Small Business Trends

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1

Small Business Trends

Policy & Supervisory Studies

January 2011

The views expressed in Small Business Trends are not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

Since Small Business Trends may contain proprietary information, its contents may be discussed but are not to be distributed.

For more information, please contact the Public Affairs Department at 404.498.8020

Small Business Optimism 1

Small Business Sentiment 2

Small Business Trends at Firms with Fewer Than 20

Employees 3

Small Business Retirement Plans 3

Small Business Credit Conditions 4

Small Business Lending Progarams 4

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Level Share of

(000s, SA) Sector M-t-M Y-o-Y Goods Producing 17,489 100% 0.15% -1.4%

1-49 6,360 36% -0.05% -2.9%

50-499 7,691 44% 0.27% -0.1%

> 499 3,438 20% 0.26% -1.3%

Service Producing 90,023 100% 0.30% 1.0%

1-49 42,139 47% 0.29% 1.1%

50-499 33,778 38% 0.37% 1.2%

> 499 14,106 16% 0.19% 0.6%

Source: ADP National Employment Report

Firm SizeFirm Size

Growth

December 2010 Employment Trends The Small Business Optimism Index fell 0.6 points, to 92.6, for the month of December. Though the drop is small, it is the first decrease observed since July 2010 and was not expected, given positive holiday season expectations and marginally better retail sales numbers. This marks the Index’s 36th month in recessionary territory.

On the other hand, private employment growth for December was very strong, growing at a pace above what is usually associated with a declining

unemployment rate. Since September, monthly employment growth has accelerated, with a greater than three-fold increase from November to December.

The service-producing sector continued to post gains across all firm sizes and it recorded the largest monthly increase in the history of ADP’s National Employment Report.

Small Business Optimism

The most frequently cited problem for small businesses in December was still poor sales, gaining an additional 3 percentage points support for the month.

107.7

81.0 92.6

80 90 100 110

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: National Federation of Independent Business

Small Business Optimism Index (SA, 1986=100) Small Business Optimism Index (SA, 1986=100)

December 2010 Employment Trends

Single-most Important Problem for Small Business U.S. Private Sector Employment by Size of Payroll

Employment (000s, SA) Employment (000s, SA)

15,000 16,000 17,000 18,000 19,000 20,000 21,000

40,000 42,000 44,000 46,000 48,000 50,000 52,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1 - 49

50 - 499

> 499

Source: ADP National Employment

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Percent of respondants

Competition from large business, 5%

Insurance, 9%

Labor costs, 3%

Financial, 5%

Govt. requirements, 13%

Inflation, 4%

Poor sales, 33%

Labor quality, 4%

Taxes, 19%

Other, 5%

Source: National Federation of Independent Businesses

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2

Small Business Sentiment

The most recent Discover Small Business Watch Survey showed that confidence among small business owners waned during the month of December. The monthly index was down 5.6 points from November, though it remained 4.6 points higher than one year ago. Over half of all small business owners reported that the economy is getting worse. Only 25 percent felt that it was actually getting better, which is down 8 percent since November. Sixty-two

percent of respondents now rate the current economy as poor. With business outlook projections faring not much better and temporary cash flow issues beginning to climb after reaching the lowest level reported in 17 months for November, more small business owners are planning to either decrease or maintain business development spending in the next six months.

Source: Data from Rasmussen Reports LLC/Discover Small Business Watch mid-month surveys

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10

Percentage of Respondents

Better Worse (* -1) Better: 12 MA Worse: 12 MA

Six Month Business Outlook

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Hiring Laying Off (* -1) Hiring: 12 MA Laying Off: 12 MA

Anticipated Work Force Changes

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Better Worse (* -1) Better: 12 MA Worse: 12 MA

Economic Trends

-60%

-40%

-20%

0%

20%

40%

60%

80%

No Yes (* -1) No: 12 MA Yes: 12 MA

Cash Flow Issue Within The Last 90 Days

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Excellent/Good Poor (* -1) Excellent/Good: 12 MA Poor: 12 MA

Current Economic Conditions

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Increase Decrease (* -1) Increase: 12 MA Decrease: 12 MA

Six Month Investment Spending Plans

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Small business retirement plans have definitely suffered as a result of the economic downturn. Only 50 percent of those surveyed now have a financial plan for their retirement, which is down 12 percentage points from 2009. Furthermore, 38 percent of small business owners stated that they do not plan to even retire at all. Only 35 percent plan to retire before the age of 65, which is down from 41 percent just one year ago.

On a separate note, 74 percent of respondents said that the recession had depleted their savings, and 20

percent saw a decrease of more than 50 percent in their retirement savings. Only 56 percent of small business owners said they are either very or somewhat likely to have enough resources to support themselves during their retirement, which is down 7 percentage points from last year.

According to Intuit, growth in small business employment was unusually strong for the month of December, with total compensation flat and hours worked up. Small business employment grew by 0.3 percent, which equates to a 3.4 percent annual growth rate. “We can hardly see the recovery in overall national employment, but among small businesses, the recovery, albeit small, is unambiguous.”

For the sixth month in a row, the West North Central Census Division experienced employment declines. Most of the Census Divisions remained flat month-to-month.

However, both the West South Central and the East South Central Census divisions grew an additional 0.1 percent, while the Mountain Census Division grew an additional 0.2 percent from November.

Furthermore, most states also saw employment growth during the month of December. The largest increases were in Washington (0.6 percent), Arizona (0.5 percent), Maryland (0.5 percent), New Jersey (0.5 percent), Texas (0.5 percent), Florida (0.4 percent), Massachusetts (0.4 percent), and Virginia (0.4 percent).

New York actually posted a –0.1 percent decline during the month.

Small Business Trends at Firms with Fewer Than 20 Employees

Source: Intuit press release, Jan. 4, 2010

Monthly Small Business Employment Growth (December 2010)

Source: Intuit press release, Jan. 4, 2010

0 5 10 15 20 25

< 10% 10% - 20% 20% - 30% 30% - 50% > 50% Unsure 2009 2010

How Much Did the Recession Decrease Your Retirement Savings?

Small Business Retirement Plans

How Likely Is It That You Will Have Enough Resources to Last through Your Retirement? (in percent)

²⁰⁰⁹ ²⁰¹⁰

Very likely 24 24

Somewhat likely 39 32

Not very likely 25 24

Not at all likely 7 11

Not sure 4 9

Source: Discover Business Watch/Rasmussen LLC Source: Discover Business Watch/Rasmussen LLC

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Small Business Credit Conditions

Unchanged from November, the National Federation of Independent Business (NFIB) reported that 91 percent of the small businesses surveyed felt that either their credit needs were met or that they simply were not interested in borrowing in December; only 9 percent thought that their credit needs were not satisfied.

Down 3 percentage points from November, 50 percent of the respondents stated that they did not want a loan, and 5 percent cited financing as their top business problem, which is up 1 percentage point from last month.

Also climbing from the record level low of 28 percent reached in November, during the month of December 30 percent of all small business owners claimed that they borrowed on a regular basis. Of those regular borrowers surveyed, 12 percent stated that loans were harder to obtain this time around when compared to their last attempt. Those who were expecting credit conditions to ease fell 1 percentage point to –11 percent for the month of December.

With most small business owners citing poor sales as their top problem, capital expenditures and the loans needed to finance them are simply not worth the investment at this point in time thus causing the strong lack in demand for credit. For the past six months, the frequency of reported capital outlays fell 4 percentage points to 47 percent of all firms, which is now only 3 percentage points above the lowest level ever recorded.

Small Business Lending Programs

As of December 31, 2010 the Small Business

Administration (SBA) exhausted its incentives under the 7(a) and 504 loan programs, which have been in effect since February 2009 as part of the American Recovery and Reinvestment Act. The SBA still offers both loan programs, but the fees and guarantees associated with these programs have returned to their traditional levels.

The recently created $30 billion Small Business Lending Fund, an initiative targeting mostly community banks, is expected to boost the number of loans extended by banks in 2011.

Michigan and North Carolina are the first two states to receive funds from the new $1.5 billion federal small business lending initiative created in October. As part of this initiative, all 50 states, including the District of Columbia and U.S. territories, can apply for federal funds. States are required to demonstrate that they can generate $10 in new private lending for ever $1 in federal funding received.

References

National Federation of Independent Business: www.nfib.com/portals/0/pdf/sbet/sbet201101.pdf

Automatic Data Processing Inc. (ADP): www.adpemploymentreport.com/pdf/FINAL_Report_December_10.pdf Discover Business Watch: www.discovercard.com/business/watch/#

Intuit: about.intuit.com/about_intuit/press_room/press_release/articles/2011/SmallBusinessEmploymentIndexDecember.html

-18 -16 -14 -12 -10 -8 -6 -4 -2 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: National Federation of Independent Business

Percent Expecting Credit Conditions To Ease, Net (SA, %)

Percent Expecting Credit Conditions to Ease, Net (SA, %)

-18 -16 -14 -12 -10 -8 -6 -4 -2 0 2

2005 2006 2007 2008 2009 2010

Net Percent of Frims

*For the population borrowing at least once every three months Source: National Federation of Independent Business

CREDIT CONDITIONS

Loan Availability Compared To Three Months Ago*

January 2005 To December 2010

Credit Conditions:

Loan Availability Compared to Three Months Ago January 2005 to December 2010