Economic Development

Small Businesses’ Recovery Remains Work in Progress

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CLEVELAND – While rates of growth in the number of small businesses and the number of people they employ has climbed since the end of the Great Recession, “There’s been a rather dramatic decline in new firms in recent years,” a Cleveland Fed economist finds, calling it “a puzzling issue.”

In this week’s edition of Forefront, a publication of the Federal Reserve Bank of Cleveland, economists Mark Schweitzer, Ann Marie Wiersch and Joset Wright-Lacy assessed the “State of Small Business” and ask, “Why, if so much has improved in recent year relating to small business, are there fewer startup firms, comparatively?”

Since the end of Great Recession, which ran from December 2007 until June 2009, the number of small businesses with between one and 49 employees have added 4.098 million net new jobs from 2010 through last December to the U.S. workforce, says the Bureau of Labor Statistics.

The number of firms that employ 50 to 249 added 2.932 million between 2010 and 2015 and those with 250 to 500 employees 6.086 million.

However, firms with one to 49 workers have ebbed and flowed in the number they employ as have those that employ 50 to 249. Only small businesses that employ 250 to 500 have seen steady upward growth and that category fell for the first time in 2015.

In 2010, small businesses that employ one to 49 netted an additional 158,000 employees, 600,000 in 2011, 799,000 in 2012 but only 785,000 in 2013. That figure rose to 933,000 in 2014 but fell to 823,000 in 2015.

For firms with 50 to 249, the figures were 381,000, 509,000, 523,000, 458,000, 627,000 and 434,000.

And firms with more than 250 employees, the data were 619,000, 917,000, 1.119 million, 1.081 million, 1.267 million and 1.083 million.

Net job gains, Sweitzer emphasizes, involve considerable hiring because to achieve growth, firms must do more than offset reductions in jobs. “The public often neglects to account for the fact that hiring is very different from net employment gains,” he said. “We have very large hiring and very large reductions going on all of the time.”

As for new companies entering the market, “The rate of new firms has recovered from the bottom of the recession,” the article reports, “but there is still a lower level of firms opened in recent years.” As one would expect, at the outset of the Great Recession, the number of small businesses that shut down surpassed the number of businesses that opened. The number that opened did not surpass the number that shut down until 2011 and the number that closed in 2013, just above 400,000, was nearly equal to those that opened.

“Startups contribute to fluidity for the U.S. economy in which people move in and out of jobs, and that fluidity has been viewed as benefiting productivity and growth,” Sweitzer said. “So whether the overall economy is becoming less dynamic because there are fewer startups in very important.”

In 1977, some 575,000 small businesses opened and 350,000 closed their doors. By 2006, the number of startup returned to nearly 575,000 but the number closing hit a pre-recession high of 450,000.

The outstanding commercial and industrial loans banks have extended to small businesses has increased since 2013 but remains 2% below 2008 levels, the Federal Deposit Insurance Corp. reports, loans here defined as $1 million or less.

Some bankers told the Cleveland Fed that they’ve relaxed their commercial lending standards, Wiersch reports, noting, “Small businesses are more creditworthy in the last several years. Businesses are getting stronger. There’s more demand for credit.”

Bank and other commercial lenders have not fully met this demand, Sweitzer said, “and there’s room to question whether the financial recovery in lending has ben enough to support new startups. There are still startups that complain about their funding.”

Published by The Business Journal, Youngstown, Ohio.