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Economic Research

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Volume 12, Number 4
Fourth Quarter 2010


The Big Impact of Small Business

Small businesses play an important role in the U.S. economy. But the economic downturn and sluggish recovery have posed formidable challenges to this segment of the economy, said staff writer Charles Davidson in "The Big Impact of Small Business," featured in the fourth-quarter issue of EconSouth.

Young, mostly small firms are a major source of job creation, wrote Davidson. "Over the past 20 years, start-up companies less than two years old generated about one-quarter of gross job creation," despite employing less than 10 percent of the nation's workforce. It is no surprise, then, that these firms are expected to play an important role in the U.S. economic recovery.

Photo of people sitting around a tableYet small firms are facing a number of obstacles impeding their ability to expand and create jobs—namely, sluggish spending, reduced demand for goods and services, and tighter lending standards. Overall decline in household wealth is another factor hindering their growth, noted Davidson. A reduction in household wealth affects small companies because many start-ups are financed by the business owners themselves. Personal wealth is also often used as collateral to obtain loans. In fact, according to the Atlanta Fed's second-quarter small business survey, loss of the owner's personal wealth was the primary obstacle to accessing credit for small businesses less than four years old.

Despite these obstacles, small business owners said they are more optimistic about 2011 than they were about 2010. Respondents to the Atlanta Fed's quarterly business survey cited improving credit conditions and an expected sales increase in the next six months. Still, "a rapid resurgence of small and young firms does not appear likely, but this key engine of job creation could play a crucial role in bringing down the nation's persistently high unemployment rate," said Davidson.

To learn more about small business and what the Atlanta Fed is doing on a grassroots and scholarly level, see the full story in the fourth-quarter issue of EconSouth, available now in print and onlinePDF document.