Down -- But Far From Out


When the Walt Disney Co. lays off 4,000 workers, the whole world finds out. If 4,000 small businesses each lay off one person, who's to know? Corporation after corporation is reporting lower profits, shrinking its payroll, and shelving capital-spending plans. Overdue commercial loans are at a six-year high, and some stock indexes are hovering at one-year lows. Where is small business in this drama?

It's offstage, making less money than in the last few years, but generally holding its own as it keeps one wary eye on the consumer and another on the headlines.

Small-company profits are dropping, perhaps to levels not seen since the early '90s recession -- but not as steeply as corporate profits, notes John Puchalla, economist at Moody's Investors Service. "Small business is having a difficult time...nevertheless, they are profitable," he says. Small companies are likely to fare better than the giants in this downturn because they know their markets more intimately, he says, and because there are no pressures to overinvest in order to compete globally.

DOWN FROM THE HEIGHTS.Entrepreneurs do worry, however, that the country might talk itself into a recession. "Small-business leaders, by and large, have invested their money in their businesses," says Michael Rogers, vice-president of communications for the Small Business Association of Michigan, which has 8,000 members. "I haven't heard a lot of wailing and gnashing of teeth over the stock market, but they are concerned about the psychological impact of all the talk about a recession, the stock market, the consumer confidence figures."

The association's quarterly survey found that profits grew for less than 20% of members in the fourth quarter of 2000 -- the worst showing in the survey's seven-year history. Likewise, members' expectations for sales, profits, and capital spending in 2001 were at an all-time low. This doesn't mean they expect severe reversals, says Rogers, who adds: "It's important to remember that the small-business owners are reporting a slowdown from what has been near-record levels of economic prosperity."

Because privately-owned companies are not required to make their finances public, most don't. But a picture of the overall trends in small-business revenues, profits, spending, and hiring can be gleaned from monthly or quarterly surveys taken by national or state business associations, as well as from a Federal Reserve report that tracks the quarterly flow of funds among nonfarm, noncorporate businesses.

SLOWING GROWTH. According to Moody's, which uses the Federal Reserve report as a proxy for small-business finances, profits increased 4.7% in the fourth quarter of 2000 vs. the year-earlier quarter. That's the slowest growth rate since early 1994.

Small Business Income, Spending Slows

Figures show increase over year-earlier quarter.

Net Income

Capital Spending

Q1-2000

8.3%

30.0%

Q2-2000

8.0%

20.1%

Q3-2000

7.1%

17.2%

Q4-2000

4.7%

10.3%

SOURCE: Moody's Investors Service

And while capital spending by small businesses rose 10.3% in the last quarter of the year when compared with a year earlier, that still represents a sharp drop on spending increases of more than 20% that characterized most of the past two years. (For large corporations, the picture is worse. Profits in the last three months of 2000 for the 900 companies on the BusinessWeek Corporate Scoreboard fell 11% from the year before, the worst quarterly report since 1991.)

The National Federation of Independent Business (NFIB), which surveys members monthly, says that, in February, 21% reported higher sales for the previous three months. Meanwhile, 35% were experiencing lower sales, with the construction, manufacturing, and retail sectors taking particularly hard hits. All in all, it's the worst showing since 1991.

Likewise, the 42% of respondents reporting reduced earnings is lower than at any time since 1992, while the federation's index gauging capital-spending plans was near its historical low in February. The majority of those surveyed cited economic prospects for their tightfistedness. "We're seeing what you would expect when sales drop," says William C. Dunkelberg, the NFIB's chief economist. "Profits will be lower this year, but it doesn't mean people are going out of business."

ANXIOUS BUT O.K. In some spots, sales remain strong. Sales-tax revenue rose in January and February in Arizona, says Tom Gunn, executive director of the Arizona Small Business Assn. Business is strong because 25,000 people are moving into the state every month, he explains. Nevertheless, he acknowledges that it still came as a sobering shock to learn that Cox Communications recently stopped construction on a large facility in Phoenix. Small-business owners "are nervous...but still generating additional income," Gunn says.

In southeast Michigan, home of the ailing auto industry, parts suppliers are feeling the slowdown -- but Rogers notes that it's still tough to find qualified workers in most other sectors, despite the fact that the state's jobless rate rose a half-percentage point in February, to 4.5%. "If there is any kind of increase in the number of good people looking for jobs, that's going to benefit small-business owners," he says, adding: "I have not heard a peep about small businesses laying off people."

Nationally, too, small companies are still crying for workers, the NFIB survey shows. A shortage of labor was No. 2 on the list of problems cited by its members, behind taxes. But finding qualified help is the No. 1 problem for Frank Mendicina, CEO of Select Office Solutions, in Irwindale, Calif. "The thing that is impeding our growth, more than the possible recession, is the lack of quality people to hire," he laments.

Revenue at Mendicina's company, which integrates computer networks for small businesses and has about 150 employees, is up at least 40% over last year, he says. "Everybody I know is making money," Mendicina says of colleagues in Orange County and Los Angeles. Nor does he find news of layoffs and lower earnings at many corporations particularly alarming. Says Mendicina: "Those companies couldn't be expected to maintain the growth they had over the last few years."

COLLECTIVE SIGH. Some small businesses see the slowdown as a chance to, yes, slow down. "What I'm hearing is a collective sigh of relief, although it's relief with a small 'r,'" says Julie Scofield, executive director of the Smaller Business Association of New England, whose 1,000 members provide services or products only to other businesses rather than to consumers. "Our constituency was so exhausted for such a long time to keep up with the incredible demand that the economy meant for them. Together with the incredibly tight labor market...it just meant going around the clock."

Some retailers might be in trouble, particularly those whose fortunes seem linked to the stock market, as well small businesses selling to the auto and telecommunications industries, brokerages, and other hard-hit manufacturing or technology sectors, might be in trouble. But the sky is not falling, say those who work with small-business owners across the country.

It would help, Scofield says, if Chicken Little would stop writing the headlines. "Right now, we still have an economy, on the whole, that's doing very well. You absolutely don't get that message from the headlines," she says. "The media has given a whole lot of coverage to the stock-market end of things and to the earnings dropping, but in most of those cases, the company is not in jeopardy, it's just less robust."

Revenue and profits may be shrinking, but optimism is holding its own. By Theresa Forsman in New York


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