Global Economic Watch


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  • Small Business Optimism Increases Slightly

    After a drop in October, optimism among small business increased a bit in November, according to a National Federation of Independent Business survey. The NFIB's Index of Small Business Optimism rose 0.9% to end the month at 92.5. Here's a look at the long term trend: The index remains below its post-recession high. NFIB economist William Dunkelberg points to Washington once again in his interpretation of the survey. GDP growth was unexpectedly strong, but most of that was inventory building, with some more exporting. Domestic sales grew only 1.9%, more in tune with other measures of how well the economy is doing. Inflation was low as expected from the NFIB data as few are raising prices. Employment was better at the end of the year, as the NFIB indicators anticipated – but not enough to restore 2007 levels of employment, six years later. The only item in small business owners’ “top 10” list of issues is that energy prices are falling. So unfortunately, not much to be optimistic about. There is a hint that owners are getting an inkling of what Obamacare might mean for labor costs, concern about the cost and availability of insurance bumped up 3 percentage points after a long period of no real change. Small firms aren’t currently required to provide insurance (this could change in the future of course), but many do. These owners may find their insurance plans “unacceptable” to Obamacare and be obliged to either pay more for the coverage or abandon it and pay the benefit in cash. This will certainly be a source of angst and confusion in 2014. The year is not ending on a high note in the small business sector of the economy. The “bifurcation” continues, the “Fortune 500” are performing well with the stock market hitting record high levels. But the small business sector is showing little growth beyond that driven by population growth. Since January 1st, the S&P has added $3.8 trillion in value – but have output and profits really increased that much? Or is this the work of the Federal Reserve which has voted to leave rates unchanged in the last 39 meetings, and likely adding to this total in December. Maybe fiscal policy will get on course and give owners something to cheer about. Read the full report here .
  • NFIB: Small Business Optimism Index Rises

    Small business owners are a bit more optimistic than they were a month ago, according to t he National Federation of Independent Business . The NFIB's Small Business Optimism Index is now at 92.1. That is a rise of 2.6 points from last month: Here's NFIB's Holly Wade breaking down some of the survey findings: You can download the full report here .
  • Atlanta Fed President on Growth and Jobs, and 'Misrepresentations' of the Impact of Small Firms

    We find that a lot of the talk about small businesses as job creators in the U.S.--especially during political campaigns--isn't quite backed up by the data. The same may be true elsewhere. Atlanta Fed President Dennis Lockhart was in Spain to speak with students at the Instituto de Empresas . The focus of his speech was on growth and jobs, and he spent some time tamping down heightened expectations for smaller faster younger firms--or "gazellas"--to drive growth in the U.S. or Europe: We found that the role of young firms in job creation is easily overstated. For instance, the claim is often made that new firms alone account for all net job creation. This is true in what you might call an accounting sense. That is, the number of jobs created by new firms about matches or exceeds the net number of jobs created by all firms. But this fact ignores the reality that established firms that are growing create many more jobs each year than do new firms. It's just that established firms that are downsizing are responsible for destroying a lot of jobs as well. New firms haven't been around long enough to downsize. In fact, as a group, young firms between one and five years old destroy more jobs than they create because of the high failure rate. Moreover, we found that many small firms are not established with an objective to grow and add employees. The landscape of small, young businesses is heavily populated with "mom-and-pop" businesses. They play an important social role, but are not a major source of jobs beyond the initial number of employees at establishment. In our investigation we then looked at the argument that it is the relatively small subset of small, young, fast-growing firms—the gazelles—that drive job creation. It's clear that gazelles do contribute significantly, but it's the growth dimension, not the age or size dimension, that matters most. That is to say, fast-growing mature firms also account for a lot of job creation. And heavy emphasis on technology and bioscience industries—so popular among economic development professionals—may also be misplaced. High-growth firms emerge in a number of industries, some decidedly low tech. All in all, it's not so obvious that the likely source of high-growth firms can be identified. The recent recession significantly constrained the growth opportunities of companies. By one definition of fast growth, there are about a third fewer fast-growing firms in the U.S. economy now compared to the mid-2000s, and they are adding about half as many jobs compared to the earlier rate. It may seem like an obvious point, but one still worth emphasizing. Innovation and entrepreneurial activity are most likely to achieve maximum impact in terms of job creation in a context of general economic growth. Read the full speech here .
  • Scott Shane: Startup Survival Rates

    Among the many academics and econobloggers who write about startups, Scott Shane has become a reliable, albeit sobering, voice. Shane, Professor of Entrepreneurial Studies at Case Western Reserve University, often focuses on the conditions required for small businesses to succeed. And he doesn't fall victim to the romantic side of entrepreneurship. So it comes as no surprise that he is once again reminding us of how difficult it is for small businesses to survive in today's business climate. At Small Business Trends , Shane has compiled the data from the Bureau of Labor Statistics and the Census Bureau in order to track the survival rate of startups. And the resulting picture is not very rosy: Shane: The 1995 BLS EST, 2000 BLS EST, and 2005 BLS EST lines each track the five year survival rates of the cohorts of new establishments founded in 1995, 2000 and 2005 respectively. Five years after they were started, 50, 49 and 47 percent of the new establishments started in 1995, 2000 and 2005, respectively, were still alive. The remaining two series come from the Census Bureau. The 2005 CENSUS EST line shows the survival rate of new establishments founded in 2005 through 2010, while the 2005 CENSUS FIRMS line shows the survival rate of new firms started in 2005 over the same period. Five years after they were started, the Census Bureau finds that 45 percent of the new establishments and 43 percent of the new firms were still alive. While I have thrown a whole lot of numbers at you, I am making a very simple point: The typical new business started in the United States is no longer in operation five years after being founded. That’s true whether statisticians at the BLS or Census are doing the measuring and it’s true whether you measure new establishments or new firms. Read Start Up Failure Rates: The Definitive Numbers here .
  • Chocolate as Disruptive Development Tool in Madagascar

    Can chocolate bars be disruptive? It all depends on how and where they are made. Fast Company 's Katherine Gammon reports on a company that is working to make chocolate bars in Madagascar. It presents as an interesting case study in how sticking to some seemingly difficult constraints in a production model can bring about real innovation in product development: Africa produces 70% of the world’s chocolate and 60% of the world’s vanilla crop, yet the continent makes just 1% of finished chocolate bars, with very little profit getting back to the farmers themselves. Now, an innovative company is disrupting the market and using limitations to their advantage to make some of the world’s best chocolate--and make a difference in Madagascar. Madecasse started in 2008 to do just that. It was started by former Peace Corps volunteers who had seen the farmers in action, and who knew the global marketplace brought just a small percentage of the profits from chocolate back to the farms. The company, which was one of [i]Fast Company’s Most Innovative Companies in 2011, has recently moved to make the chocolate culture of Madagascar even stronger: It rediscovered species of cocoa that were previously thought to be extinct. The company says that the discovery highlights the plight of the country, which is an environmental hotspot where 80% of flora and fauna are found nowhere else in the world. Cocoa farms can contribute to conservation practices because they provide shade and are often a buffer zone close to protected areas. “We’ve gotten good at turning disadvantages to our advantage,” explains Tim McCollum, one of Madecasse’s founders. “Our model and our philosophy mandates that everything in our chocolate is going to come from Madagascar. That has forced us to be more innovative, and seek some innovative flavors that haven’t been done before, like pink pepper and citrus in a chocolate bar.” Read Using Chocolate to Pull People Out of Poverty here .
  • Kauffman Foundation: Worker Hiring and Churn Rate Higher at Young Firms

    According to a new study from the Kauffman Foundation , new businesses are showing "signs of recovery" in worker turnover. It stands to reason, as the report shows, that startups have a greater percentage of new hires, but the finding that worker churn rates seem to be recovering only at young firms is telling, and may suggest, as the report points out, a slackening in economic dynamism. From the report: Figure 1 shows the rates of job creation and destruction by broad firm age groups from 1998:2 to 2011:1 for a selection of twenty-eight states. These twenty-eight states account for 56 percent of total U.S. nonfarm employment in the second quarter of 1998, according to the BLS’s Current Employment Statistics. Fluctuating around 20 percent, job creation rates for the youngest businesses—those that are zero to one year old—are much higher than for more mature businesses.14 Job creation rates for the youngest firms are twice those in the firm age range of two to ten years and four times as large as the rates for mature businesses (eleven-plus years old). Though less dramatic than the differences in job creation rates, job destruction rates also are higher for the youngest businesses than for more mature businesses. In comparing the job creation and destruction rates across firm age groups illustrated in Figure 1, it is evident that young firms have the largest net job creation rate (the difference between job creation and destruction). For the youngest firms, the net job creation rate in booms exceeds 10 percent and, even in the recent recession, exceeded 6 percent. In contrast, the net job creation rates for more mature businesses are positive in booms and negative in recessions, with a slightly higher average for businesses between two to ten years old than for those eleven years old or older. The finding that the highest net job creation rates are from young firms is consistent with the evidence in Haltiwanger, Jarmin, and Miranda (2010) from the BDS. Job creation rates are procyclical, that is, they rise during economic expansions for all firm age groups, while job destruction rates are countercyclical. Though these patterns are not surprising, the cyclical patterns differ sharply across the 2001 and 2007/09 recessions. While there was a notable increase in the job destruction rate for young businesses in the 2001 recession, the job creation rate for these businesses did not change much. In contrast, the 2007/09 recession exhibited a more pronounced decline in job creation for the youngest businesses, along with an accompanying increase in job destruction. The implication is that the 2007/09 recession hit the youngest businesses much harder than the 2001 recession did. Though the youngest businesses were hit hard in the 2007/09 recession, they are the group that has had the most robust recovery, with their job creation rate growing from 0.18 to 0.23 between 2009 and 2011. Read Job Creation, Worker Churning, and Wages at Young Businesses here .
  • Midsize Businesses' Big Impact

    At Bloomberg Businessweek , Peter Coy speaks up for the not-so-little guy. With small business getting all the attention in political debates, Coy points out that midsize businesses (annual revenue between $10 million and $1 billion) "account for one third of private-sector employment." And those businesses can la a claim for being growth engines. Coy writes: The National Center for the Middle Market is studying those neglected midsize companies with funding from GE Capital (GE), the biggest supplier of financing to the sector. The center is part of Ohio State University’s Fisher School of Business. It conducts a quarterly survey of 1,000 companies that’s designed to reflect the composition of the entire sector. On Oct. 24, the center announced that middle market companies increased head count by 2.2 percent over the 12 months through the third quarter, outpacing what it said was 1.7 percent growth in economywide employment. (The Bureau of Labor Statistics puts the economywide figure at 1.4 percent.) Revenue grew 5.5 percent over the year, vs. 1.6 percent for the big companies in the Standard & Poor’s 500-stock index, according to the National Center for the Middle Market. “Quarter after quarter, we see middle market firms emerge as the engine of growth in the U.S. economy,” Anil Makhija, who is the center’s academic director, said in a statement. Read Midsize Companies Get No Respect here .
  • With Revenue Rising, Hiring at Small Businesses Could be Next

    For those of us waiting for small businesses to make hires and help cut into unemployment numbers, Scott Shane reminds us of some basic economic rules. Small businesses will hire when small businesses are bringing in more revenue. And that means they need to sell more. Shane shares this illustration of the "s hare of Small Businesses with rising revenue and employment" at Small Business Trends : Read Small Businesses Hire When Their Revenues Rise here .
  • Small Business Optimism Index Now Tied for Highest Reading Since End of 2007

    Optimism among small business owners continues to edge upward, according to a National Federation of Independent Business survey. The NFIB's Index of Small Business Optimism rose 2 points in April and is now at 94.5. Here's a look at the long term trend: As you can see, the trend since the end of last summer has been relatively positive. The index has now pulled even with where it was in February of 2011--the highest it has been since the end of 2007. Of course, NFIB economists William Dunkelberg and Holly Wade remain anything but optimistic in their assessment. First quarter GDP growth was reported at 2.2 percent, weaker than most observers expected but consistent with the NFIB survey numbers. The Index continues to hold at the higher values of what would be considered recession level readings. Optimism has been unable to break out into expansion mode for years, producing a few false starts with no followthrough. There are hints in the April data that suggest that job creation and consumer spending were better than first reported by the government, so revisions may be positive. The unemployment rate decline was anticipated by the increase in reported hard-to-fill job openings and reported job creation was weaker in April than March, but positive. Job creation was weaker than the survey anticipated, but there will likely be upward revisions to the April figures. Looking at the larger economic picture, there isn't much reason for owners to become optimistic, the stock market is good, but the economy is bifurcated. The big tech, manufacturing and agriculture firms are doing very well as profits are at a record level. But that has not been the case on Main Street. Washington clearly is not going to address our fiscal imbalances and uncertainty is huge, about taxes, health care, new rules to help unions, energy prices, regulations and the election outcome. The Federal Reserve has taken policy into territory for which no maps exist; it's not clear where its policies will take us. Developments in Europe only magnify fears that there is another "adjustment" ahead that will be as disruptive as the one we just went through. Consumer and owner confidence in government policies is at historic lows. Whatever discretionary spending consumers and owners might do is still being deferred where possible. Owners are betting their own money and are looking for better odds before putting money on the table. Most likely, there will be little improvement on Main Street in optimism or hiring and spending this year. Read the full report here .
  • Esther Dyson on the 'Magical Thinking' behind the JOBS Act

    Esther Dyson is a big believer in startups and the power of entrepreneurship. So it may come as a bit of a surprise to learn that she is not on board with the JOBS Act . JOBS stands for Jumpstart Our Business Startups. Dyson doesn't seem to buy into the idea that government can do the jumpstart part effectively, and she likens such a move to policymakers thinking they could, or even should, help people fulfill the "American dream" of home ownership. Writing at Project Syndicate , Dyson commends the trusting spirit behind the JOBS Act, but explains that such a well-meaning initiative is rife for exploitation: I wish I had more faith in the system, but the problem is not a lack of good people, good investors, or good entrepreneurs. The problem is that, without regulation, bad people take advantage of the good ones. While regulation and restrictions may hamper small business, not all regulation and restrictions are useless. Yes, there are some wonderful, honest companies that deserve investment and can’t get it, but they are not that common. I see a lot of start-ups. Many are appealing and have good ideas, yet most of them fail. Now the quality of even the honest start-ups is likely to decline as more of them are established, and they will spend more of other people’s money before failing. For example, with more start-ups, it will be even harder for each of them to find management talent and the right employees. Indeed, many people whom an entrepreneur might have hired will probably become CEOs of competing start-ups. Meanwhile, all of them will be competing for a finite number of customers, and those companies that make progress will then have to compete for scarcer scale-up capital. Many investors in these startups are likely to lose their money. Even under the current system, many angel investors lose money. The best route to success in angel investing is to invest in, say, ten or more separate companies, so that you have the chance of at least one big winner. But, again, a broader investor pool is likely to reduce the average number of investments per investor, with inadequate diversification leading to many more losers than winners. The faith that drives the JOBS Act is the same magical thinking that drives many Internet phenomena: people are good and everyone means well. But the Internet’s easy accessibility and low entry barriers have led to spam and malware and bad behavior; each new service starts out “clean,” but then ends up requiring its own regulations. Read Markets of Magical Thinking here .
  • Scott Shane: State tax rates 'have little bearing on where people start companies'

    Scott Shane thinks we may be hearing a little too much talk about the influence of state tax rates on where entrepreneurs set up new businesses. Shane, professor of Entrepreneurial Studies at Case Western Reserve University, looked into the data and found that what we take for conventional wisdom is not particularly wise. In part, he notes, with the complexity of tax codes there is not one good tax policy that works for all types of small businesses. From Shane's article at BusinessWeek : Consider the case of two startups—a new distribution center and a new capital-intensive manufacturing venture. (Note to readers: That’s a “capital-intensive” manufacturing startup, not a “labor-intensive” one, because many states tax the two at different rates.) A 2012 Tax Foundation/KPMG report (PDF) shows there is almost no correlation between states’ effective tax rates on the two types of businesses. State taxes that are low for one are not low for the other. For instance, Louisiana has a 1 percent total effective tax rate on new, capital-intensive manufacturers—the lowest in the nation. Yet it imposes a 50 percent rate on new distribution centers, making only seven states heavier taxers of these types of startups. By contrast, neighboring Mississippi has the sixth-lowest tax rate for new distribution centers but only the 39th for new, capital-intensive manufacturers. Is your head spinning yet? And states with the lowest tax burdens aren’t the ones with the highest fraction of their population starting businesses. High-tax states, it seems, often have other advantages that offset the disadvantages of higher taxes. Consider, for example, California and Nebraska. According to the analysis I mentioned above, Nebraska has the lowest tax burden on new businesses. California, by contrast, was ranked a lowly 45th on this measure. If the favorability of the state tax regime drove new-business creation rates, Californians would start businesses at a much lower rate than Nebraskans. The opposite, however, is true. Entrepreneurial activity is much more prevalent in California than in Nebraska. The Kauffman Index of Entrepreneurial Activity (PDF) shows that from 2009 to 2011, the fraction of working-age Californians employed by others who went into business for themselves every month was 44 per 10,000 people, but for Nebraskans it was just 26 per 10,000 people. Read Small Businesses Don't Choose Low-Tax States here . ( H/t Brad Plumer )
  • What Mad Men Can Teach About Small Business

    The fifth season of Mad Men is well under way, and fans of the show are once again hooked. But for Shashi Bellamkonda , the program is not simply entertainment, but also instructive. Bellamkonda, Director of Social Media at Network Solutions , sees a lot of useful lessons in watching Don Draper and colleagues conduct business. At Small Business Trends , he lists five: 1) Don’t depend on one customer for all or your major part of your business 2) Take risks. Don’t be afraid to let a client go under compelling circumstances 3) Offline networking and shaking hands is as important today as it was in the 1960’s: 4) Dedicate resources to work on the business development and make it part of everyone’s job 5) Keep an eye on the bottom line Bellamkonda elaborates on these lessons are here . Note: We think there is a business lesson in a program developing a clearly defined style and consistent approach and finding success despite lack of big name stars and major network carriage.
  • Cisco CEO on Global Growth and Global Partners

    In a compelling interview with the Wall Street Journal 's Alan Murray , Cisco CEO John Chambers outlines how his company needs to respond to rapidly growing global demand. Chambers sees continued growth for Cisco in rapidly expanding emerging economies. But he says his company's success will depend on the success of small businesses and startups throughout the world, and so Cisco's plans have to incorporate partner companies that are merely fractions of fractions the size of Cisco. Here is an except of the interview: You can watch the full interview here .
  • New Matchmaking Service for Multinationals and Domestic Small Businesses

    Business Week 's John Tozzi reports on an interesting new program designed to get help multinational corporations like IBM connect with potential suppliers among domestic small businesses. The program is called Supplier Connection , and it creates an online interface that introduces small business to big business. Think online dating, but with a lot more money involved. Tozzi writes: The challenge for large companies is, “How do I find you, and how do I accredit you?” Citigroup ( C ) Chairman Richard Parsons said Thursday at an event promoting the website at IBM’s New York office. Citi and other major banks are among the companies participating. Others include AT&T ( T ) , Facebook, Caterpillar ( CAT ) , and Pfizer ( PFE ) . Why would such big corporations want to deal with small businesses? “The goal is to grow the U.S. economy in an effective way,” says Stanley Litow, president of the IBM International Foundation. (The foundation is funding the project with a $10 million grant.) Beyond such altruism, larger companies may find more nimble or competitive suppliers who may work harder to please a big client, says Kevin Lyons, a professor of supply chain management at Rutgers Business School. “With a small business, the hunger to do more business, to actually interact with such a large firm allows them to adapt and change,” Lyons said. Read Corporate America to Small Biz: Sell to Us here .
  • Gallup Poll Shows Small Business Owners Intend to Create More Jobs

    More small business owners intend to make new hires over the next year, according to a recently released Wells Fargo/Gallup Small Business Index poll. 22% of small business owners expect to increase the total number of jobs at their businesses, while just 8% expect to decrease the number of jobs. Here's a look at the index trend: From Gallup: The increase in small-business owner hiring intentions over the past year is consistent with the strong performance of Gallup's Job Creation Index in January and the decline in the unemployment rate as measured by Gallup at mid-month. At the same time, small-business owners have often expected to increase hiring in recent years but later reported that they actually eliminated more jobs than they created. So it remains to be seen whether the greater expectations for hiring in the next 12 months will become reality. The preference of small-business owners for hiring temporary, contract, and part-time workers may help explain why Gallup is seeing increasing numbers of people working part time but wanting full-time work even when the unemployment rate is lower. Further, this preference may reflect the continued caution on the part of many small-business owners toward the U.S. economy. Just a year ago, many owners also hoped to significantly increase their hiring in 2011, but their current reports of hiring they did last year indicates that this did not happen. Many small-business owners also continue to say they are having trouble finding qualified employees. This situation could end up hurting a lot more than one in five small businesses if hiring begins in earnest later this year. While small-business owners tend to be agile -- and have demonstrated their ability to adjust to the business cycle as needed to survive -- weak economic conditions have persisted since 2008. Read the full release here . (hat tip Small Business Trends )
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