Businesses 'not hiring' because of economic uncertainty

Weak sales are keeping many businesses from hiring new workers. Consumers are not spending at their normal levels, and although housing has improved, it's not leading the economic recovery.

By , Staff writer

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    Shoppers Joselin Pena and her niece Ingrid Romero load packages into their car after shopping at a Target store in Boston Wednesday. Retailers are reporting tepid business in May after cool weather and fresh concerns about the economy had shoppers cutting spending on clothing and other nonessentials.
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Last month, businesses took down the “now hiring” signs.

Why?

The biggest reason appears to be “uncertainty.”

Talk to a business group, economic development executives, and corporate decisionmakers, and many of them point a finger at some form of risk or policy change that may have consequences for their business. They worry whether they can afford to take on a new hire.

Some of their worries are more intangible, such as the consequences of the stock market falling sharply – as it did on Friday when the Dow Jones Industrial Average lost 323.31 points, or 3.15 percent of its value.

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“Companies just got through laying off a substantial portion of their workforce. You need a good reason to add back workers,” says Dan Meckstroth, chief economist for Manufacturers Alliance/MAPI in Arlington, Va. “They are reluctant to make investments to bring back people to work unless they have firm orders in hand.”

On Friday, this reluctance was quantified in the May employment report when the US Bureau of Labor Statistics reported that the private sector added only 41,000 jobs, far fewer than Wall Street had been expecting. The best job creators were manufacturing (up 29,000 over April), temporary-help services (up 31,000), and mining (up 10,000).

Normally, small business is a major job producer. But according to a survey by the National Federation of Independent Business (NFIB), most firms did not change their employment in May. For those who did, 8 percent increased employment by 2.4 employees, while 20 percent decreased their workforce by four people.

Why are small businesses reluctant to add workers?

“Weak sales, weak sales, weak sales,” says William Dunkelberg, chief economist for NFIB, which has many small-business members. “When you hire someone, they have to generate enough sales to cover the expense of hiring them, or you are in trouble.”

Some of the engines of growth for small business are just not running smoothly, Mr. Dunkelberg says. Consumers are not spending at their normal levels. Housing, although it has improved compared with last year, is not leading the economic recovery.

“There is so much uncertainty, you don’t want to commit to hire anybody,” he says.

The US Chamber of Commerce, which represents larger corporations, says a lot of the uncertainty for its members is Washington-generated.

“Tell me what my taxes will be as a company,” says Bruce Josten, the chamber’s executive vice president for government affairs in Washington. “No one can tell me.”

For example, he says, Congress failed to extend the research and experimentation tax credit, which expired last December.

“The R&E tax credit has been on the books for 30 years,” says Mr. Josten.

The House, he says, has passed legislation (the American Jobs and Closing Tax Loopholes Act of 2010) that is raising taxes on multinationals, retroactive to Jan. 1. It has also hiked taxes on capital investments made by Subchapter S corporations, which are normally small companies that pass their profits to shareholders but don’t pay federal income taxes.

In addition, the House has passed higher taxes for venture-capital funds, hedge funds, and private-equity funds. The legislation has yet to pass the Senate.

It’s not just taxes, says Josten. Businesses are still unsure how much the new health-care reform bill will cost them, he says. “Many companies are finding their premiums are rising,” he says. “Companies like some certainty on fixed costs.”

The uncertainty is starting to freeze business decisionmaking, says one economic development executive in the Southwest, who preferred to speak on background.

“We have been inquiring about what’s going on, and one of the clear messages about the slow pace of investment is because of the administration’s policies,” he says.

However, one longtime employment observer says the slowdown in private-sector hiring is just part of the ups and downs in the economy.

“We want a straight-line recovery, and it won’t be that way,” says John Challenger of the outplacement firm Challenger Gray & Christmas in Chicago. “We are in a three steps forward, two steps backward mode.”

Until it’s clear the economy has a healthy head of steam, he says, that’s a natural reaction. “You don’t want to hire someone and then have to let them go – it’s painful.”

Related:

Jobs numbers for May squelch some economic optimism

Dow plunges below 10000 amid bad news on euro and US jobs

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