SMEs bounce back on lending and consumer confidence

New York: Ultimate Golf Seating in Elkhart, Indiana, has hired five workers to expand its staff to ten as orders increase for its custom-made golf-cart seats, which start at $745 (Dh2,734).

"Demand is starting to improve," co-owner David Vahala said. "We're definitely making a turn this year."

Small businesses are bouncing back as access to lending eases and consumers ramp up purchases. This would be welcome news for policymakers struggling to spur the world's largest economy and bring down unemployment stalled near a 26-year high, because small companies account for 60 per cent of job creation, according to the Federal Reserve.

"The winds are changing in favour of small businesses," said Ryan Sweet, senior economist at Moody's Analytics Inc. in West Chester, Pennsylvania. "It is a gradual improvement, but they're definitely more active than they were a few months ago. As these businesses re-engage, it'll put the recovery on a more solid footing."

The Russell 2000 Index, which tracks the small-cap segment of US equity markets, has risen 19.6 per cent since August 31, compared with a 14.4 per cent gain in the Standard and Poor's 500 Index. The outperformance signals investors' rising confidence in smaller companies and those that cater to the sector.

The shift is echoed in announcements by larger companies ranging from SAP AG, the world's largest maker of business management software, to Dell Inc., the world's third-biggest personal-computer manufacturer. Charlotte, North Carolina-based Bank of America Corp., the largest US bank by assets, last month said it plans to hire 1,000 employees in the next year to focus on companies with sales of $3 million or less.

Small-business sentiment also is healing, according to the optimism index of the National Federation of Independent Business in Nashville, Tennessee, which jumped in October to a five-month high.

"This looks to us like the start of a serious improvement," Ian Shepherdson, chief US economist at High Frequency Economics Ltd. in Valhalla, New York, said in a note to clients. "We have long argued that a proper recovery in the broad economy requires a sustained improvement in the small-firm sector, which employs half the workforce."

Slow progress

A month earlier, Shepherdson had written that September NFIB data indicated "progress is slow and small firms remain deeply depressed."

John Ryding and Conrad DeQuadros of RDQ Economics LLC in New York also were encouraged by the NFIB's October report, which showed rising expectations for sales, better business conditions six months from now and improvement in hiring plans.

"Perhaps, at last, the small-business sector has a pulse, albeit a faint one," the economists wrote in a November 9 note to clients. "We expect small-business conditions to improve over the coming months."

Walldorf, Germany-based SAP's small- and medium-size enterprise business "performed quite well in the third quarter," Bill McDermott, co-chief executive officer, said on an October 27 conference call with analysts. Dell, in Round Rock, Texas, that sales to these customers grew 25 per cent in the second quarter from a year ago, after a 19 per cent gain the prior three months.

One source of relief for small companies is the thaw in lending, reinforced by the Fed's quarterly survey of senior loan officers. Fed officials have held more than 40 meetings this year to try to reverse the drop in credit. Citigroup Inc. which claims 2,500 of the world's 3,000 largest corporations as clients, says it also is targeting US companies with less than $20 million of annual sales, and plans to hire about 200 bankers by the end of 2011 to court them. That would bring the number of small-business bankers to about 500, or one for every two North American branches.

The revival in stock portfolios also helps by giving consumers the wherewithal to spend, said Ultimate Golf Seating's Vahala, who is setting his sights on southern California, Arizona, Texas and the Carolinas after his first year of selling luxury seats in retirement communities such as The Villages in Florida.

"More retired customers are saying, ‘Now I can buy this seat; it's been on my wishlist for some time,'" said Vahala, 52. He sees the possibility of adding "one or two people through the end of this year and some more next year as the sales come in."

He and his brother, Dan, also run Vahala Foam Inc., a 20-year-old company whose products go into car seats, recreational vehicles, boats and furniture. Their business, which cut staff to 65 in 2009 from about 120 before the recession, has 80 workers now and spent about $100,000 on new equipment this year. Hiring and investment would have been higher in normal years, Vahala said.

Business is "coming back nicely," he said, adding that workers have resumed 40-hour weeks after reduced shifts in 2009. "I'm still a little gun-shy. I wonder what's going to happen this winter, but I feel we'll come through it. Next year will be better."

A pickup at small companies "could be pretty dramatic for stocks," said Joseph Kremer, director of mid-, small- and micro-cap value strategies in Cleveland for Fifth Third Asset Management, which oversees about $20 billion.

Foreign sales

"A renaissance in small, private businesses would ripple through the economy," he said. Companies that sell to US customers "would suddenly be seeing more growth," while so far in the recovery, "most of what the market's been hanging its hat on is industrial demand, a lot of it fed by foreign sales."

Kremer said a general-merchandise discount retailer such as Dublin, Georgia-based Fred's Inc. may do well because some consumer spending "would be ginned up at the lower end." Companies like Consolidated Graphics Inc., a commercial printer in Houston, also might benefit from an increase in small business demand for products such as mailers, business cards and catalogues, he said.

Small companies have added jobs in every month since March, including a 21,000 gain in October, according to ADP Employer Services in Roseland, New Jersey, and St. Louis-based Macroeconomic Advisers. Medium-sized businesses employing 50 to 499 people expanded by 24,000, and large companies with more than 499 workers cut staff by 2,000.

"The momentum in business activity is up again, and that probably reflects the improvement in small business as well," said Jim O'Sullivan, chief economist at MF Global Ltd. in New York. "It increases the likelihood that a true, self-sustaining recovery is under way."

The lack of an industrywide measure makes it hard to gauge progress at small, privately held companies. The Small Business Administration defines small companies as those with fewer than 500 employees.

President Barack Obama signed small-business legislation in September that included $56 billion worth of tax cuts over the next 12 months and a $30 billion programme to boost lending.