Last week, the National Small Business Association (disclosure–I am the Immediate Past Chair of this terrific and effective non-partisan organization) released its semi-annual NSBA small business survey. The survey showed that small businesses are increasingly pessimistic about the economy’s immediate future (88% thought the economy was going to be either worse or no better in the coming year) and were not making plans to engage in full-bore hiring (less than a third thought they would be increasing their workforces at all). In previous economic downturns, small business hiring has led the nation out of the doldrums. Why is this one different?
In my view, there are several factors. The most important are lack of capital availability, dramatic uncertainty and doubts about consumer demand. Significant other factors are currency and trade issues, foreign economic problems and regulatory costs of doing business. With the devaluation of real estate and the failure of our financial system, money to expand is hard to come by. Business contraction generally throws off cash as inventories are sold and not replaced. Expansion does the opposite, as inventories are created before they are sold. Banks and other lenders have been especially reluctant to lend for working capital, and real estate collateral is fully tapped. Our reliance on credit ratings as a proxy for likelihood of getting repaid means that businesses that have survived since 2007 are probably not regarded as good credit risks and won’t get the resources they need to make a full recovery.
Every recent survey by NSBA has revealed that small businesses are uncertain what the government is going to do to them. Federal agencies are proposing burdensome new rules, the Patient Protection and Affordable Care Act is taking fire and may not survive in its current form (which is not all that clear itself), and the debt issue may or may not lead to new taxes, reduced spending or both. The crystal balls of entrepreneurs, usually revealing bright futures for those with good ideas and a strong work ethic, are opaque. That does not encourage expanding commitments to add new employees.
Consumer demand is unpredictable. Consumers look at their future employment prospects and don’t see reason for optimism. They hunker down and do not spend freely on the products and services of small businesses. Small businesses look at consumers and do not see lots of demand, so they hold off on hiring. Consumers see that and do not spend and so on in a destructive feedback loop. See my Comment on NBC Nightly News on August 10.
The lack of leadership in our nation’s and states’ capitals, the 2011 foreign economic and social problems, the burdens on our businesses and the failures of our support systems–from education to physical infrastructure–all compound the problem. The way out is not so clear. One thing ought to be obvious, however: our employment problems will not be solved without a restoration of national purpose. That purpose must include renewed support for small business–and that means real support, not just lip service.