Private Company Engine Slows

True or not, conventional wisdom says that private companies, particularly small ones, are the engine of the economy and job creation. Even if these firms only add one or two employees each, small companies number in the hundreds of thousands. But the financial fortunes of those companies have begun to flag with the balance of the economy.

According to a recent report from research firm Sageworks:

Since private companies drive significantly more than 50 percent of GDP and 65 percent of new job creation in the United States, private company financial performance is a gauge of the health of the wider U.S. economy.


Average annual sales growth for private companies has slowed to around 5.4 percent currently from nearly 11 percent in January and from around 8 percent a year earlier

Sageworks management also said 2013 private business growth is at extreme risk. And this stumble will cause the inevitable. Jobs cuts are often the only means to prevent losses.

What the Sageworks study authors did not point out is that among the most damaging problems for small businesses, if it is not the most damaging, remains access to capital. This problem began with the financial crisis and the recession. The Federal Reserve has tried to solve it in part by making capital accessible to banks. But, if anything, that cheap money is hoarded to bolster balance sheets against government regulations about capital ratios and against another economic downturn.

The hoarding is the irony of the problem. An economy that cannot add employees because of rough economic times puts a drag on gross domestic product. That drag in turn hurts the earnings of many banks, which makes it even less likely they are willing to make what they perceive are risky loans to private firms.

The Fed and some members of the Administration have consistently pointed to access to capital as a deepening and ongoing problem. But it is not one they have been able to solve, and probably it has no solution in the future, at least until the economy recovers. The risk banks take only rarely can be affected by policy or liquidity. Fear of losses trump both.

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, Banking, Research