Small Firms Struggle Even as Economy Grows

The U.S. economy expanded during the second half of 2009, stoking optimism among investors, but the outlook isn't as rosy among small-business owners.
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WASHINGTON (TheStreet) -- Business analysts and the public are eagerly searching for signs that the economy has turned around for good. The first quarter of 2010 seemed to fulfill that hope as fewer people filed for unemployment benefits. With the stocks climbing, Wall Street pros could breathe a sigh of relief.

The U.S. economy expanded during the second half of 2009, stoking optimism among investors, but the outlook isn't as rosy among small-business owners. The first quarter brought more of the same challenges they've been battling for the past two years.

"Small businesses continue to be anxious," says Chad Moutray, chief economist at the Small Business Administration's Office of Advocacy. "Confidence is higher than it was at this time last year, but it's not nearly as good as we'd like."

Slow sales continue to be the main problem facing companies that have managed to survive this far. Americans haven't seen their home values recover and are still worried about their paychecks, so they continue to limit spending.

Still, Moutray says consumer consumption has been gradually increasing."We're starting to see a glimpse of a turnaround," he says.

An increase in business loans also offers hope. "One of the bright spots right now is SBA lending," says Moutray. "Since last March, the number of loans has gone up pretty significantly. It's really moving in the right direction."

But a complete turnaround is still far off. One troubling sign is that small businesses are continuing to shed jobs and put off hiring. Owners aren't confident enough about the economy to add employees, and until they are, the national unemployment rate probably won't change significantly.

Small-business owners are more pessimistic now than they were a few months ago. Each month, the National Federation of Independent Businesses asks owners whether they expect business conditions to get better or worse during the coming six months. In February, the most recent data available, the portion of people who expected conditions to weaken was 9 percentage points higher than the amount who predicted an improvement. In October, the optimists outstripped pessimists by 11 percentage points.

In February, only 4% of owners agreed that the next three months would be a good time to expand. That's also a lower percentage than last fall (and far below the 18% to 20% who agreed in the first quarter of 2006.)

The only good news in the most recent report is that the few employers who are hiring can pick from a better pool of job candidates. In the first quarters of 2006 and 2007, about 40% of employers who were hiring said they had few or no qualified applicants for an open position. Today, that percentage has dropped to about 25%.

Despite what you might hear from government officials and business experts, credit is not a major concern for most owners. The NFIB report found that 91% of owners could obtain the credit they want or weren't interested in borrowing. While it may be harder to get a loan than a year ago, that may be a good thing -- dicey loans that once would have been rubber-stamped now receive more scrutiny.

Looking ahead, other macroeconomic factors could bring problems later in the year. "Inflation is not an issue right now," says Moutray. "We're starting to see a healthy increase in the producer price index, and the price of oil is shooting up." That could take us back to mid-2008, when rising materials expenses shrank the profit margins of companies that were reluctant to pass added costs to customers through price increases. "We could get into a situation like that again," says Moutray.

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Reported by Elizabeth Blackwell in Chicago.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.