Economy knocks self-employed out of business

Discussion in 'Economy' started by hvactec, Sep 4, 2011.

  1. hvactec
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    hvactec VIP Member

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    More than 1 million self-employed Americans are no longer in business almost four years after the last recession began, as the economy constrains entrepreneurial activity and small-business job creation.

    The 18-month contraction that started in December 2007 initially resulted in more would-be business owners, as the number of people who work for themselves grew to 16.3 million in July 2008 from 15.7 million at the end of 2007, according to data from the Bureau of Labor Statistics. Since then, the total has fallen about 10 percent to 14.7 million in July, the data show.

    Employer businesses - those that provide work for individuals including the founder - "have been starting in fewer numbers, with fewer workers and growing at a slower pace than in the past," according to Robert Litan, a vice president at the Kauffman Foundation, which supports research on startups. "Therefore, these entrepreneurs are generating increasingly fewer new jobs for the U.S. labor market."

    The number of new employer businesses dropped 24 percent to 505,473 on an annual basis in 2010 from 667,341 in 2006, according to Litan, who co-wrote a report published in July on small-business job creation.

    This has contributed to high unemployment as the economic recovery slows. The rate has remained above 9 percent for 25 of the past 27 months, falling to 9.1 percent in July from 9.2 percent in June, Labor Bureau statistics show. August data will be released today.

    President Obama has said small companies can help spur expansion and will address a joint session of Congress on Thursday to unveil plans to promote job growth. He told participants at a White House ceremony Monday that his proposals will include making it "easier" for entrepreneurs to hire people.

    Small companies employ about half the private-sector labor force, so it's "very difficult" for the jobless rate to improve when they're "not doing well, because they are too big a part of the economy," said Scott Shane, professor of entrepreneurial studies at Case Western Reserve University.

    Their weakness is also "a very big problem" for office-supply retailers such as Staples, Office Depot and OfficeMax, which sell to small businesses, said Brad Thomas, an analyst with KeyBanc Capital Markets Inc. Same-store comparative sales for this industry have stagnated in the past two years, while other retailers experienced some rebound following recessionary declines, he said.

    "One of the missing links in this recovery has been stronger small-business growth, which is hurting the sales" of these companies, said Thomas, who is relatively cautious about the sector and maintains "hold" ratings on Staples and Office Depot.

    During the economic slump, so-called "necessity entrepreneurs" started businesses because they couldn't find a job and needed to keep food on the table, said Litan. While their work may be "laudable," these mainly unincorporated sole proprietors are less likely to be major employers than firms that hire other workers in their first year, he said.

    The number of unincorporated businesses - some of them freelancers who require only a computer and Internet connection - fell about 4 percent to 9.5 million in July from 9.9 million in December 2007, after reaching 10.6 million in July 2008, Labor Bureau data show. The number of incorporated self-employed dropped about 11 percent to 5.2 million in July from 5.8 million in December 2007.

    A lack of customers and fewer opportunities forced many of these entrepreneurs out of business, according to Kristie Arslan, president and chief executive officer of the National Association for the Self-Employed. Small companies "are still in a recession because of a continued slowdown in the economy."

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  2. flacaltenn
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    flacaltenn USMB Mod Staff Member Gold Supporting Member

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  3. asterism
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    asterism Congress != Progress

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    The main reason is lack of access to credit, and this is a result of government regulations. Private equity groups are regulated more, FDIC stress tests have all but shut out new loans for startup businesses, and "stated income" loans are gone. The problem with the loss of stated income loans is that a new entrepreneur who has an idea and a good initial cash flow working part time cannot get credit at the new income rate. The only income the banks can accept is previous IRS tax returns.

    If these regulations existed before, companies like Dell Computers, Facebook, Best Buy, and Broadcom would not exist today.
     

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