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In almost every previous recession it has been small businesses that created the job growth that pulled us out of high unemployment.

According to the latest poll of small business owners taken by the NFIB, small businesses are not yet moving into job creation mode.

Over the next three months, 8 percent of small business owners surveyed plan to reduce employment (down 2 points), and 13 percent plan to create new jobs (up 3 points), yielding a seasonally adjusted net negative 1 percent of owners planning to create new jobs, unchanged and still more firms planning to cut jobs than planning to add.

"Net job creation will appear in the coming months, but the gains will be painfully slow with timid consumer spending, especially in the service sector," said William Dunkelberg, NFIB's chief economist.

Owners complained that poor sales are their top problem, and there is no need to hire with no new customers. In this sales environment, it is hard for workers to earn their pay. Owners cannot pay workers more than the value they add to the firm.  This is why a jobs tax credit will do little to increase employment.  No one can pay $40,000 for a worker to get a $5,000 tax credit unless that worker can add at least $35,000 in revenue to cover the cost of hiring.  And as long as the tax credit issue is alive in Congress and not passed, employers that were ready to hire (13 percent plan to hire) will wait until they can qualify for the credit, delaying much needed gains in employment.

More evidence that those shaping our current economic policy are completely out of touch with the realities of owning a growing a small business.

William C. Dunkelberg, chief economist for the National Federation of Independent Business, issued the following statement this morning on February job numbers based on NFIB's monthly economic survey that will be released on Tuesday, March 9. The survey was conducted through February 28 and reflects 799 small business owner respondents:

"In February, small business owners reported a seasonally adjusted decline in average employment per firm of negative 0.13 workers during the prior three months, an improvement from the January reading of negative .52 workers per firm.  Ten percent of the owners increased employment by an average of 5.0 workers per firm, but 19 percent reduced employment an average of 3.2 workers per firm (seasonally adjusted).  Lower layoffs and jobs from new firms should produce a better jobs number, but it won't be great.  There still isn't any energy in hiring."

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.

Denny Dennis, senior fellow with the NFIB Research Foundation, let me know a while back that he was working on a new small business survey looking at the impact of the recession on credit.  The NFIB released the report "Small Business Credit in a Deep Recession" today. Here are a few highlights of the report:

• Fifty-five (55) percent of small employers attempted to borrow in 2009; 45 percent did not, although five percent of owners, so-called discouraged borrowers, did not try because they did not think they could obtain credit.
• Forty (40) percent of small business owners attempting to borrow in 2009 had all of their credit needs met; 10 percent had most of their needs met; 21 percent had some of their needs met; and, 23 percent had none of their credit needs met. The current level of borrowing success is significantly lower than in the mid-2000s when up to 90 percent had their most recent credit request approved.
• The financial institution extending a line of credit changed the terms/conditions of the line(s) during 2009 for 29 percent of small employers having at least one. About 10 percent with a business loan had the same experience as did 22 percent with a business credit card. The most frequent change was increased interest rates.
• The best predictors of success in meeting credit needs were higher credit scores, customers of banks with less than $100 billion in assets, more properties collateralized for business purposes, and fewer second mortgages held.
• Overwhelmingly, the most common planned purpose of credit rejected was to fill cash flow needs.
• Broad and deep real estate ownership is a major reason why small businesses have not yet begun to recover, why larger businesses have been able to recover more quickly than small businesses, and why this recession is different, at least for small business owners, from recent ones.

Dennis puts the findings in a clear context.  "The findings show that while obtaining credit has become more difficult, declining sales and/or depressed real estate values typically lie at the base of credit problems," said Dennis.  "That means current small business problems will not be solved by simply focusing on lending issues.  Policymakers need to tackle weak demand and real estate."

Tackling weak demand requires growth in the economy, not more liquidity in financial markets.  Weak demand will also not be cured by Keynesian government spending initiatives.

This is an important study that I plan to go through carefully.  I am sure it will inform future posts on small business credit.

"So are you seeing more students interested in entrepreneurship given the depths of this recession?"

I get this question a lot.  And it is a good question because historically we saw a small upswing in student interest in entrepreneurship when the economy and job market softens.

But this is a much deeper recession and more worrisome long-term economic climate. 

How are student reacting this time?

When the bottom fell out of the economy the initial reaction among my students was shock.  This generation is one that has been protected from failure and insulated from risk.  I tend to have graduating seniors in the class I teach, so those not already in business did not know what to do next.

But over the next few months, I saw a transformation.  My students began to accept the new state of the world and adjusted their expectations.  I began to think that this generation is ready to show their entrepreneurial spirit is for real.  Maybe they are willing to step forward and help rebuild our economy one business at a time.

Then, as interest in business majors began to decline overall -- some theorized due in part to disillusion with corporate America -- the number of students in our major held steady.

Finally, the other day I received a piece of data about our program that affirmed my theory.

Each year we usually see about 15-20 new businesses started by our undergraduate students.  Mind you, they do this in the midst of taking classes and often while also working part-time.

This year we have seen a tripling of new practicing student entrepreneurs.  We went from 18 last year to 54 this year.  Keep in mind that these students are not just our majors.  They are coming from all across our campus from many different majors.

So it seems at least among the young people I work with, the entrepreneurial generation is willing.  This news has certainly raised my spirits about our economic future.

I am also confident that our students will be not only willing, but also able the help rebuild the economy -- the success rates among alumni entrepreneurs are solid.

Now it is time to turn them loose.  It is time for policy makers to give them the capital they need by cutting income taxes and the freedom they need by cutting regulations so they can help build a better future for all of us.

Forbes has just released a survey of small business owners that offers some interesting insights.  "Small Business Outlook 2010" is a study issued by Forbes Insights, in association with CIT (the full study is available free on-line, but you do need to register to see it).

Here are highlights of this study with my comments:

• "Declining revenues brought on by the 2009 recession have put additional pressure on small business cash flow, forcing many firms to make tough decisions around cutbacks."

Those entrepreneurs who have been able to make the hard decisions and get back to their bootstrapping roots have survived the first phase of the recession.  While Wall Street seems to be trying to convince themselves that a recovery is around the corner, every indication is that we will be facing a prolonged period of high unemployment with a possibility of a double-dip downturn and significant inflation.

• "Small business owners are feeling the impact of this economic pressure, working harder and longer than ever before. Still, there could be a payoff: many feel they are now smarter about running their businesses and are better leaders."

Good!  They will need these skills to navigate the next several years, which will test them with many new challenges.

• "While cautious about the general economy, most small business owners expect their 2010 revenues to grow. But coming out of the recession, they see the world changing and they will have to do business in new ways to succeed in a more competitive marketplace.

As I mentioned in my comments on the American Express OPEN survey released earlier this week, we need the optimism of entrepreneurs more than ever.  We need them to have the confidence to put their collective heads down and forge ahead to rebuild our economy.

• "Small business owners know the importance of planning and want to spend more time doing it, but they appear to have trouble putting those intentions into action. Many also seem to be unclear about how to focus their marketing and employee retention efforts."

This finding rings home with something I have been working on.  I have become increasingly convinced that we have been focusing too much on the minutia of business plans and moved away from the critical art and science of business modeling.  We need to focus more on how all the moving parts of our business fit together and how the dynamic nature of the marketplace in today's economy demand an ever evolving business model.  I will be writing more on this in coming weeks, but want to thank my colleague and friend John Wark for challenging my thinking on all of this.

• "Economic stimuli enacted by Washington have had little to no effect on small businesses, but they remain hopeful that recent proposals to raise SBA loan limits will provide some benefit in the coming year.

No kidding!  Entrepreneurs understand that it is their efforts that stimulate economies, not massive government pork and waste. 

Regarding more available debt?  Be careful what you pray for...this is not the time to be leveraging your business.

American Express OPEN just released their latest Economic Pulse survey of small business owners.  This survey was conducted 1/28/10 to 2/1/10. 

Overall, 68% of small business owners surveyed say the economy stresses them out (on par with January 2009 results).  38% say their greatest concern is a prolonged recession/"double dip" and 32% list high unemployment. 

They are right worry about both of these problems, but they also better start paying attention additional problems that are likely to raise their ugly heads very soon.  I have been beating the drum about inflation and interest rate spikes for some time.  Now I am beginning to hear bankers start to quietly warn their clients about a sharp increase in prime rates.  I have heard estimates of between 3 to 8 basis point increases by the end of 2011. 

The good news is that small business owners have not taken on more debt, which will make them vulnerable to any interest rate spike should it happen anytime soon.  Almost 60% of small business owners have not pursued credit in the last 6 months.  Of that group, 22% worry about default or bankruptcy and 30% say there isn't enough demand for their products or services to warrant taking on new debt.

What is keeping them from expanding their workforces and helping to turn things around in the economy?  Customer demand is by far the greatest single incentive to hire (42%), compared to tax credits (11%) or access to financing (5%).

Overall, small business owners are more optimistic about the economy than they were one year ago (43% think it will improve over the next 12 to 18 months versus 30% in January 2009).  But then again, they are entrepreneurs so by their nature they are going to try and see the positive whenever they can.

An curious aspect of the unemployment data of late is that even though unemployment rates seem to have stabilized, and even dropped a bit this past month, we keep losing jobs.  One of the reasons for the discrepancy is that a large number of people are no longer looking for payroll-based jobs, but becoming consultants and freelancers. 

Even during the boom time a few years ago 20 of the 25 million small businesses in American were actually people who were self-employed -- also labeled as small businesses with no employees.

This restructuring from traditional employment to entrepreneurial freelancers and self-employed is accelerating the longer this recession continues.  We soon may be hearing the cry, "We are all small businesses now!"

Andy Tabar sent along a short video from CNNMoney of the boom of self-employed and freelancers and how the market is accommodating them.

The NFIB Index of Small Business Optimism for January finds that optimism has clearly stalled for small business owners.
 
"Small business owners entered 2010 the same way they left 2009, depressed," said William Dunkelberg, NFIB chief economist. "The biggest problem continues to be a shortage of customers."

The highlights:

• Employment --Owners reported workforce reductions that average .52 workers per firm, basically unchanged for the past several months.
  

• Capital Spending --the frequency of reported capital outlays over the past six months rose three points to 47 percent of all firms, an improvement from December's record-low reading, but historically very weak. 
  

• Inventories and Sales --Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stocks. 
  

 

• Earnings -- In a word -- weak.  "Don't expect much spending or hiring until these trends reverse," said Dunkelberg.
  

• Credit --Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. 
  

The engine of any recovery -- small business -- is still in a survival mode.

Ben Cunningham sent along a link to a story that looks into what actually happened with the $15 billion for small business support announced by the SBA last spring.  I had raised concerns about an artificial infusion of debt financing for small businesses when this was first announced (see here and here).

It seems that as of today, none of the money has been distributed.  From Jake Tapper with ABC News:

The source told me that the reason the program has not been officially utilized was twofold.

One, almost every potential participant declined to cooperate because they didn't want the stigma of using TARP funds given the tremendous public anger towards Wall Street and resentment about the $700 billion bailout.

Two, the specific purpose of the plan - to get the secondary market moving again for these SBA loans - was largely accomplished.

It may seem odd, but a story about government bailouts actually qualifies as a "The Glass is Half Full" post.

Why?

First, the public is not buying "government as the solution" policies and are pushing back against them.  Although the story only references TARP, bailouts and the wasteful spending they have created have been getting more and more bad press and scrutiny from the public.   

But even more importantly, the market worked on its own without the government helping with massive infusion of taxpayer dollars.

I doubt that most of those inside the belt-line in Washington understand the real lessons of this story, however.