The year is only a few days old, but prognosticators have already pointed out the issues that will define the next few months. While economic growth will continue, they do see some growing pains. For example, Inc.com and Business Week have listed several marketplace concerns that will be top-of-mind in 2005:

1) Raw materials will get more expensive. Gone are the days when the U.S. bought the bulk of the world's metal, ore and oil at bargain prices. Last year, steel prices rose 46%, thanks in part to strong demand in Asian countries where construction is flourishing. Meanwhile, lumber prices have increased by 25% and cement is tight, causing headaches for builders in the mid-Atlantic and southwestern U.S. As a result, builders are renegotiating prices, making provisions for rising costs in contracts and comparing vendors more carefully. Moreover, small firms will likely form more alliances and join associations to bolster their purchasing clout, says Stephen Spinelli Jr., an entrepreneurship professor at Babson College in Massachusetts, to Inc.com.

2) Cost pressures are also mounting in the labor front. Along with rising commodity prices, companies are also facing increasing labor costs, mainly due to health care premium hikes. In fact, heath care premiums went up an average of 11% last year. As a result, many small companies are considering providers that offer plans with higher deductibles. In addition, employers will embrace flexible accounts, in which employees can use pretax dollars to pay for health expenses, says the Savitz Organization, a Philadelphia-based employment benefits consulting firm. Companies will also have to learn to accommodate what has been called the "sandwich" generation—people who tend to both a child and an aging parent—with such new benefits as flextime and child and elder care programs.

3) Productivity growth will slow. Productivity will continue to increase but at a less rapid pace, says a recent Business Week article. While this is to be expected at this phase of an economic recovery, this slowdown could be more pronounced because U.S. firms have been posting gains of around 4.2% for the past three years—a rate that far exceeds productivity's long-term growth pattern. This year, firms will no longer be able to offset labor cost increases with productivity gains as the job market gets tight. In fact, the growth of hourly compensation has outstripped the rise of productivity for the past two quarters—a trend that's likely to persist. Therefore, unit labor costs will continue their upward movement.

4) Lead times will lengthen because of logistical issues. For over 10 years, U.S. companies have increased efficiency, shortened lead times, and cut costs by having their inventory and components delivered just-in-time. Now, the global distribution network is backlogged. And any new port-security requirements could worsen matters. "Lead times have already doubled in a lot of cases," says Jack Stack of SRC Holdings, a Missouri-based manufacturer, to Inc.com. "And it is going to get more difficult."

5) Upstarts will get more funding. Young companies will likely receive more financial support from venture capitalists this year. According to industry trade group National Venture Capital Association, venture capital investments surged to some $25 billion in 2004. "VCs have been out raising money and they need to put that capital to work," Tracy Lefteroff, global managing partner of venture capital at PricewaterhouseCoopers in California, comments to Inc.com. "And the valuations now are more favorable toward the entrepreneur." There are some things to consider, however. First, investors are more likely to invest in businesses within close proximity, says Babson College's Spinelli to Inc.com. Also, funds will likely be given in smaller amounts. Notes Spinelli, "Businesses will see financing in smaller bids and will have to prove a concept before securing more."

Sources:

Five Trends That Will Define 2005
Amy Gunderson
Inc., December 2004
www.inc.com/magazine/20041201/5trends.html

U.S.: The Coming Battle Between Profits and Prices
James C. Cooper and Kathleen Madigan
Business Week, December 6, 2004
www.businessweek.com