The article tonight at Bloomberg, “No Job Growth for Small Business Spurs Recovery Doubt,” is a bit surprising, because so many of the people quoted in the article seem….surprised. It appears to have suddenly dawned on some economists and commentators that small concerns aren’t adding jobs, and that might have broader ramifications.
What is peculiar instead is the LACK of interest in the small business sector. In the last expansion, the overwhelming majority of hiring took place in small businesses. By contrast, big companies in the US shed jobs.
So why so little focus on small businesses? It’s drunk under the street light behavior (you do know that joke, , cop sees drunk on ground under street light, cop asks drunk what he is doing, drunk says he is looking for he keys. Cop ascertains drunk probably lost keys somewhere else, asks drunk why he is looking for keys here. Drunk says, “Because the light is better.”) It’s easy to get data about big businesses, so that’s what most analysts focus on:
Because few economic reports capture small-business statistics, some economists say investors are being misled about the strength of recovery from the longest, deepest recession since the Great Depression.
Recent numbers suggest “the official data are too heavily weighted towards bigger companies, which are doing better than credit-constrained smaller firms,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. “The latter employ half the workforce.”
The data-gathering problem affects other areas of investigation. One of my colleagues, Amar Bhide, wrote a path-breaking book on entrepreneurship. Why was his book novel? Because all the previous academic work on entrepreneurs looked only at venture capital funded companies because it was easy to study them. But less than 1% of startups winds up getting venture funding. So Bhide did fieldwork on the unwashed, unstudied 99% and wrote up what he found.
It does not take special powers of observation to divine that all is not well in small business land. First, as we have noted on this blog repeatedly, credit cards are an important source of funding to small businesses, particularly for seasonal businesses and ones that buy inventory in lumpy quantities to obtain discounts, as well as to buffer short term cash flow shortfalls (the classic problem of a customer paying late). Two of the biggest players that focused on the small business market, Advanta and American Express, have exited that business, and it is hardly a secret that other credit card issuers are getting tougher on terms.
The anecdotal evidence is also strong that many small businesses are suffering. How many retail stores and restaurants do you know of that have shuttered? And there were no doubt some small businesses that in turn sell to small businesses like these.
The Bloomberg story provides further detail:
Improvement in the unemployment rate, which fell to 9.7 in January from 10 percent in December, may stall later this year if these firms aren’t hiring, and growth likely won’t meet the median 2.7 percent annual rate forecast for 2010 by 67 economists in a Jan. 14 Bloomberg News survey….
The National Federation of Independent Business’s index of small-business optimism has been near historic lows for 15 consecutive months, declining to 88 in December from 88.3 in November, the federation reported Jan. 12. During the four prior recessions, it dipped below 90 only once.
“It has been a very difficult year, and 2009 did not end on an uplifting note,” William Dunkelberg, chief economist for the federation in Philadelphia, said in the report. “Optimism has clearly stalled, in spite of the improvements in the economy.”
Twenty-two percent of the group’s members reduced employment in December, while 10 percent added workers. The federation will release its January data tomorrow.
Investors shouldn’t assume there’s value in small caps during this recovery, according to Robert Olstein, who manages the $14 million Purchase, New York-based Olstein Strategic Opportunities Fund, which focuses on small businesses.
“Smaller startups are having a really hard time,” Olstein said in an interview. “…
Lack of access to credit is also affecting small businesses disproportionately. The Federal Reserve reported Feb. 1 that banks were continuing to tighten standards for loans to small firms, while standards for large companies were unchanged….
PayNet Inc.’s Small Business Loan Index, which tracks loans of $1 million or less, was 8.6 percent lower in December than a year ago.
“In the first half of 2009, the average monthly decrease was about 20 to 25 percent, so it’s clearly a step in the right direction,” said William Phelan, president of the Skokie, Illinois-based company, which offers credit reports for banks that lend to smaller firms. Still, “demand for expansion loans for small businesses is 35 percent below its peak in 2006. That’s another indication of how far we have to go to climb out of this recession.”
“Things don’t seem to be getting any worse, but they aren’t getting any better,” the NFIB’s Wade said. Small businesses “are in a kind of survival mode. We just haven’t seen anything indicating a change.”