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Friday, November 13, 2009


stealth depression of small business

ed harrison highlights david rosenberg's morning note on future revisions to GDP data.

Translation: small businesses are suffering disproportionately because of a credit crunch. Their pain is not adequately reflected in the numbers because of big company bias in real-time data. GDP growth is probably much lower than we realize.

This view is consistent with the dichotomy in the BLS (Bureau of Labor Statistics) household survey used to calculate the unemployment rate and the establishment survey used to calculate non-farm payrolls. ...

That shows employment levels dropping off a cliff over the last three months in the household survey. While I question the magnitude of the fall given the weekly jobless claims data, these numbers are much worse than the job losses seen in Non-farm payrolls. Directionally, this has to be right, meaning the 530,000 weekly claims was probably translating into something more like 300,000 job losses than the 200,000 reported. Again, underreporting of small business distress explains the difference.

this was also a topic addressed by david goldman.

With commercial and industrial lending by American banks down 13% since September 2008, and most banks continuing to “tighten lending standards” in the Fed’s official poll, this is not surprising. Wal-Mart will make it through a recession; not the tea-cozy shop down the mall corridor, much less the real-estate agency in the half-abandoned exurb. The global speculative grade default rate, as Moody’s reported this week, has risen to a post-Great Depression high of 12%. Credit lines for small businesses (including home equity, credit cards, and all the other devices entrepreneurs use to fund themselves) will continue to shrink.

Numerous analysts have made the point that in all previous post-war recoveries, it was small business that led job creation. During the 1980s and 1990s large businesses lost employment and small businesses grew. The fact that job losses at small business are evidently far higher than those at large businesses does not make this look like any recovery at all.

indeed, in spite of third quarter statistics indicating a very light recovery which could as easily be called a stagnation around 2007 levels of economic activity, i suspect that the depression is gathering force in the substrata of the economy which are poorly represented in first-guess economic statistics.

previous recessions have been characterized mostly by large enterprises cutting jobs while small business created them. this time, small business has been cutting jobs even faster than the big boys, making hiring very scarce and short circuiting a lot of the logic behind well-intentioned arguments such as those forwarded by new deal democrat at the bonddad blog, positing a straight correlation between initial claims and non-farm payrolls. initial claims are moderating, but hiring continues to decline. the latest JOLTS report out of the BLS illustrates the trend, though again likely understates the perniciousness of the effects in small business.

what likely doesn't is (via the orange county register) the october survey data out of the national federation of independent businesses.

In the past three months, 8% of respondents increased employment but 19% cut jobs, owners told NFIB.

The future looks a little brighter: 9% plan to create jobs and 16% plan cuts.

More bad news for employees: Owners continued to cut compensation at a record pace, the survey found.

Overall, small-business owners continue to be pessimistic about the economy. In the 1980-82 double recession, NFIB’s Index of Small Business Optimism dipped below 90 for one quarter (100 = owners’ optimism level in 1986). In this recession, the index has been below 90 for six quarters.

hires in small business will have to exceed cuts for any material recovery to take hold. but with these businesses cut off from credit and in many cases actively seeking to downscale and reduce debt, that may not be for some time.

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Agreed. The problem is not that an abnormally high number of people are being laid off, but that an abnormally low number of people are being hired.

I think that one of the problems for small businesses (and for the deficit situation in general) is that without price increases it is difficult to envision growth and therefore plan for expansion. I know that the economists don't think this way (they adjust everything into "real" terms) but ordinary people are much more optimistic when they are making more money, even if they're not better off in real terms. I used to work for a company where the chairman (who was crafty and smart despite not being nice person) liked to pat himself on the back for "having grown sales" from $5 million to $10 million over the period from 1980 to 1995. Of course, in real terms this was break even at best, but he sure felt good about it. Businesspeople, even smart ones, think in nominal terms--without an increase (or the prospect of an increase) in nominal sales, they're not going to expand or hire.

If the Feds really want recovery, they are going to have to cause inflation on Main Street. Just letting the leveraged guys drive up asset prices isn't going to cut it.

Somebody needs to get a highly publicized raise--outside of Goldman Sachs.

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