Will Small Business Jobs Act Boost Economic Growth?

The recently enacted Small Business Jobs Act of 2010 fulfills a promise U.S. President Barack Obama made to entrepreneurs soon after his election, pledging to create incentives aimed at encouraging small-business creation and growth.

Many experts agree that the package of finance and tax incentives represents some good news for small businesses struggling to cope with weak economic conditions. Although some faculty at Emory University and its Goizueta Business School and other observers praise the new initiative, others wonder if it will have the necessary impact to help jump-start the economy.

"Until now, large companies have been the biggest beneficiaries of stimulus programs and tax incentives," says Thomas Smith, an assistant professor in the practice of finance at Goizueta. "The accelerated tax write-offs featured in the new act are a good idea, since they’re aimed at incentivizing businesses to make capital purchases that can have a ripple effect throughout the economy."

Among other changes under the Small Business Jobs Act, companies can reduce their taxable income by immediately expensing the costs of certain kinds of newly acquired business assets, instead of depreciating them over their "useful life," a period of years determined by the Internal Revenue Service. Generally, companies like to expense their assets quickly as a way to significantly reduce their tax liability.

The asset write-offs, popularly known as Section 179 after the applicable part of the Internal Revenue Code, were previously limited to $250,000 in a given year. The new act raises the threshold to $500,000 of newly purchased assets per year, subject to certain limitations, during 2010 and 2011.

In another bid to get businesses to spend more, the act extends and revises the so-called bonus depreciation rules, which let taxpayers depreciate 50 percent of the cost of certain assets in the first year they are placed in service.

An earlier set of bonus depreciation rules expired at the end of 2009, but the new act extends it to assets placed in service through the end of 2010, and certain assets may qualify even if they are purchased and put into service through 2011.

Some observers have questioned the timing of the legislation, suggesting that few small business owners will risk making significant capital expenditures during the current downturn. They also complain that the bonus depreciation rules, while welcome, have such a limited timeframe that few businesses will not have enough time to plan and get financing for the capital purchases.

Smith, however, isn’t so sure about that.

"The fact is that machinery and equipment is either wearing out—or, in the case of computers and other technology-based assets—is becoming obsolete," he says. "Businesses that want to stay competitive aren’t likely to hold off on necessary purchases just because the economic recovery isn’t moving as quickly as they hoped. Obama’s responses to the recession may not all be perfect, but he’s moving in the right direction."

If Smith was hedging on his view of the tax incentives, another Obama initiative has his full support.

"I think the tax incentives were a good idea, but the $30 billion that’s being released to banks to stimulate small-business lending is even better," he says. "Many small business owners I’ve spoken with have complained that they’ve wanted to take advantage of expansion and other opportunities, but simply couldn’t get loans to finance their plan."

Besides replacing aging assets, some business want to upgrade to more efficient machinery and equipment that can reduce their operating and other costs, adds Smith.

"It’s difficult to say with certainty exactly what the catalyst to spur business activity will be," Smith observes. "But we’ve got to try bold, new initiatives like these, as well as other strategies, to incentivize businesses to start hiring again. To do nothing would be myopic."

Perhaps, but this economy presents some unique challenges, says T. Clifton Green, an associate finance professor at Goizueta.


"Although the recession is officially over, we seem to be having the jobless recovery that people feared, in that unemployment is still very high," notes Green. "The idea behind the $30 billion government bank-loan program and the tax credit initiative is to get small businesses spending to expand their businesses and hire new people."

But large companies can easily borrow at historically low rates, "and they are not using the money to expand," he adds. "Rather than hiring, they're using new debt to buy back stock or replace old technology that they held off replacing during the recession. The recent behavior of large business suggests the small business act may not have the intended new hiring effect."

Indeed, William J. Carney, a chaired professor of corporate law at Emory, stresses that another administration initiative, healthcare reform, may have already undermined any benefit the Small Business Jobs Act may have provided.

"Congress meant well by pushing businesses to provide healthcare insurance," he says. "But it could be counterproductive to hiring, especially among low-wage employers who don't want to take on "Cadillac" insurance programs for minimum-wage workers. We've already seen pushback from McDonald's Corp. and other big employers that complained and are getting limited waivers."

Yet New York City entrepreneur and Goizueta graduate Brett Klasko believes that more credit access could boost businesses.

"Opening up the lending channels is a good idea," says Klasko, chief executive officer of the marketing firm Phinaz whose subsidiaries, Ticket Boosterand Investors Alley, focus on the sports and financial industries, respectively.

"The additional federal funding could give banks an incentive to lend," he adds.

If the effectiveness of this program and others is in debate, then how—or if—such legislation can stimulate a positive response with voters in the midterm elections is even murkier.

"I don’t know if this program and others will really help the Democrats much in the midterm elections," notes Klasko. "For example, the president has been pushing to let some or all of the Bush-era tax cuts expire, and I don’t think that’s a good idea, since it will end up hurting businesses."

Obama may hope that the administration’s most recent stimulus effort will help Democrats in the November elections, but Goizueta finance professor Tarun Chordia does not believe it will help the economy much.

"The act, like the previous "cash for clunkers" and "homebuyers’ incentive," might just move some activity forward," he says. "It might not really create new activity, and we’ll suffer the aftereffects later on."

In contrast to these "small fixes," there’s a real need to upgrade infrastructure, says Chordia. "We currently have spare capacity in the economy, and it is important that the right projects are funded. There is a large debate in economics between those who feel that government spending on infrastructure projects during downturns can help future GDP growth and those who feel that government spending is generally wasteful. It is probably true that projects funded for political reasons, just before the November elections, are likely to be wasteful.

Chordia believes that big issues like the hangover in the housing market will take at least two or three years to resolve, regardless of what the federal government does.

"This recession is different than past slumps," explains Chordia. "In this one, we’ve seen a broad retreat in asset prices, and it will take time to get supply and demand back into balance. At this point the motivation for the stimulus programs seems to be the November election."

From Knowledge@Emory

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PricewaterhouseCoopers Report: Second Quarter IPO Market Records First Increase in Activity Since 2007

/PRNewswire/ -- The volume of United States (US) initial public offerings (IPOs) continued to remain low in the first half of 2009. For the first six months, there were only 14 IPOs that raised $2.3 billion, a significant drop from the 43 offerings that generated $27.7 billion for the same period in 2008. The first half of 2008 saw the largest US IPO in history, the $ 17.9 billion Visa Inc. IPO, which skewed the amount of proceeds raised during that period. By comparison, the largest IPO in the first half of 2009 was the $720 million Mead Johnson Nutrition Co. IPO.

A quarter-over-quarter comparison saw an increase in IPO activity in the second quarter of 2009 for the first time since the fourth quarter of 2007. The downward trend in IPO volume started in the first quarter of 2008 and reached its lowest point in the first quarter of 2009. That quarter (Q1 2009) saw only two IPOs that raised $722 million, the lowest in terms of volume in recent history. There were 12 IPOs that raised $1.6 billion in the second quarter of 2009 compared with 18 IPOs that raised $5.1 billion in the second quarter of 2008.

"A few select companies were able to take advantage of the capital markets which started to improve in late March," said Scott Gehsmann, a capital markets partner in PricewaterhouseCoopers' Transaction Services practice. "As we move toward the later part of the year, we will see more companies testing the IPO waters."

The first six months of 2009 saw eight financial sponsor-backed IPOs, comprising 57% of the total volume, and raising an aggregate of $1.0 billion or 44% of the total proceeds. This is significantly higher than 26% of the total volume and 6% of the total proceeds during the same period in 2008.

China was the only non-US issuer, and had four offerings that raised $0.3 billion in proceeds during the first half of 2009. There were 11 non-US issuer IPOs during the same period in 2008, raising $1.6 billion in proceeds.

The NYSE continued to lead in 2009 IPO volume with 11 IPOs raising $2.0 billion in proceeds, 88% of the total proceeds raised during the first six months of 2009.

Similar to the US, global IPO activity saw modest growth in the second quarter of 2009. Europe brought 28 companies public in the April to June period raising $0.8 billion, but that paled in comparison to the second quarter of 2008 when there were 133 offerings raising $18.3 billion. The four largest IPOs of the second quarter accounted for 88% of the total money raised. Hong Kong saw 18 IPOs that raised $2.2 billion in the first half of 2009, which was a 66% drop in terms of value from the same period in 2008. Similar to other markets, the majority of the IPOs in Hong Kong in the first half of 2009 occurred during the second quarter. Brazil witnessed Latin America's largest offering with the $4.3 billion Visanet IPO in June 2009. This was also the largest IPO globally in the first half of 2009.

"Stronger second quarter IPO activity bodes well for the second half of the year," noted Gehsmann. "In fact, a number of companies have already begun to assess their IPO-readiness in preparation for the inevitable return of the IPO market."

US IPO Watch is a quarterly survey of all IPOs listed on US exchanges. These include IPOs by domestic and foreign companies, best-efforts, business development companies, filings with the FDIC, and bank demutualizations. IPOs do not include unit investment trusts and fully classified closed-end funds. Visit our website, www.pwc.com/ustransactionservices, for our 2006, 2007 and 2008 US IPO Watch reports.

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Merrill Lynch Fund Manager Survey Finds Chinese Economic Optimism Fuelling Improved Growth Outlook

/PRNewswire/ -- Fresh optimism over China's growth prospects has led to a marked improvement in economic sentiment globally, according to the Merrill Lynch Survey of Fund Managers for February.

Investors are at their most hopeful about the year ahead since the credit crunch took hold in July 2007, with the number who forecast a worsening economy in the 12 months ahead falling to a net -6 percent. This compares with a net -24 percent in January. The majority recognises, however, that the world economy is in recession.

Fears of a prolonged slowdown in China appear to be fading. The number of investors who predict lower growth in China over the coming 12 months has fallen sharply, to a net 21 percent in February from a net 70 percent in January.

Similarly, severe pessimism about the outlook for corporate earnings has started to ease. A net 43 percent of respondents expect to see deteriorating profits over the coming year, significantly lower than the 63 percent who held that view in December. A net 49 percent of the panel predicts inflation will fall over the coming 12 months, compared with 64 percent in January and 82 percent in December.

"Fund manager expectations for Chinese economic growth rose dramatically to their highest levels since 2007, and faint global decoupling hopes now reside solely with China," says Michael Hartnett, chief Global Emerging Markets Equity strategist at Banc of America Securities-Merrill Lynch Research.

Commodities coming back as equity allocations shift into cyclicals

Commodities have enjoyed the sharpest pick-up in terms of changes to asset allocations in the past two months. Investors hold a net 15 percent underweight position in commodities, down from a net 32 percent underweight in December.

Bond weightings were trimmed while equity allocations fell back to a net 34 percent underweight - the same position as in December. Investors have been pruning back their allocations to traditional defensive sectors and moving into more cyclical sectors.

Weightings fell in Telecoms, Insurance, Staples and Utilities. At the same time investors increased positions in Technology, Energy, Materials, Industrials and Discretionary Spending.

"Higher risk appetite, rising commodity sentiment and a strong valuation case could encourage further investment in energy and materials sectors. We see this as best played out through sterling-denominated assets," said Gary Baker, Banc of America Securities-Merrill Lynch head of EMEA Equity Strategy.

U.S. in favour while Japan allocations fall

Appetite for U.S. equities has been reawakened in February, possibly boosted by poor market performance in January. The net overweight position in U.S. equities has risen to 15 percent this month, up from 7 percent one month ago. The U.S. benefits from having the best profits outlook, and 31 percent of respondents want to overweight U.S. equities in the next 12 months.

At the same time allocations to Japan have fallen starkly with investors who hold a net underweight position of 26 percent, compared to 15 percent in January. Traditionally, Japanese equities would benefit from a broad pick-up in sentiment. Japan also suffers from having an overvalued major currency, according to the survey.

For the first time, respondents view the yen as more overvalued than the euro. Pessimism over the euro has broadly moderated, while the region's macro-economic outlook is somewhat more favorable.

"Eurozone growth expectations picked up to the highest level in 12 months in February," said Baker. "But in contrast with the global picture, the number of European portfolio managers overweight cash spiked to the highest level since October 2001."

Survey of Fund Managers

A total of 212 fund managers, managing a total of US$599 billion, participated in the global survey from 6 February to 12 February. A total of 177 managers, managing US$372 billion, participated in the regional surveys. The survey was conducted by Banc of America Securities-Merrill Lynch Research with the help of market research company Taylor Nelson Sofres (TNS). Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.

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