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'Check Engine' Light for US Economic Driver Is On

Natalie Behring | Bloomberg | Getty Images

If small business is the economic engine that makes America go, then it’s clear the “check engine” light is now on.

New data from the small business analytics firm PayNet shows investments by small manufacturers slowed down substantially in the first quarter. Even more worrisome, those business owners are cautious about growth in the second half of this year. “It’s surprising. It’s a cooling off,” says William Phelan, PayNet's co-founder and president. “If you see the relative changes going on here you can say they really have become more cautious and started to jam on the brakes.”

In the first quarter of this year, PayNet found investments by small manufacturers grew by 17 percent to approximately $13 billion. While that’s a healthy gain, it’s much slower that the 37 percent growth in 2011. In 2010, as the economy was coming out of the recession, small manufacturers boosted investment in their operations by 9 percent.

It’s difficult to determine why small business owners, especially manufacturers, have become more cautious. The biggest reason is uncertainty about the economy, what will happen with the federal budget and America’s corporate tax structure. “They are really kind of continuing down the same path, but they are not charging ahead,” said Phelan.

Ironically, the balance sheets for small manufacturers have not been this strong in years. PayNet, which tracks approximately 20 million business loans totaling $1 trillion, says 30 and 90 day delinquencies continue to fall. Still, many small firms are holding their cash instead of investing it in the business because they are seeing sluggish demand. “What we hear them say is there just aren't enough customers walking through the front door to buy their goods and services,” said Phelan.

Unlike 2011, when expansion among small manufacturers was broad based, the growth this year is more concentrated. The sectors expanding include chemical firms, petroleum and coal companies. Logging and millwork companies are also expanding. By comparison general industrial machinery equipment makers, rubber and miscellaneous plastics manufacturers are experiencing slower growth.

As for the job growth, small manufacturers are slowly hiring more people. Overall, the manufacturing sector has added more than 500,000 jobs since the recession ended, but more extensive hiring has been slow to develop. Phelan says it’s a case of companies who cut back during the recession becoming more efficient.

“[The recession] forced them to get leaner and meaner and they have reacted wonderfully to it, and now we just have to get some expansion in the economy to start hiring all these people back.”

Email us at SmallBiz@cnbc.com and follow us on Twitter @SmallBizCNBC.

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