When President Obama brought bankers to Washington around the holidays it wasn't to hand out Christmas presents, but rather to prod them to lend more freely to small businesses. While the stock market is up about 60 percent from the bottom and hopes for economic recovery are on the rise, small businesses are still struggling, and history suggests that if they don't show up to the recovery party soon, we could very well be staring at a jobless recovery rather than a more traditional V-shaped rebound.

Small businesses depend a lot more on the strength of domestic demand and the U.S. consumer for their revenue growth than large businesses do. They don't benefit as much from a weak dollar and economic growth abroad, and are more dependent on the banking system to fund their businesses and get them through the tough times.

While the broader economy is showing some signs of life, small-business owners haven't had much to cheer about. Wells Fargo, in partnership with the Gallup Organization, has been conducting a quarterly survey of small-business owners for the past six years and, in the latest survey, the index that measures their confidence in business conditions was at a record low.

Small businesses reported that revenues weakened further, their financial situation worsened, cash flows remained poor, capital spending remained weak, and employment worsened further. Only 8 percent of small businesses reported increasing payrolls at the end of 2009, while 31 percent were still cutting them. Fifty-eight percent of small businesses are delaying purchases.

And while the credit crunch on Wall Street has ended, the one on Main Street continues to get worse. Thirty-three percent of small businesses said credit was difficult to obtain in the fourth quarter of 2009 and, worse, 40 percent said they expect to have trouble getting approved for loans 12 months from now. The threat of new taxes and government regulatory requirements add another level of risk and uncertainty for small-business owners.

Equifax reports that, in the fourth quarter, small-business bankruptcies were up 44 percent from a year ago, and in hard-hit states like California, they were up 81 percent. And we will never know the true extent of the financial damage since many small-business owners file for personal bankruptcy rather than seek protection for their businesses.

Clearly, lending to small businesses these days is not for the faint of heart, and too much of it may even lead to an unwelcome knock at the door from your bank examiner. After all, wasn't it reckless lending that lead to this financial crisis in the first place? Asking bankers to loosen credit standards, or take "second looks" at small-business loan applications that have already been vetted and rejected seems at odds with the Obama administration's efforts to stabilize and strengthen the U.S. financial system.

At the same time I understand and share the president's concern.

All the rhetoric in Washington about stimulating small-business growth is more than just symbolic. Businesses with less than 500 employees are generally considered small and it's these firms that have created most of the new jobs in the U.S. over the last two decades. According to the Bureau of Labor Statistics, between the third quarter of 1992 and the fourth quarter of 2008, businesses with less than 20 employees accounted for 38.4 percent of gross job gains, while those with less than 500 employees accounted for 77.4 percent of gross job gains.

True, small businesses also shed jobs more aggressively than larger businesses, especially during bad times, since they don't have the same access to credit and financial strength that larger businesses have to weather the tough times. But even when comparing net job creation statistics, small businesses still have the edge over big firms, though a narrower one. Small businesses with less than 20 employees accounted for 17.1 percent of net job creation between the third quarter of 1992 and the last quarter of 2008, and small businesses with less than 500 employees accounted for just over half, 55.1 percent of net job creation.

No matter how you slice it, the conclusion is the same: the small-business impact on the U.S. labor market is anything but small. A full economic recovery won't really begin until small businesses start spending, and hiring, again.

 

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