Small business sidelined in slow recovery from recession

Mom-and-pop firms, usually the first to resume hiring, are stymied by slow demand, the real estate slump and uncertainty about the future.

Reporting from Washington —

In every recession over the last three decades, it has been America's small businesses — those Lilliputian companies with fewer than 100 employees — that stepped forward, began hiring and pulled the country out of the mire.

Not this time.

Small firms are on the sidelines, and it's not just because of tight credit from the financial meltdown, as the Obama administration and others have been saying.

Rather, a host of factors — some well-recognized and others seemingly unnoticed in the national debate over economic policy — are converging to restrain small-business owners from hiring.

Among them:

Near-stagnant demand for goods and services as a result of consumers' reluctance to return to their free-spending ways.

A disturbing falloff in the creation of new small businesses.

The devastation of the real estate market.

Uncertainty about the economic outlook at home and abroad.

"Small businesses are not hiring, and until then, we will not have a strong, sufficient recovery," said Rep. Daniel Lipinski (D-Ill.), a member of the House Committee on Small Business. "I think this is why the economic recovery is moving very slowly."

It's a historical change of major proportions. In each of the previous three economic recoveries, small employers accounted for the vast majority of new jobs — the bulk of them coming from firms with fewer than 20 workers, according to Census Bureau data.

Between 1990 and 1993, employers with 1,000 or more workers added 258,000 jobs. Those with 500 to 999 workers shed 102,000 jobs during that period. But the smallest mom-and-pop operations added 860,000 jobs, census figures show.

The contrast was even more dramatic after the deep recession in the early 1980s.

This time around, unemployment levels are worse than in previous downturns, seemingly stuck near 10%, with more dismal news coming in Friday's jobless report for June. That and other recent evidence of economic weakness have increased fears of a double-dip recession.

The fact that many small firms are seeing little increase in demand for their services and products is decisive for Scott George, owner of Mid-America Dental & Hearing Center, which employs 55 people in the southwestern Missouri town of Mount Vernon.

"I'm not having any trouble getting money," said George, who recently got a $250,000 loan to renovate one of his buildings. But he's not hiring more workers because of little or no growth in sales.

"If I got more people coming through the front door, then I'd need more people to take care of them," George said.

Then there is the problem of fewer small companies starting up.

The rate of business creation fell sharply in the last two years but had been dropping since 2005, according to the Global Entrepreneurship Monitor, a research consortium. Separate government data from states such as California and Florida confirm the trend.

An aging population may explain part of the decline. Typically, it's been people under 30 who have launched firms, but that burden has shifted to older entrepreneurs, said Julio De Castro, lead author of the monitor's U.S. report.

"I look at the long-term trend, and it's not a positive one," he said.

And President Obama's pledges to spur small-business activity and hiring — including boosting government-backed lending and reducing taxes for start-ups — have been slow to be adopted as lawmakers fret about the federal deficit.

Jack Ablin, chief investment officer of Harris Private Bank in Chicago, fears the recently passed financial regulatory overhaul could further impede new business formation. " Washington is tightening standards," he said.

In the meantime, the depressed real estate market, which many fear is headed downward again as home sales and construction falter, is exerting indirect but heavy pressure on many small firms.

The connection between real estate values and the health of small businesses has received relatively little attention from most policymakers, but real estate has long been the financial lifeblood of such companies, nurturing profits and expansion.

Nearly all small-business operators own their homes, according to the National Federation of Independent Business, and about half of them own all or part their companies' buildings or land. What's more, the lobbying group found, 4 in 10 small employers also own investment real estate.

These real estate holdings often have generated profits and provided collateral for companies to borrow against for new machinery or other expansion. That's been especially important in entrepreneurial hubs such as Los Angeles and Chicago.

Now, just as many consumers can no longer use their homes as cash machines, many small businesses can't draw on their properties to invest and hire. In a 2008 survey, 22% of small employers told the federation that they had taken out at least one mortgage to support their business operations.

"In olden days, many of the start-ups got financing by refinancing their homes. That's gone," said Sung Won Sohn, a California State University economist.

Sohn recalled a small auto dealer in Los Angeles who made most of his money not by selling cars but by frequently refinancing the mortgage on his lot, which until recently kept rising in value.

It's the same story for many immigrant entrepreneurs who bought hole-in-the-wall restaurants soon after arriving in America, he said. "Because of real estate, they bought homes and went out to eat," pumping up sales and jobs at other mom-and-pop businesses, Sohn said.

Even for small firms that are doing well in this economy, the bleak real estate market is an obstacle to increasing sales and adding staff.

Bob McCutcheon is trying to expand McCutcheon's Apple Products Inc. by building a new retail-office center on his 1.2-acre parcel in Frederick, Md.

McCutcheon has sketches of the three-story center, with a water wheel at the base, a fort-style tower rising high above the roof and an apple design on top. He figures it would cost $7 million to construct and would allow him to add 10 workers to his 30-employee firm.

The problem is he can't find enough other businesses to sign up as tenants inside the 35,000-square-foot building. So the project is on hold. And without tenants, McCutcheon has no plans to bulk up his payroll.

"I'll try to avoid hiring more people," said McCutcheon, whose family has been running the business since 1938. "I'll upgrade my machinery rather than add more people. It's a lot easier to manage machines."

That sort of thinking, of course, isn't unique to McCutcheon or to small businesses. Squeezing more output from existing workers — that is, increasing productivity — has been a central strategy for most businesses for years, including the corporate giants.

Adding to the uncertainties for businesses of all sizes are the shaky global economy and the prospects of higher taxes to deal with the federal deficit and higher costs to deal with healthcare and the recent government overhaul of financial regulations.

The upshot is that the typical small-business owner sees a lot of reasons to sit tight.

Joy Staveley of Flagstaff, Ariz., said it was clear to her why people are more scared to take a risk on a new business: There are more regulations, taxes and government-mandated costs — and fears of more to come — with President George W. Bush's tax cuts expiring soon, new healthcare rules and pending legislation on energy.

"I've seen poor economies in the past, and I can deal with it," said Staveley, who with her husband has been running Canyoneers, a Grand Canyon river-rafting business, for 30 years. "But what I can't get through is a runaway government."

Such sentiments are not uncommon among many small-business operators, the bulk of them conservatives who believe Washington does not understand or respond to their needs.

"I really feel small businesses have been put on the back burner," said Mike Bailey, owner of Car Doctor, an auto-repair shop in downtown Oklahoma City.

Business has picked up this year, Bailey said, and he's prepared to add workers if he can expand into a bigger place. But he admits to being gun-shy.

"To be frank, I'm a little timid," he said. "We experienced fast growth in the '90s, and then we experienced the worst of the worst. It really keeps me from investing."

don.lee@latimes.com

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