The last two years have been grim for small businesses, but 2010 could be different. For the first time in two years, a majority of small business owners are expressing confidence they will see growth opportunities over the next 12 months, according to a new survey by the National Small Business Association (NSBA).
But they don’t call economics the dismal science for nothing; several key factors also need to fall into place before a real economic recovery can take hold. On that front, the news is, well, dismal.
While much of the public attention in the past six months has focused on the need to ramp up small business lending, the debate has been a bit like the proverbial chicken and egg.
Banks are reluctant to loan because they see rising credit risk among small businesses because of the economy. And, small businesses say they can’t begin to think about growing sales and jobs until they can be assured of adequate credit.
So the Obama administration has tried to step into the breach by encouraging more lending through the Small Business Administration and community banks. Certainly everything helps, but despite their expressions of support, banks continue to rein in small business lending.
The nation’s biggest banks cut their small business lending balance by another $1 billion in November, according to a Treasury report released last week. The drop marked the seventh straight month of declines.
Of the 22 banks that got the most help from the Treasury’s bailout programs, small business loan balances have been trimmed by $12.5 billion since April. Total lending has fallen 4.6 percent in that during that time, to $256.8 billion.
While it may seem like banks are talking out of one side of their mouths and doing just the opposite, they continue to face significant problems. Despite all the publicity about bonuses, many of the nation’s largest banks still face significant loan losses.
Major banks are in the midst of reporting fourth-quarter earnings, and it doesn’t take much to figure out that they are far from out of the woods.
JPMorgan Chase, for example, reported that it fourth-quarter loss in its retail financial services division was bigger than at the height of the credit crisis in 2008, according to an analysis by Seeking Alpha, a Web site that tracks the stock market.
Bank of America and Citibank, the nation’s two largest banks, also reported that their lending and consumer credit operations remain troubled and both banks cautioned that the economic recovery is fragile or yet to even get off the ground.
JPMorgan reported fourth-quarter losses of $399 in its retail financial services division (which includes mortgages). The bank lost $306 million in its credit card division. J.P. Morgan’s provision for credit losses was $7.28 billion last quarter. Despite the steep losses in its lending arm, JPMorgan still reported a profit.
Bank of America lost $5.2 billion in the fourth quarter, and was forced to charge off $8.4 billion in bad loans. It lost $1.03 billion on its credit card portfolio, substantially higher than in the fourth quarter of 2008, during the depths of the credit crisis, according to the analysis.
Citibank lost $2.33 billion on it local consumer lending operations. Net credit losses for the bank were $7.13 billion. Although better than the $7.97 billion loss in the same quarter last year, the bank was required to add $706 million to its loan loss reserves. That is money that is not available for other uses, such as lending.
The upshot according to the analysis is that “earnings for the big banks indicate that the U.S. economy is still in severe recession. Their lending operations are still experiencing massive losses and in some cases these have gotten worse than during the bleakest days of the credit crisis.”
Of the three banks, only Citibank has increased small business lending over the past seven months. Bank of America has slashed its small business portfolio by just over 6 percent and J.P. Morgan Chase has cut its portfolio by 3.7 percent, according to the Treasury report. Indeed, loan defaults, including small business loans, are expected to continue rising in 2010.
“The real story is banks are undercapitalized, with inadequate loan loss provisions, demand for small business loans is down, and there are few creditworthy borrowers in the first place. In short, bank earnings are a mirage, banks have reason not to lend,” writes Mike Shedlock, an investment advisor, in a recent issue of The Market Oracle, a UK investment newsletter.
According to the NSBA survey, nearly one quarter (24 percent) of small businesses experienced worsening terms on their outstanding bank loans (up from 19 percent in July 2009) and 64 percent said the fees and terms on their credit cards had gotten worse in just the last six months.
Remarkably, a majority of small business owners say they are no longer counting on bank loans for their business. Only 46 percent of small business owners today are using bank loans, down from 53 percent in July 2009, according to the NSBA survey.
The nation’s crippled banks are a major stumbling block, but they are only part of the problem. The other part — the chicken if you will — is the U.S. consumer. Sixty-four percent of small businesses reported falling revenues in December, up from 62 percent in July 2009 and 30 percent in August 2008. It’s the highest percentage since the NSBA began tracking this data in 1993.
Indeed, consumer spending makes up 72 percent of the nation’s gross domestic product, and without some improvement in consumer sentiment the recovery will be severely hampered. The news there is both good and bad.
While inflation is relatively tame, which is good for consumers, real wages are falling. That means consumers have even less to spend regardless of their employment status.
Weekly earnings fell 1.6 percent during 2009, the worst pullback since 1990, after rising 3.1 percent in 2008, according to a Labor Department report. When coupled with the expected inflation rate of 2.7 percent, that equals a significant loss in spending power.
Meanwhile, the Commerce Department reported that retail sales fell unexpectedly, by 0.3 percent, in December, marking the worst year on record for the spending. For all of 2009, retail sales tumbled 6.2 percent from a year ago, the steepest annual plunge since the government began collecting data in 1992.
What’s more, businesses are being squeezed by the economy’s twin bugaboos — rising energy and health care costs. Energy prices surged 18.2 percent in 2009, the sharpest rise since 1979. Gasoline prices jumped 53.5 percent, an all-time record gain going back to 1937. And one in five small businesses reported laying off workers due to rising health care costs, according to the NSBA survey.
The bottom line is that 2010 will be a pivotal year for the economy. That fact that more small businesses are optimistic looking forward is nothing short of remarkable. But the economy could easily be tipped back into a deep recession. In short, this is no time to give up on economic stimulus.
If anything, the government needs to find a way to get more money into the hands of consumers, and the best way to do that is through a massive tax cut.