Privately-held businesses are aggregately performing better now than at any point since the recession -- sales are growing across the board, and profit margins are increasing, too. With such objective evidence of success, privately-held businesses should be celebrating. Instead, they are cautious.
The National Federation of Independent Business reports the Small Business Optimism Index, a measure combining ten factors including plans to invest, planned hiring and expected economic expansion. For the month of June 2011, supposedly two years after we cleared the recession, the Optimism Index was "stagnant," dropping from 90.9 in May to 90.8 in June. The small decline isn't necessarily a bad omen, but a sign that business owners are being cautious. If you compare the current situation to February's level (94.5) you can see their trepidation has been slowly building.
Small business represents 64 percent of net new jobs for the past 15 years, but -- in spite of their profits and growth -- small businesses haven't been hiring lately, according to the still-elevated unemployment rate. There is too much uncertainty for employers to take on the long-term financial risk of new employees. Below are five factors contributing to the privately-held business uncertainty and its effects on unemployment:
1) U.S. debt. Last week, debt rating agencies began to question the U.S. federal government's ability to cover interest payments. This does not mean that the rating agencies think the government will default, but they do acknowledge it is a possibility. Unless elected officials can develop a long term and credible solution (more than just raising the debt ceiling) to the nation's spending problem, then the government's bond ratings could be downgraded. What does that mean for business owners? Without a sustainable solution in place or at least on the table for negotiations, business owners cannot predict the effect that the U.S. defaulting on its payments would have on their future interest rates and borrowing capacity.
2) Healthcare policy. The Affordable Care Act was signed into law in March 2010 and created insurance exchanges, designed to make comparison shopping easier for small businesses and help them find relevant tax credits for healthcare. But, until the exchanges are fully implemented and small business owners figure out how to navigate their framework, healthcare costs remain another big question mark for hiring.
3) Possibility of tax hikes. Related to point #1, the possibility of tax hikes, both personal and commercial, cannot be disregarded. Like healthcare, tax increases to help alleviate the national debt could severely hinder the profitability of American businesses. Though they have been increasing slightly, the average net profit margin for private companies is only about 3.5%. Not knowing the effects the eventual tax code changes would have on this margin encourage business owners to halt other investments, like employees.
4) Possibility of the Fed's quantitative easing. When Federal Reserve Chairman Ben S. Bernanke went before the Senate, he indicated that if the economy turns out to be weaker than expected, the Fed would consider a third round of quantitative easing, QE3. Such action is not guaranteed, only an option. But, the threat of QE3 is enough to evoke a market response. The inflation that would result from the QE3 would increase costs for small businesses and discourage consumer spending, which brings up point #5...
5) Stalled consumer spending. For both April and May, 2011, real personal consumption expenditure (real PCE), which takes prices changes into account, decreased .1 percent. Like the change to the Small Business Optimism Index, the small decreases are not alarming. It is more likely the case that consumers are likewise spending cautiously until they know what will happen regarding the three previous points.
While Washington is actively attempting to give reason for business owners to celebrate and solve these unknowns, both parties are presently contributing to the uncertainty in the business operating environment and discouraging hiring. Private businesses are run by people who are not risk-averse but have costs to manage. Within the next week, as the August 2 deadline from the Treasury approaches, business owners should expect some resolution about their expected costs. When they do, they will be positioned to hire.