Small businesses see growth, but eye interest rates
NEW YORK (Reuters) - Small business owners plan for growth this year but are closely tracking recent interest rate rises and any impact they might have on their business and customers, according to a spot survey of firms in the New York region.
Rates have risen sharply over the last two months, leaving benchmark 10-year Treasury yields about a percentage point above mid-May levels and near the highest levels since August 2011.
If those higher rates hurt consumers, that would "ultimately have a net effect on us," says Michael Muzyk, president of Bronx, N.Y.-based Baldor Specialty Foods.
Baldor senses changes to the economy because it supplies produce to restaurants and hotels in New York City. If the economy weakens, New Yorkers cut back on restaurant spending. Meanwhile, slow U.S. or global growth can dampen the tourism that fuels New York's hotel business.
Baldor has annual revenue above $200 million, over 800 employees, and 200 trucks delivering produce, but the recent rise in rates won't have a direct impact because of the firm's strong cash position, Muzyk said. The company also has access to a credit line should it want to invest or expand, he said.
The recent rise in interest rates - and the parallel rise in mortgage rates - is of more concern to Wheatfield, New York-based Calamar, a real estate firm involved in financing, construction and property management.
Already, with mortgage rates at two-year highs, the Mortgage Bankers Association's seasonally adjusted index of mortgage application activity fell 2.6 percent in the week ended July 12.
Calamar runs on a 15-year strategic plan, says its chairman and chief executive officer, Kenneth Franasiak.
"We saw the peak in 2007. We went to all cash and from that point, we've re-deployed into the market again," Franasiak said. "We see a continuation of slow economic growth and our customers and clients share those views."
Many economists have come around to that view as well with some Q2 GDP growth estimates as low as 0.3 percent following growth of just 1.8 percent in the first quarter and barely positive growth of 0.4 percent in the quarter before that.
The rise in interest rates has not yet affected business at Ring's End, a Darien, Connecticut-based retail lumber, millwork and building specialty company, but since the firm's business is closely tied to housing and construction, its president and chief executive officer David Campbell is watching to see whether rates stabilize or move higher.
"We still have historically low rates, but if they keep going up, it could slow things down a bit," he said.
The rise in interest rates could actually spur some transactions if people "want to lock in" a mortgage before the rates go even higher, Campbell noted.
Meanwhile, rising home prices has encouraged people to begin spending money on home maintenance and improvement projects they might have deferred, he said.
"We anticipate the economy, and business, will gradually get better, but we're not looking for any boom," Campbell said.
The recent rise in rates is "not a great thing for small businesses, but we've had a nice long run of low interest rates," notes Gale Epstein, president and creative director of Hanky Panky, which manufactures lingerie in the New York City boroughs of Brooklyn and Queens.
If the recent rise in interest rates hurts consumers, her firm could feel it later this year, Epstein said.
The Thomson Reuters/University of Michigan survey showed Americans in early July were more optimistic about current economic conditions than they had been in six years, but had lost some confidence in the recovery's prospects.
FISCAL POLICY MATTERS
Besides interest rates, small businesses are also focused on fiscal policy.
Federal budget sequestration cuts that occurred this year drastically hurt DHS Systems LLC, an Orangeburg, N.Y., company whose biggest product is standard army medium and large command centers - shelters with a trailer that carries a generator and all the equipment a mobile facility requires.
"Our revenues dropped from $210 million to about $110 million," said A. John Prusmack, DHS Systems' president and chief executive officer who started the company in 1984. "That means you have to lay off a lot of people. We had about 500 employees; now we have 180-185. When that happens, you lose a lot of your expertise, your production talent."
DHS Systems is in the process of moving to Huntsville, Alabama, where Prusmack believes elected representatives will be more responsive to defense contractors.
Despite the challenges, however, the owners see some upside potential for their businesses.
"Hope is not a business plan, but a lot of cash is on the sidelines and as people begin to feel more confident, they are doing things they weren't doing 24 months ago or even 12 months ago. They are hiring and increasing capital spending," Franasiak said. "But it takes time. This is a marathon, not a sprint."
(Reporting By Ellen Freilich; Editing by Ken Wills)
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