U.S. economic growth slowed down in 2001 from the blistering pace of prior years. Real GDP increased 0.3 percent during 2001, a substantial decline from the 3.8 percent increase of 2000. Inflation remained tame. The most telling guide to the economy's impact on small business and vice versa was the large rise in business bankruptcies and the labor market's ups and downs.
Business Bankruptcies
The number of business bankruptcies climbed 12.8 percent from the 2000 level, reaching 39,719.
Although this was a rather sharp percentage increase, the total number of business bankruptcies
was only half of what it was in the early 1990s. Business bankruptcies often occur when costs
rise and revenues do not. Many companies found themselves in these circumstances in 2001.
The data show that wages and salaries rose 3.8 percent and benefits rose 5.1 percent in 2001.
Since small firms tend to be more labor intensive than large firms, wages, salary, and
benefits make up a relatively large share of small firms' expenses. At the same time, certain
industries' sales decreased, notably in manufacturing and wholesale trade. Although
productivity increased 2.0 percent during the year, this was not enough of an efficiency
increase to keep many firms afloat.
Financing
Bankruptcy also results from financing difficulties. Firms that are cut off from financing
may experience difficulties getting inventory and riding out drop-offs in sales and new
orders. Meanwhile, banks respond to weakening economic conditions; surveys from the Federal
Reserve Board show that banks tightened their lending standards to degrees not seen since
the recession of the early 1990s. Small firms that were able to secure loans paid lower
interest rates in 2001 than 2000. But, in general, small business borrowing declined, as
small firms chose to stay on the sidelines, decreasing production, rather than trying to
produce goods and services for which demand had softened. Small firms' decreased their
demand for loans to levels not seen since the early 1990s.
Business borrowing declined by one-third in 2001, falling to $194.3 billion, and capital expenditures fell by 17 percent. In comparison, household borrowing increased by 10 percent, spurred by the low financing rates automobile makers offered at the end of the year.
Equity Markets
While bank financing is very important to new and very small businesses, many larger small
businesses that are looking to expand depend upon equity financing. The equity markets
continued to struggle in 2001. This indicates ongoing uncertainty in the long-term outlook
for venture capital. The NASDAQ, an important financing tool for rapidly expanding small
businesses (particularly in technology sectors), peaked in early 2000 and lost an astounding
58 percent to the end of 2001. The S&P 500, which is a much broader index, suffered less.
The S&P index is an important indicator for small businesses, since it represents the
capital strength of larger firms that are likely to conduct business with small firms. Its
direction often drives consumer sentiment. The S&P index lost just 25 percent. The year
ended on an upswing, as both indexes posted large gains during the fourth quarter.
Employment Trends
Even with the rise in bankruptcies, the labor market held relatively firm. The unemployment
rate rose during the year but remained below 5 percent, at a historically low 4.8 percent.
Nonfarm private employment stayed level at 111 million. This indicates an increase in the
number of people looking for work who were new entrants to the labor force.
The effects of the economic slowdown were spread unevenly across industry employment. The manufacturing sector, which is dominated by large businesses, lost 778,000 net jobs. The services sector, in which small businesses predominate, added 470,000 net new jobs during the year. The only other sector with a significant decline was wholesale trade, which lost 171,000 net jobs. Consumer spending helped stabilize the economy; after services, the retail trade sector added the most net new jobs. The gains and losses in the different industries tended to cancel each other out.
Self-Employment and Turnover
Increases in displaced workers often lead to rising self-employment, as job seekers often
go into business for themselves. This effect was not yet visible in 2001; self-employment,
remained essentially unchanged, going from 9.9 million in 2000 to 9.8 million in 2001. In
strong economic times, many selfemployed individuals expand into new employer firms. Since
2001 was a challenge for firms in many industries, the number of new firm births declined
and employer firm deaths increased. The two figures reached levels that essentially canceled
each other out. This convergence made the number of employer firms remain relatively level,
rising from an estimated 5.7 million in 2000 to an estimated 5.8 million in 2001.
Conclusion
All of the forgoing indicators are powerful inputs into the bottom line. On balance, the
bottom line was better for smaller ventures than for larger ventures during the year. Nonfarm
proprietors' income rose 2.4 percent during the year, while corporate profits declined 7.2
percent.
The Complete Report (pdf)
Information courtesy of the Small Business Administration.
