Will Small Business Stunt An Employment Recovery?

Yesterday, Bloomberg had a rather depressing article about why the employment picture might not get cheerier anytime soon: small businesses continue to cut jobs. Since they account for 70% of new job creation, if small businesses aren't hiring, it will be a very, very slow ride down from 9.7% unemployment. Let's look at what the article says.

Bloomberg reports:

Companies with fewer than 500 employees, such as Phoenix Technologies Ltd. and Sonic Corp., helped lead the economy out of the four recessions since 1980. This time, they continue to cut capital spending and dismiss workers, eliminating 3,000 jobs in January, according to Roseland, New Jersey-based Automatic Data Processing Inc., the world's largest payroll processor.

The article notes:

The Russell 2000 Index of small-cap stocks has risen 4 percent in the past six months, lagging behind a 6 percent increase in the Standard & Poor's 500 Index. Coming out of previous recessions, shares of companies with market capitalization between $250 million and $1 billion generally led markets higher.

For example, it says:

The Russell Index gained 17 percent in the six months following the end of the 2001 recession, compared with 0.2 percent for the S&P 500.

And it quotes a Goldman economist:

"It suggests that a V-shaped economic rebound is even more unlikely than suggested by many standard economic indicators," said Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York, which sees gross domestic product growing 2.3 percent this year.

Unfortunately, I think this view makes a lot of sense. I've written a few times that this recession's recovery might not resemble the usual quick road back to full employment. Labor immobility is a big problem. Consumer credit tightening should keep spending low and encourage personal debt reduction. While larger businesses are getting more credit, smaller ones aren't having as easy a time, though the government is pushing to change that.

But even more credit for small business won't necessarily lead to more hiring: no responsible business owner would incur additional debt to hire more workers -- unless the company anticipates a major demand increase with considerable certainty that its current staff can't accommodate. I doubt that's happening at many smaller firms right now, since most economic forecasts predict only modest GDP growth for 2010.

For this reason, it makes sense that smaller businesses aren't ramping up their hiring, and may even be continuing their layoffs. Until that changes, unemployment won't be able to decline very significantly. This reinforces the view that a jobless recovery is likely.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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