December 18, 2014

Is Small Business Prosperity Just Around the Corner?

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“Prosperity is just around the corner” is what Herbert Hoover told businessmen in 1932, at the depth of the Great Depression and close to a decade before prosperity returned. An optimist might say Hoover was right; it was just a very long corner.

I thought of Hoover’s famous quote when reading the spate of articles that have explained that the U.S. economy has turned the corner. That is, of course, unless you are unemployed or run a small business.

While I have written before about the non-recovery among small companies, the excessive optimism in the press has me turning to this topic again. I’ve looked at the data and they don’t show a recovery on Main Street. Moreover, I don’t think we’ll see one for a while.

Before I turn to why I don’t forecast a small company rebound anytime soon, let me first describe the current status of the small business sector. In a word, it’s not good. The National Federation of Independent Business’s (NFIB) December survey of its members (who own small companies) indicates slightly lower optimism than in November, which the NFIB had said remained “ in recession territory… far below values that have typified a recovery period.” And the NFIB’s December figures on the share of small business owners planning capital investments and small business owners’ sales were lower than November’s levels, which the NFIB had said were “still historically quite low” and “not yet supportive of a widespread recovery in the small business sector,” respectively.

Discover Card’s Small Business Watch – a survey of business owners with less than six people on their payroll – shows a similar lack of recovery. In December 2010, 45 percent of survey respondents reported having temporary cash flow problems, three percentage points higher than in June 2009 when the recession ended. Similarly, only one tenth of owners said they were adding employees, not many more than the nine percent hiring in June 2009. In December 2010, 62 percent of entrepreneurs said that current economic conditions were poor, an increase of three percentage points from the level at the end of the recession. Finally, in December 2010, 21 percent of small business owners surveyed planned to increase spending on business development; a number virtually the same as the 22 percent who said they planned to do so in June of 2009.

So why aren’t small businesses experiencing the economic recovery that seems to be driving the stock market higher and putting large amounts of cash in the coffers of large, multinational corporations? I think there are four reasons: First, small business owners are much more affected by the slump in housing prices than large companies. Construction and real estate have a particularly high proportion of small companies, and, of course, those industries aren’t experiencing a robust recovery.

Moreover, small business financing depends a lot on housing prices. Big public companies obtain the capital that they need by issuing bonds and stock and selling them to investors, but small businesses rely heavily on personally guaranteed and personally borrowed money from banks. Analysis I conducted with my colleague Mark Schweitzer of the Federal Reserve Bank of Cleveland shows that the fall in housing prices has eliminated almost $25 billion in potential credit for small business owners.

Second, big businesses can better take advantage of the more robust economic growth occurring in other countries. Small Business Administration data shows that small businesses only account for 31 percent of exports but generate more than half of non-agricultural private sector GDP. The lesser reliance of large businesses on economic conditions within the country has worked to their advantage in recent months.

Third, increase in government regulation, as seen in the financial and health care reform bills have imposed a disproportionately large burden on small businesses. In a recent paper, Nicole and Mark Crain of Lafayette University wrote that “small businesses face an annual regulatory cost … which is 36 percent higher than the regulatory cost facing large firms.”

Fourth, most government policies to combat the weak economic conditions have helped large companies more than small ones. For instance, the stimulus program, which worked in part through government contracting, favored large businesses that knew how to work the public contracting system.

Unfortunately, I don’t foresee robust growth returning to the small business sector anytime soon. Growth in home prices doesn’t appear to be on the horizon. Despite the Tea Party members elected to Congress, government regulation isn’t likely to decline. Economic growth outside the country will remain stronger than growth within the country. And no large public policies that favor small business owners are heading down the pike.

11 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

11 Reactions

  1. Hi Scott,

    Another factor is the dollar’s strength in relation to the Euro and the Chinese RMB. Both of which impact the cost of goods and the value of exports.

    Ivan

  2. Unfortunately I have to agree with you Scott. The recovery is going to be a long and slow process for SMBs and for the economy in general. The optimism of the press will help get the wheels moving, but a recession fundamentally affects how people think and behave. We aren’t just going to snap out of it.

    @Ivan – You make a good point with exchange rates. With the way the US is printing money, inflation is almost inevitable with the first symptoms appearing as poor exchange rates and expensive oil.

  3. Doom & gloom news delivered, now how to respond?

    That’s the question. What to focus on. Here’s some notes I took on Tony Robbins latest Ultimate Business Growth seminar where he directly addressed this point…

    What Creates a Business Breakthrough?

    Decision making.

    Decision making is the force that shifts destiny, personal or professional. Most people don

    • Hi Note Taking Nerd #2, I don’t view this as being doom and gloom — it’s just trying to understand the realities of the situation we face. I am as “glass half full” a person as you’ll ever meet, but we can’t close our eyes to what’s around us. It’s only by understanding what we’re up against that we can face it down.

      I’ll add two thoughts to Scott’s well-reasoned piece:

      (1) There’s a danger in averages. The problem with surveys is that the numbers address things in a general averaged sense, but there are many pockets of small business that are doing very well, even as others have been hit hard by the recession. However, when you hear figures that try to cover all industries, and all small businesses, the numbers for the poorly performing ones drag down the numbers as a whole. That tends to make everything sound more uniformly negative than it is. My point: there are bright spots out there.

      (2) This ought to be a wake-up call to members of Congress, the President and state/local governments about the chilling effects of excessive regulation. Maybe Scott doesn’t hold out much hope that things will change soon, and I have to agree with him on that. But all we need is one strong leader with a clear vision for business, like a Ronald Reagan, or even a Bill Clinton (who was quite pro-business, I thought) and things WILL change. So I do hold out hope that change can occur at some time.

  4. There’s no easy fix for small businesses these days. The public has been cutting the spending since 2008, and it’s affecting the moms and pops shops more than the large corporations. They can’t get credit, plus if they cater their services to the big guys, they’re not even getting paid before 60-90 days after.

  5. Interesting. I didn’t know that housing prices were such a factor but, upon reflection, it makes perfect sense.

  6. Great article.Right on traget. We have been in business for 42 years and this is the worst recession for a small business in that time period. There is no money for small businesses, cash flow is super tight, and state and federal regualtions continue to be targeted on small businesses. It is interesting all the “hot air” that is given to small business in governemnt. No bail out monies for us, and the programs they do have you must have gold plated credit. Almost impossible.

  7. Thanks for the post, Scott.

    I prefer a reality-based view of things, as opposed to well…spin!

    Spin does nothing. Spin doesn’t change the reality of the situation.

    I’m right there with you, Scott; there’s just not enough data, or good signs that point to a powerful recovery.

    Here’s something else to gnaw on, Small Business Trends community folks;

    What’s going to happen to the massive amounts of empty retail space all over the US? Could this be the next headache for all of us to deal with?

    The Franchise King

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