Small Matters: For small businesses, a year to forget

Well, 2011 is in the "bag," so what progress did the small-business sector make?

Well, let's just say that if they were making a movie, they wouldn't pick Frank Sinatra's "It Was a Very Good Year" for the sound track.

Small business produces half of our private GDP (nongovernment), employs more than half of the private workforce, and creates two-thirds of the net new jobs over the long haul. It's a crucial sector for the economy's future prospects.

The National Federation of Independent Business surveys a sample of its 350,000 member firms every month and creates an Index of Small Business Optimism based on 10 questions ranging from hiring to future expectations.

At the end of 2011, the index was unchanged. And the December index was 6 points below the historic average.

At the same point in the recovery from the 2001 recession, the index was 10 points higher.

By this measure, the current recovery is the worst since the federation started collecting data in 1973, covering the last five recessions.

In December, only 10 percent of the owners thought the current period was a good time to expand their businesses substantially. That was just a two-point gain over the year and well below values we typically see in an expansion, now 2 1/2 years old.

With such pessimism about the future, it is no surprise that owners have been reluctant to hire or expand their firms, build up more inventory, or buy new equipment.

Job creation did improve, mostly because firms stopped releasing workers and firm failures bottomed.

But new hiring has not picked up. Job creation for the economy came from new firms being formed and from larger firms, which do not hire many employees as they expand output.

At least in the second half of 2011, the number of new firms started once again exceeded the number of terminations, the first time since 2007.

In the coming months, more firms plan to increase employment rather than cut it, a positive for 2012, but still weak for an expansion.

On the credit front, only 4 percent of the owners reported "financing and interest rates" as their top business problem. Thirty percent reported all credit needs met, while 63 percent had no interest in a loan.

So loan demand is weak. This squares with the reports of bank lending officers who lament that there are too few qualified applicants. They have plenty of money to lend.

The Optimism Index did post gains for the last four months of the year, a good sign even if there was no progress for the entire year.

There are more positive than negative signs from the overall economy now, but it is a mixed picture. GDP growth in the fourth quarter disappointed at 2.8 percent but was the best for the year.

Consumer expenditures on "services" (about 70 percent of our spending) didn't grow all year. This key segment for job creation must do better if we are to really reduce unemployment.

2011 was the worst year for home sales on record. Housing starts are running at a 600,000 annual rate, a million below the level we would expect based on demographic trends.

Housing starts will return to historical levels, but not by year-end. There are still a million or two excess houses to dispose of, and this takes time.

Inflation and interest rates will remain low unless the Middle East explodes and oil prices increase. Employment gains will be steady, but growth will be subpar. And barring a disaster somewhere, the stock market will be OK.

All this will be the undercurrent for the presidential race that will dominate the news until the end of the year. As economist Joel Naroff summed it up: "The economy is moving forward but the recovery remains mired in the muck of uncertain households and businesses and restrictive fiscal policy that may get worse."