Small business thoughts on the economy

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Tune in to Wall Street, and hope exists that the economic recovery might be strengthening. But that does not seem to be the predominant feeling on Main Street.

Despite the obvious importance of Wall Street in terms of capital and credit, America very much is a nation of small businesses.

For example, according to the Small Business Administration, there were 27.5 million businesses in the U.S. in 2009. And with the latest data showing that only 18,311 firms had more than 500 employees, it means that 99.9 percent of all U.S. businesses rank as smaller — i.e., small and mid-size — enterprises. In this light, big business almost seems inconsequential.

Unfortunately, given the latest survey, this nation of small businesses remains a nation seriously lacking in economic confidence.

It’s been about a year since this column examined what small business owners think about the current state of commerce, and where they think the economy might be headed.

The latest monthly Discover Small Business Watch survey, done by Rasmussen Reports for Discover Business card, was released on March 28. In a press statement, the findings were introduced as follows: “If the overall economy is improving in 2011, small business owners aren’t feeling it. Their outlook on the direction of the economy and the climate for their particular businesses has been in decline since January, and more than half of them have rated the economy as poor for 19 consecutive months.”

Specifically, 56 percent rated the current economy as poor, 35 percent as fair, 6 percent good and 3 percent excellent. That’s a striking gap of 91 percent saying poor/fair versus a mere 9 percent declaring the economy as good/excellent.

Unfortunately, these small business owners are not optimistic about the trend either. In fact, they’ve gotten more pessimistic. The 54 percent in March who said the economy is getting worse was up from 41 percent in February. Meanwhile, only 27 percent said economic conditions were improving, with 15 percent saying they were the same.

And the pessimists still hold the field in terms of their own businesses over the coming six months, with 42 percent saying conditions are getting worse, 30 percent getting better, and 24 expecting condition to remain unchanged.

That pessimism naturally translates into restraint on business investment. Again over the coming six months, 40 percent expect to decrease spending on business development, with 29 percent expecting to increase such spending and 27 percent saying no change. In an already-poor business investment climate, that points to more than two-thirds of small firms looking to either cut or leave spending on business development unchanged.

As for hiring in coming months, the overwhelming answer from small businesses is status quo. They expect to make no workforce changes — 75 percent saying they would doing no hiring — compared to 11 percent saying they would be laying off workers and another 11 percent expecting to hire more workers. Given that firms with fewer than 500 employees account for roughly two-thirds of net new jobs, that’s a recipe for continuing anemic job creation across the economy.

It’s obvious that the economic mess that began in 2008 has taken a heavy toll on many entrepreneurs. Seventy-seven percent of small business owners said their profitability suffered over the past three years. Of that group, 57 percent said they have not experienced a sustained recovery, versus 21 percent who have.

Ryan Scully, director of Discover’s business credit card, added: “Our surveys have shown that the economic events of the recent past have hit small businesses hard, and many are still struggling to sustain an individual recovery of their own. Nearly a third of small business owners told us they have contemplated going out of business sometime during the past two months, which is up from spring of 2008.”

Given the depth of the recession and the lackluster recovery, perhaps we shouldn’t be too surprised by any of this. After all, from late 2007 to the middle of 2009, the nation suffered under one of the worst recessions since the Great Depression — with quarterly real GDP growth averaging -2.8 percent. And growth during the subsequent recovery has averaged only 2.9 percent. Keep in mind that real GDP growth has averaged 3.4 percent since 1950, and during non-recession years, growth averaged 4.5 percent.

Add in lurking problems that would negatively affect future growth. Consider energy, for example. Given the ongoing unrest in North Africa and the Middle East, uncertainty reigns over oil and gas prices. Throw in the reality of rising inflation due to two-and-a-half years of loose monetary policy by the Federal Reserve, and energy cost concerns only mount.

The Rasmussen survey reported that 76 percent of small business owners said rising gas prices have affected profitability, with 90 percent of those saying the impact was negative or very negative.

In the end, public policy clearly affects whether small businesses merely survive or thrive. On energy, for example, more regulation, high taxes, inflationary monetary policy, and limiting domestic energy exploration and production drive up costs and work against small businesses. Change those policies, and that will help change the attitudes of the innovators and job creators, i.e., the entrepreneurs, and boost our economic recovery. The same goes for tax, spending and regulatory policies across the board.

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council, can be reached at rkeating@sbecouncil.org. His new book is titled Warrior Monk: A Pastor Stephen Grant Novel.