Entrepreneurial economy in critical condition – but is it recovering or not?

The vital signs for entrepreneurship in America continues to weaken.

In the most recent snap shot of the health of small business, the National Federation of Independent Business (NFIB) Index of Small Business Optimism saw only slight improvement in August. Most of the improvement was accounted for by gains in expected real sales and expectations for business conditions six months out. However, both measures remain in recession territory. And when we look at the tangible measures of current activity, such as actually creating new jobs, spending for new capital investments, and sales, we see a continued stagnation and even further declines.

One of the risks of looking at such indexes month after month is that we can lose sight of the long-term impact of a weak entrepreneurial segment to our economy. It is like sitting for hours with a family member who is in intensive care. We can become numbed by the warning lights that flash on the monitors of their vital signs.

What is the accumulative impact of all of this bad economic news and what does it mean for the health of entrepreneurship in America?

We can gain some perspective from the latest Global Entrepreneurship Monitor (GEM) Report conducted by Babson College and Baruch College. The GEM looks at longer term trends. The latest GEM paints a stark picture of the prognosis for entrepreneurial in the U.S.

According to the 2009 GEM assessment, U.S. entrepreneurial activity fell significantly from 10.6% in 2005 to 6.9% in 2009. And the steep decline in US entrepreneurial activity translated also to established businesses, as those declined by 26% (7.7% to 5.7%).

Entrepreneurial ventures of all types suffered during the deepest phase of the crisis in 2008-9:

• Early-stage fell from 8.7% to 6.9%;
• Established declined from 7.7% to 5.7%;
• Opportunity-driven declined from 7.2% to 4.8%.

The only exception to these declines were necessity-driven entrepreneurs, or those who I call accidental entrepreneurs. As expected, growing unemployment -- particularly increased structural unemployment -- led to an increase in their numbers.

Here are a few more key findings from the latest GEM study of the U.S.:

• The Midwest bears greatest hardship, with its early-stage entrepreneurship dropping from 7.4% to 4.8%. Owner-managed businesses--less than 42 months old--fell from 3.2% to 1.4% in the Midwest. Non-Caucasian entrepreneurs suffered disproportionately. Their early-stage activity fell considerably from 17.9% in 2008 to 5.3% in 2009.

• Like the NFIB monthly surveys, GEM found that pessimism has heightened. U.S. early-stage and established entrepreneurs uniformly rated the entrepreneurial climate negative with few business opportunities.

• GEM found a drop in innovation. The good news is that the U.S. is still an innovation leader. Of innovation-driven economies, the U.S. is among the countries with the highest rates for emerging (nascent) entrepreneurial activity and holds a higher average rate among nascent and new firm (3-43months in business) economies.

• GEM found that starting a business in the U.S. was more difficult in general than growing an existing business. This is consistent with what I have been saying -- if you have survived to this point, you have a reasonable chance of emerging on the other side of this recession as one of the market leaders. The question remains -- When will this recession end?

• A key contributor to difficulty in starting businesses is that informal investment in entrepreneurs, from friends and family, continued to fall in 2009.

Bill Dunkelberg, NFIB's chief economist, offers a succinct summary of what all of this data means: "Consumers are pessimistic, business owners are pessimistic and Washington's leadership has been unable to inspire any confidence in the future."

The entrepreneurship in the U.S. is in critical condition, and those who we have entrusted with the care of our economy over the past decade are guilty of nothing less than malpractice.

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