If you're worried about losing your job, you're less likely to take on a new-car monthly payment if your old vehicle is meeting most of your needs, right? That's an added, recurring expense you might put off - either until your current car breaks down or you're more confidence in your employment.
In the same way, entrepreneurs uncertain about the strength of the U.S. economic recovery or their own industry trends seem to be staying cautious when it comes to adding overhead - whether that's in the form of workers, debt or other fixed costs, according to Brian Hamilton, chairman and co-founder of Sageworks, a financial information company that collects and analyzes data on privately held companies.
U.S. employers added about 169,000 jobs in August, helping to nudge unemployment to 7.3 percent from 7.4 percent. But Friday's jobs report also indicated about 74,000 fewer jobs were created in June and July than the government initially thought. And a drop in the labor force participation rate means that fewer Americans are actually employed now than last month, even though it's been more than four years after the recession officially ended.
"It's a little troubling when you look at the unemployment rate in comparison to where we are in the economic cycle," Hamilton said. "At this point in the economic recovery, almost 50 months into it, we'd really like to see the unemployment rate hovering around 6%."
"The truth is that many businesses are still very cautious, and they're trying to minimize their overhead in any way possible," he said.
Some businesses are doing this by holding out on adding any new employees whatsoever, while others are limiting their potential exposure to new costs by hiring part-time or temporary employees. Privately held companies really aren't borrowing a lot of money either, even though sales and profitability at private companies have improved from last year, he noted.
Sageworks data shows that temporary staffing agencies have seen strong sales growth in recent years, averaging at least a 15% annual increase in sales since 2010. "It can be a risk for companies to take on full-time employees, which require a certain number of hours and pay as well as benefits," said Sageworks analyst Libby Bierman. "Part-time or temporary employees might be a lower cost option for the businesses."
In addition, using temporary or contract employees can help companies more easily identify total employee costs, advisory firm Expense Reduction Analysts of Addison, Texas, recently advised clients on its website.
"The hourly bill rate charged by the staffing firm represents the total cost of the employee, including employer mandated taxes and insurance (Social Security, Medicare, workers' compensation, state and federal unemployment insurance) and health care costs," wrote Expense Reduction Analysts director Michael LaLonde. "Some employers don't track that total cost so this information from the staffing firm may add clarity in understanding the true cost of incremental employees and operating costs."
Industry statistics also reflect employers' reliance on contract or temporary hires. The American Staffing Association says that 79 percent of staffing employees work full time, and nearly 90 percent of the industry's $117 billion in 2012 sales came from temporary and contract staffing, rather than permanent placements. Professional and technical occupations are the fastest growing kinds of jobs, too.
Sageworks Chairman Hamilton said employers' caution may stem from uncertainty surrounding the Affordable Care Act and other policy issues. Or, he said, "Some companies may have simply learned their lesson during the recession and want to keep their operations lean."
"Whatever the cause, businesses aren't hiring full time employees at the consistent rate we'd expect at this point," he said.
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