A recovery? Small businesses aren't so sure.

Two years into the recovery, the outlook among small businesses is gloomy. Will it be self-fulfilling?

By Mary Helen Miller, Correspondent / July 19, 2011

In this July 15, 2011 photo, Newport Tent employee Ronnie Edelen uses a gasoline-powered "Ponjaur" hammer to drive the corner stakes for a 40x60 foot wedding tent at Sweet Berry Farm in Middletown, R.I. Owners of small businesses, the backbone of the Rhode Island economy, say burdensome rules and regulations cost them time and money. The gloomy outlook is widespread among small businesses nationwide.

Stephan Savoia/AP

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Small business is sour, pessimistic. If America were holding a party to celebrate the recovery, small business would be the killjoy.

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"It's a phony recovery," says Frank Shannon, owner of Finishes Ltd., in Colorado Springs, Colo. A decade ago, his small metal-plating company employed more than 20 people. Today, his workforce is fewer than 10. "If I don't have orders, I don't need employees," he says.

The gloom is widespread. Small-business optimism has been sinking since March, says the National Federation of Independent Business (NFIB), a Washington-based group that represents small businesses and surveys them monthly. Its May poll of more than 700 small businesses found that more small firms are planning to shrink their payroll this summer than expand it.

It's not clear whether all this pessimism is justified. But the danger is that it becomes self-fulfilling, observers say. If small-business owners are not optimistic about sales, they won't stock more goods and hire people who can keep the economy's engine running. How much does the performance of small businesses matter to economic recovery?

Small businesses "do have a major impact," says Robert Litan, vice president of research and policy at the Kauffman Foundation, a Kansas City, Mo., organization that studies entrepreneurship.

And they have the power to do so.

Small businesses represent a big chunk of the US economy. Firms with fewer than 50 workers employ slightly more than a quarter of America's workforce. If one counts as a small business any firm with fewer than 500 employees, the sector balloons to half of America's workers. Counted that way, small business also accounts for about half of economic activity, as measured by gross domestic product.

"If you're talking about half the economy, and sales growth isn't there, and job growth isn't there, it's a pretty significant effect," says Dane Stangler, a director of research at Kauffman. "There are lots of reasons for pessimism."

But even though small business has much to overcome, data show that firms with fewer than 50 employees have fared better than larger ones since the recession began. Employment at the smallest businesses – those with fewer than 50 employees – fell less during the Great Recession than it did at larger businesses, and it has rebounded faster, according to surveys of the private sector by payroll processor ADP. Since hitting a low in 2010, small-business employment has risen 1.7 percent, a little better than the 1.4 percent of larger business. As a result, the small-business workforce is only about 4 percent below its prerecession peak, while employment at larger businesses is still off 7 percent.

Entrepreneurs are also starting new businesses at a record pace, according to the Kauffman Foundation, which has been tracking entrepreneurship for 15 years.