A 'Seismic' Shift In The Small Business Economy

(By Lynn Adler - Reuters) - A "seismic" shift to service-based small businesses away from manufacturing, transportation and construction is stifling economic growth and eroding the negotiating power of companies such as truck makers, according to a PayNet study.

The swing is likely permanent, without less restrictive and costly regulations, and is weighing on wage and employment gains, said Bill Phelan, founder of PayNet, which tracks U.S. small business borrowing.

Transportation, manufacturing and construction companies, the traditional drivers of the $7 trillion small business economy, scaled back to 23 percent of that in 2011 from 35 percent in 2000, the study found, while service companies rose to 44 percent from 34 percent in the same period.

The study, released on Thursday, looked at the number of companies in various industries in the United States from 2000 to 2011 and the economic implications of a shifting composition.

"The services sector generates 70 cents of economic growth for every dollar of investment -- invest one dollar and get 70 cents extra -- whereas in manufacturing you invest a dollar and you get $1.40 extra," Phelan said in an interview. "Big difference in GDP."

This bias toward a service-focused economy that generates less add-on revenue and gross domestic product growth sped up during the recession as companies and consumers sought cost cuts, he added.

PayNet estimates the number of trucking companies has been cut in half, by 350,000, since 2000.

"The mom and pop owner-operator has gone the way of the dinosaur," he said of trucking companies. "There's a seismic shift away from the small to the big."

Steep fuel prices, stricter regulations, added security expenses after the September 11, 2001 attacks on the United States and sophisticated technologies needed to heighten efficiency strained smaller companies and forced consolidation within the trucking industry.

"Before you had Billy Bob trucker coming in and buying three trucks and he didn't have a lot of negotiating power, he was happy to get his trucks and move on," Phelan said. "Now you've got Swift coming in and buying 300 trucks, and saying 'what kind of deal are you going to give me, Paccar, Volvo, Daimler?'."

This, in turn, has narrowed profit margins for manufacturers.

"The negotiating power is shifting from the seller to the buyer," he added. "They're all going to have to throw in extra value-added services and forced to come up with innovations to make their trucks more attractive."

Meanwhile, an aging population needs more health services, education demand is growing as job seekers develop new skills in a tough employment market, and more compliance and regulatory requirements mean more legal services.

In one optimistic sign within the service arena's expansion, demand for engineering and management services rose during the study period of more than a decade.

"That's a knowledge industry and that creates value so I think that's a fabulous sign that the whole service shift isn't just a bunch of dry-cleaners," said Phelan.

In a separate, monthly survey, PayNet on Thursday said U.S. small business borrowing rose in January.

Chicago-based PayNet provides risk management tools to the commercial credit industry. Its data reflects commercial loans and leases on more than 19 million contracts worth about $900 billion.

(Reporting by Lynn Adler; Editing by Andrea Evans and James Dalgleish)

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