Guest Post: Are Small Businesses Hiring Again?

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President Obama signs the Small Business Jobs Act (Jason Reed/REUTERS)

By Kate Pickert

The U.S. economy will not recover without a dramatic turnaround in the small business sector. That’s just a fact. According to the Small Business Administration, companies with fewer than 500 employees account for 44% all private payroll and created 64% of net jobs between 1993 and 2008. (Net is the number of new jobs minus the number of jobs lost.)

Our economy’s reliance on small business can help explain why recovery from the recession is so stubbornly slow. As Rex Nutting explains in the Wall Street Journal today, large and medium-sized businesses are actually doing quite well right now. One index that surveys these companies finds the sector itself is growing at 5% per year. But as Nutting explains, the overall economy is only growing at 3%. The culprit: small business, which is nearly stagnant.

It’s no wonder the recovery has been so anemic: The U.S. economy has been trying to run on one leg.

Large businesses—the good leg—have been growing robustly for at least a year. Production is rising, sales are higher and profits are through the roof. But the recovery missed the second leg—small businesses, which account for about half of U.S. output and jobs.

The small business sector, thankfully, is not completely stagnant. A monthly report from the National Federation of Independent Business, a lobbying group that represents small business owners, has recently shown slow – very slow – but steady recovery of this crucial sector of the economy.

One way to measure recovery is to measure that intangible feeling responsible for lots of business decisions – optimism. (Some pundits call this “confidence” or “certainty.”) The NFIB’s “optimism index,” which is based on 10 poll questions asked of small business owners, was higher in November and December 2010 than it had been at any time since December 2007. Sales of small business goods and services, while still sluggish, were far better in the second half of 2010 than at any time since before the stock market crash of September 2008.

One NFIB indicator that measures small business owners’ plans to hire more workers, a crucial statistics, registered its highest figure in 27 months. That figure, calculated by subtracting the number of businesses who say they plan to reduce their workforce from the number who plan to increase it, was 6. That’s far better than -10, August 2009’s number, but still way below the double-digit positive numbers registered on the index throughout 2005, 2006 and 2007. In other words, things are looking up for the small business sector, but it’s akin to arriving at Base Camp 1 on Everest – it’s a long, long, long way to the summit. But at least the economy is consistently moving in the right direction.

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