Small US businesses sidelined in recovery

Washington: In every recession over the past three decades, it has been America's small businesses those Lilliputian companies with fewer than 100 employees that stepped forward, began hiring, and pulled the country out of the mire.

Not this time. Small firms are on the sidelines, and it's not just because of tight credit from the financial meltdown, as the Obama administration and others have been saying.

Rather, a host of factors some well-recognised and others seemingly unnoticed in the national debate over economic policy are converging to restrain small-business owners from hiring.

These include the near-stagnant demand for goods and services as a result of consumers' reluctance to return to their free-spending ways; a disturbing falloff in the creation of new small businesses; the devastation of the real estate market; and uncertainty about the economic outlook at home and abroad.

"Small businesses are not hiring, and until then, we will not have a strong, sufficient recovery," said Representative Daniel Lipinski (Democrat Illinois).

Lipinski is a member of the House Committee on Small Business.

"I think this is why the economic recovery is moving very slowly," he said.

It's a historical change of major proportions.

In each of the previous three economic recoveries, small employers accounted for the vast majority of new jobs — the bulk of them coming from firms with fewer than 20 workers, according to Census Bureau data.

Between 1990 and 1993, employers with 1,000 or more workers added 258,000 jobs.

Those with 500 to 999 workers shed 102,000 jobs during that period.

But the smallest mom-and-pop operations added 860,000 jobs, census figures show.

The contrast was even more dramatic after the deep recession in the early 1980s.

However this time around, unemployment levels are worse than in previous downturns, seemingly stuck near 10 per cent, with more dismal news coming in Friday's jobless report for June.

That and other recent evidence of economic weakness have increased fears of a double-dip recession.

The fact that many small firms were seeing little increase in demand for their services and products was decisive for Scott George, owner of Mid-America Dental and Hearing Centre, which employs 55 people in the southwestern Missouri town of Mount Vernon.

"I'm not having any trouble getting money," said George, who recently got a $250,000 loan to renovate one of his buildings.

But he's not hiring more workers because of little or no growth in sales.

"If I got more people coming through the front door, then I'd need more people to take care of them," George said.

Then there was the problem of fewer small companies starting up.

The rate of business creation has fallen sharply in the past two years but had been dropping since 2005, according to the Global Entrepreneurship Monitor, a research consortium.

Data from states such as California and Florida confirmed the trend.

An ageing population may explain part of the decline. Typically, it's been people under 30 who have launched firms, but that burden has shifted to older entrepreneurs, said Julio De Castro, lead author of the monitor's US report.

"I look at the long-term trend, and it's not a positive one," he said.

And President Obama's pledges to spur small-business activity and hiring have been slow to be adopted as lawmakers fret about the federal deficit.

Jack Ablin, chief investment officer of Harris Private Bank in Chicago, said he feared the recently passed financial regulatory overhaul could impede new business formation.

In the meantime, the depressed real estate market, was exerting indirect but heavy pressure on many small firms.

Nearly all small-business operators owned their homes, according to the National Federation of Independent Business, and about half of them own all or part their companies' buildings or land.