THE BLOG
04/15/2010 05:12 am ET | Updated May 25, 2011

Businesses Cutting the Growth Cushion

Many mainstream analysts believe it won't be long before things return to "normal." But they are deluding themselves, especially as far as the job market is concerned.

For one thing, it now seems pretty clear that the economy that existed before the financial crisis hit had been artificially pumped up by years of cheap money and unsustainable levels of debt.

Those factors also led to significant malinvestment and allowed some parts of the economy -- think finance and real estate -- to grow too large relative to others. Now that the bubble has burst, many of the jobs that used to exist in those areas are never coming back.

There's another reason why the labor market will remain under pressure. According to two small businesspeople who were kind enough to post their comments at Financial Armageddon, the difficult conditions that owners have experienced over the past few years are leading many of them to eliminate or reduce the cushion of underutilized staff they keep on their books to cope with future growth.

From "Chip":

As a small business owner in advertising/marketing I interface with hundreds of others in the "small business" realm. For most of the past 30 years it has made sense to operate a small business with excess personnel capacity because of upward trending growth (at varying rates, but almost constant growth). This "excess capacity" need exerted an unseen pressure on hiring practices. We hired for two reasons: today's need and the ability to smoothly handle growth which was sure to come.

Now that all of the businesses have faced two or more years of downward trending, it makes zero sense to have any excess manpower capacity. The ranks of the unemployed are swelled by both those directly affected by lowered sales but also the lack of need for any of us to prepare for growth and have excess capacity on board. I have not seen anything written on this aspect of shedding extra capacity which was an integral part of decades of growth. Are you aware of anything on the topic?

I guess another way of saying it is that we used to consider lower productivity a cost of the growth curve. Now productivity is studied more closely by us small guys because growth will not bail out wasteful practices in today's market. I'm in Austin Texas, supposedly one of the "less affected" areas. I'm extremely concerned about the slow velocity of money, the dismal sales reports I hear first hand, and the total lack of expansion in any sector. Of the hundreds of business owners I know NONE are hiring. Most feel fortunate when someone resigns. No one wants to send anyone into this awful job market so those who quit provide the easy way to shrink the payroll. Small businesses are often run like family so many owners hold out as long as they can so that they don't have to be "cruel".

So, my forecast, with a grain of salt is "nothing cheerful on the horizon" for quite a while ...

And "Angryfutureexpat":

Chip's exactly right. In my business (before it failed recently) we would strive for approximately 10-15% underutilization so that a burst of business could be handled smoothly.

I can't even imagine anyone out there operating a business along those lines in this environment.