Dear Mr. President:

It is a pleasure to present the U.S. Small Business Administration (SBA) Office of 
Advocacy’s 2009 edition of The Small Business Economy: A Report to the President.  
Given the dynamic nature of the current economic environment, we have chosen to 
expedite this annual report in the hope that the earlier release date will make it more 
relevant to current events. 
	The U.S. economic recession became progressively worse by the end of 2008, 
with rising unemployment, shrinking real gross domestic product, and increased anxiety 
among consumer and business leaders. Small businesses were challenged in many ways 
during the year, with many struggling to make ends meet. Their top concerns in the 
middle of 2008 included poor sales and inflation; by year’s end, access to credit was a 
major concern. The nation’s job generators were forced to reevaluate their businesses, lay 
off workers, and postpone plans to grow their firms. 
      Of course, even a bad economic environment can be seen as a time to look for 
opportunities, and entrepreneurs will, no doubt, be able to explore new markets for future 
growth—or make plans to do so as the economy revives. And the economy will revive, 
with help from America’s entrepreneurs.
	Over the past year, the Office of Advocacy has continued to conduct and solicit 
research documenting the importance of entrepreneurship in the American economy and 
highlighting policy issues of relevance to small firms (see Appendix B for a summary of 
recent research). 
      Innovation and entrepreneurship will be crucial to the nation’s economic revival 
and competitiveness in a global marketplace. A 2008 update by Zoltan Acs, William 
Parsons, and Spencer Tracy to David Birch’s seminal research of the 1980s and 1990s on 
“gazelles,” or fast-growing, high-impact firms, found that these firms account for almost 
all of the growth in private sector employment and revenue in the economy. Lawrence A. 
Plummer and Brian Headd noted that establishment birth rates are similar in both rural 
and urban areas—a surprising result that illustrates how entrepreneurial ventures can 
spring up anywhere. Such findings help to explain why economic development officials 
seek out and support “second-stage businesses,” many of which develop and employ 
innovations. A study by Anthony Breitzman and Diana Hicks again emphasized the 
significance of small business patents.
	Small businesses owned by various demographic groups make important 
contributions to the American economy. For example, a 2008 study by Robert Fairlie 
showed that immigrant entrepreneurs generate nearly 12 percent of all business income in 
the United States. Darrene Hackler, Ellen Harpel, and Heike Mayer detailed gains made 
by self-employed women. My October 2008 working paper on self-employment and 
baccalaureate education highlighted the importance of human capital, as did a chapter in 
the 2008 Small Business Economy by Jules Lichtenstein on small business training and 
development.
	All of the Office of Advocacy’s research can be found online at 
http://www.sba.gov/advo/research, and regular updates on new research can be accessed 
on the Office of Advocacy’s research listserv at http://web.sba.gov/list.  
      We appreciate your interest in and support for small business, as well as for the 
data and research necessary to document their significant contributions. 

Shawne Carter McGibbon				Chad Moutray
Acting Chief Counsel for Advocacy	Chief Economist and Director of 
Economic Research
      
Executive Summary

The 2009 edition of The Small Business Economy reviews the economic environment 
and, to the extent that data are available, how small firms fared in the recessionary 
economy and financial markets of 2008. Appendices provide additional data about small 
businesses along with summaries of 2008 small business research from the Office of 
Advocacy.

The State of Small Business, 2008

Small businesses create most of the nation’s new jobs, employ about half of the nation’s 
private sector work force, and provide half of the nation’s nonfarm, private real gross 
domestic product (GDP), as well as a significant share of innovations. In 2008, with the 
rest of the economy, they faced a deepening recession. 
      Real gross domestic product saw a 1.1 percent gain for the year, but fourth quarter 
GDP was down 6.3 percent on an annualized basis. Trends in the components of GDP 
were revealing: consumption spending showed modest growth in the first half of the year, 
followed by sharp declines in the second half. Investment was bleak, with significant 
declines in all but the third quarter. Real government consumption and gross investment 
made up for a small portion of the decline. Real exports, which had been a bright spot, 
were down by 23.6 percent in the fourth quarter. The financial markets were 
characterized by instability, following the unraveling of the housing market in 2006.
	Small businesses struggled to weather the downturn. Average unincorporated self-
employment fell from 10.4 million in 2007 to 10.1 million in 2008—a number that 
averaged 9.6 million by November and December. Incorporated self-employment 
remained steady at 5.8 million, on average, over the 2007-2008 period. Some 
nongovernmental surveys found small firms expressing less willingness to expand, hire 
new workers, invest in new plant and equipment, or borrow money, at least in the near 
term. In particular, construction, an industry dominated by small firms, was hurting, 
having lost 682,000 jobs in 2008. 
	As the new year began, the incoming administration sought to counteract the 
falling aggregate demand through a massive stimulus package that invested in 
infrastructure development, educational facility improvements, broadband access, 
scientific research, and tax incentives. The stimulus also increased funding for guaranteed 
loans and other initiatives of the U.S. Small Business Administration in the hope of 
boosting small business growth.
	The chapter briefly summarizes several of the current challenges faced by small 
firms, including access to capital, the cost and availability of health insurance, retaining a 
quality work force, global competition, and concerns about taxes, regulation, and federal 
procurement. 
	Small firms also make important contributions to the economy through 
innovations and the creation of jobs, enterprises, and entire new industries. In sum, small 
firms struggled mightily in the recessionary economy of 2008—and if the past is an 
indication, they will likely help lead the economic recovery. 

Small Business Financing

By the beginning of 2008, an increasingly turbulent U.S. financial market was burdened 
with persistent doubts and fears about the survivability of major financial institutions—
major investment banks as well as securities dealers at home and in Europe. The U.S. 
financial markets struggled, but failed by September 2008 to gain the confidence of 
market participants sufficient to restore market functioning in 2008, despite extraordinary 
efforts by the Treasury Department and the Federal Reserve Board.
      Small firms faced difficult challenges in the extremely distressed financial 
environment. The credit freeze in the short-term funding market had a devastating effect 
on the economy and small firms. By late 2008, the normal production of goods and 
services had virtually stalled. 
      Although interest rates paid by small business owners followed a pattern similar 
to movements in the prime rate, which declined throughout the year, most small business 
owners faced a less accommodating credit market, especially in the second half of 2008. 
Lenders exhibited widening rate spreads and tightening terms of small business lending. 
Business borrowing plunged in the fourth quarter of 2008 to a low annual rate 
comparable to the levels experienced in the 2001 recession.
      According to June 2007-June 2008 data from financial institutions’ Call Reports 
to their regulators, developments in the financial markets had a limited impact on small 
business lending in the first half of 2008. A Federal Reserve Board (FRB) survey of 
lenders indicated loans were available at satisfactory levels in that period. Despite the 
lack of very current data, a number of indicators suggest that the flow of funds to small 
firms was much curtailed by the fourth quarter of 2008. 
      Ongoing studies based on the FRB’s Survey of Small Business Finances provide 
detail on how small businesses and entrepreneurs participate in financial markets.