Economic Forecasts

Big Firms Prosper as Small Business Struggles

Record corporate profits suggest that the economy should be booming. But small firms — the main engine for job growth — still have it tough, particularly at the bank.

Politics isn’t the only schism in the United States. There’s also a big firm/small firm divide, with each side experiencing a different economy. It’s a trend that will persist through the end of 2011 and probably into next year as well.

For big firms, money is easier to come by. Looking to expand into new lines or to hire? Corporations are sitting on cash, just waiting for the right acquisition. Many big companies are also finding cheap financing. Google raised $1 billion at 1.25% for three years. Banks are keener to lend to large businesses.

Many big companies are raking in robust profits — with gains of 15% for April to June. Companies that cut costs quickly, early in the recession, are benefiting. And a number of large companies are buoyed by strong sales in rising export markets, where demand for machinery, electrical equipment and more has offset declines in sales at home.

But for smalls, it’s a different story. They face a quite different financial climate. Most don’t have access to Wall Street funds, and bank loans are harder for them to get than for their bigger brethren. Tougher lending standards mean they need rock-solid business plans. And they’ll still pay much higher interest rates.

Many small firms, which are largely service firms — printers, restaurants, construction companies, retailers and so on — are fighting just to keep their doors open. Although some engage in manufacturing, few of them export. The financial, logistical and regulatory hurdles of selling overseas are too daunting. Thus, they aren’t tapping into the brisk growth of markets in emerging nations such as Brazil, China and India.

So with American consumers still clutching their wallets tightly in light of very high unemployment, small firms are being disproportionately hurt. During the 1980s, debt made up 84% of consumers’ income after taxes and inflation. In the past decade, the share hit 133%, fueling spending. Now it’s at 110% and continued declines suggest about $3.5 trillion going to reduce debt in coming years. That’s money that’s not spent on goods and services, and won’t support economic growth and increased jobs.

Moreover, most smalls must wait to see sales pick up before reinvesting for growth, and they remain gloomy. Nearly 70% of those surveyed by the National Federation of Independent Business say it’s a lousy time to expand. In another survey, only 19% expect to hire in the next 12 months. For many smalls, the recession isn’t over.

Big businesses, on the other hand, are more upbeat. They’re poised to jump into higher gear when growth looks ready to blossom. 87% of the Business Roundtable’s members — all large firms — see sales up in 2011. They expect to both buy equipment and hire.

In other recoveries, smalls’ struggles were less obvious and less dramatic. Big gains in government hiring masked some of the pain, while housing upswings, which typically follow recessions, cushioned the blow. This time, neither is present.

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