The importance small businesses for both job creation and job loss in our economy is highlighted in a new study from the SBA Office of Advocacy.  Through much of the 1990s and and into the 2000s, small businesses accounted for 65% of new jobs created in the economy. But since the recession took hold, small business has accounted for 60% of job losses.

Over the 15-year period from 1993 to 2008, small businesses created some 65 percent of the net new jobs in the private sector, according to conservative estimates cited in a new report from the SBA Office of Advocacy.

Advocacy economist Brian Headd notes that many of the new jobs were in new business startups, but an even larger share were in expanding firms of all sizes–particularly mid-sized firms with 20-499 employees.

“More and more, we’re finding that both new startups and ongoing high-growth firms have important roles to play in the labor market,” said Acting Chief Counsel for Advocacy Susan M. Walthall. “Fast-growing firms scattered across the economy create a large share of jobs–and because no one can predict which idea will be the next to catch on, it’s important to create an environment in which a wide spectrum can start up and expand.”

Advocacy’s analysis of the quarterly Bureau of Labor Statistics data show that over the 15 years from 1993 to mid-2008, 31 percent of net job gains (jobs created minus jobs lost) came from the opening of new establishments. An even larger share–the remaining 69 percent–were from ongoing firms of all sizes that expanded. (These net figures are based on establishment openings minus closings and establishment expansions minus contractions.)  

But then came the recession.

In the current recession, firms with fewer than 20 employees began losing jobs as early as the second quarter of 2007. Small business have accounted for 60% of all job losses.  From 2008 to the second quarter of 2009, these smallest firms accounted for 24 percent of the net job losses.  Businesses with 20-499 employees accounted for 36 percent of job losses. The remaining 40 percent of job losses were in large firms with more than 500 employees.

Keep in mind that up until 2007, small businesses under 500 employees and larger firms each made up about 50% of the workforce.

In every past recession it has been small businesses that have kick-started job creation.  We don’t see evidence of that happening right now, and federal policy is doing everything wrong to help entrepreneurs play the vital role of job creation in our dire economic situation.

The National Federation of Independent Business Index of Small Business Optimism lost 0.3 points in December, falling to 88.0 (1986=100) [1]. The Index has been below 90 for 15 months. Optimism has clearly stalled.
 
Since I made a resolution this year to look at the world from a “Glass Half Full” perspective, let’s see what good news we can see in the details from this survey.

Employment

Ten percent of the owners increased employment, which was the highest reading of 2009.  That is encouraging, but the survey also found that 22 percent reduced employment.

The job outlook is also has some hopeful signs.  Ten percent reported unfilled job openings, up two points from November.  This is a good sign.

Those planning to reduce hiring still is about double the percentage of those planning to increase hiring.  However, over the next three months, the number of small business owners planning to reduce employment has declined slightly.  And those planning to increase their hiring is up one percentage point from November.   

Capital Spending

The frequency of reported capital outlays over the past six months was unchanged at 44 percent of all firms, holding at a record low level (data first collected in 1979). But, plans to make capital expenditures over the next few months rose two points to 18 percent.  Still near the record low, but at least it has started to move in the right direction.

Sales

When it comes to revenues, it becomes a little harder to see positive signs.  The net percent of all owners reporting higher sales in the past three months remained negative at negative 25 percent.  However, this is a six-point improvement over the dismal November reading. 

Earnings

Try as I might, I could not find a silver lining in the responses on profits.  Reports of positive profit trends were unchanged at a net negative 43 percentage points. For the 54 percent reporting lower earnings compared to the previous three months, 65 percent cited weaker sales, 4 percent each blamed rising labor costs, higher materials costs and higher insurance costs, while 6 percent blamed lower selling prices. Poor real sales and price cuts are responsible for much of the weakness in profits.

Owners continued to reduce compensation at a record pace, with 10 percent reporting reduced worker compensation and 9 percent reporting gains, unchanged from November. 

Credit

Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15 percent reported loans harder to get than in their last attempt, unchanged from November.

“Still that is not nearly as severe as the financial distress reported in the pre-1983 period,” said NFIB Chief
Economist William Dunkelberg. “Twenty-four months of recession have sapped the financial strength of many small firms.” 

Look for the Small Victories

“2009 was a very difficult year for small business,” said Dunkelberg.  “Continued weak sales and threatening
domestic policies from Washington, have left small business owners with
little to be optimistic about in the coming year.”

Alright, so the big picture shows only slight signs of improvement in the economic conditions for small business.

Let’s keep focusing on the small victories.  Let’s keep our eyes on those entrepreneurs who are keeping their heads held high and finding ways to succeed in spite of the adversities they are facing in the economy and from the misguided policies coming out of Washington.