Small businesses "losing their steam"

Common wisdom has the small business sector being the engine of economic growth and job creation.  It’s the small, nimble players who can react the fastest to anticipated demand;m where larger corporations move more slowly and cautiously, small businesses can make decisions quickly on expansion and hiring.  They are seen as harbingers for the future direction of the economy — which is why the LA Times sends up a warning flare today on a drop in small-business hiring (via Calculated Risk):

For the recovery to gain steam, most economists believe small businesses need to be strong enough to hire new workers. But according to one measure, the employment picture in this sector is weakening.

Intuit Inc., which provides payroll services for small employers, says the nation’s tiniest companies had fewer new hires last month than any time since October.

The data are further evidence of a trend that has had many economists worried for months and intensifies concerns that smaller firms may not be robust enough to help lead the country out of its financial slump. The slowdown in hiring is particularly troublesome, experts say, because small businesses typically hire first during a recovery. A reluctance by little companies to add positions could mean that the big firms, which typically lag behind, will add jobs even more gradually.

“It’s a bad sign,” said Susan Woodward, an economist who tracks small business employment for Intuit. “Small businesses hire first — and they’re losing their steam.”

Intuit has a clientele of 56,000 small businesses, certainly a good sample from which to derive analyses of hiring patterns.  According to their payroll reports, small businesses began expanding in February, with Intuit seeing 60,000 more payroll positions, or about one for each of their customers.  Since then, however, these business owners have become much more cautious.  In May, the number had dropped to 32,000, and last month payrolls only grew 18,000, meaning that hiring averaged less than one new hire for every three small businesses.

Now, some small businesses wonder whether to replace those who are leaving:

Tulsa Rib Co., a restaurant in Orange, needs to hire two people to replace workers who left their jobs recently. But Liz Parker, who owns the eatery with her husband, Steve, said business was too inconsistent to justify the hires.

“One week we’ll have all of our lunches and dinners filled, and we’ll feel real super that customers are going to come back,” she said, “and then the next week it falls off a cliff.”

As the Times explains, this deflation of enthusiasm is a big problem in the overall job picture.  Small businesses (those with 19 employees or fewer) account for one-sixth of American jobs, but this year they have accounted for one-third of all new jobs.  If small businesses stop opening new positions and hold off on expansion, larger companies probably won’t pick up the slack.  It’s a recipe for stagnation in employment.

Part of the issue is credit.  Small businesses can’t get loans very easily these days, and most expansion requires bridge loans to make investments ahead of the increased revenue predicted.  But part of it is also costs — and with Congress debating a bill that will significantly increase energy costs and businesses looking at the additional burdens of ObamaCare, they’re not terribly eager to add personnel in the midst of uncertainty.