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Why Small Business Owners Are Hesitant to Hire

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Ken Levien has no plans to hire more people for his real estate project management company in New York. He says his business has only about 85 percent of the amount of work it can handle because the building industry is still hurting from the recession.

"Things are looking down in the construction business in New York City," he says.

Levien has a lot of company. Many small businessowners aren't hiring or expanding because the outlook for the economy, or their own companies, is uncertain.

That raises the question of whether small businesses will give the economy the boost that it needs. Economists say that in past recoveries, small companies were the first to hire. When the economy was improving, they were more nimble than large companies because they didn't have the bureaucracy that can slow the hiring process. Their hiring helped propel the economy forward.

The economy is growing, but that growth has slowed — and so has the pace of hiring among business with less than 500 employees. The U.S. economy grew at an annual rate of just 2.2 percent from January through March, according to government figures. That's down from the moderate 3 percent growth during the last three months of 2011. Making things worse, the pace of hiring by small businesses is slowing, according to the payroll company ADP, which issues a monthly report on employment at companies in the private sector. ADP says that employment at small and medium-sized businesses rose by 181,000 in March. Employment rose by just 119,000 in April.

On the Front Lines

Levien says his company, Levien & Co., could handle another two or three projects without having to hire more people. The firm handles a variety of commercial building and renovation projects, but specializes in nonprofits like museums, health care facilities, social service organizations, churches and synagogues. Clients have included Carnegie Hall.

But "there's not a lot of building going on in New York City," Levien says.

His assessment is backed up by numbers from the New York Building Congress, a trade association for the construction industry. In a report issued this week, the group forecast that construction spending in the city will rise 5 percent this year after dropping 3.5 percent in 2011. But spending is expected to fall 13 percent in 2013. Levien notes that a lot of construction dollars in New York this year are going toward just one project: the rebuilding of the World Trade Center.

Levien says his company's revenue is stable, but it's still down 11 percent from 2008, the best year his company has had. It's up nearly 30 percent from 2009.

Meanwhile, thousands of miles away, in Las Vegas, Ruth Furman has become very cautious about her public relations business, Image Words. So she's not hiring employees and instead is depending on freelance writers, graphic artists and administrative help.

"I don't feel comfortable with the ebb and flow of my clients' needs," Furman says.

Las Vegas was one of the hardest-hit parts of the country during the recession— the housing market crashed and the casino business dropped off sharply. And many of Furman's clients are in the area. She now gets more short-term projects than she did before the recession, which means her income is less predictable. Last year turned out to be better than expected — revenue was down only slightly from 2010. But she estimates that first-quarter revenue this year was down 13 percent from a year earlier.

The Big Picture

Small business owners don't want to take chances because they can see how troubled the national economy is, says Paul Merski, chief economist with the Independent Community Bankers of America, a banking trade group.

"If you go through the litany of economic data, it is just not giving small businesses the confidence to hire, to expand," Merski says. "They don't see the future return on that (expansion), or the future cash flow to take on additional debt." One sign that small businesses may be poised to do more hiring is that they would take out loans to fuel expansion.

But it's not just that companies aren't applying for loans.

"Small businesses haven't even tapped their open lines of credit," Merski says. "I hear from community bankers saying, `I wish I had loan demand."

Wells Fargo & Co. is seeing the trend firsthand. "More people are paying down their lines of credit than are drawing down on them," says Mark Bernstein, head of the bank's small business division.

The Great Recession is still fresh in the minds of many small business owners. "Who would expect small business people not to be a little bit cautious after this experience?" Bernstein says.

But Angelo Santinelli, a management consultant and adjunct lecturer in entrepreneurship at Babson College, believes small business owners are focused on what's going on in their own companies rather than on economic reports. He says manufacturers aren't stepping up their production because they're concerned that without strong sales they'll be stuck with inventory and they'll lose money.

"No one feels comfortable that they're going to make their numbers," Santinelli says. "Every sales person is working harder than ever before."

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