small-business financial services manager for JPMorgan Chase.

"Certainly I think that within the lending environment there is a lot of activity going on, notwithstanding the creep in rates we're seeing," he said. "There's no shortage of small-business lenders who want to be involved with successful companies."

The Federal Reserve pushed borrowing costs to their highest level in nearly four years on Aug. 9 when it raised the federal funds rate by one-quarter percentage point, to 3.5 percent. It marked the 10th increase of that size in the Fed's 14-month campaign to tighten credit and stave off inflation. In turn, commercial banks began boosting their prime lending rates to 6.5 percent.

Tannenbaum predicted the federal funds rate-the interest banks charge one another on overnight loans-will rise to at least 4 percent by the end of the year. So far, the incremental increases have not had a damaging effect on the economy, he said.

But there are hints of worries. Higher interest rates, combined with surging oil prices, are tempering the optimism of small-business owners.

A survey from International Profit Associates Inc. in Buffalo Grove, Ill., a management consultancy to small and mediumsize businesses, shows fewer companies expect to grow this year. In the Aug. 11 poll, 29 percent of business owners said they expected to increase the size of their staffs, down from 36 percent in April.

Count Tim Queisser, owner of the Snooty Fox Restaurant on East 86th Street, among the concerned. Competition from arriving restaurants on the 96th Street corridor between Keystone Avenue and Allisonville Road is cutting into his business.

"We're having a harder time competing for employees," he said. We're competing, don't get me wrong, but it's not as easy as it used to be."

Queisser also thinks consumer spending could slip soon because "more and more people are getting by with credit cards and racking up debt," he said. "I think people's discretionary income will be getting short real quick."

Patrick Barkey, an economist and director of economic and policy study at Ball Sate University's College of Business, described rising energy prices as a "wild card" in the economic recovery.

"It's a stop sign that the economy keeps running through," he said. "At some point, it's going to change the outlook for the economy and people will start pulling back. But it hasn't happened yet."
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