Small business struggles revealed in firm size numbers

Posted on | June 23, 2010 | 5 Comments

(Photo by ansik, via Flickr)

Well, finally!!!

So, in 2007, there were 27.8 million U.S. businesses and, of them, 91.6% were microbusinesses with fewer than five employees.

That represents a 3.6% increase in the U.S. business population from March 2006 to March 2007 and that’s a pretty healthy jump. However, that healthy jump consists almost entirely of nonemployer businesses, continuing the trend that became noticeable and notable back in 2003.

We know from numbers released by the U.S. Census Bureau in June of last year that the number of nonemployer firms increased from 20.8 million to 21.7 million in 2007, up 4.5% from 2006 levels.

Employer numbers increased much more modestly, as usual. Overall, the number of employer businesses grew by a relatively minute 0.5%, from 6,022,127 firms to 6,049,655 of them.

Microbusiness employers with fewer than five employees increased by only 1% over the year, while including microbuisness employers with up to ten workers reduces the amount of population growth to 0.7%. That is because the number of employer firms with between 5 and 9 employees actually declined slightly over the period.

Similarly, non-micro small businesses (those with more than five employees) decreased slightly in number between the 2006 and 2007 measures. And I do mean slightly — the difference is only 7,719 businesses out of more than 2.3 million, a 0.3% decline.

Large firms also experienced a fairly healthy increase in number compared to those non-micro small businesses — although, as usual, the raw numbers are minuscule compared to all those millions of microbusinesses.

Firms with more than 500 employees increased in number from 18,071 to 18,311. That is a 1.3% increase (an additional 240 firms) and that may explain what happened to some of those medium-sized firms; clearly a notable number of them grew to become large.

Obviously, that 240-firm increase in large businesses does not quite account for the almost-8,000 non-micro small firms that disappeared between 2006 and 2007. So where did they go?

As a matter of fact, if you look at the difference between the overall increase in employer firms and the increase in the smallest firm size class of microbusiness employers (fewer than five employees), it would appear that those firms did not necessarily fail but they may have shrunk to micro-size.

Between 2006 and 2007, there was a total increase of 27,528 in the business population. Microbusiness employers with fewer than five workers grew by 35,275 firms. From this, it looks like there were some failures (not very many, really), there were a few that grew from small to large and there was a sizable number that shrank from small to micro.

Given what happened later that year — recall that the NBER declared the recession to have started in December 2007 — it seems probable that this pattern will continue. There may be a few small firms that grow into largeness but there will probably be more small firms that shrink to microness through 2008 and 2009.

As for the proportional numbers, they continue to creep in the general directions in which they have been creeping.

Nonemployer firms have increased from 77.5% to 78.2% of all U.S. firms. Again, given what has happened in the economy since 2007 and Kauffman’s recent findings, I have very little doubt that nonemployers will be up to and possibly beyond 80% of all U.S. firms by 2009.

From a historical perspective, the number of nonemployers has increased by 40.5% in the ten years from 1997 to 2007. That compares, for example, to a 7.8% increase in nonemployers between 1992 and 1997 or, even better, a 23% increase in the number of nonemployers between 1992 and 2002.

I’m not making this up. Clearly, the growth in the number of nonemployers accelerated significantly during the early years of this century and, right now, it does not look like there is reason to suppose that trend will change.

The big question is this: even though their overall contribution to GDP is considered negligible, it matters that there are so many new nonemployer firms in the U.S. business population. What is that impact? And what are the implications for the Big Picture?

Proportionately speaking, microbusinesses did not increase by very much. Firms with fewer than five employees now comprise 91.6% (up from 91.2%) of U.S. firms, while those with fewer than ten workers make up 95.4% (up from 95.2%) of all businesses.

The middle continues to shrink. Non-micro small businesses with between 5 and 499 employees dropped from 8.7% of the business population to 8.4% of same. The large firm proportion remained consistent; they are still less than one percent (0.7%) of U.S. firms.

(I’ll be talking about the numbers with Dr. Zolten Acs, Chief Economist with the SBA Office of Advocacy on Monday, June 28th, on the next edition of Microbusiness Conversations. I hope you can join me.)

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