Different datasets point in different directions regarding SMEs and … (+) Entrepreneurship.
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it depends.
The answer at any given time will depend on these and many other factors, such as the data set used, how “small business” is defined, what region of the country is measured, the economic sector tracked, seasonal fluctuations, etc. It depends on whether you get it. question.
We know with some confidence that new business creation continues to be strong. The Census Bureau tracks monthly business applications filed with the IRS through Business Formation Statistics (BFS). As previously discussed here, monthly business applications spiked in mid-2020 and remain at historically high levels. For example, the number of new business applications in July was still 57% higher than the monthly average from January 2015 to February 2020.
This also applies to “propensity” business applications, which the Census Bureau determines are likely to be businesses with employees based on several variables. The number of trending business applications in July was 30% higher than the monthly average from 2015-20. Americans remain optimistic about entrepreneurship, even though observers estimate the probability of a recession to be somewhere between 20% and 30%.
What about existing small businesses? Are they equally optimistic? More importantly, how are they performing? It’s one thing to have many new business applications submitted, but it’s another thing to know that some of them are likely to become employers. It’s another thing to look at the environment those companies are entering and try to gauge their growth prospects. This is no easy task. Fortunately, some organizations are making brave and credible efforts to do so.
Small businesses can grow
The monthly Fiserv Small Business Index is useful because it is calculated from point-of-sale transaction data and has generally trended upward over the past year. This applies to both sales and trade indices. The great thing about Fiserv’s data is that it provides visibility into both small businesses and their customers. For example, in August, the retail sector’s average transaction size decreased both monthly and annually, even though the number of transactions increased.
Fiserv data provides comprehensive visibility into sales performance for small and medium-sized businesses of all sizes. You’ll get a slightly different look than the Intuit QuickBooks Small Business Index. For the first time, the index now includes sales and employment data. *This is for the smallest businesses with fewer than 10 employees.
Starting in February 2024, average monthly revenue for small businesses has increased for six consecutive months, according to the latest findings from the QuickBooks Small Business Index. Monthly revenue growth for small businesses is more volatile, but in positive territory for the fourth consecutive month. The employment data in the QuickBooks index is less optimistic. Through the first seven months of 2024, job growth was positive only once, in July. The growth rate in July was small at 0.03%, but it was positive for the first time since December 2023.
Based on these two data sources, existing small and medium-sized enterprises experience moderate positive growth. Recent survey data from the National Federation of Independent Business (NFIB) tends to paint a more negative picture. The net share of respondents reporting a change in revenue has been persistently and significantly negative over the four-year period. Although “actual sales change” has become less negative, there is still a clear downward trend (measured as a net percentage of respondents) since mid-2023.
So, is it positive or negative? What do you see when you look beneath the surface?
Small businesses are thriving everywhere.
The key findings of the Small Business Index may obscure considerable disparities between different types of companies. And that’s exactly what the Fiserv and QuickBook indexes found: wide dispersion between economic sectors.
In the QuickBooks Small Business Index, the highest revenue growth was in the education and health services sectors. Finance and real estate had the largest declines in revenue. In contrast, in the Fiserv Small Business Index, trucking and food manufacturing had the largest monthly increases from July to August, while insurance companies and education services had the largest declines. (The two indexes are not accurately comparable in terms of sectors because they capture different parts of the NAICS code that classifies economic activity.)
Geographical differences are also evident. According to Fiserv data, small businesses in Illinois and South Dakota saw healthy monthly sales increases, while those in Vermont and New Mexico did not. Similarly, in the QuickBooks index, small business revenues increased in Indiana and Illinois but decreased in New York and Oregon.
Do “SMEs” exist?
Some small businesses are growing, while others are not. In some states, small businesses are adding jobs and increasing sales, while in others they are not. This seems like a pretty common conclusion to draw from the wealth of data we have at hand. But it should remind us of two things.
First, while there is a “national” U.S. economy shaped by interest rates, tax laws, etc., many U.S. businesses, and thus many U.S. workers, still occur within regions or within specific economic sectors. I’m even more influenced by this. This is important for educational institutions, financiers, job seekers, potential entrepreneurs, etc.
Second, what we call “SMEs” are far from a monolithic entity. That’s especially important for policymakers. We can work to enact laws and policies that fully support small and medium-sized enterprises. However, it must be kept in mind that the impact of those actions will ultimately be shaped by sectoral and regional factors.
*Full disclosure: Intuit is a supporter of the Bipartisan Policy Center, where the author works. All views expressed here are those of the author and arrived at independently.
