Economic Slowdown: implications for Minority Businesses

The economy was growing robustly up until two months ago. Recently, it has run into another bump in the road. The question is what does the current slowdown mean for minority-owned businesses?

The last recession had a devastating effect on minority businesses. For example, the Gazelle Index survey found the following:

  •   26% of Latino businesses cut their workforce by more than 50%
  •   24% of black business owners cut their workforce by more than 50%
  •   20% of women business owners cut their workforce by more than 50%
  •  15% of white business owners cut their workforce by more than 50%

Given the extent of hiring cutbacks, it is important that the economy grows substantially if minority business employment is to recover fully.

Without question, the recovery still has lots of strength, but it is unfolding in a cyclical pattern, one that is similar to a roller coaster moving higher and higher, but is doing so in an up-and-down fashion rather than along a straight line.

Fourth quarter 2011 GDP grew rapidly and then it slowed down. Between December and February the economy created 250,000 jobs a month and unemployment (especially among blacks) decreased noticeably. Overall unemployment dropped from 8.7% to 8.3%, while black unemployment declined from 15.8% to 14%.

Then in March and April, growth slowed. In March the economy created 154,000 and in April 115,000 jobs were added. The overall unemployment rate dropped to 8.1% while the black unemployment rate fell to 13%.

The slowdown is caused by two factors, both of which have significant implications for minority businesses; the cutback in government spending and a decrease in business fixed investment.

  1. GDP growth declined from 3.0% to 2.2% between the last quarter of 2011 and the first quarter of 2012.
  2. Reductions in government spending were responsible for taking a full percentage point off of GDP growth.

Small businesses and especially minority businesses have been hit hard by the slowdown because they are very dependent on government contracting opportunities. For example, consider the following:

  • Black businesses comprise 6.8% of all small businesses and 15.3% of federal contractors.
  • Latino businesses are 8.0% of all small businesses and 11% of federal contractors.
  • Asians businesses are 5.5% of all small businesses and 10.3% of federal contractors.

The downturn in business fixed investment is the second factor that is responsible for the current slowdown. During the third quarter of 2011 business fixed investment was 16%, in the fourth quarter it was 5.2%. In comparison, during the first quarter of 2012 fixed investment was -2.1%.

Small businesses, especially those that are high performing depend heavily upon business-to-business purchases and corporate supply chain opportunities. Those opportunities have been curtailed somewhat because of the slowdown in fixed investment. The net result has been a reduction in small business hiring.

Fortunately, consumer spending has taken up the slack created by government and corporate reductions. Consumers are currently saving less and spending more, especially on automobiles, food and retail services, and leisure and hospitality.

In short, the current slowdown has implications for minority-owned businesses because it is caused by cutbacks in government and corporate spending— two sectors minority businesses are heavily dependent on. Business investment is always cyclical so one can expect it recover in the coming months. The major concern is government spending.

If the Congress behaves like governments in the Eurozone and implements severe austerity measures to balance the budget, it could mean hard times ahead. Let us hope that Congress will study the European experience and undertake a more rational approach to balancing the budget. Its strategy should be one that focuses on stimulating economic growth, making reasoned budget cuts and increasing tax revenues.