As a small-business owner, if you have trouble reconciling your company's experience with the economic statistics in the headlines, it's not surprising.
A lot of what small companies do -- doubling the size of the store, increasing profits, taking on debt, going out of business altogether -- isn't reflected, at least initially, in the figures the government and others keep on, say, capital spending, earnings, and job creation or elimination.
Small companies are left out for a few reasons: It's simpler and cheaper to collect information from large, publicly held corporations because they have more stringent reporting requirements, for the sake of their shareholders. At the same time, small businesses are sometimes secretive -- about profits and spending, for example. It's a painstaking process for the numbers-crunchers to piece together revenue, hiring, capital spending, etc., from sales-tax payments and income-tax returns.
CATCHING-UP PROCESS. Nobody really knows how many small businesses came and went last month, how many jobs they provided or eliminated, how much money they made or lost. It can take years to figure that out and adjust all the numbers, says small-business economist William C. Dunkelberg. His monthly survey of small-business owners for the National Federation of Independent Business is cited by many forecasters as one of the most reliable pictures of small-business economics over time, despite the inherent problems with self-reported surveys.
"Think about GDP and the national income accounts," Dunkelberg says. "We go around and collect the cash-register receipts from all the stores in the U.S. and add them up. Then we check all the income-tax returns, and they should match. The first estimate has the fewest responses in it. At the end of three years, we finally have caught up with every register receipt and every tax return, and we declare [GDP] a factual number -- that's why I'm always astounded at how much the [initial] GDP figure moves the market."
Small business, according to some estimates, accounts for roughly 40% of the GDP and employs about one-half of the private work force. So it's significant that its experience isn't reflected in many of the statistics until months or years after the fact, although forecasters disagree on just how significant. "We get more data from big business because it's easier to get," says David A. Levy, vice-chairman and director of forecasting for the Levy Institute Forecasting Center in Mount Kisco, N.Y. "It's a problem because small business is part of the economy."
A large part, by some measures. In 2000, noncorporate business profits were estimated at $743 billion, which topped the $560 billion in corporate earnings (excluding financial firms), according to Moody's Investors Service. However, corporate capital spending -- more than $1 trillion -- far outpaced small-business capital spending, at just under $200 billion.
WEIGHTY ISSUE. Economists and those in Washington who collect the data are aware of the small-business statistical gap and consider it a problem, says Irving Leveson, president of ForecastCenter.com in Marlboro, N.J. "It does matter, which is why people have paid attention to it even though they haven't made the progress in correcting it that they might like," he says. "It matters for gauging the progress of the economy."
For example, manufacturing, which at the moment is suffering, tends to be concentrated among large corporations. So, current figures tend to give too much weight to that sector in relation to the service sector, which includes the majority of small businesses.
"If there's an inventory problem or a capital-spending problem, it will hit the manufacturing sector first before layoffs spread to the service sector," says Levy. "I've noticed that the NFIB survey results are sometimes different from what I'm picking up more broadly."
Only recently, with the June survey, have NFIB members reported the steep downturn in sales and profits that their corporate brethren have experienced all year (see "Recession-Type Numbers").
FUZZY FORECASTING. Some argue that the preponderance of small companies in the Internet economy is one of the reasons forecasters didn't foresee the dot-com downturn of early 2000. "If you get a sudden shift in capital spending at dot-coms, you don't have a monthly report," said Leveson. "A lot of people missed the fact that capital spending was collapsing." He points out that ad-spending declines traditionally follow general economic downturns, while last spring was the first time the drop in ad spending was one of the catalysts for a downturn.
Of course, the lag in collecting small-business economic data isn't the only problem in the economic-forecasting picture. "None of the data are perfect, and some of them are shockingly awful," says Levy, citing new-home sales, industrial building, and personal savings as notoriously unreliable figures.
NFIB economist Dunkelberg doesn't consider the flaws in the national data a big problem. "We need the uncertainty. Without it, I might be out of a job," he jokes. Presumably, that would show up in the unemployment statistics -- eventually. By Theresa Forsman in New York