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Small Business Trends: Measuring Industry Health

Small Business Trends: Measuring Industry Health

June 5, 2012

By: Melanie Berkowitz, Esq.

If you have been following small business news to try to get a sense of the health of that sector, you may not be sure what to think. 

According to a sampling of recent news items, small business lending is down, but small business owners are having an easier time getting credit, some analysts report that hiring is up, while sales are fairly slow, and small business owners are feeling optimistic. Or maybe they are just less pessimistic

In other words, it's been a rollercoaster.

Small Business Trends of Late
It has been nearly five years since the current recession began, so it is no wonder that experts are parsing economic numbers in dozens of ways to try to find good news. It’s not always easy to find. 

The National Federation of Independent Businesses (NFIB) recently released its April “Optimism Index” for small businesses, which showed an absolute gain of 2 points in small business optimism. 

Sounds good, until you consider that the gain merely erases the past year’s losses, bringing the index back to February, 2011 levels. 

The bottom line? According to the NFIB, small business optimism is likely to remain flat in 2012 and there will be little improvement in small business hiring and spending this year.

But that does not mean that it is all doom and gloom for small business trends. We are starting to see  indications that it is time to stop circling the wagons and start getting back on the road to business growth and expansion. Small businesses just need to be able to recognize the signs and then act on them at the right time. 

“Optimism and economic  improvement usually grow together for small businesses,” explains Holly Wade, Senior Policy Analyst for the NFIB. “We do not see a lot of change in small business owners’ behavior until they are confident that the recovery can support their growth. At the same time, small business hiring and spending need to increase to help the economy recover enough to create that optimism.”  

So where do optimism and recovery begin? According to the experts, a couple of factors are the most important in fueling small business optimism. Not surprisingly, it all starts with sales.

Consistent Sales Growth a “Must” for Small Business Recovery
“The increase in consumer spending we’ve been seeing since December is starting to trickle down to the small business level,” says Steve Strauss, USA Today small business columnist and author of The Small Business Bible

He sees a trend that will put more money in the coffers of small businesses: “Individual consumers are spending more, and more freely, and many small businesses are starting to see bigger projects from bigger clients with bigger budgets come their way,” he says.

“Small business optimism depends first and foremost on increased sales,” agrees Wade. “Most small business owners want to see consistent sales growth for at least six months before they are confident that their economic situation is improving.” 

Without this confidence, Wade notes, we should not expect to see many small businesses hiring or making big capital expenditures. Instead, small employers will make do with their current workforce and infrastructure to manage the (hopeful) increase in customer activity.

Increased Lending to Small Business Fundinges Will Fuel Growth
The Small Business Credit Availability Act we reported on should make it easier for small businesses to get loans – now they just need to feel optimistic enough to ask for them.  

Getting business owners to seek out small business funding is key; a Bank of America survey of small businesses found that 78% of small businesses that have requested loans in the past two years were approved, but the majority of small businesses that do have open lines of credit have been using the money for emergencies only. 

As optimism increases, more businesses should start using loans for growth as part of their 2012 business plan, Wade says. 

A capital expenditure such as the purchase of new equipment or rent of more space does not require additional hiring, allowing small business owners to focus on growing without increasing headcount until they can truly support the cost.  

Improved Numbers in the Residential Housing Industry Will Indicate Recovery 
We know that overall employment numbers are still below 2007 pre-recession levels, and while small businesses are starting to hire again, their efforts are not yet enough to overcome previous losses. 

Both Strauss and Wade agree that it is going to take some time before unemployment levels drop to pre-recession levels.  

“Small business owners tend to be nervous about adding to their workforce because they fear getting stuck with a payroll they cannot meet if the economy dips again,” says Wade. “So when we see employment numbers growing, particularly across sectors that have been slow, that will be a strong indication that small businesses optimism back. 

She points to the residential housing industry, which has taken a serious hit in the past few years, as a good benchmark. “When small businesses in the housing construction industry start hiring again, we expect to see the Optimism Index rise among small businesses across the board.”