The Entrepreneurial View #471                                                               

Gloominess Spreading to Small Business

by Raymond J. Keating

The current economic picture doesn't look too pretty.  In the fourth quarter of 2007, it was rather ugly, and it seems like matters are only getting uglier in the first quarter of this year.

According to the federal government's initial estimate, real GDP growth in the fourth quarter was a mere 0.6%. While business investment grew, nonresidential investment continued to plummet. The housing mess obviously continues to take its toll.  Perhaps most disturbing, government accounted for 0.5% of the 0.6% GDP growth rate, leaving the private sector barely creeping ahead at 0.1%. 

For all of 2007, real GDP grew at 2.2%, compared to a post-World War II average of 3.5%. 

But what about small business in the midst of this turmoil?

On February 7, the SBA's Office of Advocacy released its "Quarterly Indicators" report.  It serves up a few measures of interest to small business.  For example:

• Business bankruptcies had dropped dramatically in 2006 - from 39.2 thousand in 2005 to 19.7 thousand in 2006. The trend data indicated that the numbers would be up considerably for 2007 compared to 2006, but nowhere near the 2005 level.

• While throughout most of 2007 the prime bank loan rate was more than double where it had been in 2003 - 4.1% in 2003 versus 8.3% in the first half of 2007 - as the Federal Reserve has cut interest rates, the prime rate is coming down as well. It registered 7.5% in the fourth quarter of 2007.

• Venture capital investment has climbed slowly but steadily since 2003. In 2003, it registered $19.7 billion, while it reached $29.4 billion.

• The number of incorporated self-employed has been steadily rising in recent years - from 4.6 million in 2002 to 5.5 million in 2006 - and that trend apparently continued in 2007.

• Meanwhile, the number of unincorporated self-employed also climbed over the previous five years, but the trend in late 2007 pointed to a decline.

These numbers present a mixed picture. 

But there are reports out recently that show matters becoming more troubling.  On January 28, Discover Financial Services reported: "Few small business owners started out the year with confidence in the direction of the U.S. economy, according to the Discover Small Business Watch. The monthly index fell nearly 6½ points in January to 86.3, the second-largest point tumble in the 18-month existence of the poll. The index has been steadily decreasing since July, when it was 107.3."

The Discover poll also noted that "74 percent of small business owners feel that economic conditions in the U.S. are getting worse, a jump from 65 percent who felt that way in December." In addition, "35 percent of small business owners picked the economy by far as the most important issue in the presidential campaign. The war in Iraq was a distant second at 14 percent; followed by government ethics and corruption, 13 percent; immigration, 11 percent; health care, 9 percent; national security, 8 percent; Social Security, 4 percent; and some other issue, 2 percent. Six percent were not sure."

On Tuesday, February 12, another survey chimed in with glum tidings from small business on the economy. Reuters reported: "Small businesses are losing confidence in the U.S. economy and have little hope a spate of interest rate cuts or economic stimulus measures will do much to boost sales, according to a survey released on Tuesday. The National Federation of Independent Business said its index of small business optimism slipped 2.8 points in January to 91.8, the lowest reading since January 1991, when the U.S. was mired in recession."

Of course, the economic pulse of small businesses matters a great deal.  After all, it is small businesses that create the bulk of new jobs in our economy, employ about half of all private sector workers, serve as key sources of innovation, and generate more than half of nonfarm private GDP.

Bottom line: our economy is all about small business. And apparently, many small businesses are rather dreary right now in their outlook.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.