Tuesday, November 10, 2009

Small Business Failures Leading the Recession

It's no secret that California has been among the hardest hit states.  Not only have housing prices been hit with more force than the national average, but the unemployment rate is among the highest in the nation.  But another equally destructive force is occurring that seems to get little press: the failure of small businesses. 

I live in the Los Angeles area, and virtually every major boulevard and thoroughfare is littered with "going out of business" or "for lease" signs, even in posh places like Beverly Hills and Santa Monica.  By small business, I'm referring to the types of business in strip malls or specialty businesses.  Particularly hard hit are restaurants and other types of enterprises selling non-essentials or services like spas. 

I've looked up statistics for small business closings on Google but found very little which quantifies it. Most of this commentary is based on my anecdotal experiences and observations.  It's well understood that small businesses, especially start-ups, carry a higher level of risk than say Coca Cola, but they are critically important to the economy.

Most of the country's employment growth has historically come from the creation and expansion of small business. Microsoft, for example, was started out of a  garage. But as they reach a certain size their growth prospects slow. Then, we read of large company's laying off tens of thousands of workers.  What we don't read about is how many are affected by the closed dry cleaner or pizzeria and I contend that this is the bigger problem.

The reason why is that the closures are contagious.  Once the first strip mall shop closes, less foot traffic will be created putting the next store in jeopardy and so on.  I suspect that this trend is not anywhere near over. Most retail survives because of the jump in sales at Christmas. At this moment, anyway, unless the adminstration creates a "Cash for Christmans Presents" program , it's hard to imagine the ones still holding on by their fingernails will get any kind of bump they would need to give them some breathing room and fighting chance to survive.

Another problem is that credit has dried up for small business as a key lender specializing in these enterprises went bankrupt last month: CIT.  This company is not a household name, but it's capacity to lend, even if it wanted to,  is down to perhaps 20% of what it was last year.  It was the fifth largest bankruptcy ever. That is how important this company was to "Middle America".  Now, not only will the most credit worthy companies  be unable to access temporary seasonal credit, but far less of it.

Furthermore, commercial real estate like malls and office buildings are losing tenants. From what I've been told anecdotally, landlords are often reluctant to negotiate lower rents, possibly fearing the repercussions on other tenants, who would want similar concessions. 

The solution to this disturbing trend isn't obvious, but I don't even see it being discussed.  Companies like GM and AIG which are sucking up billions of dollars and NOT producing jobs are getting assistance while the little guy is on his own.  We would produce far more jobs diverting assistance to small business than   pouring undisclosed billions into the old dinosaurs.  I'd rather bet the future of our country on the possibility of the next Microsoft than the old GM anyday.  And, as I've written in previous essays, the more little guys we save, the fewer jobs we lose and the sooner our real estate problems will self correct.  The only problem to this solution?

Unions, though smaller than they once were, are a big voting block and we all know how incredibly important it is for politicians to get re-elected, now don't we? Just ask the automakers.

Marko's Take


  1. As usual, a good article. I, too, live in the greater Los Angeles area and have seen exactly the closures and pending closures you're talking about. It is a frightening and insidious cancer that I think a lot of people are not spotting, nor understanding the potential repercussions. With all the 'talking head' talk about 'we are in a recovery', I wonder what they will say after this Christmas season will fail to save these smaller businesses and only many more will have to close shop. We are in for a rude awakening when the Christmas numbers come in. I doubt there will be much more talk about 'a recovery'.

  2. Peter:

    Thanks for the comment. Every bone in my body says strip malls are going to go in record numbers. Of course, this will affect the lenders and landlords who will lead the next challenge to be faced.


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