The U.S. economy began to revive in 2002 after struggling in 2001. Real GDP increased 2.4 percent with inflation under control. These encouraging signs were dampened by a slower fourth quarter GDP increase (an annual rate of 1.4 percent) and private sector employment losses. While the economy began to expand again, concerns about stagnant growth remained.
The small business sector also showed signs of awakening after a lackluster 2001. A weak labor market often leads to rising selfemployment, a situation that occurred in 2002. In addition, the number of business bankruptcies declined slightly from the previous year, indicating that business casualties may have peaked. The increased economic optimism shown in the National Federation of Independent Business (NFIB) small business optimism index in 2002 was another sign of strength.
These positive economic signs suggest that a transition from economic contraction to expansion may have been taking place in 2002. It is not uncommon, however, for announcements of economic recovery to lag behind the actual turnaround because of data delays. For example, the National Bureau of Economic Research announced the end of the recession of the early 1990s twenty-one months after the fact.
The Number of Businesses and Turnover
In 2002, there were 22.9 million businesses in the United States. These consisted of both
non-employer and employer businesses, which often react differently to the same economic
stimuli. This proved to be the case in 2002, as the number of non-employers tended to rise
while employer firms showed a slight decline. Although the annual self-employment figure
dropped 1.8 percent from 2001 to 2002 (continuing a recent trend), it increased from the
first quarter through the fourth quarter. Sole proprietorships rose 2.9 percent in 2002, to
18.4 million.
Data from the U.S. Department of Labor's Employment and Training Administration show decreases in the number of employers in 2001 and 2002.7 Negative territory had not been seen since 1991. Using data from the Department of Labor and Census Bureau, the Office of Advocacy estimates that there were 5.6 million employers in 2002.
The 2002 decline in the number of employers is the result of an estimated 550,100 employer firm births and 584,500 employer terminations. However, the number of new employer firms rose this past year after a decline in 2001 - an encouraging reversal.
Business Bankruptcies
While personal bankruptcies reached a new record in 2002, business bankruptcies declined
by 38,155, or 3.9 percent, from 2001. This decline is another signal that small businesses
as a group may be beyond the worst.
It is not surprising to see business bankruptcies down with sales essentially up and costs essentially under control. Retail and wholesale sales were both up from the previous year, and manufacturing was essentially flat after a large loss in 2001. Compensation, which is a proportionately large cost to small firms as they are often labor intensive, rose 2.1 percent and interest rates were down. As frequently happens in economic downturns, industrial cuts (including plant or entire firm closings) may have removed inefficient operations, thus increasing productivity.
Financing
The combined trends of tightened bank lending standards and decreased demand for loans by
small businesses, which emerged in the late 1990s, continued into 2002. The rate of bank
tightening and weakened demand decreased in early 2002 only to pick up again near the end
of 2002. Overall, bank commercial and industrial loans declined 6.5 percent compared to the
previous year. Small firms that did acquire loans during 2002 likely enjoyed low interest
rates. Because of the Federal Reserve Bank's action in late 2002 to lower the federal funds
rate, the prime rate dropped to 4.25 percent, a level not seen in many readers' lifetimes.
Equity Markets
Bank financing is very important to new and very small business. Growing businesses and
larger ones often depend on equity financing. The equity markets continued to struggle in
2002, as they had for the previous three years, as markets retreated to their levels of
about six years ago. The markets may have bottomed out, as the Standard & Poor's and
NASDAQ indexes both grew during fourth quarter 2002.
Employment Trends
Employment news remained gloomy, since strong firms and finances are needed for hiring.
Economic reviewers have pointed out, in referring to the current state of the U.S. economy,
that employment gains generally lag behind other indicators.8 This was borne out by the
numbers in 2002. Unemployment rose by about one percentage point to 5.8 percent. This
represented a decline of 1.5 million private sector jobs.
Employment in manufacturing, services, and retail trade tend to drive the overall employment figures, since these three major industries represent about three-quarters of private employment. Manufacturing lost 1 million jobs in 2002, and employment in this sector dropped below 17 million for the first time since 1963. This decline is the result of a longer term trend, independent of economic performance in 2002. Manufacturing employment peaked in 1979 and has declined ever since. Real manufacturing output has increased since the 1960s due to continuous productivity gains. Jobs lost in manufacturing were more than made up for by the boom in the service industry and the information revolution of the last decades of the 20th century.
Although service sector employment continued to grow in 2001 and 2002, the effects of the recent slowdown are actually more serious in this sector. During the 1990s, the service sector added an average of 1.2 million jobs per year. Over the last two years, however, it has added only 0.2 million new jobs per year, on average. This recent increase was the result of health services. The economy's current employment struggles appear to be a product of the stalled information revolution, rather than of shortterm manufacturing woes.
The employment level in retail trade in 2002 fell below the level in 2000. In fact, struggles were widespread; only three of the nine major industry groups—agricultural services; FIRE (finance, insurance, and real estate); and services—had employment gains in 2002. Needless to say, laid-off workers and new labor force entrants who were unable to find work in 2002 met with a tough job market. But even with overall employment declining, wages and benefits rose in 2002.
Insurance - A Small Business Challenge in 2002
According to the National Federation of Independent Business, taxes were the leading
small business problem entering 2002 and the cost/availability of insurance (mainly health)
led by the end of the year. Insurance cost and availability was hit hard by the increasing
threat of terrorism and accelerating healthcare costs. The Employee Benefit Research
Institute conducted a survey that showed that small firms were trying to deal with the
health insurance problem by passing on costs to employees. Small firms' insurance decisions
were highly price sensitive, and small businesses tended to respond to price increases by
changing or dropping coverage. The survey also showed that about one-third of those not
offering coverage could be enticed to do so through lower costs.
Conclusion
The most reliable economic indicators of the start of an economic upturn are the consistent
expansion of output and the improved financial situation for firms. Nonfarm sole proprietors'
income increased 4.9 percent, and corporate profits increased 7.6 percent, giving owners
the finances and confidence to expand their firms. This provided momentum and optimism
for the struggling U.S. economy as it entered 2003.
The Complete Report (pdf)
Information courtesy of the Small Business Administration.
