Departments - January/February 2010
Leading Indicators
The Wrong Solution
by Bill Dunkelberg
As small business owners struggle with slow sales and looming tax hikes, the government tries to solve Main Street’s woes with enhanced SBA lending
The Obama administration has recently jumped on the "small business bandwagon." It’s better late than never, as small businesses produce half of the private GDP and create two-thirds of all new jobs. The so-called stimulus barely paid lip service to the importance of small business, but with a shortage of sympathy for helping large firms, there was a pivot. It sounds like the administration thinks the reason small firms aren’t hiring is that they can’t get credit. Although credit is harder to get than in the last expansion, financing is cited as the most important problem by only 4 percent of the hundreds of thousands of NFIB member firms.
Less Demand for Lending
Although a nice gesture, enhancing Small Business Administration lending programs won’t help much because too many owners have no reason to borrow, and fewer than 1 percent of small businesses have any government-sponsored loan. Record low percentages of owners cite the current period as a good time to expand. More owners plan to reduce inventories rather than add to them, and record low percentages plan any capital expenditures. In short, the demand for credit is in short supply. Banks have money to lend--at least on Main Street, where thousands of small banks have consumer deposits, now rising with a higher savings rate--but they’re seeing fewer qualified loan applicants. Only 10 percent of all firms said all their credit needs weren’t met (some are refused, some receive less credit than desired), so 90 percent are happy or don’t want to borrow. Failing to understand the problem can lead to bad policy and unfair criticism of our nation’s healthy community banks. Asking them to make more unsound loans is bad policy.
What small business needs is customers. While 17 percent reported quarterly sales gains early in the fourth quarter, 44 percent reported declines. But very little in the stimulus provided consumer spending support, and all Washington talks about now is raising taxes (and energy costs) and passing healthcare reform--likely a job destroyer and a bill laden with taxes and penalties. A $500 billion payroll tax cut last January would have been helpful (in comparison to the "earmarks" in the stimulus bill, for which spending has not even started), but such suggestions were squashed in committees. About 50 percent of consumer spending is accounted for by the top 20 percent of the income distribution, a favorite target of Congress these days. Recovering from major declines in housing and stock market wealth, they have only higher taxes, healthcare fees and energy costs to look forward to.
The Shape of Recovery
Statistically, we are in a steep "V" recovery, with GDP rebounding from a 6.4 percent decline in the first quarter of 2009 to 3.5 percent growth in the third. That is quite a comeback, but unless the consumer comes back the recovery is likely to turn into the "square root recovery" ( )--slower, flatter growth on the recovery leg of the V.
Federal government spending rose more than 7 percent, and most of the reported jobs saved or created were in the public sector (and of dubious measurement). What’s more, financing trillion-dollar deficits will definitely crowd out private spending. Chances for a "W" recovery? The most likely cause would be another serious policy goof in Washington to send consumers running. But it doesn’t appear that credit availability will be the cause, just a shortage of credit-worthy borrowers whose P&Ls are weak because sales are anemic. The private sector will continue to move the economy forward, despite the headwinds coming from Washington. But a recovery on par with that following the 1980–82 recession period is not likely.
Dr. Bill Dunkelberg, a nationally known authority on small business and entrepreneurship, has served as NFIB’s chief economist since 1971.