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Will the Recovery Leave Small Business Behind?

Posted by: John Tozzi on November 16, 2009

Is the small business sector underperforming the broader economy? And if so, does our economic data accurately reflect that?

Those are the questions Jan Hatzius, chief US economist at Goldman Sachs (GS), tackled in a Nov. 11 commentary (no link available). Hatzius says the recent 3.5% GDP growth estimate (annualized) for the third quarter could overstate how much the economy expanded by as much as .5 to 2 percentage points. He gets there essentially by looking at how GDP growth historically tracks to the NFIB’s Small Business Optimism Index.

From Hatzius’s note:

The National Federation of Independent Business (NFIB) reported on Tuesday that small business optimism edged up very modestly to 89.1 in October. While this is the highest level in a year, the index remains more than two standard deviations below its long-term average. The weakness of the NFIB [index] stands in stark contrast to other indicators such as the purchasing managers indexes published by the Institute for Supply Management, which have moved back to around their long-term averages, and real GDP, which grew an estimated 3.5% (annualized) in the third quarter. Small firms appear to be underperforming their larger peers, most likely because of differential access to credit.

I put together the rough chart below based on quarterly data from the NFIB’s Optimism Index. Each line charts the group’s measure of small business optimism (based on member surveys), starting in the first quarter of a recession and going through the end of that business cycle (i.e., when the next recession begins). I’ve used the NBER’s business cycle dates, and I combined the double-dip recessions of the early 1980s. Click here for full image.


The red line tracks the index from Q4 of 2007, when the current downturn officially began. Though it’s ticking up, the NFIB’s optimism measure is way below where it has been at this point in any other business cycle since the index began in 1974. Despite the rally in the stock market and other hopeful signs, this measure of the small business sector doesn’t show an incipient recovery. With small firms employing half of all private sector workers, their gloomy outlook contributes to the high unemployment rate. (In the last three months, 19% of small employers reduced headcount, compared to 8% that increased, according to the NFIB’s November survey.)

If small companies are suffering more than large ones, there could be a discrepancy if data collection for small firms, especially proprietors, lags. Here’s Hatzius’s takeaway:

Our conclusion is that if small firms aren’t captured well in the advance GDP data, the economy may be growing less quickly than suggested by the recent official data. This would not only reconcile the GDP data with the NFIB survey, but would also go some way toward explaining why the unemployment rate has so far continued to increase at a considerable clip despite official GDP estimates that imply above-trend growth. If there is an error, it may eventually be corrected via revisions, although the process could take several years.

If this analysis is accurate, it clarifies the disconnect between big business and small business. That difference was less evident earlier in the downturn. Things looked pretty dismal for businesses of all sizes a year ago. At this stage, big businesses and small busineses appear to be facing different recoveries — or lack of thereof.

Many of our readers have steered their companies through at least one downturn before. If you have, let us know — is this one different? Are you less optimistic about growth? Why? Tell us in comments below, or on Twitter.

More analysis on this from Seeking Alpha, the Curious Capitalist, and the The Pragmatic Capitalist.

Reader Comments

Pamela Miller

November 17, 2009 01:08 PM

Inasmuch as a lot of us Small Businesses provide services or products that are not basic necessities to survival, I guess we just picked a really bad time in our history to be optimistic. In my case, I am just hoping that a modestly secure retirement doesn't go up in smoke.

Jeff Goldberg

November 17, 2009 04:31 PM

My experience is we had credit availble in the early 1990's. This time it has all but dried up. With no credit it is difficult to wiggle. We therfore have laid off 2 people and are hoping for some type of holiday season to pull us through.


November 17, 2009 09:47 PM

Small business will not lead us out, the money is blown to the administrations friends on Wall Street, credit does not exist, nor will it any time soon. The credit markets will not allow for a recovery. The Small Business Admin should be called the Large Disaster Admin, they must be the old team from FEMA. A complete waste of tax payer money, unless of course your Goldman, hats off to them for working the system.

Jim M

November 18, 2009 08:48 AM

We employ 47 people. We manufacture analytical instruments for labs. I hear a great deal about Government loans to small businesses and the problems associated with this due to various bank issues. Our situation is different. We do not want more loans. We have a healthy credit line as it is. What we need is more business and reduced expenses. I have frozen salaries, suspended 401K contributions and managers have taken a 5% pay cut. I have not laid anyone off at this point. We are so lean as it is I am afraid we will really damage the business further if we let people go. NFIB and other business owners like myself have suggested that the government reduce payroll taxes for some period of time. In 2008 we paid almost $250K in payroll tax. If this were reduced 50% it would be a huge help. We are also and S Corp. With the income tax increase in January we are taking even a larger hit on any profit made. As you know with an S Corp any profit the company makes is passed through to me as income...even though it isn't. There is an opportunity here to help small business but so far there is no interest in government in doing anything but handing out SBA Loans...sometimes.


November 18, 2009 12:17 PM

I have recently I chatted with the SBA and some banks. They all say they can’t help. They can’t loan money out to business because of the economy. So what is a small business owner to do? Some are not paying vendors, employees, state sales taxes and taxes. All this is going to do is start a chain reaction and close more businesses, lose more homes and increase bankruptcies. It is not the American way for the everyday hard working American to lose everything while the real criminals in Washington get off free and with millions in their pockets.

Small business, banks and employment are the answer to get us out of the economic crisis. First, the Federal government needs to start a group like the SBA but call it BBA Big Business Association. BBA will work with the huge business (businesses that are in the stock market). BBA will work with larger banks to get loans to huge business thorough a bank loan but the Federal government (meaning the people) will guarantee the note but will have many restrictions. Second, the Stock market needs to be fixed. It needs to go back to where it was a place for businesses to get revenue by putting shares of stock out to the public. Everything else about it needs to go. If people need to gamble, they can go to Vegas. Then there needs to be strict regulation of businesses on the Stock market. Examples, CEO, Board members and employees have wage caps, records checked by multiple firms (one that works for the people), all records must be open to the public, (accounting records, board-meeting records, CEO records), and you get the point. Second, the Federal government and State government need to work with the SBA at state level to help small business (1 to 3 and 1 to 100 employees). It is the same principal as above, but with one difference. Let all banks be part of the lending. Most small businesses deal with local community banks. Let the small businesses deal with the bank they work with already. Once again, there will have to be some restriction, Examples, maybe businesses need to have been operating for so many years, show that funds are being used to pay vendors and taxes, retaining and adding employees, purchasing equipment, purchasing inventory, etc. Once again, a government guaranteed note will back the loan.

What is the plus side of this? First, the American people will go for this. It is equal and fair for all and not a give away for the few. Second, business will be doing business with other businesses; money will start to flow in the economy again. Employment will be retained and new employment added. Second, money will turn hands faster and increase tax revenue. Third, small communities in America can still be part of America. Lastly, the American dream (pursuit of happiness) is not gone for every poor American and is not exclusively for the rich in America.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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