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.
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-Expenses of Wars-Wars-Wars never ending Wars. (Military industrial complex) Ike warned about this one.
-Not all of the Tarp money has been paid back to the Government. The Federal Reserve is still giving low interest loans to banks. The Federal Reserve is knee deep in the toxic mortgage securities, that the banks
use as assets for the low base interest loans.
-Most of the debt right now is due to the financial crash of 2008. This is why we should have never deregulated the markets---Finance does not know how to curb their irrational behavior.
-They need to exercise the Sherman Anti Trust act again, break up the multinational monopolies and just see how well the Small business will do again. You will find it works amazing well.
So, to focus on programs had have been working for years, is just a way to make up for the deceit due to irresponsible banking crash of the Global world economy.
70% of the economy is consumer spending, so the real issue is lack of demand for products. What business wants to expand with no consumer demands?
Being in finance is a big help in sorting out the real Truth
Do you believe this made-up "laundry list" yourself, or are you just trying to rationalize the lack of hiring by private companies?
And, while #5 is certainly credible, can't you see the reason? With so many people out of work, so many "working" at lower-paying jobs that are far below their capabilities and experience, and so many worried about losing their jobs, or course there will be lower consumer demand.
Surely you can understand that. Can't you?
But until people go back to work, this will last for a very long time. Why business doesn't support a REAL, and SUBSTANTIAL Economic Stimulus, is puzzling to me. After all, when a private company is getting lower revenues and trying to regain its footing, what does it do? It borrows. And it allows them to make the short-term improvements that are necessary and then pay the funds back in the long-term.
We can't "Cut Our Way To Prosperity" unless we believe in fairy tales. We HAVE to spend more to get the wheels out of the ditch. When that happens your company's revenues will expand, as will the economy as a whole.
These Deficit Fetishists are going to sink us all if we continue to buy their ideologically-based nonsense.
And the reason consumers aren't spending has nothing to do with the US debt or possible future tax hikes. Consumers aren't spending because they simply do not have the money. Wages have been flat for the past 30 years, while executive compensation has soared a thousand fold.
Right-wing ideologists cannot possibly fathom the demand argument because it's a matter of religious belief that 'job creators' simply 'create' jobs based upon a mythical state involving 'freedom' from all regulations and from taxes. Businesses do not 'create' jobs. DEMAND creates jobs. Businesses HIRE people to meet demand. Now, sometimes they might have to borrow money to buy equipment AND to pay new employees so that they can RAPIDLY meet increasing demand, and that requires low interest rates/easy availability of money from lenders; but although interest rates are low and money SHOULD be relatively easy to borrow, the banks aren't too interested in lending because they're still panic-stricken by the financial system collapse and their own incompetence, greed and fraud which caused it. But, if people who spend nearly everything they earn had more money to spend, the banks would ease up on funding very rapidly.
The health care argument is silly, btw. I don't know a single small business in my city which has any health plan at all. I know there must be some, but that went out of vogue years ago...about the time insurance costs became ridiculously prohibitive. Since a government managed non-profit health care system is a 'commie plot', there is no way to reduce overall health system costs and that problem will only get worse...much worse.
They need to creat jobs for American or they need to give up THEIR entitlements and stop calling themselves American companies.
The truth is that businesses are not hiring because they have enough leverage to squeeze the living daylights out of existing employees, who are drowning in fear, inertia and exhaustion thanks to the predatory instincts of employers who smell blood in the water. Plus, you ignore the elephant in the room - 95% of employees are at-will so if any of the "uncertainty" bogeymen (strawmen) you mention were to come about, all you gotta do is hand out pink slips.
This may be great for an individual employer in the short term, who can grind employees into the ground and replace them with others as soon as they are depleted, but it is HUGELY destructive to the US economy in both the short and long term because it prohibits mobility, innovation, purchasing power, and stability.
So spare me the chestnuts about how scared employers are, and let's focus on who is terrorizing who and why. Workers have no leverage, which is exactly how employers want it. THIS is the number 1-4 reason why employers aren't hiring.
1) To blame a years worth of anemic hiring on what has happened in the last month or so is disingenuous at best. While this may make some nervous this month, this is hardly a historical, systematic problem.
2) Healthcare costs are always an unknown. They are rising 10-30% annually now. They have been rising much faster than inflation for a year. If "Obamacare" was scrapped tomorrow, those costs would still be an unknown on a year-to-year basis.
3) Like healthcare, taxes are also an unknown. It is an unknown that every business deals with on a year-to-year basis. We have been told for nearly a decade now that historically low tax rates will create jobs. Well, that hasn't happened. To suggest that a small business owner isn't hiring because they may pay another 3% on their personal income is also disingenuous.
4) QE, another word for inflation. Maybe an issue. But depending on the industry, a slightly weaker dollar may be helpful (exports, tourism).
5) As a small business operator, and a member of our town's Chamber of Commerce, this is by far the predominant problem. While some moan about a $50 increase in a fee, this isn't putting our businesses out.
You offer a dream. Businesses will not hire new employees next week because there is a deal on the debt. They will do so when there are more customers to service.
Joseph Patrick Bulko, MBA