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Small businesses less confident about profits, job creation

April 10, 2012|By Don Lee

Washington — After six months of improving confidence, the mood of small businesses in America turned sour in March – with plans for job creation and expectations for sales growth, profits and business conditions all falling from the prior month.

The new report Tuesday from the National Federation of Independent Business, a leading small-employer lobbying group, adds to the worries after the disappointing job growth in March, when the economy generated just 120,000 net new jobs.  

Consistent with the national jobs reports, the federation's survey found that actual hiring over the last few months were the best since early last year. But the hiring outlook for spring is decidedly less favorable: The survey showed a drop in both the percent of business owners with openings and those planning to increase the number of workers.

Their top concern is still weak sales, but with the recent jump in oil prices, more small employers also reported worries about a buildup of inflation. “With an outlook like this, fewer owners will bet their hard-earned capital on the future,” said William Dunkelberg, the federation’s chief economist, who analyzed the survey results.

The group’s dour report is bad news: In past recoveries, start-ups and other small firms far and away led the pack in job creation. But this time around, data indicate, small employers have been hemmed in not only by sluggish sales, but tight credit and a general lack of optimism.

Consider the latest data on employment by firm size from the Labor Department:  Between the second quarter of 2010 and the second quarter of 2011, employers with 50 or fewer workers accounted for 593,000, or about 27%, of the 2.18 million total net job gains during that period. In a comparable period following the 2000-2001 recession, firms with 50 or fewer workers were behind 39% of the net new jobs, according to Moody’s Analytics.

The difference is even more striking when comparing the current recovery with the very strong recovery following the early 1980s recession, when employers with fewer than 100 workers accounted for the vast majority of the net job gains.

One big factor behind the lagging hiring and performance by small businesses is the housing market. NFIB's and other studies indicate that many entrepreneurs in the past relied on real estate to finance start-ups and growth in their business, but the housing collapse took away that option for many owners.

What’s more, even as exports have grown solidly and helped boost manufacturing and profits for larger companies, most small firms don’t sell goods abroad and hence can't cash in on the booming demand from developing economies.

“If all small businesses were publicly traded,” said Dunkelberg, “the markets would look far less exuberant based on reported profit trends.”

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