The Wall Street Journal
A yawning gap has opened in the early stages of the economic recovery between big companies and small businesses, with the former enjoying access to credit and growing global markets and the latter hurting badly on both fronts.
This dichotomy will likely slow the recovery, since smaller firms are typically quick to hire and invest in an upturn.
The dour attitude of small business stands in contrast to indications of a broader recovery. The U.S. economy grew at a 5.9% annual rate in the fourth quarter as it shook off the recession. But a revival in optimism by smaller companies has been absent.
The National Federation of Independent Businesses' Small Business Optimism Index fell 1.3 points to 88.0 last month and has remained in a narrow band between 86.5 and 89.3 since April 2009. That range is below where it was in the depths of the early 1990s recession.
Meanwhile, big companies have seen a snap-back in sales and profits. Companies in the S&P 500-stock index saw sales of $2.182 trillion in the fourth quarter of 2009, up from $2.021 trillion among the exact same 500 companies a year earlier, according to Thomson Reuters. Earnings among the group tripled to $156.2 billion over the period.
"We've clearly seen a substantial improvement in the large business sector," said Jan Hatzius, an economist with Goldman Sachs Group Inc. "On the other hand, smaller companies seem to have done quite a bit worse."
There is little sign of recovery at Twin Forks Overhead Doors, which sells and installs high-end garage doors. Owner Steven Hall said the Riverhead, N.Y., firm had average annual sales of about $3.5 million until 2008, the first full year of recession. His biggest projects soon started falling through and annual sales dropped by about $1 million last year.
"My business relies 100% on consumer confidence," said Mr. Hall. "They want to make sure they can spend that money."
Small businesses accounted for a larger-than-normal share of job losses in the recession, and have been slower to recover. They racked up 45% of the job losses during the recent recession, according to David Altig, head of research at the Federal Reserve Bank of Atlanta. During the 2001 recession, by contrast, small businesses accounted for just 9% of the job losses.
There are many reasons small businesses aren't getting traction. Smaller firms are more exposed to the U.S. economy, while bigger firms get larger shares of sales from overseas economies such as China and India, where growth is still robust.
Another problem is credit. While there is mounting evidence that small-business loans have become easier to come by in recent months, credit still remains tight. In the most recent NFIB survey, 34% reported regular borrowing in February, which was a two-point improvement from the previous month but still low by historical standards.
The lending squeeze is especially hard for small firms like Pittsburgh Foundry & Machine Co., a family-owned metal casting company. Small manufacturers often buy large amounts of raw materials like steel, yet it can take up to six months to get paid for their deliveries, leaving the companies in a bind. The large capital needs and high fixed costs can make banks leery of lending to such companies, even when they have contracts.
Last month, Pittsburgh Foundry & Machine landed a contract to make ship parts for the U.S. Army, but couldn't get the several hundred thousand dollars it needed to finance the purchase of steel, iron and bronze to build parts ranging in size from a few pounds to three tons. So the company's owners used their own money to buy the metal. "The banks said they didn't want to be next in line in an investment like that," said company Vice President Sean Smith. "We're doing it ourselves out of our own pocket."
This dichotomy will likely slow the recovery, since smaller firms are typically quick to hire and invest in an upturn.
The dour attitude of small business stands in contrast to indications of a broader recovery. The U.S. economy grew at a 5.9% annual rate in the fourth quarter as it shook off the recession. But a revival in optimism by smaller companies has been absent.
The National Federation of Independent Businesses' Small Business Optimism Index fell 1.3 points to 88.0 last month and has remained in a narrow band between 86.5 and 89.3 since April 2009. That range is below where it was in the depths of the early 1990s recession.
Meanwhile, big companies have seen a snap-back in sales and profits. Companies in the S&P 500-stock index saw sales of $2.182 trillion in the fourth quarter of 2009, up from $2.021 trillion among the exact same 500 companies a year earlier, according to Thomson Reuters. Earnings among the group tripled to $156.2 billion over the period.
"We've clearly seen a substantial improvement in the large business sector," said Jan Hatzius, an economist with Goldman Sachs Group Inc. "On the other hand, smaller companies seem to have done quite a bit worse."
There is little sign of recovery at Twin Forks Overhead Doors, which sells and installs high-end garage doors. Owner Steven Hall said the Riverhead, N.Y., firm had average annual sales of about $3.5 million until 2008, the first full year of recession. His biggest projects soon started falling through and annual sales dropped by about $1 million last year.
"My business relies 100% on consumer confidence," said Mr. Hall. "They want to make sure they can spend that money."
Small businesses accounted for a larger-than-normal share of job losses in the recession, and have been slower to recover. They racked up 45% of the job losses during the recent recession, according to David Altig, head of research at the Federal Reserve Bank of Atlanta. During the 2001 recession, by contrast, small businesses accounted for just 9% of the job losses.
There are many reasons small businesses aren't getting traction. Smaller firms are more exposed to the U.S. economy, while bigger firms get larger shares of sales from overseas economies such as China and India, where growth is still robust.
Another problem is credit. While there is mounting evidence that small-business loans have become easier to come by in recent months, credit still remains tight. In the most recent NFIB survey, 34% reported regular borrowing in February, which was a two-point improvement from the previous month but still low by historical standards.
The lending squeeze is especially hard for small firms like Pittsburgh Foundry & Machine Co., a family-owned metal casting company. Small manufacturers often buy large amounts of raw materials like steel, yet it can take up to six months to get paid for their deliveries, leaving the companies in a bind. The large capital needs and high fixed costs can make banks leery of lending to such companies, even when they have contracts.
Last month, Pittsburgh Foundry & Machine landed a contract to make ship parts for the U.S. Army, but couldn't get the several hundred thousand dollars it needed to finance the purchase of steel, iron and bronze to build parts ranging in size from a few pounds to three tons. So the company's owners used their own money to buy the metal. "The banks said they didn't want to be next in line in an investment like that," said company Vice President Sean Smith. "We're doing it ourselves out of our own pocket."
