Daily News: March 1, 2012

PayNet Small Business Study Shows Shift Toward Service Sector

A new study of the change in the types of small businesses from 2000 to 2011 reveals a dramatic shift towards service-based businesses. This longitudinal study shows that traditional sectors that drove the small business economy in the past, like manufacturing, transportation and construction, represent a shrinking share of the composition of the U.S. economy.

The data shows small businesses are expanding today at the same rate as they were in 2005. The Thomson Reuters PayNet Small Business Lending Index, which measures the amount of investment activity by millions of small businesses, increased 18% compared to the same month a year ago. This marks the 23rd consecutive month over month growth, and the 18th consecutive month of double-digit growth. At the same time, businesses’ ability to repay loans improved to levels better than 2005, making conditions ripe for continued economic growth.

Service-based businesses are taking a bigger part of the $7 trillion small business economy. The PayNet study found seven of the top ten expansion industries were service based. These include Health Services (+4%), Membership Organizations (+2%) and Legal Services (+1%). General Government services grew relative to its size. Ag Services, which include crop services, vet services and crop management, grew as a share of all small businesses. Educational Services are a top grower. These are colleges and vocational schools. Membership Organizations are trade associations; professional membership organizations; labor unions and similar labor organizations; and political and religious organizations. Legal and Insurance Services became a growing part of the small business economy also ranking among the movers.

Production based industries comprise a smaller share of all small businesses. The Big Three traditional drivers of the small business economy, Transportation, Manufacturing and Construction make up 23% of the U.S. small business economy in 2011 down substantially from 35% in 2000. This 12% decrease means about 542,000 less in the Big Three sectors today than was the case in 2000. Transportation includes air, water and trucking to move goods around. This sector saw a 50% fall from 13% of the economy to 6% by 2011. The Construction industry took a big hit as six of the ten biggest decliners were related to the housing construction industry. Lumber and Wood and Special Trade Contractors shrank the most as a percent of total small businesses in operation. Manufacturing companies made-up 10% of all small businesses in 2000 but fell to 8% by 2011. Factoring in growth this report indicates 65,000 less manufacturing businesses operate in the U.S. in 2011 than in 2000.

According to PayNet’s study, this shift to services accelerated in 2008; the recession has been particularly hard on the production sectors of the small business economy. Service businesses are important but their multiplier effect is less than production businesses that results in less add-on revenue and GDP. Perhaps this is one of the reasons for the jobless recovery and stagnant wages.