Press Release
Economic Uncertainty and Poor Sales Help Explain Small Firms’ Disproportionate Job Losses during Downturn
July 21, 2011
Note To Editors
NEW YORK—The Federal Reserve Bank of New York today released Why Small Businesses Were Hit Harder by the Recent Recession, the latest article in the Current Issues in Economics and Finance series from the Research and Statistics Group.

Uncertainty about economic conditions and poor sales were the main reasons why small firms experienced steeper job declines than large firms during the 2007-09 downturn, according to analysis in the article. Furthermore, although tightened access to credit and adverse financial conditions also constrained small firms, a more pressing factor was the decline in new investment and associated financing brought on by low consumer demand for the firms’ products and services.

Between December 2007 and December 2009, jobs declined 10.4 percent in small firms (those with fewer than fifty employees), compared with 7.5 percent in large ones.

In this article, Ayşegül Şahin, Sagiri Kitao, Anna Cororaton and Sergiu Laiu seek to account for the downturn’s disproportionate effect on small firms. The authors review data on employment patterns and industry composition of firms by size. They also explore possible links between credit availability and firm performance by analyzing national surveys and established data series on economic activity and business conditions.

The authors determine that industry composition of job losses fails to explain the deeper job declines among small firms, as these businesses were hit harder than large ones regardless of industry. And while some small firms indeed experienced limited credit availability, this factor was a secondary driver of the difficulties they encountered.

Rather, the authors concluded that demand factors—notably, economic uncertainty and poor sales owing to reduced consumer demand—were the most important reasons for the weak performance and sluggish recovery of small firms.

Ayşegül Şahin is an assistant vice president, Sagiri Kitao a senior economist, and Anna Cororaton an assistant economist in the Federal Reserve Bank of New York’s Research and Statistics Group; Sergiu Laiu is an associate business support analyst in the Markets Group.

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