The American economy
has been, and will continue to be, built by entrepreneurs. If you believe that
entrepreneurs’ voices need to be heard and want to help to educate government
officials about the important role entrepreneurs play in our economy, I encourage you to connect with the Build A Stronger America initiative supported by the Kauffman Foundation. All you have to do is click on the link above and join the Entrepreneurs’ Movement. I did!
I quick follow-up on my post from yesterday about small business employment trends….
Denny Dennis with the NFIB Research Foundation pointed out to me that the data from the Bureau of Labor’s Business Employment Dynamics (BED) report adds additional worrisome clues into the state of job creation among entrepreneurial firms.
Typically, small business creates modest employment growth during recessions, while big businesses have massive job losses. However, the BED data indicates that this recession is seeing small business is creating fewer jobs than large businesses.
The SBA Office of Advocacy has issued an update of their Small Business FAQ. There are some worrisome changes in some of the statistics.
The small business job engine is sputtering. For several years the SBA has estimated that about 78% of new jobs in the U.S. have been created by small businesses over the past several years. They now estimate this figure to be about 64%. I would predict an even further plummet over the next two years. These are running averages, so it takes time for the numbers to shift. However, I must admit that this sudden drop took my breath away when I read it.
The small business foundation of the economy is weakening. The SBA estimates that in 2007 the small business birth rate is about 627,200, which is the lowest level in the past five years. I am worried what the 2009 figures will show, although this number includes self-employed. That number may be up due to the high unemployment rate. But, for the first time in the past several years, business closure rates and business bankruptcy rates exceed the business birth rate. This is alarming. We also need to keep our eye on the Census estimate of the number of small business that have employees. It was at 6.0 million as of 2007 estimates (if the future estimates really will have any credibility with the new policy that is moving the Census Bureau directly under the control of the White House).
And what about survival rates? The jury is out on this. We will have to wait until 2011 to have any meaningful data on business survival rates. The baseline going into this economic downturn — that may be turning into a full fledged small business collapse thanks to the policies of the current President and his predecessor — is 69% survival rate two years out and 51% survival rate five years out. Again, we have to rely on the Census for these estimates, so not sure how they will spin the future statistics.
If I hear one more report about a jobless economic recovery I think my head will explode. There is not real economic recovery without job creation. Talking about a “jobless recovery” is a classic spin that politicians from both parties use when the economy gets stuck in a long-term slump.
The latest from William Dunkelberg, chief economist for the National Federation of Independent Business, indicates that the slump is, indeed, going to be with us for quite a while:
“Small business owners in August reported a decline in average employment per firm of 0.8 workers (seasonally adjusted) during the last three months. August’s figure was unchanged from July, but a big improvement from the record loss of 1.26 workers posted in May.
“Six percent of the owners increased employment by an average of 2.5 workers per firm while 22 percent reduced employment an average of 3.9 workers per firm (seasonally adjusted). The job generating machine is still in reverse. The BLS recently reported unusually high job losses in the small business sector, due in part to terminations and failures. As can be seen in the chart below, the reduction in labor costs (e.g., jobs) has been huge. This explains the recently announced impressive productivity numbers; if employees are fired faster than sales fall, output (sales) per hour will rise. Hopefully, this job cutting has been overdone and will produce a faster than expected recovery in employment (once consumers start spending – retailers and restaurants are in tough shape). Manufacturing is improving, but that will not budge the employment numbers.”
“Eight percent (seasonally adjusted) of small business owners reported unfilled job openings, down 1 point from July. Over the next three months, 13 percent plan to reduce employment (down 1 point), and 7 percent plan to create new jobs (down 1 point), yielding a seasonally adjusted net 0 percent of owners planning to create new jobs, a 3 point improvement over July. Not seasonally adjusted, net job creation plans were negative in all industry groups except the professional services and the wholesale trades.”
I participated a while back in an economics blogger forum at the Kauffman Foundation. They have published a documentary about this one day event, which you can view here.
Although I am not an economist, I was invited as someone who looks at economics from an entrepreneur’s eye.
I have been arguing for some time that it is time to
fundamentally restructure our immigration policy in this country. We need to create a path for aspiring entrepreneurs to come in and help fuel our entrepreneurial economy. A new study from the Office of Advocacy of the SBA reinforces my point.
The study authored by David Hart, Zoltan Acs and Spencer Tracy found that sixteen percent of high-impact, high-tech firms have at least one immigrant founder. Although these firms are concentrated in states with large immigrant populations, in most other respects they resemble high-impact, high-tech firms founded by native-born entrepreneurs.
Moreover, these immigrant entrepreneurs are highly educated and appear to be strongly rooted in the United States. Roughly 55 percent of the foreign- born founders hold a masters degree or a doctorate. In addition, they are more than twice as likely as native-born founders to hold a doctorate.
Furthermore, 77 percent of the foreign-born high-tech entrepreneurs are American citizens and, on average, they have lived over 25 years in the United States. Two-thirds of them received their college degrees here, as well.
“Immigrant entrepreneurs clearly contribute a significant amount to our country’s cutting edge high-tech firms,” said Shawne McGibbon, acting Chief Counsel for Advocacy. “This report outlines these contributions and delivers important new data about immigrant entrepreneurs.”
I am participating in a multi-blogger forum through Forbes magazine as part of their
This week’s topic from Brett Nelson, Entrepreneurs Editor at Forbes.com:
There’s a lot of confusion about whether we are in a deflationary or an inflationary environment. What sorts of pricing strategies should small business owners consider right now?
I have consistently been on the side of those who are worried that inflation is inevitable. Although the recession has dampened inflationary pressures, I still believe this is only a temporary reprive.
The problem for small business during inflationary times is that they are less able to adjust prices as quickly to
adjust to inflationary pressures. There is never a smooth and orderly increase in
prices for every business in the economy and small businesses often suffer the most.
If you have big suppliers and/or customers they can tie your hands.
Your costs go up, but you are unable to pass along these costs with
higher prices.
What I worry about even more is that we may see inflation take hold long before the recession is over. This makes keeping prices up to stay ahead of increasing costs even more difficult as demand will still be fairly weak for some time.
So
what can a small business do in terms of pricing strategies to try and weather this
impending inflationary storm?
The recession has made entrepreneurs leary of doing anything but cut prices to keep their businesses afloat during the recession. While that may still be the best course over the short-run, pay very close attention to pricing from your suppliers, decreases in unemployment, increasing interest rates, and pricing moves from the big boys in your industry. These are the elements of your inflationary dashboard.
When inflation heats up even a little, be aggressive with frequent
small price increases rather than waiting and trying to catch up at
some point with one big jump. Don’t let yourself get behind, as small businesses can almost never play catch-up with their prices.
This can be tough to implement for some businesses, particulary if you publically list your prices. For example, it can get very costly to print up new menus each month for a restaurant owner who wants to follow this strategy.
But customers are less likely to pay attention to price increases if they are small, so it is essential to find creative ways to communicate your pricing to allow for you to implement this strategy during inflationary times. For a resaurant it may require using menu inserts that can inexpensively be replaced. This was actually very commonly used in restaurants during the 1970s and 1980s when we had high inflation.
I know the question of the week is pricing, but I can’t let this discussion go without a brief reminder that the income statement is also made up of costs. Adjusting to inflation also requires careful attention to expenses, as cutting costs can at least somewhat help ease the pressure to increase prices.
Continue the prudent management of expenses that helped you survive the recession:
– Keep overhead low.
– Build cash reserves to buffer short term price increases that precede your ability to get higher prices from your customers.
– Watch your margins carefully. Worry about growing profits, not sales.
– Don’t lock into long-term contracts that have narrow margins with large customers.
– Pay down variable interest loans ASAP, especially now that
interest rates are temporarily realtively low. As soon as inflation heats up, interest rates will continue to rise.
Immigrants have always played a vital role in fueling our entrepreneurial economic engine. Given our need for help in revving up that engine right now, I wish we would take another look at our immigration policy.
The primary reason that we see so many immigrants pursue entrepreneurship is that they are opportunity focused – surveys reveal that this is what drives many of them to leave for new a new country. I have to wonder how attractive the US will look in a few years after our mad dash to socialism is fully in force.
When we look within specific ethnic communities in the US, recent immigrants out perform non-immigrants in economic achievements and have higher rates of self-employment than native-born in these ethnic communities.
In Internet-based ventures, immigrant entrepreneurs pursue more aggressive strategy. One study found that 25.4% of engineering and technology companies include at least one founder who was born outside of the US.
Here are a few more quick facts:
I have written in the past that our immigration process is too complex and outdated. It is yet another example of public policy, social activism, and bureaucracy run amuck. Immigrants have always been a major force for innovation and entrepreneurial activity in the US. It is time to rethink how we manage this process.
Immigration Road Blog displays a flow chart of the current immigration process in the US. No wonder so many choose the route of illegal immigration. The process is a labyrinth that inhibits people from pursuing immigration through the legal channels.
Here is my column from today’s Tennessean. Happy Father’s Day!
In its monthly surveys of small business owners, the National Federation of Independent Business found that small
businesses have been feeling a bit more optimistic the past two months.
The results seem to suggest that entrepreneurs are beginning to believe
that the worst may be over when it comes to the recession. But just
what will the recovery will look like? And what is the longer-term
outlook for the economy?The pace of the recovery will not be consistent for every business owner. This recovery is not going to be a case of a rising tide lifting all boats.
While
certain sectors of the economy and specific geographic regions are
showing some signs of improvement, others seem to be mired with flat or
even continued declining sales.Within
specific industries we are seeing inconsistent trends. For example,
while much of real estate and construction remains almost dead in the
water, those who work within the health-care segment of this industry
report improving performance.Business owners hold back
In
looking deeper into the results of the NFIB survey, there are signs
that this recovery may be a long, slow road. Even though entrepreneurs
feel more optimistic, they do not plan to increase hiring, build
inventories or resume capital spending anytime soon.Some
of their optimism may be coming from a realization that the cries in
the media that this was becoming the “next Great Depression” were
unsubstantiated exaggerations.“The
biggest concern on the minds of (business) owners is the weakness in
spending which has now started to turn up as consumers become less
concerned with proclamations of pending disaster for the economy — it’s
not going to happen,” said NFIB chief economist William Dunkelberg.However, the improvement in consumer spending shows little sign of creating a strong bounce in the economy anytime soon.
And
what can we expect for the long-term economic outlook? Understand that
economies are not just isolated to commercial transactions. There is a
strong long-term tie between our economy and our society and culture.
There are some signs that we may be in a period of fundamental economic
and cultural change.Things won’t be the same
The frenzied consumerism-driven economy that dominated our past decades may never return.
We
may emerge from the recession into a very different economic/cultural
reality. There are growing signs that consumers are becoming less
concerned with keeping up with the Joneses and more focused on becoming
frugal spenders.Opportunities
can still be found in such a transformed economy if it actually occurs.
The key will be to understand these changes and offer new business
models that respond to changing needs, preferences, attitudes and
consumer behavior.Entrepreneurs
have led the way with almost every economic recovery. Let’s hope that
their newfound optimism will soon translate into renewed and
sustainable economic growth.
There has been quite a bit of discussion lately about the role the Entre-Boomers (those of us from the Baby Boomer generation who are pursuing entrepreneurship) in the economy. Now that we are in what looks to be a prolonged economic lull, the role of Entre-Boomers may become more important than ever.
My colleague John Wark sent along a discussion about this that was published this week at The American:
Contrary to popularly held assumptions, it turns out that over the past decade or so, the highest rate of entrepreneurial activity (a measurement of new business creation) belongs to the 55-64 age group. The 20-34 age bracket meanwhile–which we usually identify with swashbuckling and risk-taking youth (think Facebook and Google)–has the lowest. Perhaps most surprising, this disparity occurred even during the decade surrounding the dot-com boom–when the young entrepreneurial upstart became a cultural icon.
- In every single year from 1996 to 2007, Americans between the ages of 55 and 64 had a higher rate of entrepreneurial activity than those aged 20-34.
- For the entire period, the 55-64 group averaged a rate of entrepreneurial activity roughly one-third larger than their youngest counterparts.
- These trends seem likely to persist: in the Kauffman Firm Survey, a longitudinal survey of nearly 5,000 companies that began in 2004, slightly less than two-thirds of firm founders are between the ages of 35 and 54.
- Additionally, Kauffman research has revealed that the average age of the founders of technology companies in the United States is a surprisingly high 39–with twice as many over age 50 as under age 25.
So what are the implications of these trends?
First and foremost, we better get our small business policy right to make sure these Entre-Boomers and their children in the Entrepreneurial Generation (the second most entrepreneurial age group) can be successful.
Entrepreneur magazine has a revealing debate that gets to the heart of what needs to happen policy-wise to ignite entrepreneurial activity in our economy. It has a debate about the so-called stimulus package between two prominent economists. I agree with position taken by Raymond Keating, chief economist of the Small Business and Entrepreneurship Council in this article:
I’m against it because if you
really want to get entrepreneurship and investment moving again, you
need tax relief that’s not targeted and temporary. Investors and
entrepreneurs need [permanent] changes that will really improve the
profitability of taking risks in the expansion or startup of businesses.
On the spending side, I think most entrepreneurs understand that these
resources the government is tossing around…don’t materialize from
nothing. The economy would benefit from leaving those resources in the
private sector rather than putting dollars in the hands of politicians
and their appointees to decide where they are going to be spent.
Even economists who think this is a good idea will acknowledge that
it’s just an effort to throw as much money as you possibly can at the
problem and hope that something good comes out of it. Is it better than
nothing? Yes. Is it enough to really get our economy moving? I would
say no. It falls way short.
We also need to understand that most of the ventures that Entre-Boomers are creating will be small and organic. They will be bootstrapped by both choice and necessity. All of this talk about the need to focus on high growth, venture-backed firms is misguided. I hope Scott Shane and others like him will look at the entire set of data out there. But, given his latest comments at the New York Times small business blog, I am not sure if this will ever happen, as seen by these comments:
I am supportive of the argument that government policy should encourage
the formation and development of venture-capital-backed start-ups. In
various books, articles and blog posts, I have said that the federal
government should focus more resources and attention on high-potential
start-ups and less on the typical new business. Such an approach would,
as the venture capital association argues, provide a greater return in
terms of job and wealth creation to government investment in the
creation of more typical new companies.
His myopic brand of socialized entrepreneurship is not enough to get things going. These folks need to stop the false debate of small business versus venture-backed firms. We need both right now! The data shows that we need the high growth firms for their breakthroughs and we need small businesses for their job creation power. And neither type of business gets any long-term benefit from government meddling.
Finally, we need to find a way to socially and culturally harness the entrepreneurial energy of the Entre-Boomers. The economy does not operate in some sort of vaccum where only the exchange of goods and services takes place. The economy is shaped by culture, and culture shapes the economy. The current dramatic rush toward socialism is reinforcing a passive, dependent society. My students and I saw first hand during our trip to Eastern Europe where this will take us.
The sheer numbers and assertive nature of the Boomers shaped our culture in the 1960s and 1970s. It is now time for them to help lead us again. Their growing emphasis on economic self-reliance can translate into a renewed celebration of the power of free enterprise in our society and culture. At least I hope it can — as that may be our only chance to turn this mess around.