By Joyce M. Rosenberg
The Associated Press

NEW YORK - Small businesses didn't need Federal Reserve Chairman Alan Greenspan to tell them about the danger of deflation, a general decline in prices in the economy.

The National Federation of Independent Business found in an April survey of its members that 23 percent of manufacturing company respondents had been forced to lower their average selling prices.

Manufacturers have been some of the hardest-hit businesses in the economy's downturn; in the finance, insurance and real estate sectors, some of the economy's top performers, just 8 percent reported lower prices.

Falling prices can pose a serious threat to a company's profits, and force business owners to lay off workers and make other cost cuts. But the other side of the pricing equation, inflation, carries its own problems for small businesses because higher prices can make it harder for them to compete.

Vic Tanon sees the problem from both sides.

Tanon is CEO of StaffPay, an Irvine, Calif., company that supplies employees and human resources and benefits management to other firms. StaffPay has had to raise its average prices 20 percent because of an increase in workers compensation costs, but many of the company's customers are manufacturing firms struggling with a drop in selling prices.

"They're lowering their prices and yet we're having to hike it up," Tanon said.

Tanon saw the price increase as putting StaffPay's customer base in jeopardy. So company executives began an analysis to see where the greatest dangers lay, and created a program to give those customers a higher level of service.

"Someone's always out there that's going to be cheaper, so the emphasis is in the value-added services," he said.

In its survey, the NFIB found that 52 percent of small businesses involved in finance, insurance and real estate reported they had raised their average selling prices. And 20 percent of professional service businesses had higher prices. By contrast, only 8 percent of manufacturers reported they had raised their prices.

Manufacturers' situation won't be resolved by a strengthening economy. They are under pressure to keep prices down because competitors in China, Korea and other countries have lower labor costs.

Hank Cox, a spokesman for the National Association of Manufacturers in Washington, noted that manufacturers' pricing troubles predate the economy's most recent downturn.

"From 1994 through 2001, the price of manufactured goods declined by 6 percent, while in other sectors they could rise 18 percent," Cox said.

He noted that while service establishments such as restaurants and hotels generally have more local competition, "manufacturing more than any other sector has to compete on the world stage."

Manufacturers that are currently more vulnerable in terms of lower prices include those that produce electronics and textiles, Cox said. Manufacturers who sell their products to the military and to the construction industry are in a stronger position.

Greenspan, in testimony before Congress last month, said deflation is a remote possibility, but that the central bank was prepared to deal with an overall drop in prices should it happen. The country has not had an episode of deflation since the Great Depression.