Wednesday, November 07, 2007

Committee Examines Economic Impact of the Nation’s Small Firms

This morning, Chairwoman Nydia M. Velázquez [D-N.Y.] gave the following opening statement at a House Small Business Committee hearing on the state of the small-business economy:

"Today’s hearing will examine the production, employment, and output of our nation’s small businesses as drivers of the U.S. economy. There can be little doubt that, at its heart, our nation’s economy is truly a small-business economy.

"Research has shown that small businesses create most of the nation’s net new jobs and account for almost half of our employer firms. Additionally, they produce more than half of the country’s non-farm private output. It goes without question that small firms make significant contributions to the U.S. economy.

"Today’s hearing will provide a forum to hear the Federal Reserve’s perspective on small businesses’ contributions to the economy. This comes at a time where we are seeing mounting challenges in the financial markets. These challenges, stemming mainly from the housing market, may spill over to other sectors of the economy. This would have broad ramifications, including an impact on small businesses.

"Despite this recent turmoil, small businesses remain a critical source of growth. The number of new businesses, measured as the number of firm births, has shown a net increase of over 20,000 since 2004. Just last week, the Labor Department reported nationwide job growth of 166,000 new jobs and a stable rate of unemployment. Small businesses were at the heart of these metrics, and whatever our economic future may hold, we can be assured that small businesses will be the vanguard for production, job creation, and output nationwide.

"Recently, however, we’ve witnessed increased volatility in the capital markets. These conditions have been driven primarily by weaknesses in the mortgage sector, but virtually every business sector has been affected by these events. Mortgage market instability has resulted in a tightening of lending standards that has spilled over into the small businesses credit markets. Indicators reflect that entrepreneurs are experiencing difficulty obtaining credit and more banks are reporting lower demand for small business loans.

"I am sure it comes as no surprise to members of this Committee that small businesses have more difficulty gaining access to affordable sources of credit compared to large businesses or other types of borrowers. Unfortunately, the most recent Federal Reserve's Report to the Congress on the Availability of Credit to Small Businesses reveals that this continues to be the case.

"Small businesses continue to rely disproportionately upon more expensive alternatives to traditional credit than larger businesses. Additionally, the percentage of small businesses that used credit cards increased nearly 10 percent since the last Federal Reserve survey. These results demonstrate the need for strong SBA programs aimed at providing small firms with access to affordable sources of financing.

"Yet, despite the obvious importance of small businesses, there remain few studies on their economic role. In addressing the need for solid information on small businesses, few studies have been more influential than the Federal Reserve’s Report to Congress on the Availability of Credit to Small Businesses. Much of the information contained in the report is gleaned from the Survey of Small Business Finances, which is itself the most comprehensive and up-to-date direct assessment of small-business finance.

"Over the past decade, this report has provided Congress with invaluable insight into the small-business credit markets. Now, more than ever, such insight is a key resource in developing balanced and effective economic policies. With the economic turmoil we have seen recently, it is paramount that we all work together to restore financial market stability and offset the effects of tighter credit conditions.

"These developments have created uncertainty over our economic future. Our history has proven that, as small businesses go, so goes the national economy. In this environment, it is more important than ever that this committee remain committed to ensuring that small businesses have access to the financial tools they need to grow and thrive."

View video highlights from today’s hearing.

Sources: Federal Reserve Board, U.S. House Small Business Committee

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