Monday, March 17, 2014

Small Business in the Aftermath of the Great Recession

The most popular post on my blog involves comparisons of economics growth of small business vs. big business.  In Fall 2013, I wrote an article for the Rollins Graduate Business School Alumni Newsletter that examined the issue in more detail ("Small Business in the Aftermath of the Great Recession").  Recently, I made a brief presentation to the Winter Park Chamber of Commerce on the same topic.  What were the key takeaways from the article and presentation?  As one would guess, the rate of new business creation declined significantly during the recession while the rate of business destruction soared.  In recent years, the rate of business destruction has declined to at or below where it was prior to the recession.  Meanwhile, new business creation has improved, but still lags where it was prior to the crisis.

As a result, net business creation is still quite small compared to before 2007 (the most recent figures indicate that net new business creation is about half of what it was in the mid-2000s). According to the Business Employment Dynamics survey, small business (those with fewer than 50 workers) shed 3.6 million jobs during the recession, but recovered 2.2 million through the second quarter of 2013 (latest data available) for a net loss of 1.4 million jobs.  Meanwhile, large businesses (those with more than 500 employees) lost 4.3 million workers during the recession, but added 3.6 million through the second quarter of 2013 for a net loss of 700,000 employees (medium-sized businesses have experienced a net gain of 100,000 workers - loss of 1.6 million followed by a gain of 1.7 million).  Thus, it appears most of the remaining shortfall in employment is due to the underperformance of new and small businesses. Given that there was a financial crisis, access to credit played an important role in the relative weakness of small business.  The following figure illustrates the difference in the net tightening of lending standards for small vs. large business:

Thus, though lending standards began to ease in 2011 for large business, access to credit continued to tighten for small business before stabilizing in 2012 (preliminary evidence indicates that it eased in 2013).  It gets more complex, but it appears that tight credit due to the financial crisis had a larger impact on small business, helping to explain their relatively weak economic performance.  For those interested in more detail, feel free to read the article and.or view the presentation.