You know things are awful when Washington politicians seem genuinely concerned about small business, rather than simply spouting the usual platitudes toward an amorphous group that typically lacks the political muscle of Wall Street or unions.
Within the last week, head honchos from the Federal Reserve, the Treasury, Goldman Sachs and Warren Buffett himself have expressed concern that small business isn’t responding as needed.
And it is needed.
Small business (defined as 500 or fewer employees) creates 60 to 80 percent of new jobs. So it’s not an exaggeration to suggest that without a healthy, growing small business sector, there will be no recovery.
Yet there is mounting evidence that small business has taken an unusually hard hit this recession.
In looking at data since 1992, Atlanta Fed economist Melinda Pitts wrote: “Firms with less than 50 employees have made up approximately one-third of the nation's employment growth. During the employment declines associated with the 2001 recession, these firms made up only 9 percent of job losses. In the current recession, though, these very small firms have made up 45 percent of the nation's job losses.”
Ouch. That’s five times the rate of job losses than in the previous recession, or over 3 million people dropped from payrolls of the smallest firms.
And to make matters worse, the financing needed to reverse that trend and fuel growth just isn’t there.
Treasury reported that the 22 largest banks receiving TARP money had cut $10.5 billion from their small business portfolio.
The Small Business Administration has approved one-third fewer loans this year than last.
Smaller banks, too, have clamped down on lending.
Add the fact that many small businesses are partly financed through their owners’ credit cards and home equity – two major lines of credit that banks have clamped down on -- and the picture grows dim.
As if that wasn’t bad enough, Fed officials note a link between smaller banks, which normally supply small businesses their loans, and the commercial real estate crisis that is further curtailing lending.
In a recent speech to the Urban Land Institute’s Emerging Trends in Real Estate Conference in Atlanta, Dennis Lockhart, president of the Atlanta Fed, said banks with the most exposure to commercial real estate are the same banks that lend mostly to small businesses.
Those banks are hunkering down. They aren’t looking to help small business get back on track.
Jimmy Adams, executive vice president of the Atlanta-based Adams Transfer & Storage, said his bank is providing credit for continuing operations but nothing that would be associated with growth.
“Anything beyond the core that even remotely smells of investment, or something for which you don’t have a contract in hand to pay for it, and you aren’t going to get credit,” Adams said.
“We are all on the sidelines,” he added.
Growth does not occur on the sidelines. Nor does it feel like a recovery to those on the sidelines.
It feels fragile.
Like “any bump in the road will put us back in recession,” Adams said.
Thomas Oliver writes the Sunday business column. He can be reached at firstname.lastname@example.org.
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