Bloomberg Business Week: Small Business: Still Waiting for Recovery

Washington, D.C., Nov 19 -

By John Tozzi; Bloomberg Business Week

The recovery that began in the middle of last year hasn't reached small businesses yet. While corporate profits approach pre-recession levels, income at small private companies is recovering much more slowly, according to data from the Bureau of Economic Analysis. Proprietors' income—the profits of unincorporated businesses such as partnerships or individuals who work for themselves—is down nearly 5 percent from two years ago, while corporate profits have jumped 21 percent in that period, the BEA reports.

The uneven recovery of small companies stems partly from the diverging fortunes of the U.S. and faster-growing countries. Many big corporations are seeing strong sales from their overseas operations while smaller companies tend to sell primarily to customers in the U.S., says Drew White, chief financial officer at accounting software company Sageworks, which collects and analyzes financial data from hundreds of thousands of private companies. "Small businesses are probably going to get revenue later in the business cycle than the big businesses that are exporting to growing markets internationally," White says. "[Large companies] have the ability to shift markets if they see demand."

Sageworks' data show sales down by 5 percent this year at companies with less than $20 million in revenue. Sales were flat or down at such companies in 16 of 19 industries, with only education, health care, and finance showing growth. Construction firms have been hit the hardest: Revenues are down 14 percent for 2010 after a 10 percent drop in 2009. According to surveys from the National Federation of Independent Business, most small companies haven't seen consistent sales growth since 2006, which may contribute to high unemployment given the importance of small business in creating jobs.

Although many small businesses are corporations, the BEA's measure of proprietors' income gauges the performance of the bulk of U.S. enterprises. About 19.9 million partnerships and sole proprietorships with no employees existed in 2008, the latest year for which U.S. Census Bureau data are available. That number fell almost 2 percent from the previous year. While the reason for the slide isn't clear, Small Business Administration economist Brian Headd says the economy may still be too weak to support many small businesses. The drop "was surprising," Headd says. "You kind of expect when the labor market struggles, people are more likely to start their own businesses."

The bottom line: While corporations are bouncing back, sales are still declining at small companies, economists say, which is a drag on hiring.

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