I am blogging this morning from my father’s house in southern Florida where the recession seems to have hit particularly hard.

The NFIB has released an early summary of the job creation portion of their monthly survey summary due out this week, and it is also not very promising for the short-term employment outlook.

Seasonally adjusted, there was a decline in average employment per firm of 0.74 workers reported by small business owners in January, the second largest monthly decline in survey history (December was the largest at -0.86 workers per firm). Eight percent of the owners increased employment by an average of 3.3 workers per firm, but 23 percent reduced employment at average of 4.1 workers per firm (seasonally adjusted). The private sector is very weak, with the only job growth coming from education, healthcare and government.

Over the next three months, 9 percent of small business owners plan to create new jobs (up 1 point), and 14 percent plan workforce reductions (down 5 points), yielding a seasonally adjusted net negative 6 percent of owners planning to create new jobs, the third lowest reading in survey history and unchanged from December. Lower readings occurred only in the 1974-5 and the 1980-82 recession periods. Not seasonally adjusted, job creation plans were positive in all the service sectors, but negative in manufacturing and construction, retail and wholesale. Of the nine census regions, only in the Mountain states did more owners plan to increase employment than planned to reduce employment.

With reports of sales and profit declines more frequent than at any time in the past 35 years, firms have little choice but to reduce costs to survive, and for small firms, the major cost is labor (about 80 percent). Consumer spending didn’t revive, so employment adjustments must now be larger, since hoped-for gains in sales did not materialize. Firms are now cutting hours faster than sales are falling, a rare event. This will raise productivity (sales per hour) and mitigate the rise in unit labor costs. 

There is a bit of a silver lining in their findings this month.  It looks like firms are making adjustments quickly now, which the NFIB believes should bring the economy to a bottom sooner rather than later. The service sector seems to be finding its legs.

This week I showed the video Demographic Winter to both my undergraduate and graduate students. 

The video documents a chilling demographic trend that is not getting enough attention — the declining fertility rate that is occurring in about 70% of the countries around the world.

Here is a part of the synopsis of the film from their website:

One of the most ominous events of modern history is quietly unfolding.  Social scientists and economists agree – we are headed toward a demographic winter which threatens to have catastrophic social and economic consequences.  The effects will be severe and long lasting and are already becoming manifest in much of Europe.

A groundbreaking film, Demographic Winter: Decline of the Human Family, reveals in chilling soberness how societies with diminished family influence are now grimly seen as being in social and economic jeopardy.

Demographic Winter draws upon experts from all around the world – demographers, economists, sociologists, psychologists, civic and religious leaders, parliamentarians and diplomats.  Together, they reveal the dangers facing society and the world’s economies, dangers far more imminent than global warming and at least as severe. 

We had a rich discussion in both of my classes. 

We talked about the impact of declining populations on the future of the US and world economies.  The data presented in the film seems to paint a fairly bleak picture for the US and other western economies over the coming decades due to population decline.  Japan and much of Europe are already feeling the negative economic effects of declining fertility rates.  The US is expected to begin this slow economic decline beginning around 2010 — when Baby Boomers reach their peak spending age.

The graduate students, mostly Generation X, were stunned.  Our program is an evening MBA degree, so most of the students are working full-time.  They were concerned about their careers, their children’s futures, and their outlook for retirement.

My undergraduate students, who are mostly Generation Y, seemed to take it more in stride.  They reminded me that this is part of the reason why they are studying entrepreneurship, after all.  They understand that our economy will never look like it did even a decade ago.  They already know that it is up to them to create their own way in the world — the corporate career path of the past century is at a dead end in their minds. 

What is increasingly clear to me is that our post recovery economy will probably not be very robust.  The timing of this recession just at the time that Baby Boomers are reaching peak spending age is like, to use the words of one of my students, “the perfect storm.”  I believe the recovery will be slow, but that the long term will be a general decline over the coming decades.

Will there be opportunity in this world?  You bet.  But, you will need to be highly skilled at identifying more scarce market niches and a much more nimble manager as your business grows.  We will not see times when any fool can make money as an entrepreneur.  With softer markets only the best will thrive.

The film suggests that much of the boom of the past twenty years is attributable to one main cause — the Boomers reaching their peak consumption age.  Those times are over, and there is every indication that a long-term booming economy will not come again in the US for generations — if ever.

ADP Small Business Report for Janaury 2009 was released today.  It shows that the recession has deepened on Main Street.

 

• Total small business employment: -175,000

• Goods-producing sector: -74,000 small business jobs

• Service-providing sector: -101,000 small business jobs

 

This marks the third consecutive month of decline in the small-size business sector.  Although January’s number shows fewer job losses than December, the recession continues to have an impact on this space.  Although job declines have consistently been interpreted as mostly affecting larger corporations, businesses with fewer than 500 employees lost 430,000 jobs in the month of January.

 

It continues to be alarming how little Washington is paying attention to small business in their policy decisions.   

For small business owners, 2008 ended with a whimper.  The National Federation of Independent Business Small Business Optimism Index fell 2.6 points to 85.2, the second lowest reading in the 35-year history of the survey. 

Owners were hoping consumers would ride to the rescue, but that did not happen.  “Unless there is a solid turnaround in January, we are in for a longer-than-usual recession,” said NFIB Chief Economist William Dunkelberg.

Here are some of the highlights (or should I say low-lights) of the last survey of small business owners for 2008:

Employment — Average employment per firm declined 0.86 workers (seasonally adjusted), the largest monthly decline in survey history.  On the bright side, forty percent of owners hired or tried to hire (down three points from November), and 75 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill.  Now the bad news – over the next three months, only 8 percent plan to create new jobs. However, this is still not the worst recession since the Great Depression, as so many in the media are claiming.  There were lower employment readings in both the 1974-75 and the 1980-82 recession periods. 

Capital Spending — Small business owners are deferring any project not essential to the survival of the firm.

 “In this uncertain environment,” said Dunkelberg, “owners are postponing any capital projects that are not essential to the operation of the firm – or that they can’t afford or can’t finance.”  

Inventories and Sales — Small business owners continued to liquidate inventories.  The net percent of owners expecting gains in real sales volumes fell to a net-negative 18 points (down four points) seasonally adjusted. 

Earnings — Profit gains deteriorated another four points to a negative 42 percent, a record low.  A year ago, reports of positive profit trends were 22 points better! 

According to today’s ADP Small Business Report small-size businesses lost 281,000 jobs in December, the largest decline in small-size business employment recorded by the ADP Small Business Report since the beginning of the ADP National Employment Report dataset in December 2000.

 

The ADP Small Business Report is a subset of the ADP National Employment Report:

 

• Total small business employment: -281,000
• Goods-producing sector: -80,000 small business jobs
• Service-providing sector: -201,000 small business jobs

If government is going to get more involved with the economy — OK, OK, since government is going to get more involved with the economy — the new administration should take a look at the plan proposed by Bill George (former Medtronic CEO and now a professor of management practice at Harvard) published at Business Week.  George asserts that his plan “will jump-start the innovation economy by providing built-in long-term growth, redistributing wealth without punishing the wealthy, and creating millions of well-paying jobs.”

I have been waiting with some angst for the November NFIB survey of small business owners.  The results were released this morning.  Overall, these entrepreneurs are not optimistic about the near future, as indicated by the Index of Small Business Optimism which recorded the fourth lowest reading in the 35-year history of the survey. 

So what do the specific items tell us? 

While this is a significant recession, at this point it does not appear to be as bad as the two other major downturns of the past half century.

Employment

 

The reduction in work forces in these small businesses seems to have taken a pause.  The decline in average employment per firm dropped slightly in November, but was not nearly as bad as September and October.  43% of those surveyed hired or tried to hire. This seems remarkably high when compared to the corporate sector, where the news is about hiring freezes and layoffs.  Interestingly, even with the increase in overall unemployment in the US, finding the right people is still a problem.  72% of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. 

The outlook for employment in small business suggests that we have not hit bottom in this recession.  Over the next three months, only 6% plan to create new jobs, and 17% plan workforce reductions.  This yields a seasonally adjusted net-negative 4% of owners planning to create new jobs, one of the lowest readings in survey history. 

While this is not good news, these findings are not as low as occurred in the 1974-75 or the 1980-82 recession periods. 

Capital Spending

The frequency of reported capital outlays over the past six months rose two points to 56% of all firms, still at recession levels, but still not as bad as we saw in the 1974-1975 downturn. These entrepreneurs are spending a little more on new equipment and new fixtures and furniture.  They are spending a little less on new automobiles.   

Overall, spending is weak, but the frequency of outlays has improved for the last two months and there is a slight increase in planned capital spending over the next few months.

Inventories and Sales

Small business owners continued to reduce inventory levels to adjust to slower sales. 

Earnings  

The net percent of owners reporting higher profits deteriorated further in November.  Seasonally adjusted, those reporting declining earnings trends outnumbered those with gains by 38% percentage points

Profitability is the second worst showing in 35 years of survey history.

Inflation

Nothing tends to kill inflation like a recession.  Price pressures vanished in November.  However, many of the structural causes of inflation are still present, so we need to keep an eye on inflation as the economy rebounds.

Credit

As the economy weakens, loan demand from small business owners continues to decline. 

My Take

While this is a bad recession, for entrepreneurs there is no indication that it is any worse than the last two deep recessions over the past fifty years.  We survived these tough times and will survive this one.

Small business owners are approaching these tough times with a prudent hand: 

·          They are focusing on cash.

·          They are reducing debt.

·          They are tightening inventory.

·          They are being cautious about their overhead expenses.

While business failure will increase, the entrepreneurial spirit is still alive and well.  Our entrepreneurial core should keep us from falling into a deeper recession.  New venture formation will help lead us to the recovery that we can expect by early 2010.

Want to give the economy an entrepreneurial shot in the arm?  Immigration may be part of the answer.

Most studies find that immigrants are more likely to be entrepreneurs or self-employed than the population as a whole.  The Philadelphia Business Journal reports on yet another study that adds more support:

About 220 businesses, employing 900 workers, occupy the six-block stretch of 52nd Street between Arch and Spruce streets in West Philadelphia.

Overwhelmingly, they are immigrant-owned, reported the Welcoming Center for New Pennsylvanians, which hopes a study released this month will bring attention to the contributions being made by immigrants to the city’s struggling commercial corridors.

Immigrants have accounted for nearly 75 percent of the area’s labor growth since 2000 and, when compared to native born, more are employed (73 percent versus 71.5 percent) and self-employed (10.7 percent versus 7.9 percent), according to a new Brookings Institution study, “Recent Immigration to Philadelphia: Regional Change in a Re-Emerging Gateway.”

Over the past several decades we have looked at immigrants as a source of cheap labor and our policy — or lack thereof — has reflected this. 

To help create jobs and growth we should open our doors to entrepreneurs from around the globe.  Current policy makes it difficult for entrepreneurs to enter the US legally.  We should be actively recruiting immigrants who want to come to our system of free enterprise to start their businesses, just as we did to bring in the scientists we needed in the 1950s and 1960s to help fight the cold war. 

The last great entrepreneurial economic boom was created in large part by first generation Americans and sustained by a large, but controlled, wave of immigration that helped to build an economy that last through most of the 1900s.

 

In addition to a “green card” for immigrants coming here to work, the US also needs another card (let’s color it a “red card” for urgent) to support the flow of legitimate entrepreneurs looking for the freedom this country offers to business owners.

If the results of a new survey from Junior Achievement are correct, the youth of today may be losing hope in entrepreneurship as a career path.  From Independent Street:

A poll released yesterday by Junior Achievement USA, a Colorado Springs, Colo., organization that hosts after-school programs for youth, found that fewer teens surveyed were interested in eventually starting their own businesses than just a year earlier. It found 60% of the 712 13- to 18-year-olds surveyed indicated they’d be interested in becoming entrepreneurs, compared with 67% in 2007.

While this percent is still very high historically speaking, the downward trend is alarming.  Entrepreneurship is the hope for our future growth and we need this generation to be ready to lead the way.