NEW YORK — Small businesses are becoming the Achilles heel of the U.S. recovery by limiting growth and job creation.
Companies with fewer than 500 employees, such as Phoenix Technologies Ltd. and Sonic Corp., helped lead the economy out of the four recessions since 1980. This time, they continue to cut capital spending and dismiss workers, eliminating 3,000 jobs in January, according to Roseland, N.J.-based Automatic Data Processing, the world's largest payroll processor.
Improvement in the unemployment rate, which fell to 9.7 in January from 10 percent in December, may stall later this year if these firms aren't hiring, and growth likely won't meet the median 2.7 percent annual rate forecast for 2010 by 67 economists in a Bloomberg News survey last month.
"Will you have a sustainable recovery a few years down the road without getting some small-business spending? No," said Cary Leahey, senior managing director at Decision Economics in New York and a former White House economist. "Wall Street gets it."
The Russell 2000 Index of small-cap stocks has risen 4 percent in the past six months, lagging behind a 6 percent increase in the Standard & Poor's 500 Index. Coming out of previous recessions, shares of companies with market capitalization between $250 million and $1 billion generally led markets higher.
The Russell Index gained 17 percent in the six months following the end of the 2001 recession, compared with 0.2 percent for the S&P 500.
The U.S. economy expanded at a 5.7 percent annual rate in the fourth quarter, the fastest pace in six years, after a 2.2 percent increase in the third quarter, buoyed partly by capital expenditures for equipment and software by large companies such as Dallas-based Texas Instruments. Growth may be difficult to sustain if smaller firms continue to pare spending and staff.
"It suggests that a V-shaped economic rebound is even more unlikely than suggested by many standard economic indicators," said Andrew Tilton, an economist at Goldman Sachs in New York, which sees gross domestic product growing 2.3 percent this year.
The National Federation of Independent Business' index of small-business optimism has been near historic lows for 15 consecutive months, declining to 88 in December from 88.3 in November, the federation reported last month. During the four prior recessions, it dipped below 90 only once.
"It has been a very difficult year, and 2009 did not end on an uplifting note," William Dunkelberg, chief economist for the federation in Philadelphia, said in the report. "Optimism has clearly stalled, in spite of the improvements in the economy."
Twenty-two percent of the group's members reduced employment in December, while 10 percent added workers. The federation is to release its January data today.
Because few economic reports capture small-business statistics, some economists say investors are being misled about the strength of recovery from the longest, deepest recession in decades.
Recent numbers suggest "the official data are too heavily weighted towards bigger companies, which are doing better than credit-constrained smaller firms," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "The latter employ half the work force."
The Institute for Supply Management's manufacturing report and the index of leading economic indicators are two such measures, Shepherdson said. The Tempe, Ariz.-based institute's factory gauge rose to 58.4 in January from 54.9 the previous month, the fastest pace since August 2004. The New York-based Conference Board's index of the outlook for the next three to six months gained 1.1 percent in December, the ninth consecutive increase.
The unexpected drop in the U.S. unemployment rate during January to 9.7 percent shows those indicators "have the direction of the recovery spot on," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "The wheels of the economy are turning. The improvement in the employment data does match the increase in GDP the last two quarters, so it's not a fluke."