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Business is better this year, the owner of the gourmet Two Smart Cookies shop in St. Paul, Minnesota, tells me. The Denver Post (October 8, 2011) reports business is down 10 percent at the Big Hoss Bar-B-Q Steakhouse, but the owner says that’s not bad in today’s economy. In Texas, a Star-Telegram (July 23, 2011) story suggests business is good at the Purple Heart Pawn & Gun shop—but whether that is good or bad news for small business is an open question. One survey of small businesses indicates pessimism, while another strikes a note of optimism.
So what's the real story?
To get a better understanding of the prospects for 2012, let’s look at:
- A spectrum of hard numbers and statistics
- The debate over the “new normal” versus the traditional business cycle
- Some professional analyses
- Advice for small and medium-sized businesses in 2012
What the numbers say
Small and medium-sized businesses generally did not have a great year in 2011. A bifurcated recovery brought increased income and employment for those with highest incomes, but income stagnation and unemployment at middle and lower levels. Similarly, in the business sector, corporate profits rose steadily for big businesses, while the small and medium-sized business sector struggled for traction, along with their customers. The commonly watched economic indicators illustrate this.
Bankruptcies
In a July 2011 report published by Equifax small business bankruptcy filings have been falling steadily since the second quarter of 2009. That sounds like good news, even though the rate of decline slowed somewhat in mid-2011. Personal bankruptcies also fell steadily and significantly during 2010 and the first quarter of 2011, but then rose slightly in the second quarter.
Has the small business sector shaken out, with the more precarious businesses already failing and the survivors getting stronger? Is this a pause before another storm? Or is a higher rate of bankruptcy filings just the way the nation's economic life will look from here on in?
With economic news under the microscope, it’s hard not to grasp at every number and try to squeeze it for meaning. But even in uncertain times, perspective is crucial. Take the concern over a slowing rate of decline in small business bankruptcies, which went from 324 in the first quarter of 2011 to 321 in the second quarter. Putting the numbers in perspective means remembering that small business bankruptcies numbered fewer than 200 on the Equifax index before 2008, then soared to a high of 461 in 2009. So while the 2011 numbers may not be great, they are more than halfway back to pre-recession levels, nowhere near the 2008–2009 peaks, and still headed in the right direction.
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Consumer spending
In a report published by the Bureau of Economic Analysis, consumer spending started rising, albeit slowly, in 2009, as personal income also began to recover. Despite the upward trend, businesses continued to worry over consumer confidence and sales in 2011. Concern over sales consistently trumps all other small business worries, including credit, taxes, and government regulation.
Unemployment
Unemployment numbers are another crucial indicator for small business. People who are unemployed don't spend a lot, and people who fear for their jobs also tend to cut spending.
Unemployment rates hovering around 9 percent don't tell the whole story. The more revealing number includes people who are employed part time because they can’t find full-time work, “discouraged workers” who have given up looking for employment, and those who have looked for jobs in the past year and want to work, but haven’t been actively searching in the month of the labor survey. Taken together, these “marginally attached” workers added about 7 percent to the unemployment total in any given month during 2011.
While the number of people without jobs is still uncomfortably high, the employment rate is even more worrisome. The recession cost about 8.75 million jobs from January 2008 to February 2010. Recovery has not been nearly as rapid, with only 1.94 million jobs recovered by the end of July 2011. In a June 20, 2011, article on “Small Business Trends” web site, Case Western Reserve University economist Scott Shane writes, 63 percent of the U.S. population was employed at the end of 2007, but only 58 percent had jobs in May 2011. “To have the same fraction of Americans working as we had before the recession,” Shane writes, “10.8 million more Americans would need to be employed.”
Gross domestic product
Gross domestic product (GDP) is a general measure of economic health, and the 2011 figures were troublesome. According to data released by the Bureau of Economic Analysis on September 29, 2011, the annualized rate of growth was only 0.4 percent in the first quarter, and
1.3 percent in the second quarter. At the end of 2010, economists had predicted a growth rate of about 3 percent, and failure to make that number dragged down business, political, and consumer confidence.
On the other hand, business growth could still be seen in many sectors. A September 2011 report from Institute for Supply Management noted that manufacturing was still growing, though more slowly than in the preceding year. In fact, by the middle of the year, both manufacturing and non-manufacturing sectors, as measured by the Institute's Purchasing Managers' Index (PMI) and Non-Manufacturing Index (NMI) indices, showed 24 months of consecutive growth. That's a pretty solid growth curve, especially given the history, in recent decades, of declining U.S. manufacturing jobs and movement of manufacturing overseas. While U.S. manufacturing is looking better, that has not translated into lots of jobs, as many industries have learned to produce more with fewer workers.
Corporate profits
Corporate profits are also part of the equation for predicting 2012 prospects. In 2010, U.S. corporate profits rose by 37 percent, and continued to increase in 2011.
“Corporate earnings are at all-time highs,” Eric Bleeker confirms in an article he wrote about corporate stocks for The Motley Fool (July 2011). “Perhaps most tellingly, that earnings figure would be an all-time record; finally passing record earnings seen in mid-2007 at a time when phony profits from the financial sector were fueling growth.”
While profits are up, the good news is not uniformly distributed. Small business recovery remains closely tied to consumer confidence and spending, which will not fully recover until employment numbers rise significantly. For now, recovery has meant a slowly rising economic tide that is lifting mainly the big boats. Is this the shape of the future, or will the gradual recovery, in the end, mean a full recovery for the small business sector, too?
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New normal versus the business cycle
With permission from the Public Information Office, the National Bureau of Economic Research publishes a chart titled “U.S. Business Cycle Expansions and Contractions,” which lists dozens of recessions, dating back to the mid-19th century. The economic cycle is characterized by a period of growth, followed by a recession, followed by renewed growth. Over the long term, the trend is upward. Recessions and depressions may reverse economic growth, but the U.S. economy has always recovered and grown even bigger in normal times.
This time around, some insist that the economic outlook is fundamentally different, and that the return to normal will be a “new normal” of permanently worse economic conditions.
The Pacific Investment Management Company (PIMCO) helped popularize the term. They predicted that the post-recession U.S. economy would be permanently worse than it was prior to 2008—permanently higher unemployment, lower standard of living, and lower GDP and corporate profits.
Across the country, pundits and journalists latched on to the term. In a 2009 article titled, “Finance: Americans Adapt to the ‘New Normal’,” ABC News declared, "It’s a world of ‘new normals,’ with more belt-tightening, less income, and, in many cases, a newfound gratitude for the most basic human comforts: family, home, and health.”
Are we in a new normal of permanently lowered expectations, or have we heard this before?
The new normal has been invoked repeatedly during previous economic downturns. Bloomberg Businessweek's Roben Farzad points out that in 1939, New York Mayor Fiorello LaGuardia urged people to realize the depression was permanent, “not a temporary depression but a New Normal.” Forbes columnist John Tammy noted that, “The 1970s consensus was that powerful economic growth and healthy stock markets were a thing of the past, and the new normal would be inflation and high unemployment.”
Characterizing the recession as an adjustment that leads to a new normal makes a psychological and political difference. Psychologically, invoking the new normal increases a sense of inevitability. If larger profits for big business or a widening wealth gap are simply a new normal, then small businesses and most individuals must lower their expectations.
Business cycles, on the other hand, can be predicted, and affected, by individuals, businesses, and governments. Cycles imply there are lessons from the past and remedies that have worked before to help businesses and individuals weather the storm. Understanding the current situation as part of a business cycle reinforces an expectation of return to a better time, rather than acceptance of a diminished future.
So are we in a new normal or a normal business cycle? Many financial professionals don’t see our current state as static or dismal. Blogging for Financial Times in January 2011, Cardiff Garcia rounds up a whole group of commentators, all of whom believe that business cycles still exist and that the new normal is neither new nor permanent.
What the professionals say
Recovery from recession looks fundamentally different depending on where individuals and businesses are located in the economy. Lower-income earners continue to feel the recession's squeeze. Business recovery is on a similar dual track.
Morgan Housel, an economic analyst at The Motley Fool, points to a big difference between small business and big business recovery. “You have really strong large, multinational corporations, and then everyone else,” says Housel. “If a small company lacks easy access to credit, and doesn’t have the reach to do business in parts of the world that are still booming, they're stuck in a mostly tepid U.S. economy that’s still deleveraging. Size has made a big difference lately.”
Some small businesses depend on personal credit, and businesses “have less financial wiggle room than big businesses that can borrow in bond market,” says Ryan Sweet, a senior economist at Moody’s Analytics.
“This is not going to be a normal recovery,” says Tony Hallada, principal-in-charge of LarsonAllen Financial, LLC. “This is different. We are in a muddle-through, long, protracted downturn.” Hallada counsels that small businesses have to hang tough for the next 12–24 months, with recovery finally solidifying in 2013–2014.
Housel posits a similarly cautious outlook for 2012: “The only group [the recession is] over for is large, multinational corporations, and maybe the top 40 percent of workers. For small and medium-sized businesses, I think you can still firmly call this a recession.”
While economic indicators may say that the recession is over, the recovery is not proceeding at an even pace, and 2012 looks like another tough year, though it’s likely to be somewhat better than 2011.
Marie Johns, deputy administrator at the Small Business Administration (SBA), agrees that small businesses were hit especially hard by the recession, but puts a positive spin on the near future. “The good news,” says Johns, “is small businesses are recovering. The private sector has created over two million jobs in the past two years, and we know much of that job creation comes from small businesses.”
Johns acknowledges there are gaps. “That’s why we launched our underserved communities initiative,” she says. She also points to a new micro-lending program launched in 2011 to provide micro-loans of $50,000 and below to small businesses.
The job of the SBA is supporting small business, so a certain amount of cheerleading is to be expected. Johns points to a range of SBA programs available to help small businesses, including the Small Loan Advantage and Community Advantage programs and support for exporters with loans and counseling. And, she says, small businesses should consider getting connected to a SBA business counselor, even if everything is going well. “Our data show that having that counselor, that knowledgeable third party makes a difference in terms of a company’s ability to grow.”
Advice for small and medium-sized businesses for 2012
While Hallada believes that solid recovery won’t happen until 2013 or 2014, he says that small businesses are in a relatively strong position. They have become leaner during the recession years. His advice for 2012? Business owners will need to “manage their euphoria when things get good and manage their fears when things get bad,” says Hallada. “Be a good risk manager. Be prepared—think about planning for lots of scenarios and be proactive, not reactive.”
Johns says, “There are some advantages to being small and nimble in an uncertain economy. Small companies can quickly adjust to compensate for quick changes in their industry, and we’ve seen that in this recession.”
Manage their euphoria when things get good and manage their fears when things get bad.
—Tony Hallada, Principal-in-Charge, LarsonAllen Financial, LLC
The Motley Fool's Housel thinks small businesses have developed successful survival strategies and should continue to use them. “Companies figured out how to become as productive as possible ever since the recession hit three years ago,” says Housel. “What’s terrible for the worker has been great for the company: businesses cut redundant workers, outsourced what was possible, and implemented information technology to get computers doing what warm bodies used to. The surge in productivity has been impressive. Even when business picks up, a lot of those productivity gains will stick around. Companies learned how to be lean and mean, and they're unlikely to go back to their old ways.”
Moody’s Sweet agrees businesses have been in a survival mode since 2007 and managed to squeeze all the productivity they could out of their workforces. He believes they will have to begin hiring again, but that the workplace has changed. “Businesses typically can shake the memory of a recession fairly quickly,” Sweet notes, as they did in 2001, “but this one is lingering and having a lasting impact on business psychology.”
Small businesses may have cut costs to the bone and survived—but most agree that it doesn’t feel good. Survival feels like running uphill, but without the cheering crowds or the certainty of rest at the finish line of marathon. At this point, there is no finish line in sight, so small businesses are just hoping the course will level out in 2012.
Mary Turck is a freelance writer, who also edits the online
Twin Cities Daily Planet.
Contact Mary at
maryturck@visi.com.