It's Official: Economic Downturn Engulfs Small Businesses

In the third quarter last year, the economy posted a healthy 4.6 percent growth rate and unemployment was under 5 percent. The biggest complaint of small business owners, outside of soaring health insurance, was their inability to find good workers.

But since that time, what began as a housing slump that grew into a major Wall Street credit crisis has now engulfed Main Street businesses in a severe economic downturn, according to several new reports and surveys. The economy was a pointed topic this week as small business owners gathered in Washington for the National Federation of Independent Business (NFIB) annual Washington summit, and no wonder.

Jupiter eSources, an Oklahoma City company that monitors court records, reported that for the first time during this credit crisis, U.S. businesses were seeking bankruptcy protection at a faster rate than consumers. More than 5,000 firms filed for bankruptcy in April, the biggest monthly total since new bankruptcy laws took effect in 2005, according to Jupiter. In the first quarter of this year, 13,155 mostly small businesses filed for bankruptcy, nearly a 45 percent increase from the 9,103 business bankruptcy filings made during the same period in 2007.

The credit crunch and falling consumer spending are depressing sales at the same time that businesses are facing soaring costs, thanks, in part, to skyrocketing oil prices. The punishing 106 percent increase in energy prices since last year, unprecedented even when adjusted for inflation, are hitting small businesses disproportionately harder because their margins are typically thinner than large businesses, and they have less latitude to raise prices. As a result, many small businesses have seen their profits wiped out and are now just trying to hang on.

"We are basically losing money every month, about $1,000 a month. It's been about two, three months now," said Tom Weisbecker, who owns a western Pennsylvania sandwich shop. He told the Associated Press that his costs are soaring; beef is up 20 percent and a 20-liter jug of canola oil is up 160 percent. A bag of flour has tripled in price. He says all of the fuel deliveries he's received in the past six months have included between $5 and $9 fuel surcharges.

New surveys show that the problems are not only widespread, but are getting worse. The NFIB released its latest survey of economic conditions this week, and it found that small business owners' confidence had reached its lowest level in 28 years. The index fell 2.2 points in May to 89.3, the lowest reading since 1980, when the index plunged during one of the severest recessions since the Great Depression. The only saving grace is that declines in real spending and hiring are yet to reach the levels of past recessions, according to NFIB Chief Economist William Dunkelberg.

In the face of the slowing economy, more and more small business owners are being forced to raise prices. The net percent (minus those reporting lower prices) of owners reporting higher average selling prices rose three points to 23 percent in May. An increasing number of owners worried about inflation "through the back door," said Dunkelberg. A net 32 percent of those polled said they planned to raise prices in the near future; "not good news for those concerned about inflation," Dunkelberg added.

The National Association for the Self-Employed (NASE), which represents businesses that typically have five employers or fewer, found similar distress among its members. In a new survey, 86 percent said the downturn has had a moderate to significant impact on their firms, and three in four described the effect as negative. “The self-employed are reporting that the cost of running their business has increased, revenue and sales are down, and that they are refraining from purchasing new equipment and inventory as a result,” Kristie Darien, who heads the NASE legislative office in Washington, D.C., said in a statement.

According to the organization, members are tightening their belts to shoulder increasing cash-flow problems, and many have been forced to raise prices just to make ends meet. Three-quarters of those surveyed said they were "very concerned" about the current economy. "In fact, half said they were not at all confident that it would improve in the next 6 to 12 months," said Darien.

Their concerns are well founded. Last week's surprise upturn in unemployment from 5.0 percent to 5.5 percent was the clearest indication yet that the economy is getting worse. It touched off a major sell-off on Wall Street that continued into this week as oil prices rose to more than $136 a barrel. Analysts are predicting oil to range from $150 to $170 a barrel this summer and fall, before settling to around $100 a barrel next year.

Small business hiring, which has been the biggest engine of economic growth in the past few years, is also slowing. The percentage of those firms that hired or tried to hire new employees fell by 5 percentage points, according to the NFIB, and the number of unfilled job openings fell by 6 percentage points. Eight percent of owners said finding qualified labor was their top business problem, compared with 17 percent who cited it as a problem last September. "That is an indication that the unemployment rate will rise," said Dunkelberg.

Republican presidential candidate John McCain's speech was one of the highlights of the NFIB summit. Most of it focused on the need to extend Bush administration tax cuts. While the issue certainly merits discussion, neither candidate has addressed how they intend to deal with the economy’s current crisis, which likely will still be lingering when the next president takes office in January.

Instead of dwelling on long-term economic policies, McCain and Obama need to address how they intend to end the current crisis in the real estate and credit markets, and how they will counter the high price of oil and other commodities, a situation that has been likened to the 1970s era of "stagflation." In fact, McCain has been trying to compare Obama to former President Jimmy Carter, who failed to curb stagflation during his '70s presidential term. But McCain should also remember that eight years of Bush administration policies got us here.