Thursday, March 8, 2012

GDP: Small Business vs. Large Business

A story about how the small business share of GDP declined below 45% in 2010 caught my attention, so I decided to explore it further.  Here's a link to the report behind the headlines.  First, it should be noted that the report defines a small business as a company with fewer than 500 employees (so large businesses are those with 500 or more employees).  There's quite a bit of interesting information available. For example, here's a chart showing nominal economic growth for small businesses vs. large businesses since 2003 (the classification system changed in 2003, so it represents a good starting point):
For the period as a whole, the nominal growth of large business GDP grew by 46% while small business GDP grew by 26%.  You'll note the rapid growth of large business GDP in 2010; nearly 60% of the growth was due to one sector - finance (this was not a rebound from the crash but represented nearly a 30% increase from the previous peak).

Why the underperformance of smal businesses?  One reason is construction, which represents about 10% of small business GDP, but only 2% of large business GDP.  In addition, in several sectors, large businesses outperformed small businesses.  For example, manufacturing suffered a significant decline in 2009 regardless of the size of the firm, but large business manufacturing declined by 6.4% while small business manufacturing declined by 15.5%.  As manufacturing rebounded in 2010, large businesses grew by 6.9% while small businesses grew by 4%.  Similarly, in wholesale and retail trade, small businesses declined at nearly three times the rate of large businesses in 2008-2009.

Which sectors are dominated by small businesses in terms of share of GDP?  Construction (83%), Real Estate & Leasing (75%), and Arts & Entertainment (69%).  Large Businesses dominate Utilities (nearly 90%), Information Services (88%), and Manufacturing (72%).  Just over 13% of small business GDP comes from Wholesale & Retail Trade while just over 12% comes from Real Estate/Leasing and Professional/Technical Services, respectively.  As of 2010, the largest shares of large business GDP are derived from Manufacturing (21%), Finance (15.6%), and Wholesale/Retail Trade (14%).

There's much more information available in the report.  It confirms what most people already knew; small businesses are struggling as the economy continues to recover from the Great Recession.