No. 231

July 2003

SMALL BUSINESS

RESEARCH

SUMMARY

Small Business during the Business Cycle

Joel Popkin and Company, 

2003 [79 pages] Washington, D.C.

under contract no. SBAHQ-01-R-0011

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

After the longest expansion in post-war history, the

U.S. economy has been through a recession and is

struggling to return to a solid growth path. How

small firms behave during the different phases of a

business cycle—expansion and recession—is again a

focus of policy discussion. This research separates

firm size differences related to the economic cycle

from differences that might be related to longer term

economic trends. It also looks at various quarterly

indicators produced by small business surveys to

determine what, if any, insights they provide into

where small businesses are in relation to the economic business cycle.

Overall Findings

Industries react differently to changes in the business

cycle. Within some industries, primarily those that

produce goods, there are noticeable differences

between small and large business activities related to

cyclical changes. In the construction industry, small

business gross domestic product (GDP) fluctuates

much more than large business GDP. In the service

industry there is little difference between small and

large firms in response to the business cycle. 

Highlights

• The firm size relationship of GDP to the business cycle has changed over time. The study compares six expansionary periods (from the low point

of a cycle to the next peak) since the late 1950s.

Small business GDP declined relative to large business GDP during the earliest two expansionary periods (1958 and 1961), held about steady during the

1970s, and rose during the 1980s and 1990s.

• Cyclical changes affect industries differently.

Construction, populated primarily by small businesses,

is among the industries most sensitive to the business

cycle. Small construction firms are both more negatively affected by downturns and more positively

affected by expansions than large construction firms.

• The manufacturing and mining industries also

show firm size differences related to the business

cycle, especially in the non-compensation components of GDP (profits, interest payments, etc.) Large

manufacturing businesses are more cyclically sensitive, in part related to large swings in corporate profits. They grow faster than small manufacturing businesses during expansions and may also dip lower

during contractions.

• The finance, insurance, and real estate industry

and the trade sectors show little difference by firm

size in their response to the business cycle. 

• Service businesses, which produce a large portion of small business GDP, are less cyclically sensitive and show a modest difference between large and

small business activity over the cycle.

• When the Index of Small Business Optimism

produced by the National Federation of Independent

Business (NFIB) is above 103, it indicates an expansionary mode for small business GDP.
Scope and Methodology

The study used a variety of annual business size

measures but primarily focused on GDP by business

size, currently available for 1958-1999, and the

major sub-components of those data, compensation

and noncompensation (which includes net interest,

depreciation, profit-type income and indirect business taxes). Limited by the unavailability of monthly

or quarterly data, the study was not able to examine

small firms' behavior during the recession phases,

which have been relatively short in duration.

Regression analysis was used with the GDP data

to estimate the relationships of the fluctuations in

GDP by major industry sector to the fluctuations in

overall GDP, and within industry sectors, the relationships of fluctuations in GDP by business size to

the those of the industry overall.

Other data examined for differences by business

size that could be related to cyclical changes in the

economy were employment by establishment size

and selected measures of small business 

financing activities.

The study examines the possible use of quarterly

survey data from the NFIB as an indicator of small

business' place in the business cycle.

Ordering Information

The full text of this report and summaries of other

studies performed under contract to the U.S. Small

Business Administration’s Office of Advocacy are

available on the Internet at www.sba.gov/advo/research.

Printed copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

Tel. (800) 553-6847

TDD: (703) 487-4639

www.ntis.gov

Order number: PB2003-105466

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