Small Business Job Engine Remains Stuck In Low Gear

So much for momentum. Or is it false hope?

Small business—long the jobs engine of the economy—still faces big obstacles, say experts and trade group representatives, and is unlikely to drive job growth as it has in past recoveries anytime soon.


At the top of the obstacles: weak demand, higher taxes and uncertainty about future costs.

"From 2003-2007 we built this economy on a zero-savings rate and we built too many restaurants, houses, shopping malls and retail stores," says William Dunkelberg, chief economist of the National Federation of Independent Business. "It left with us with too much of all this stuff. It takes time to get rid of it. It [job creation] is going to be very slow."

If so, that would be a break with the past, when small business was the first to add jobs. Even more worrisome is that small business were hemorrhaging jobs towards the end of the recession.

According to the Bureau of Labor Statistics, companies with 1-4 employees lost 140,000 jobs in the first quarter of 2009; firms with 10-19 employees shed 220,000 jobs. (That’s the most recent period covered by the data.)

In previous recovery periods, companies in the two groups were responsible for net job gains relatively soon after the downturn had ended and hiring picked up momentum as the recovery was established.

In the third quarter of 1993, for instance, the 1-4-employee group created about 120,000 jobs, while the 14-20-person group added 60,000. That may not seem like a lot, but the workforce was much smaller then.

Near the peak of the last economic recovery, the two groups were combining for more than 140,000 jobs a quarter.

Demand The Key

This time around, the big problem, is weak demand, says Dunkelberg. A third of the NFIB's member—whose payrolls average 10 employees—say their top problem is weak sales.

A look at the NFIB's biggest member groups speaks volumes: retail, 30 percent; construction 15 percent, professional services, 10 percent.

None of these have been leading the economic recovery, as they often have in the past.

"We haven't seen pent up demand come back," says Martin Regalia, chief economist of the US. Chamber of Commerce, whose members are predominantly small companies with ten or less employees. "Part of that is a function of the wealth we lost."

What's more, consumer debt levels remain high, and wage gains small, say economists.

Regalia, however, is quick to add that the demand problem goes beyond the consumer sector.

"There are huge numbers of small businesses that draw their customers from the ranks of big business," says Regalia, adding that many companies that slashed spending—and service contracts—following the collapse of Lehman Brothers have yet to add them back.

Business and professional services were also growth leaders in past jobs recoveries.

Construction Still Suffering

There are other hangovers from the crisis and the boom-bust lending cycle. Take residential construction, where the supply-and-demand model remains grossly out of balance.

A lack of credit remains "the leading reason we continue to

Unemployment line
Unemployment line

see a fall off in employment," says David Crowe, chief economist for the National Association of Home Builders.

Eighty percent of the group's members build 25 or fewer homes a year and have an average payroll of about 7 1/2 workers.

"If they can't get credit they can’t hire anybody and build anything," says Crowe.

No wonder then that construction was the big job loser in May. The 35,000-decline put industry payrolls 30,000 below where they were a year ago.

By contrast, coming out of the 1991 recession, construction added more than 100,000 jobs and 20,000 new firms in a year's time.

Past and Future

If a hangover from the past weren't enough, there's also worry and uncertainty about the future,

Regalia and others say a host of major legislative initiatives, from health care to financial services to energy, is weighing on business and delaying hiring.

Cost structures are changing and are bound to change more, as reforms lead to new regulations and higher taxes that raise the cost of doing business. At the same time, tax incentives are being lost, while personal income taxes for the entrepreneurial class are set to go up in 2011.

"Policy changes have brough a whole series of unintended consequences that are sapping strength, demand and the normal synergies," says Regalia.