Small Businesses Pace Economy, Bank Says
The small-business owner is the “unsung hero” of the economy, leading the nation’s economic growth during the early 1980s after some rough times in the 1970s, Wells Fargo’s chief economist said Tuesday.
California’s small companies are heading the pack when it comes to economic growth, with Southern California proving to be an especially fertile ground for small business, said Joseph A. Wahed, who Tuesday unveiled the bank’s study on the relationship between small business and the economy.
“Small business doesn’t get the attention it deserves,” Wahed said. “We all focus on big business.
“But the real unsung hero of the California economy--and, indeed, all the United States--is the average small-business person,” he said.
For example, during the 1980-82 recession, the worst since World War II, California’s small businesses were responsible for virtually all of the state’s job growth, the Wells Fargo study said. During those years, small business created 414,000 new jobs, while large businesses laid off employees, resulting in an overall employment growth of more than 300,000 jobs, the study reported.
“California is the sixth-largest economy in the world thanks largely to small business,” Wahed said. “Look around you. This is America, a nation of small shopkeepers.”
Wells Fargo undertook the three-month study, researched and written by senior domestic economist Gary Schlossberg, primarily as a self-education process for the nation’s 12th-largest bank. Nearly 40% of Wells Fargo’s commercial banking group’s loan portfolio is made up of loans to small businesses with annual sales of less than $5 million.
Wells Fargo’s study generally defined small businesses as companies with fewer than 20 employees.
In California, the highest growth areas for small business are the services, retailing and high-technology sectors, the study found. Southern California was home to a whopping 56.4% of the state’s small firms in 1982, followed by the San Francisco Bay Area with 23.7%.
California had more business start-ups and expansions in 1984 than any other state and accounted for nearly 20% of the country’s 600 fastest-growing private and public companies as determined by Inc. magazine, the study said.
Small business in California is leading the nation’s growth because of the state’s diversified economy, the large size of the market that can support an enormous number of service businesses and its high-tech bent, Wahed said. What’s more, “we have an innovative spirit, an entrepreneurial spirit that is lacking in other states,” he said.
Small business experienced dynamic growth particularly in 1983 and 1984 as the nation’s attitudes began to shift and investors became more willing to assume the risk of starting a small firm, Wahed said.
Some of those entrepreneurs were middle managers who were laid off by large firms during the recession, he said. And one-third of the new small-business owners each year are women.
“I don’t think people are looking around and saying, ‘How can government protect me,’ ” Wahed said. “You look around you and say, ‘How can I make money now?’
“That’s a new spirit,” Wahed said. “It’s a new wave of risk-takers in an environment of low inflation, lower taxes and deregulation.”
Sensitive to Business Cycles
Small businesses are very sensitive to business cycles, and 1985 “has been a mediocre year for small business,” Wahed said. “We have had our big growth, and I think the economy is slowing down now.”
He said that 1986 “will be a wee bit better, but not much better. Looking toward 1990, we are settling into more normal growth--it won’t be bad, but it won’t be like 1983 and 1984, which were phenomenal.”
The proposition of opening a small business isn’t easy and involves a good deal of risk and hard work, Wahed said. The failure rate for all new enterprises is 65% in the first five years of operation; for franchises it is only 4%, the study said. Wahed said the failure rate for small business is 80%.
“The small owner has to be prepared to work damn hard,” Wahed said. In addition, “a small-business person has to have enough experience. He can’t say that just because he can cook an omelet he can open a restaurant.”
