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The Rebound Is Not Here Yet

The major high end lines are still not seeing a return to the days before the beginning of the "Great Recession." Let's say you own a company making High End Custom furniture in the throes of the Great Recession. Luckily, you have the Midas touch: Everything turns into perfectly exectuded oders, gold and profits. But then your CNC cutting system breaks and you need a new one. How would you pay for it? If you had the cash on hand, you could buy the saw using your own profits. The alternative is to get a loan, but the Great Recession was an era of tight-fisted banks and tight credit. The bank officer takes one look at your credit score, your overleveraged house, and says “no thanks.” Between 2007 and 2012, roughly 60 percent of America’s job losses happened at companies with fewer than 50 employees.

Put another way: Between 2007 and 2009, small companies lost 11 percent of their jobs; large companies lost 7 percent. Why did small enterprises do so badly in the Great Recession? One explanation is that they just couldn’t get loans. The recession created deep scepticism among the nation’s lenders. Large companies could still raise money in this climate by selling bonds or selling stock. But small companies were at the mercy of banks. Many believe the banks were too stingy, and that this caused unnecessary job losses.To test this theory, economists at the Federal Reserve observed something of a natural experiment in the fallout of the Great Recession.

Not all businesses, they noticed, depend on outside financing to the same extent. Different industries have different habits. For instance, mining operations tend to rely heavily on borrowed or investors’ capital. There are a lot of upfront costs (digging a mine comes to mind), and profits might not show up until years down the road.

Clothing makers, on the other hand, prefer to buy equipment and raw materials out of their own profits. Using a database of companies and how they spent their money, the researchers sorted different industries by their proclivities for outside money.

Some of the most dependent industries were furniture stores and miningcompanies; some of the most self-financing were forestry and insurance. If credit constraints really did harm small businesses during the Great Recession, then the businesses in credit-dependent industries should have suffered more. That’s exactly what many researchers found in their working paper, where they argue that “financing constraints of small firms were one of the important drivers of unemployment dynamics in the U.S. during the Great Recession.”

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