Small Business Picks Up, Preceding Fed's Easy Money

Ultimate Golf Seating in Elkhart, Indiana, has hired five workers to expand its staff to 10 as orders increase for its custom-made golf-cart seats, which start at $745.

“Demand is starting to improve,” co-owner David Vahala said. “We’re definitely making a turn this year.”

Small businesses are bouncing back as access to lending eases and consumers ramp up purchases. This would be welcome news for policy makers struggling to spur the world’s largest economy and bring down unemployment stalled near a 26-year high, because small companies account for 60 percent of job creation, according to Federal Reserve Chairman Ben S. Bernanke. The Fed said Nov. 3 it plans to buy another $600 billion of Treasuries, citing “disappointingly slow” progress in the recovery.

“The winds are changing in favor of small businesses,” said Ryan Sweet, senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “It is a gradual improvement, but they’re definitely more active than they were a few months ago. As these businesses re-engage, it’ll put the recovery on a more solid footing.”

The Russell 2000 Index, which tracks the small-cap segment of U.S. equity markets, has risen 19.6 percent since August 31, compared with a 14.4 percent gain in the Standard & Poor’s 500 Index. The outperformance signals investors’ rising confidence in smaller companies and those that cater to the sector, including Administaff Inc., which provides human-resource services to small and mid-size businesses.

Analysts Upgrade

The Kingwood, Texas-based company’s stock jumped 8.2 percent to $27.90 on Nov. 2 after Roth Capital analyst Jeff Martin in Newport Beach, California, upgraded the stock to buy from neutral and set a price target of $34 a share following third-quarter earnings that exceeded analysts’ estimates.

The shift is echoed in announcements by larger companies ranging from SAP AG, the world’s largest maker of business- management software, to Dell Inc., the world’s third-biggest personal-computer manufacturer. Charlotte, North Carolina-based Bank of America Corp., the largest U.S. bank by assets, last month said it plans to hire 1,000 employees in the next year to focus on companies with sales of $3 million or less.

Small-business sentiment also is healing, according to the optimism index of the National Federation of Independent Business in Nashville, Tennessee, which jumped in October to a five-month high.

‘Serious Improvement’

“This looks to us like the start of a serious improvement,” Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York, said in a note to clients after the NFIB report on Nov. 9. “We have long argued that a proper recovery in the broad economy requires a sustained improvement in the small-firm sector, which employs half the workforce.”

A month earlier, Shepherdson had written that September NFIB data indicated “progress is slow and small firms remain deeply depressed.”

John Ryding and Conrad DeQuadros of RDQ Economics LLC in New York also were encouraged by the NFIB’s October report, which showed rising expectations for sales, better business conditions six months from now and improvement in hiring plans.

“Perhaps, at last, the small-business sector has a pulse, albeit a faint one,” the economists wrote in a Nov. 9 note to clients. “We expect small-business conditions to improve over the coming months.”

‘Performed Quite Well’

Walldorf, Germany-based SAP’s small- and medium-size enterprise business “performed quite well in the third quarter,” Bill McDermott, co-chief executive officer, said on an Oct. 27 conference call with analysts. Dell, in Round Rock, Texas, said Aug. 19 that sales to these customers grew 25 percent in the second quarter from a year ago, after a 19 percent gain the prior three months.

One source of relief for small companies is the thaw in lending, reinforced by the Fed’s quarterly survey of senior loan officers, released Nov. 8. Fed officials have held more than 40 meetings this year to try to reverse the drop in credit, and Bernanke said in an Oct. 15 speech that regulators have “seen some positive signs.”

Citigroup Inc. which claims 2,500 of the world’s 3,000 largest corporations as clients, says it also is targeting U.S. companies with less than $20 million of annual sales, and plans to hire about 200 bankers by the end of 2011 to court them. That would bring the number of small-business bankers to about 500, or one for every two North American branches.

Portfolio Revival

The revival in stock portfolios also helps by giving consumers the wherewithal to spend, said Ultimate Golf Seating’s Vahala, who is setting his sights on southern California, Arizona, Texas and the Carolinas after his first year of selling luxury seats in retirement communities such as The Villages in Florida.

“More retired customers are saying, ‘Now I can buy this seat; it’s been on my wish list for some time,’” said Vahala, 52. He sees the possibility of adding “one or two people through the end of this year and some more next year as the sales come in.”

He and his brother, Dan, also run Vahala Foam Inc., a 20- year-old company whose products go into car seats, recreational vehicles, boats and furniture. Their business, which cut staff to 65 in 2009 from about 120 before the recession, has 80 workers now and spent about $100,000 on new equipment this year. Hiring and investment would have been higher in normal years, Vahala said.

‘Coming Back Nicely’

Business is “coming back nicely,” he said, adding that workers have resumed 40-hour weeks after reduced shifts in 2009. “I’m still a little gun-shy. I wonder what’s going to happen this winter, but I feel we’ll come through it. Next year will be better.”

A pickup at small companies “could be pretty dramatic for stocks,” said Joseph Kremer, director of mid-, small- and micro-cap value strategies in Cleveland for Fifth Third Asset Management, which oversees about $20 billion.

“A renaissance in small, private businesses would ripple through the economy,” he said. Companies that sell to U.S. customers “would suddenly be seeing more growth,” while so far in the recovery, “most of what the market’s been hanging its hat on is industrial demand, a lot of it fed by foreign sales.”

Kremer said a general-merchandise discount retailer such as Dublin, Georgia-based Fred’s Inc. may do well because some consumer spending “would be ginned up at the lower end.” Companies like Consolidated Graphics Inc., a commercial printer in Houston, also might benefit from an increase in small- business demand for products such as mailers, business cards and catalogs, he said.

Jobs Turnaround

Data on employment show the turnaround has begun. Small companies have added jobs in every month since March, including a 21,000 gain in October, according to ADP Employer Services in Roseland, New Jersey, and St. Louis-based Macroeconomic Advisers LLC. Medium-sized businesses employing 50 to 499 people expanded by 24,000, and large companies with more than 499 workers cut staff by 2,000.

“The momentum in business activity is up again, and that probably reflects the improvement in small business as well,” said Jim O’Sullivan, chief economist at MF Global Ltd. in New York. “It increases the likelihood that a true, self-sustaining recovery is under way.”

More Active

The lack of an industrywide measure makes it hard to gauge progress at small, privately held companies. The Small Business Administration defines small companies as those with fewer than 500 employees. Another description, used by Fort Lauderdale, Florida-based SFN Group Inc., qualifies small customers as having annualized revenue of less than $5 million. The staffing and recruitment services provider, which changed its name from Spherion Corp. in February, said such clients are becoming more active.

“We did see some more engagement by the small accounts,” Roy Krause, chief executive officer, said Oct. 28 on SFN’s third-quarter earnings call. “That’s an issue everybody’s been talking about in the industry.”

Paychex Inc., which manages payrolls accounting for companies that employ fewer than 100 workers, said checks per client rose 1.2 percent from a year ago in the quarter ended Aug. 31, after a 1.1 percent gain in the previous quarter that broke a more than three-year-long string of declines.

“Small businesses are doing some hiring and have reduced their layoffs,” John Morphy, chief financial officer of the Rochester, New York-based company, said in a Nov. 11 interview. “Of the clients that have weathered the storm, the majority are doing well. We’re seeing stability in our sales.”

2001 Recession

Sweet at Moody’s says small businesses, which he defines as those with fewer than 50 workers, still have a lot of ground to recover. He estimates these companies accounted for 37 percent of job losses during the 18-month recession that ended June 2009, compared with 16 percent during the 2001 slump.

Demand is still uneven, credit isn’t widely available and home equity, often a source of funds for small companies, has plunged. While the government has provided assistance, it will take time to deliver results.

President Barack Obama signed small-business legislation in September that included $56 billion worth of tax cuts over the next 12 months and a $30 billion program to boost lending. That’s in addition to support from his stimulus plan, such as funding to increase limits on loan guarantees offered by the Small Business Administration.

Small companies still have “a lot of problems to work through, so their contribution will be more visible next year and even more noticeable in 2012,” Sweet said. “But they’re making progress, which at this stage of the recovery is very welcome because it keeps us moving in the right direction.”

To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.