August 13, 2004 -- With output up, the stock market recovering and profits increasing, conditions were ripe for entrepreneurial activity in 2003, positioning small businesses to drive job gains in 2004, according to a new report by the Small Business Administration's Office of Advocacy.

In reviewing the economic landscape of 2003, the report found that the number of employer firms and self-employed people grew by 0.3 percent and 3.7 percent respectively. As output rose by 3.1 percent in 2003, up from a dreary 2.2 percent rise in 2002, businesses cashed in. Proprietors' income increased by 5.6 percent and corporate profits swelled 18.3 percent.

Based on the fact that only 17,000 of the United States' more than 5.7 million firms have 500 employees or more, the report concluded that more than 99 percent of U.S. businesses are small.

The number of employers increased during 2003, but at a slightly slower rate than in the prior year. The number of employer firm births declined to 572,900, down 2.8 percent from 2002. However, employer terminations dipped 2.3 percent to 554,800 in 2003. Additionally, fewer businesses closed up shop, as bankruptcies declined by 9.1 percent in 2003.

While the number of businesses increased in 2003, hiring did not follow suit. Though the unemployment rate remained at 6 percent, the private sector shed 400,000 jobs.

However, because the number of employer firms has risen every year since 1991, there should be pent-up demand, asserted the report.

"Considering that hiring the first employee is often the most difficult, there are a great many businesses that are potential job creators," noted the report. "Despite 5.7 percent unemployment rate at the end of 2003, a labor shortage could still potentially arise quickly."

One of the biggest challenges facing small businesses when considering hiring and retaining workers was the soaring cost of health insurance, which rose 15.5 percent for small firms in 2003, according to the Kaiser Family Foundation. The percentage of small businesses providing health insurance fell to 65 percent in 2003, down from 71 percent in 1999.