Weathering the Storm: Things Have Been Better for the Nation's Entrepreneurs, but According to a New Survey, Small Business Is Holding Its Own

BusinessWeek Online | November 15, 2002

Growth in the U.S. hasn't set any records in 2002 and is likely to come in at around a modest 3% by yearend, according to most estimates. But when it comes to identifying the economy's bright lights, the nation's small businesses are entitled to take a bow.

By just about any yardstick, the small-business sector in the U.S. has defied the uncertain trends of a year alternately chilled by the shadow of terrorism and rattled by the psychological impact of corporate scandals. Moreover, it has done so with its characteristic optimism relatively intact.

So says the October survey of small-business attitudes conducted by the National Federation of Independent Businesses (NFIB), which found only a slight dip in expectations for an ongoing recovery. According to the study, the net percentage of small-business owners anticipating an improvement in economic conditions declined by just 0.6%, to 31% -- not enough to alarm NFIB Chief Economist William Dunkelberg, who actually sees it as a positive indicator in line with historical norms.

"This is not a depressed outlook," explains Dunkelberg. "This indicator always reaches its highest levels at the beginning of a recovery, and then fades as the recovery progresses." In that light, the minimal decline can be seen as an ironic indication that the stop-start recovery is finally gaining traction.

SALES DOWN, PROFITS UP. 

 The NFIB report also demonstrates how entrepreneurs have adjusted to the new business climate: While sales trended down in October, profits moved in the opposite direction, with the survey finding earnings had risen by an average of 3%. The explanation? Simply put, small businesses are doing more with less, taking advantage of lower material costs, and benefiting from what the report describes as "usual seasonal change." Says Dunkelberg: "Reports of favorable earnings trends haven't looked this good since 2000."

The report's big surprise was the increase in payrolls, with 19% reporting higher labor costs, vs. the scant 6% that were able to hike the price of their goods and services. Meanwhile, overall employment in the small-business sector was down by around one-tenth of one percent, the 17th such decline in the past 18 months.

"Output is rising," says Dunkelberg, "but at this stage of the recovery, firms are using excess labor capacity to get the job done. Overall, there is little incentive to increase employment when the current labor force -- the best workers retained during the recession -- is still underutilized and sales growth is modest."

CHEAP CREDIT. 

 The most upbeat news: Few small businesses are encountering problems borrowing money, with just 3% reporting that credit is hard to find. With interest rates at an all time low, money is cheap -- and reported borrowing activity is at levels comparable with the tech boom.

The big headache for U.S. entrepreneurs was the cost and availability of insurance, which 19% of surveyed entrepreneurs listed second only to taxes as the bane of their professional lives.

All in all, according to Dunkelberg, it's a qualified thumbs-up for the U.S. small-business economy. "The October NFIB survey shows improved hiring plans, steady CAPX [capital expenditure]...and continued strong plans to add to inventory," he writes. "None of these indices are 'supercharged,' so expected growth is moderate." As a report card might put: Working hard, but improvement expected.