SMALL BUSINESS ECONOMY

The SMALL BUSINESS ECONOMY

2002?2003

The SMALL BUSINESS

ECONOMY

A REPORT TO THE PRESIDENT

2002?2003

2002?2003

The SMALL BUSINESS

ECONOMY

A REPORT TO THE PRESIDENT

United States Government Printing Office Washington: 2004

For sale by the Superintendent of Documents Mail Stop: SSOP U.S. Government Printing Office Washington, D.C. 20402

Dear Mr. President:

The Office of Advocacy of the U.S. Small Business Administration is pleased to present The Small Business Economy: A Report to the President. This report is the second in a series of annual reports on small businesses and their importance to the overall economy and builds on a long tradition of Advocacy documenting data and issues of relevance for small firms. The data for this report cover 2001 and 2002.

Small businesses play a vital role in the U.S. economy, and fortunately, policies from your Administration and the Congress continue to emphasize this. For instance, on March 19, 2002, you unveiled your Small Business Agenda and proposed a series of initiatives to promote entrepreneurship. By promoting a favorable tax and regulatory environment, proposing more options for small firms to provide health care, and assuring a competitive government contracting process, your Small Business Agenda was tailored to provide a favorable environment for small firms to flourish.

Part of the Small Business Agenda was to strengthen the Office of Advocacy and its enforcement of the Regulatory Flexibility Act. On August 13, 2002, you signed Executive Order 13272 which did just that. This action strengthened the influence that small firms have in reducing burdensome regulations imposed at the federal level. Advocacy has built on your commitment to small businesses by enhancing its partnership with the Office of Information and Regulatory Affairs (OIRA) and through effective outreach and training with federal agencies, part of our efforts as the "watchdog for small business."

A Report to the President i

The two years discussed in this report were trying times economically for many Americans. The U.S. economy suffered from a recession, national security concerns, and corporate accounting scandals. But the nation's economic health is quite resilient. According to the National Bureau of Economic Research, the recession lasted just eight months, and many economic indicators showed positive improvement in the months following that period. In the labor market, which has struggled, many policymakers, including you, have looked to small business as the source of new jobs. Our figures from the U.S. Census Bureau indicate the wisdom in such a strategy; over the past decade, small businesses have accounted for 60 to 80 percent of the net new jobs.

The American entrepreneur will continue to make the U.S. economy stronger and more competitive in the global environment. New, innovative firms stretch the capabilities of the marketplace and provide for a vibrant business climate. Advocacy research, for example, shows that university research and development efforts lead to new businesses being created in the surrounding area. Therefore, innovation has an important role in economic growth. This is no surprise. Small firms will continue to innovate, create jobs, and stimulate the economy for many years to come.

Thomas M. Sullivan Chief Counsel for Advocacy

Chad Moutray Chief Economist

ii The Small Business Economy

Acknowledgments

The Small Business Economy: A Report to the President was prepared by the U.S. Small Business Administration, Office of Advocacy. The Chief Counsel for Advocacy is Thomas M. Sullivan; the Chief Economist is Chad Moutray. The project was managed by Kathryn J. Tobias, senior editor. Thanks to Dawn Crockett for her assistance. Specific sections were written or prepared by the following staff: Chapter 1 Brian Headd Chapter 2 Ying Lowrey Chapter 3 Charles Ou Chapter 4 Major Clark Appendix A Brian Headd Appendix B Chad Moutray The Office of Advocacy appreciates the interest of all who reviewed the report. Thanks are also extended to Jodi Bloom, Kristen Argenio, and Jessica Snyder of Designfarm and to the U.S. Government Printing Office for their assistance.

Acknowledgments iii

iv The Small Business Economy

Contents

EXECUTIVE SUMMARY

1

CHAPTER 1 The Small Business Economy, 2001?2002 5

History as a Guide

6

The Shock to the System, 2001

7

The Flat Terrain, 2002

10

CHAPTER 2 Minorities and Women in Business

13

Minorities in Business

14

The Minority Population

14

Minorities in the Labor Force

14

Minority-owned Businesses

19

Women and Small Business

36

Self-Employment

36

Census Data on Women-owned Businesses

43

Women-owned Sole Proprietorships

45

CHAPTER 3 Small Business Financing

57

Economic and Credit Conditions in 2002

57

Interest Rate Movements

58

Use of Funds by Major Nonfinancial Sectors

60

Borrowing by the Federal Government

60

Borrowing by State and Local Governments

60

Borrowing by the Household Sector

60

Business Borrowing

62

Contents v

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