The Small Business Economic Climate

The current recession, which is the longest since the Great Depression, is clearly having an impact on small businesses. The impact has continued to spread over the past three waves of the SBSI (Dec/Jan 2009, June, and December) and small businesses are being forced to take harsher measures to weather the downturn.

The general view of the economic climate grew more pessimistic from the start of 2009 to June (see Figure 30). Since June, the economic view has been stable. As of December, more small businesses feel the climate is “worsening” (36 percent) than “improving” (25 percent).

Figure 30

Another measure of the economy is the perceived impact the recession has had on small businesses. The impact has steadily increased over the past three waves, while decreasing numbers of small businesses believe that impact has been minimal (see Figure 31). Half of small businesses – 50 percent – believe the downturn has had a high impact on their business, compared to just 36 percent a year ago. As of December, only 19 percent of small businesses were minimally impacted, compared to 31 percent a year ago. Fully four out of five small businesses have now been impacted more than minimally by the recession.

Figure 31

*Note: Non-response not included in sample.

The recession’s effects on small businesses have been expanding over the past six months, although not all impacts are necessarily bad. As shown in Figure 32, which lists the ways the recession has affected small businesses as of June and December, a few good things have happened:

• As of December, 72 percent have found ways to operate more efficiently (up significantly from 66 percent in June)
• 47 percent have been led to find new products and services that benefit customers
• As hard times force people to work together, 43 percent have become better teams
• 31 percent have reduced inefficient or unnecessary staff by December

The recession has also led to some negative effects, some of which have increased over time. As of December, 52 percent have had to discount products and services, a significant increase over June when only 40 percent had done so. Such discounting is probably a natural outcome as the recession reaches its worst stage. Unfortunately, analysis of the SBSI has shown that firms that engage in such behavior are less successful. Deep discounting to win sales can worsen the financial situation of a business, create problems delivering services, and diminish the perceptions of quality.

Another negative effect is worsening morale within the company. A full 43 percent of small businesses experienced this effect, up significantly from 30 percent in June. It appears that as the recession has lingered, it has begun to test the resolve of owners and staff.

Figure 32

The downturn has affected small businesses in a variety of other ways, but to a lesser degree than those mentioned. As a result of the recession, owners have to do the following as of December:

• Accept a lower standard of living (42 percent)
• Make pay cuts (35 percent)
• Reduce employee benefits (29 percent)
• Shorten the work week (25 percent)
• Reduce valuable staff (23 percent)
• Implement furloughs (13 percent).

Against the backdrop of a rising impact of the economy, the outlook for the year ahead is more positive (see Figure 33). As of December, more small business owners expect the economy to improve in the next 12 months (36 percent) than to decline (26 percent). Looking at the trends, small business owners got much more pessimistic over the first 6 months of 2009, while their optimism has not changed over the second half of the year. Hopefully, in the next wave, expectations will start to shift to being more positive and counterproductive behaviors such as cutting prices and valuable staff will stop growing.

Figure 33

A final observation is how small businesses plan to invest when the economy improves (see Figure 34). The most common “top priority” is to replenish owner savings (20 percent will do so). This is not surprising because so many owners have had to cut their own pay and tap their savings to finance their enterprises. Other priorities include new equipment, marketing, building emergency funds for the business, and information technology. A number mentioned an “other” priority, which includes paying down existing debt, building the business for the future, and acquiring land/buildings (perhaps to take advantage of low prices).

Figure 34

Note: owners were asked to provide just one answer, the “top priority.” The categories included were a pre-coded list which was derived from open-ended responses to a similar question in Wave 1.