The year 2000 was a good one for many sectors of the U.S. economy. Real gross domestic product (GDP) grew 5.0 percent and employment grew 2.2 percent, while inflation (measured by the Consumer Price Index) increased by a historically mild 3.4 percent. The increase in real GDP was the largest yearly gain since 1984. However, most of the gain was in the beginning of the year, with a leveling out during the second half of 2000. Also, while the inflation increase of 3.4 percent was low, it was a gain over the previous year and the highest rate since the end of the last recession in 1991. Hence, even though 2000 was a good year, it did not provide a lot of positive momentum for 2001.
The year 2000 built upon the momentum of economic growth in 1999. Retail sales were up almost 8 percent on an annual basis. To meet these sales, businesses increased loan amounts and capital expenditures around 10 percent, even as interest rates increased. Business growth and the labor shortage were evident in the more than 6 percent increase in compensation of workers, but with productivity rising around 4 percent, businesses saw healthy financial returns. Nonfarm proprietors' income increased by about 8 percent, corporate profits by 10 percent.
The healthy financial state of the economy resulted in an increase of more than 10 percent in federal tax receipts and an extraordinary 90 percent increase in the annual federal surplus. This positions the federal government to react to and try to counter a potential future downdraft in the economy.
But the fire was still burning for plenty of new entrepreneurs in 2000. Based on U.S. Department of Labor and U.S. Census Bureau data, Advocacy estimates that there were 612,400 new employer firms in 2000. Times of growth often present opportunities elsewhere for owners of struggling firms, and an estimated 550,000 business terminations (or closures) occurred during the year. Business births increased by 4.2 percent from the previous year, surpassing business deaths, up by 3.5 percent. Few of the closures resulted in bankruptcy; business bankruptcies numbered only 35,219, an all-time low.
Business turnover, often an indicator of economic growth as new endeavors replace outmoded operations, was high in the western states. The state of Washington had the highest rates of both firm formation and firm termination. Nevada and Utah were in the top five in both categories. Colorado businesses also did well and grew without much replacement: Colorado was in the top five for new firm formation and the lowest five for firm terminations.
The net of births and deaths produced an estimated increase in the number of employer firms. New employer firms rose to an estimated 5.8 million in 2000—up from the 1999 level of 5.7 million. But the number of firms consisting of just the owner declined during the year. The number of primarily self-employed individuals declined to 9.9 million from the prior year's 10.1 million. This decline of 1.8 percent was not entirely unexpected, as the labor market was tight and provided opportunities elsewhere.
The employment opportunities of expanding and new firms led to a private sector employment increase of just over one million workers. This increased the private sector work force to 118.2 million for 2000, with 68 million of these working for small firms. Most of the private sector increase was in the large firm category; but because firms can change firm size categories, it is unclear whether this increase was from small firms creating jobs and growing into large firms or from large firm growth. Because most of the overall increase occurred in the large firm service sector, it appears that most of the growth was in small service businesses that grew large. And because the largest decrease was in large business manufacturing, it appears that the job losses resulted primarily from large businesses shrinking into small businesses.
Most of the job growth occurred specifically in business services, and with the construction (and remodeling) boom continuing, special trade contractors also saw a large increase. The financial industries of security and commodity brokers, as well as holding and other investment offices, grew the fastest (or had the highest percentage increases) during the year. As the finance markets fluctuated, apparently so did jobs in the finance industries, because many banking jobs were lost. Clothing manufacturing jobs also suffered.
Equity markets were also down in 2000. The NASDAQ, an important financing tool for small businesses trying to grow into large businesses, peaked in early 2000 and lost an astounding 39 percent for the year. The S&P 500 also fell, losing 10 percent. The broader S&P 500 is important to small businesses, as large businesses are often their customers and its direction can drive consumer sentiment. To make matters worse, these declines came after a string of years with large gains, which increased expectations of high returns. The performance of the equity markets often sets the table for how conservative or aggressive banks will be in making loans.
Surveys from the Federal Reserve Board show that banks have been tightening lending standards at rates not seen since the last recession in the early 1990s, and bank rates have been increasing more rapidly than their costs. However, the share of banks reporting increases in small business demand for loans has gone down and is now lower than it was in the early 1990s. So supply is tighter and demand is off, which does not necessarily bode well for the future.
The Future
Just as populations need births to replace deaths, so does the business community.
Natural selection and bad luck will weed out the struggling firms and open up opportunities
for new firms. The chosen ones will receive financing, but with government support—mostly
from the SBA - even new ventures overlooked by traditional private sector lending have
opportunities for at least limited financing. So the cycle of entry, growth, stability,
decline, and exit will continue. The aggregation of all of these individual business life
cycles will determine how next year will be.
As reported by the National Federation of Independent Business, finding qualified labor was still a top issue with small businesses in 2001, but this was beginning to be overshadowed by taxes as the most important problem.
With economic growth projected to be flat or with low peaks and valleys, the year 2001 can be expected to show an increase in small business closures when the final numbers are out. However, 2001 will also likely see a net increase in self-employment as laid-off workers - and more significantly, workers being underwhelmed by job prospects - seek entrepreneurial opportunities.
The Complete Report (pdf)
Information courtesy of the Small Business Administration.
