Lack of hiring by small business stalls recovery

WASHINGTON — In every recession over the past three decades, it has been America's small businesses — companies with fewer than 100 employees — that stepped forward, began hiring and pulled the country out of the mire.

Not this time.

Small firms are on the sidelines, and it's not just because of tight credit from the financial meltdown, as the Obama administration and others have been saying.

Rather, a host of factors — some well-recognized and others seemingly unnoticed in the national debate over economic policy — are converging to restrain small-business owners from hiring.

Among them:

* Near-stagnant demand for goods and services as a result of consumers' reluctance to return to their free-spending ways.

* A disturbing falloff in the creation of new small businesses.

* The devastation of the real estate market.

* Uncertainty about the economic outlook at home and abroad.

"Small businesses are not hiring, and until then, we will not have a strong, sufficient recovery," said Rep. Daniel Lipinski, D-Ill., a member of the House Small Business Committee. "I think this is why the economic recovery is moving very slowly."

It's a historical change of major proportions. In each of the previous three economic recoveries, small employers accounted for the vast majority of new jobs — the bulk of them coming from firms with fewer than 20 workers, according to Census Bureau data.

Between 1990 and 1993, employers with 1,000 or more workers added 258,000 jobs. Those with 500 to 999 workers shed 102,000 jobs during that period. But the smallest operations added 860,000 jobs, census figures show.

The contrast was even more dramatic after the deep recession in the early 1980s.

The fact that many small firms are seeing little increase in demand for their services and products is decisive for Scott George, owner of Mid-America Dental and Hearing Center, which employs 55 people in the southwest Missouri town of Mount Vernon.

"I'm not having any trouble getting money," said George, who recently got a $250,000 loan to renovate one of his buildings. But he's not hiring more workers because of little or no growth in sales.

"If I got more people coming through the front door, then I'd need more people to take care of them," George said.

Then there is the problem of fewer small companies starting up.

The rate of business creation fell sharply in the past two years but had been dropping since 2005, according to the Global Entrepreneurship Monitor, a research consortium. Separate government data from states such as California and Florida confirm the trend.

An aging population may explain part of the decline. Typically, it's been people under 30 who have launched firms, but that burden has shifted to older entrepreneurs, said Julio De Castro, lead author of the monitor's U.S. report.

"I look at the long-term trend, and it's not a positive one," he said.

And President Obama's pledges to spur small-business activity and hiring — including boosting government-backed lending and reducing taxes for start-ups — have been slow to be adopted as lawmakers fret about the federal deficit.

Jack Ablin, chief investment officer of Harris Private Bank in Chicago, fears the recently passed financial regulatory overhaul could further impede new business formation. "Washington is tightening standards," he said.

In the meantime, the depressed real estate market, which many fear is headed downward again as home sales and construction falter, is exerting indirect but heavy pressure on many small firms.

The connection between real estate values and the health of small businesses has received relatively little attention from most policymakers, but real estate has long been the financial lifeblood of such companies, nurturing profits and expansion.

Nearly all small-business operators own their homes, according to the National Federation of Independent Business, and about half of them own all or part their companies' buildings or land. What's more, the lobbying group found, four in 10 small employers also own investment real estate.

These real estate holdings often have generated profits and provided collateral for companies to borrow against for new machinery or other expansion. That's been especially important in entrepreneurial hubs such as Los Angeles and Chicago.

Now, just as many consumers can no longer use their homes as cash machines, many small businesses can't draw on their properties to invest and hire. In a 2008 survey, 22 percent of small-business employers told the federation that they had taken out at least one mortgage to support their business operations.

"In olden days, many of the startups got financing by refinancing their homes. That's gone," said Sung Won Sohn, a California State University economist.