A crisis in confidence is holding back the most important job powerhouse of the past two decades
The recession may have officially ended two years ago, but unemployment is still painfully high, and the squeeze on small businesses might be to blame.
Historically, small businesses have led the country out of recessions, generating nearly 65 percent of net new private-sector jobs over the past decade, according to the
But that engine of job creation has been sputtering as the economy claws its way out of one the deepest recessions in U.S. history. Net gains totaled just 18,000 jobs in June, and the national unemployment rate ticked up to 9.2 percent according to
"Small businesses have added some jobs, but it's a lot less than you would have seen in previous recoveries," says
This year, the private sector has added about 200,000 jobs a month on average, but economists say businesses need to add somewhere between 350,000 to 400,000 jobs each month over the next three years to bring unemployment down to a more normalized level of around 6 percent.
Without a boost in hiring from small businesses, that goal may remain out of reach and prolong an economic recovery that's already been painfully slow. "When you're not feeding the economy with smaller-business growth, that's really a danger," says
Particularly troubling is the large drop-off in the number of start-ups since the beginning of the recession. The number of new establishments for the year ending in
"The shortfall in this job market in this recovery is [because] small business formation has been very weak. I think that's the key problem," says
Stagnant consumer spending and tight credit have also put financial pressure on small businesses. While experts say credit markets aren't as tight as they were a year ago, getting a loan is still tough. That's especially true against the grim backdrop of the housing slump, given that many small business owners rely on home equity as collateral for loans.
"You need capital and credit to grow or start up [a small business]," says
But it's not just a matter of encouraging banks to lend, it's nudging small businesses to borrow and invest in their companies, too. That's been a tough sell lately as confidence in the economy among small-business owners has sunk to its lowest level since September, primarily due to low consumer demand and poor sales. "Those challenges translate into a continued decline in confidence," Smits adds. "There's a pullback. You go into survival mode."
The Index of Small Business Optimism fell for the third consecutive month in May, reflecting persistent pessimism among small-business owners about the outlook for the economy. Perhaps the most sobering statistic for the jobs outlook: The net share of firms reporting that they plan to hire moved into negative territory for the first time in eight months.
"This report is not good, as small businesses are feeling the brunt of this sluggish economic recovery," says
"We are stuck in this cycle that will eventually get jump-started," McCracken says. "It's just that usually it's been able to happen a lot faster because the credit markets haven't been so locked up."
Nevertheless, there are a few bright spots. The overall decline in confidence has slowed a bit, and experts expect lower commodity and energy prices to offer some relief to battered small businesses in the coming months.
But a full recovery will take time. "The reality is that small companies are such an important part of our economy and the start-ups that replenish [jobs] are so crucial that we're not going to just grow out of this," McCracken says.
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