According to the SBA, small businesses have created about 78% of all new jobs in the US over the past twenty years.

For the first time, October’s ADP Small Business Report reports a net loss of jobs in the small business sector of our economy: 

• Total small business employment: -25,000
• Goods-producing sector: -36,000 small business jobs
• Service-providing sector: +11,000 small business jobs

Carl Schramm of the Kauffman Foundation has a great commentary on the importance of “Joe the Plumber“:

What appeals to me most about Joe Wurzelbacher of Ohio — better known today as “Joe the plumber” — is his dream. He speaks for men and women we all know, who want to own their own business, who want to make a job, not take a job.

Joe wants to join the nearly 600,000 other Americans who launch their own companies each year. The proposed solutions to our current economic crisis (and it seems there’s a new one almost every day) inevitably tilt toward the government as the answer.

Yet, today, more than ever, government is not the answer, and a recent telephone survey of 816 registered voters, sponsored by the Kauffman Foundation, shows that a majority of Americans agree.

In that survey, 60 percent said they had the most faith and confidence in the American people and the small business owner to guide the U.S. economy.

(Thanks to Andy Tabar for passing this along)..

I am beginning to believe that the shock of the bank failures will play out a lot like post 9-11, but in slow motion.

Instead of a sudden event that brought us all to an immediate standstill, the current situation played out over several days and even weeks.

The outcome was the same:  economic paralysis.  After 9-11 everything came to a standstill.  Everyone wanted to wait and see what would happen next before they re-engaged in normal economic activity. 

We have the same outcome today, but it happened more slowly.  Wave after wave of bad news from Wall Street and panic laden communications from Washington eventually put us into that same paralysis, that same “wait and see what is next” mentality.

Seth Godin commented about this tendency of human nature recently in his blog post “Do You Have 16 Boxes?”:

When something is going wrong, when the economy is out of sync, we panic….We talk ourselves into hysteria about how, “none of our customers have any money,” or, “in this bleak economy, we’ll never make a sale.” Instead of using the relative downtime to build…we just sit in the corner, keening, worrying….

I heard a consistent mantra out there from entrepreneurs I talked with over the past few weeks — “We just want to wait and see what is going to happen.” 

We are beginning to understand that although we have a mess; it is a mess we can all make it through.  As a result, economic activity is beginning to perk up a bit. 

Soon we will see both confidence and economic activity heat up.  We will have a slowdown for quite a while, but we should see improvement over the next few quarters.

Fortunately, panic is giving way to strategizing.  Hopelessness is giving way to planning.  Paralysis is giving way to prudent decision making. 

The NFIB has released a survey that examines the state of credit for small business.

The following is a summary of their findings:

Loan Demand is Down

Since the third quarter of 2007, the economy has slowed.  This has produced a decline in borrowing activity by small firms (lower credit demand) and smaller loan pipelines at the nation’s banks.  This is confirmed by substantial declines in the percent of firms planning and making investments in inventory stocks and capital improvements and new equipment.  Arguably, some of this decline may be due to owners “thinking they might not get credit”, but for necessary expenditures, owners likely try to get needed financing.    

Even with no change in lending standards, C&I lending falls, although it has nothing to do with a “credit crunch”.   As measured by the regular borrowing activity of NFIB’s 350,000 member firms, credit demand is down from its expansion peak reached early in 2006.  Then, 40% borrowed on a regular basis, compared to 32% in September.  This is not a credit-crunch (a supply side response), but rather a weakening of credit demand due to the weakness in the economy.

Credit Market Experiences

 

Obtaining needed financing was harder in July, August and September 2008 than it was in 2007, as fewer owners reported that all of their credit needs were met (more were turned down or got less credit than they wanted).   Recent figures are equivalent to readings at the start of the 1990s expansion or during the 2001 “recession” (wasn’t much of one), but the unusual nature of the expansion from 1995 to the peak in 2000 makes interpretation more difficult as capital spending hit a wall on 12/31/99 (Y2K was done) and the dot.com bubble burst suddenly and dramatically.  Statistically, this series shows nothing worse than what was experienced in 2001, not a “credit crunch”.

 

When credit costs and availability become a problem, small business owners signal the stress.  But there clearly has been no sign of a “credit crunch” since its existence was declared by the Fed and financial commentators.  In September, only 3% (3% in the first two weeks, 4% in the last two weeks) said credit was their top business problem, unchanged for 20 years, including the past 12 months.  Small business owner response indicates like a normal business cycle contraction, with credit harder to get for some and with lower credit demand for others.  But no spike in credit problems for small business owners appears as Wall Street apparently experienced.

The Bottom Line

In most “Main Street” markets, it’s pretty much business as usual, even with the shock of losing Fannie Preferred stock at many smaller lending institutions. 

 

Overall, there is less “savings” to lend out.  Sovereign wealth funds have returned some of that savings pool by buying into troubled banks, but there is less for the Wall Street banks to lend to each other and likely a little less for community banks to lend out as large banks poach deposits from local institutions.  But loan demand is down as well and this should not be attributed to a “credit crunch”. 

 

For every loser in the market, there is a winner who sold the “asset” at a high price and got the money.  Sound lending practices at banks lending to real customers involve leverage of 10 to 1, not the 30 to 1 we saw on Wall Street. 

 

Hopefully we can rein in these excesses before we lose the baby and the bathwater.  In the meantime, we still have too many houses (rental units, condos, single family) and small business sales are weak, and that’s the basic problem.

Bruce Schierstedt sent along a link to a poll that was conducted at a website that attracts a more techie kind of entrepreneur crowd called Webware: 

In and quick and admittedly unscientific poll on Webware, I asked entrepreneurs to answer two questions. The practical question: “How long will your cash last?” The state of mind question: “How freaked out are you?”

The results were kind of interesting.  The author, Rafe Needleman, sounded concerned that only half of the respondents to his web poll had enough cash to last at least a year.  He clearly must hang out with a different crowd of entrepreneurs than I tend to!

About two-thirds are feeling pretty good about their future and are not “freaking out.” 

Although not a valid survey (no web poll ever is), it is interesting to hear what this group of entrepreneurs is thinking right now.

My own read from entrepreneurs I talk to is that they are still optimistic when they look at things over the long-run.  But, they are concerned about the next year or so.  In short, if they can hang in there for the next several months they believe that good times will return.

A friend sent along this slide show that was leaked from a meeting held by the VC giant Sequoia Capital.  It gives an objective analysis of how we got into our current economic mess (greed and living beyond our means), what lies ahead (slow recovery is probably best case), and what start-ups of all types and sizes can do to survive (get back to basics).  I

f you have not seen this I urge you to view it, study it, and learn from it….  as we say in my business, “This WILL be on the final exam!”

As a response to economic turmoil, American Express OPEN conducted research -called the Economic Pulse – October 7th and 8th to look at how sentiment has changed in the past two months and gauge opinion on breaking news such as the 0 billion financial rescue package. 

 

Credit tightening has become a major issue: 63% of small business owners say the tightening of credit has affected their business, compared with 50% in August. As a result, 12% have had to lay off staff, 79% say sales are decreasing and 51% say they have had to tap personal assets to pay business expenses.

 

Here are some specific findings:  

 

• 55% of small business owners believe the financial rescue package signed into law on October 3 will be effective in some way to stabilize the economy — although more than half, this is not a strong endorsement  
• 25% of small business owners say increasing the amount of bank deposits insured by the FDIC from $100,000 to $250,000 will help them — I hope this is not low because the remainder are already in a weak cash position   
• 33% of small business owners are raising prices to manage in the current economic environment versus 48% in August — this is probably a sign of sagging demand      
• 71% of small business owners are stressed out by the economy; 55% were stressed out in February — this finding worries me the most, as we need small businesses to get us out of this mess.
• And the most sobering finding?  Nearly one in five (18%) small business owners risk going out of business because of the economic climate.

Need a little inspiration in these uncertain times?  Brett Nelson has written a great piece at Forbes titled “The Greatest Risks They Ever Took.” 

Here is one of my favorite quotes that hits entrepreneurial risk taking at its most personal level:

“The biggest risk was telling my fiancé one month before our wedding that I was going to quit my high-paying job to gamble on a ‘big idea’ with my old college roommate,”

So said Michael Chasen, co-founder of Blackboard.  The outcome of this risk?  Their business is now listed on NASDAQ and his fiancé agreed to tie the knot.

Here is what Nelson took away from his interviews he conducted while writing this story:

The best results come to those willing to take a chance–an important reminder for entrepreneurs, financiers and political leaders as the global economy braces for even rougher weather.

Indeed. 

My hat is off to those financiers who did not pursue the short-cuts created by greed.  Our economic system will need their strength more than ever over the coming months.

My hats off to the politicians who did not panic and vote for the soon-to-be ill-fated bailout.  History will show their courage to be well-founded.  I am proud to count my own Representative Marsha Blackburn among this group.

My hat is off to those entrepreneurs who continue to forge ahead in uncertain times — buying new buildings, adding new staff, investing in increased inventory — because they are confident in their ventures.  They are the ones who we will rely on to rebuild a strong economy.

William C. Dunkelberg, chief economist for the National Federation of Independent Business, issued the following statement on September job numbers based on NFIB’s monthly economic survey that will be released on Tuesday, October 14:

 

“Seasonally adjusted, small business owners reported basically no new job creation over the past few months. The September NFIB survey showed an average loss of -0.34 workers per firm, a decline in private sector employment. Eight percent of the owners increased employment by an average of 3.4 workers per firm, but 18 percent reduced employment at average of 3.1 workers per firm. Not a great performance, unfortunately. 

 

“Forty-nine percent of the owners hired or tried to hire, and 78 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill. Seasonally adjusted 18 percent reported unfilled job openings, a 3 point gain (but still below the thirty-four year average of 22), suggesting that the unemployment rate won’t change much, if at all. Nine percent of the owners reported that the availability of qualified labor was their top business problem, well below last September’s reading of 17 percent.

 

“Over the next three months, 12 percent plan to create new jobs, and 10 percent plan workforce reductions yielding a seasonally adjusted net 7 percent of owners planning to create new jobs, down two points from August, historically weak but not a real recession number. The September survey shows that small business owners are still muddling along in this economy.”

These findings indicate a gloomier picture than the ADP survey issued earlier this week.