The year 2000 witnessed strong growth in inflation-adjusted aggregate output, corporate profits, and employment. Between 1999 and 2000, real gross domestic product rose by 5 percent, corporate profits rose by 10.5 percent, and the U.S. economy added some 2.4 million new jobs as the unemployment rate fell to just 4.0 percent. The federal budget posted its third consecutive annual surplus in 2000, rising by nearly 90 percent between 1999 and 2000 alone. The year also showed some signs of increases in the average price level, as indicated by a 3.4 percent increase in the consumer price index (CPI). This, among other signs of upward pressure on input and output prices, prompted measures by the Federal Reserve Bank to try to slow the economy to a sustainable growth rate. Indeed, the prime rate rose by more than 1 percentage point to approximately 9.23 percent in 2000. Reacting in part to this Fed tightening, the stock market posted net losses for the year. Losses in the tech-laden NASDAQ were exacerbated by disappointing earnings results. Of special relevance to generally labor-intensive small businesses, the total compensation cost index rose by 4.4 percent between 1999 and 2000, exceeding the inflation rate.
Growth in the Number of Businesses
The number of businesses continued to increase in 2000, and bankruptcies
declined for the third consecutive year. Small firms employed about 51 percent
of the private sector economy and accounted for 75 percent of net new jobs,
according to the most recent available data.
Research on Businesses Owned by Women, Minorities, and Veterans
Small businesses are an important means by which women, minorities, and
veterans enter the American economic mainstream. According to data in the
Census Bureau's Survey of Women-Owned Business Enterprises (SWOBE),
the number of women-owned firms totaled 5.4 million in 1997, with 7.1 million
employees and $818.7 billion in receipts. Women-owned firms made up 26
percent of the nation's 20.8 million nonfarm businesses and 4.4 percent of the
$18.6 trillion in receipts of all businesses in 1997.
The Census Bureau's 1997 Survey of Minority-Owned Business Enterprises (SMOBE) suggested large increases from 1992 to 1997 in minority-owned businesses; most of which are small. The data for the first time included C corporations, making the totals more comprehensive than those collected in the last previous economic census in 1992. Excluding C corporations, the number of American Indian- and Alaska Native-owned businesses increased the most, by an estimated 84 percent, and their receipts grew by 179 percent. The number of businesses owned by Asians and Pacific Islanders rose 30 percent, and their total receipts climbed by 68 percent. Hispanic- and Black-owned businesses increased their numbers by 30 percent and 26 percent and their receipts by 49 percent and 33 percent, respectively. In comparison, the total number of U.S. firms other than C corporations was up 7 percent, and their total receipts were up 40 percent. In 1997, there were 1,199,896 businesses owned by Hispanics, 912,960 owned by Asians and Pacific Islanders, 823,499 owned by Blacks, and 197,300 owned by American Indians and Alaska Natives. Their shares of the 20.8 million U.S. firms were 5.76 percent, 4.38 percent, 3.95 percent, and 0.95 percent, respectively.
An estimated 1.6 million of the 11.6 million individuals with some selfemployment earnings in 1999, or 13.9 percent, were veterans. The Veterans Entrepreneurship and Small Business Development Act of 1999 requires the collection and reporting of additional data on businesses owned by veterans. New research is under way to address the new requirements.
Small Business Employment
The formation and dissolution of businesses results in job turnover and allows the economy to evolve. But employment changes associated with business openings and closings can often cancel each other out, giving the impression of a static business environment. In the recent past, employment gains from firm startups and expansions have overwhelmed job losses from firm closings and contractions, so the effect on employment has been a net increase.
Small firms employed about 51 percent of the private sector economy in 1998, a slight decline from 55 percent in 1990. This share changed less than 1 percent in any one year over the 1990-1998 period.
Small firms are responsible for about 75 percent of the net new jobs. Total private employment in the United States grew by 2.2 percent between 1999 and 2000. Once again, the services industry division accounted for the greatest absolute growth in employment, while the manufacturing industry division actually saw a loss of 83,000 jobs between 1999 and 2000.
Business Income
Corporate profits rose by a lofty 10.5 percent, from $856 billion in 1999 to $946 billion in 2000. Nonfarm proprietors' income, sometimes used as a proxy for very small business' profits, rose from $638 billion in 1999 to $688 billion in 2000, an increase of 7.8 percent.
Financing of Small Businesses
Small businesses use a variety of financing sources, from internal resources such as their own savings and retained earnings, to external sources, such as informal loans from associates, loans from banks and other financial intermediaries, and financial instruments in the public markets.
With the U.S. economy slowing significantly in the second half of 2000, a pause in borrowing by small businesses resulted in little growth in borrowing over the course of the year. Borrowing by small firms in the debt market stayed at a rather high level, but increased little over the previous four years. Bank consolidations continued to affect the relative importance of banks of various sizes in small business lending. While many of the multi-billion-dollar banks that emerge from these consolidations continue to be active small business lenders, the increasing concentration of assets in larger financial institutions with much lower ratios of small business loans to total business loans deserves continuing scrutiny.
Borrowing in the equity markets continued to increase significantly in 2000. While small company initial public offerings (IPOs) declined considerably, IPOs by venture-backed industrial firms remained very active. Most signifi - cantly, venture capital financing grew by more than 50 percent in 2000 over the record 1999 level. Venture capital disbursements reached $100 billion.
Procurement from Small Firms
The federal government spends more than $200 billion a year on the procurement of goods and services. Small firms annually receive more than 20 percent of all prime contract dollars and another 10-14 percent of the federal procurement pie in subcontracts. Large firms receive more than 60 percent of all federal procurement dollars.
In FY 2000, small businesses won $76.3 billion in federal contract awards, including $45.3 billion in direct contract awards from the federal government and an additional $31.3 billion in subcontracts from prime contractors working directly for the federal government. The $76.3 billion small business total represented 34.5 percent of the $221.2 billion in contract actions awarded by the federal government in FY 2000, a decrease from the previous year's 35.6 percent small business share. (The $31.3 billion in subcontracts represented about 39 percent of dollars subcontracted under Federal prime contracts.)
The percentage of prime contracts awarded in FY 2000 to small socially and economically disadvantaged and women-owned businesses remained at levels consistent with FY 1999. In FY 1999, minority-owned firms were awarded $12.1 billion in prime contracts or 6.0 percent of total federal contract dollars; the dollar amount increased to $13 billion in FY 2000 and the share decreased slightly - to 5.9 percent. Women-owned firms were awarded $4.5 billion in prime contracts or 2.25 percent of federal buys in FY 1999; total dollars to women-owned businesses increased to $4.9 billion, but the women-owned share decreased to 2.20 percent in FY 2000.
Federal contract markets continue to change at an unparalleled pace. Two laws, the Federal Acquisition Streamlining Act (FASA), enacted in 1994, and the Federal Acquisition Reform Act (FARA) or the Clinger-Cohen Act, enacted in 1996, continue to have an unprecedented impact on the federal procurement process. Additional reforms were enacted in December 1997 in the HUBZone and contract bundling legislation.
The Small Business Administration's Office of Advocacy has been analyzing the use of such acquisition tools as credit card purchases, federal supply schedules, and contract bundling to determine their impact on small business purchases. For example, data show that agencies increased their credit card purchases from about $5 billion in FY 1997 to nearly $13 billion in FY 2000. Over the same period, the number of contract actions doubled from 11 million to nearly 22 million. Preliminary data show that the small business shares of credit card purchases have historically been the beneficiary of small purchase orders, but preliminary reports suggest that their share of federal purchases by credit card may be lower.
Conclusion
Small businesses continue to be an important part of the American economy, contributing new jobs, innovations, and opportunities for minorities, women, and immigrants to enter the economic mainstream. Small firms fared reasonably well in the economy of 2000, continuing to create new businesses and new jobs at high rates. Financing was available for most small business needs, although the end-of-year slowing encouraged caution in many business sectors. The small business share of federal procurement dollars, although down slightly from FY 1999 percentages, still reflected growth in dollar terms.
