After a wave of criticism, the Obama administration is taking a second look at its stimulus plan for small businesses and is expected to announce new initiatives in the next 10 days or so directly targeting small business lending and community banks. The renewed effort couldn’t come a moment too soon.
The National Federation of Independent Business’s (NFIB) just released monthly survey of small business members couldn’t have paint a worse picture of the economy. In fact, some of the categories are near, or at, their worst levels in the 35-year history of the survey.
The organization’s overall Small Business Optimism Index fell by another 1.5 points to 82.6 in February, the second lowest level in the survey’s history. The index’s base 100 score equals business conditions in 1986. In an even more dismal reading, average employment per firm over the past three months declined to its worst level ever.
Seasonally adjusted, 9 percent of the owners increased employment, but 24 percent reduced employment. “This indicates that the job loss numbers will be about the same as January or worse,” said William Dunkelberg, chief economist of the NFIB. In addition to reducing employment, owners are pulling back on employee pay. A record high 8 percent reported reducing employee compensation, and a record low 11 percent reported raising worker compensation, helping to keep the lid on labor costs.
On a positive note, 11 percent (seasonally adjusted) reported unfilled job openings, unchanged from February, added Dunkelberg. Job openings are a significant predictor of the unemployment rate. “But, it is clear that the first quarter of 2009 will be as bad as the fourth quarter of last year,” he said.
In a column last month, Small Business Stimulus Bill: Is ‘Half a Loaf’ Enough?, I reported that the administration’s massive stimulus bill to revive the economy would likely fall short of bringing relief to this all-important sector of the economy. As Dan Danner, NFIB president and chief executive affirmed, the bill was a “good start, but in the current economic climate … not enough.”
In the waning days of the Bush administration, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which included the controversial Troubled Asset Relief Program, known as TARP. I reported in January that the government had spent more than $1.6 trillion dollars in TARP funds since then, bailing out big businesses such as troubled insurer American International Group (AIG) and mortgage purchasers Fannie Mae and Freddie Mac. But almost none of the money had trickled down to small community banks or, by extension, small businesses.
After all of that, the Obama administration finally seemed to wake up and notice Main Street’s distress. It’s now ready to ramp up more aid to small firms, which typically generate the lion’s share of new jobs during an economic recovery. Over the past week, Treasury Secretary Timothy Geithner has been making the rounds on Capitol Hill, telling lawmakers in private meetings that the administration is crafting a new plan targeting small firms.
Only bits and pieces of the plan have leaked out in publications such as The Wall Street Journal, but enough information is available to sketch a rough outline of what the initiative is likely to entail. The overall goal is to boost liquidity for small firms to help jump-start job creation.
The Obama administration is expected to get the ball rolling in the next week or so, with legislation that will provide financing, liquidity, and guarantees to open up small business lending. The size of the program is unclear, but it will come in addition to the Term Asset-Backed Securities Loan Facility, or TALF, according to the Journal. The administration hopes to generate up to $1 trillion of lending for businesses and households.
TALF is aimed at reinvigorating the secondary market for U.S. Small Business Administration (SBA) guaranteed loans, as well as auto, credit card, and student loans, which essentially have been frozen since October 2008, according to the National Small Business Association (NSBA).
Federal Reserve Chairman Benjamin Bernanke testified recently that the program will not only provide direct credit for sectors of the small business and consumer communities, but that it will stimulate other activities and other investors. He also said that the benefits of the program should be immediately noticeable. But the NSBA noted that others were less optimistic.
Terry & Associates, Inc., an executive and SBA recruiting firm, found in a recent survey that only 33 percent of the most active SBA lenders expressed confidence that TALF would lead to increased lending. Most lenders appear to be taking a “wait and see” attitude until they can determine whether the secondary market for loans is thawed enough to allow the sale of loans at a reasonable price, it noted.
Right now, almost half (48 percent) of major SBA lenders say they have stopped making loans, according to a March survey by the recruiting firm. That’s up 3 percent from its February survey. About 20 percent of those surveyed said they were committed to increasing lending, an increase of almost 8 percent over the previous poll. “While this is encouraging news … more ‘stimulus’ and economic recovery [is] needed before we see a broad industry return to lending,” the survey concluded.
Last month, Geithner announced that the administration was working on a new small business and community bank lending initiative that would help jump-start lending. A key component of the plan, he said, would focus on government financing for the purchase of highly rated SBA loans. More money would also be earmarked to increase government guarantees on SBA loans and to cut SBA loan fees.
The NSBA has called for the federal government to use $3 billion of the remaining half of the $700 billion in TARP funding to directly purchase SBA 7(a) pooled securities.
As I’ve noted previously, if the nation is ever to break this recessionary spiral, it must tap the power of small businesses to create jobs. Access to capital is the key to economic growth, and it seems the Obama administration is finally starting get it — respond to Main Street’s needs and watch the economy grow.