“One of the major anomalies we have noticed in this U.S. economic recovery,” notes the Richebacher Society’s Rob Parenteau, “is that small businesses are not participating in the upswing very much at all. As displayed in the chart below, while supply managers in the most cyclical part of the U.S. economy, namely manufacturing, have reported a stronger rebound in economic activity than in the prior two recoveries, the National Federation of Independent Business small business optimism index has yet to regain even to the level of the 1990–1 recession trough.
“Yes, small businesses are clawing their way back, but the mood remains distressingly dour in this, the entrepreneurial heart of the American economy.
“We believe two culprits can be identified in the body slam experienced by small businesses during the recent recession. First, U.S. households adopted an unusual deficit spending habit for the decade extending beyond the fourth quarter of 1998. Under the influence of a sustained rise in equity prices during the New Economy bubble of the late ’90s, and an unprecedented housing boom 2001–06, U.S. consumers became very comfortable spending more than they were earning…
“We suspect many small businesses were, unknowingly, especially dependent upon perpetually increasing deficit spending by households. One can easily imagine all sorts of discretionary consumer service businesses that found niches to inhabit and grow under what, at its peak in the fourth quarter of 2005, was an annualized household deficit spending rate of $419 billion…
“The second major force crushing small business has been the scarcity of credit flowing to this business segment. Small businesses are the first clients that banks cut off when credit conditions tighten and economic uncertainty spreads. That has certainly been true in spades this time around. Only in the February reading on credit conditions for small businesses have we begun to see any kind of relief.
“If we are correct in our assessment that investors may next start to adopt a self-sustaining recovery view about the United States, then we would put on our stock picking hat and go hunting for financial firms with a history of small business lending that have clean enough balance sheets to either (a) drive a consolidation wave or (b) steal market share from their more conservative or cautious competitors…”
“Yes, small businesses are clawing their way back, but the mood remains distressingly dour in this, the entrepreneurial heart of the American economy.
“We believe two culprits can be identified in the body slam experienced by small businesses during the recent recession. First, U.S. households adopted an unusual deficit spending habit for the decade extending beyond the fourth quarter of 1998. Under the influence of a sustained rise in equity prices during the New Economy bubble of the late ’90s, and an unprecedented housing boom 2001–06, U.S. consumers became very comfortable spending more than they were earning…
“We suspect many small businesses were, unknowingly, especially dependent upon perpetually increasing deficit spending by households. One can easily imagine all sorts of discretionary consumer service businesses that found niches to inhabit and grow under what, at its peak in the fourth quarter of 2005, was an annualized household deficit spending rate of $419 billion…
“The second major force crushing small business has been the scarcity of credit flowing to this business segment. Small businesses are the first clients that banks cut off when credit conditions tighten and economic uncertainty spreads. That has certainly been true in spades this time around. Only in the February reading on credit conditions for small businesses have we begun to see any kind of relief.
“If we are correct in our assessment that investors may next start to adopt a self-sustaining recovery view about the United States, then we would put on our stock picking hat and go hunting for financial firms with a history of small business lending that have clean enough balance sheets to either (a) drive a consolidation wave or (b) steal market share from their more conservative or cautious competitors…”
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