Small business: tight credit makes job creation tough

The lingering effect of a financial crisis stands as a major obstacle to job creation in the US. That's the view of many economists, bolstered by a survey of small business owners released Tuesday.

Employers are still more likely to cut workers than to hire new ones, according to the National Federation of Independent Business, which represents many of the nation's small businesses. That's the case even though the recession appears to be officially over and worries about large banks failing have receded.

During the next three months, 16 percent of the firms surveyed said they plan to cut jobs, while 9 percent of the employers said they plan to hire.

Access to credit is an important part of the problem, with many of the businesses saying it's hard to get loans.

The jobs drought has become the top issue facing the economy, with unemployment rising to 10.2 percent of the labor force in a government report last week. Reinforcing the concern on Tuesday, the Labor Department reported that the number of US job openings in September was little changed at about 2.5 million.

Until this year, monthly reports in the current decade had always seen at least 3 million job openings – and often more than 4 million.

The big question earlier this year was how to stop a tide of layoffs. Now it's how to restart employers' engines of new hiring.

Many economists worry that the financial sector's weakened state will hinder job creation.

"It may take quite a while for financial institutions to heal to the point that normal credit flows are restored," Janet Yellen, president of the Federal Reserve Bank of San Francisco, said in Phoenix Tuesday. "Banks have clamped down on underwriting and credit terms for both businesses and consumers. Smaller businesses ... are particularly feeling the pinch."

Smaller firms have a harder time raising funds from sources other than banks, such as by issuing stock.

Of course, job creation requires more than just a better flow of credit. For one thing, recessions typically dampen demand for credit by consumers and businesses, as well as the supply of loans. And this particular recession had its roots in an excess of easy lending.

A genuine recovery, it appears, will involve a slow process in which consumers repair their finances, start spending again, and investors begin financing more new businesses.

"Many interrelated steps" are needed, says Asha Bangalore, an economist at the Northern Trust Co. in Chicago. But "the place to start is the credit markets."

She notes that a Federal Reserve survey of bank loan officers, released Monday, shows some signs of an improved lending climate.

Beyond banks, Ms. Bangalore says consumer demand for goods and services has started to turn up, albeit modestly.

But she says it may take a while before consumers spend fast enough to push the jobless rate sharply lower. That's because businesses are able to boost output quite a bit just by allowing their current employees work longer hours.

Her forecast: Unemployment will peak at 10.7 percent in the middle of 2010, and be at 10.4 percent at the end of next year.

-----

Follow us on Twitter.