The National Post: SHOPKEEPER NATION - In the U.S.; 70% of all hiring is done by small businesses, many of whom are struggling to survive
February 20, 2010
When Kip Kiebke launched his credit-counselling business New Financial You about eight months ago, he planned to get a loan and add at least three positions, including a full-time bookkeeper.
Instead, the sputtering economy and stinginess on the part of lenders has forced the Hartford, Conn.-based entrepreneur to cut back the hours of his five existing employees from 40 hours a week to 30.
"I didn't want to do it, but what am I going to do?" asks Mr. Kiebke, whose firm offers advice on how to get higher credit ratings. "If I didn't do something, it would put a strain on my business and it could go under."
Small businesses like Mr. Kiebke's have long been the meat and potatoes of the U.S. economy. Companies with less than 500 employees traditionally have accounted for as much as 70% of hiring in the United States. But these days, adding new workers is far from the minds of most small business owners, many of whom are struggling to stay afloat as they grapple with a 50% drop in business and difficulty getting loans to help fund operations.
While many of the United States' Fortune 500 corporations are on a road to recovery -- some even hiring again -- the travails of small businesses will remain a big factor behind the country's lingering unemployment. Although the United States is six months into an economic recovery, joblessness is expected to stay above a 26-year high of around 10% for the remainder of this year. Add in the army of people who have given up looking for work and the underemployed part-timers and the jobless rate is as high as 17%.
With a sluggish recovery predicted, unemployment probably won't return to 5% -- a level of so-called full employment, where the people who really want jobs have them -- until 2016, says a recent forecast from the U.S. Congressional Budget Office.
"People think that it's General Electric, IBM and Chevron that do all of the hiring in this country, but truly it's small businesses," says Al Angrisani, head of Angrisani Turnarounds LLC, which helps troubled companies. "A jobs recovery cannot happen without a small-business recovery."
If less than a third of the United States' nearly 30 million small businesses added only one new employee each, the increase would more than wipe out the 8.4 million jobs lost since the United States slid into a recession in December 2007.
But that kind of hiring isn't likely.
In a January poll of 200 owners of businesses with fewer than 100 employees, 80% said they planned to hold off hiring full-time employees for the foreseeable future. That's far gloomier than October, when 52% said they weren't thinking of adding new full-time workers, said the surveys from Angrisani Turnarounds and Toluna Inc.
Back in 1981, when faced with similarly high unemployment, U.S. president Ronald Reagan signed a bill to cut taxes by US$1-trillion, mainly for the benefit of small businesses and entrepreneurs.
Proponents of the massive tax cut -- including Mr. Angrisani, who was assistant secretary of labour under Mr. Reagan-- say it was instrumental in the U.S. economy's creation of 14 million new jobs in eight years, most of which were generated by small start-ups.
Barack Obama isn't able to be anywhere near as aggressive, in large part because of the economic mess and ballooning deficit that has diminished the appetite of U.S. lawmakers for tax cuts and new spending.
Help for small business was only a small part of the US$787-billion economic stimulus bill passed by the Obama administration a year ago that aims to protect or create 3.5 million jobs over two years. A lot of the money has ended up going to state and local governments to help them keep teachers and firefighters employed.
Mr. Obama's already paltry US$85-billion proposed bipartisan jobs bill is being scaled back further and isn't expected to create many jobs. It's main thrust is a tax cut for small businesses that hire unemployed workers.
Critics say the tax cut will mainly end up giving a break to small-business owners who would be hiring anyway.
Another provision promised by Mr. Obama-- the redirection of US$30-billion from the US$700-billion Wall Street bailout fund to encourage community banks to lend to small businesses -- has been dropped for now.
Some experts say bailout money would be better spent by offering it directly to struggling small businesses.
"Many community banks have regulations that don't allow them to make high-risk loans," says Lynn Tilton, a New York City-based private-equity maven who, since 2000, has acquired or taken stakes in more than 70 distressed companies. "Many community banks have broken balance sheets and exposure to bad commercial real estate so their focus is on trying to survive."
Ms. Tilton, who runs Patriarch Partners, pitched her own proposal last year to the White House that called for using a mix of money from the big-bank bailout and private funds to provide rescue loans to ailing small and medium-sized businesses that have been rejected by lenders.
"Banks have been fixing their balance sheets and leaving small businesses behind," says Ms. Tilton, whose portfolio of companies includes U.S. map publisher Rand McNally, Arizona Iced Tea and MD Helicopters.
U.S. lawmakers might need to revisit their small business loan strategy amid signs that thousands of U.S. community banks are headed for a new crisis because of losses on commercial real-estate loans. The U.S. Congressional panel overseeing the Wall Street bailout fund warned last week that as many as 3,000 small banks might run into trouble because of souring loans on malls and other commercial ventures. If the bleak outlook proves correct, already tight lending to small businesses could be further curtailed.
More than tax cuts, subsidized loans or other government incentives, the best hope for small businesses would be a genuine economic revival, says Jay Kaplan, an economics professor at the University of Colorado.
"The sources of growth between 2002 and 2007 came from consumers lowering their savings rate and taking out equity lines against their houses," he says. "As Warren Buffett said, 'We went on quite a binge and the hangover is going to be proportional to the binge.' It's not the best situation. We could be in for a prolonged period of 1% to 2% economic growth."
That wouldn't be enough to absorb the 1.5 million or so new entrants to the job market each year, let alone bring down the unemployment rate.
The United States probably needs economic growth of around 3% just to keep up and an uptick of 4% to 5% to start bringing unemployment down in a meaningful way. The Congressional Budget Office's forecast for a return to 5% employment in 2016 calls for yearly economic growth of more than 4% starting in 2012.
Although it may be in for a long haul, the United States has demonstrated throughout its history an ability to get its unemployment levels down through innovation.
Between 1993 and 2000, the U.S. economy created 21 million jobs across a wide variety of sectors that ended with a rock-bottom employment rate of 3.8% at the height of the technology boom. The more recent boom was less broadly based, but still led to an unemployment rate of 4.4%.
"People have been predicting doom and gloom since the 1980s, but we'll find a way to bounce back," Prof. Kaplan says. "The lead may come from exports to growing economies such as Brazil and China. But once we get the ball rolling it's pretty easy to keep it that way. It's a confidence thing that has a self-sustaining quality.... High tech was the growth engine of the 1990s and who's to say what the next innovation will be?"
Innovation will be particularly important this time around given that economists predict that as many as one-quarter of the 8.4 million jobs cut over the past two years won't be returning.
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