Monday, December 20, 2010

The Small-Business Hiring Outlook? Two More Years Wandering in the Desert

Small businesses, like my 53-person outfit, see no reason whatsoever to do anything but hold tight to our cash for the next two years.
December 20, 2010 - by Jeff Pope
Mr. Pope runs a manufacturing company in the Midwest.

My company employs 53 people and is in the business of providing fabricated components to equipment manufacturers. Roughly 50% of our sales are for export, with the remaining concentrated in the Midwest where our plant is located. We would be classified as a low- to medium-technology machining and fabrication company.

In short, we have been right in the middle of the worst economic conditions since the late 1970s. I speak only for myself here, but I do know that in my circle the views expressed here are not unique or original, rather they are nearly universal. We are the people who are reluctant to hire new people in order to protect our businesses.

"Small businesses are where jobs are created" is a common refrain from politicians and pundits these days. Suddenly the entrepreneurial business owner has been discovered as the hero of job creation for the whole country. And also its nemesis: witness their stubborn reluctance to expand and hire new workers. While the majority of the commentariat attributes this reluctance to uncertainty over taxes and health care costs, the reality runs much deeper. The problem is an ever more serious concern that political Washington will cause enough damage to the economy to cause long-term conditions in which small businesses won't be able to survive.

A seriously adverse business environment has been created, bad enough that small businesses — always fragile and necessarily obsessed with their ongoing existence — must opt for hyper-conservative financial management. The first restriction is hiring new people. Most of those responsible for creating this environment are still in place in Washington, and as long as they are there business owners will find it difficult to tack from their current lock-down mode.

This is not fear; rather it is a rational business approach to having low confidence in future conditions. Most owners have been around long enough to have experienced several economic gyrations, but this one is unique in that the political component seems to dominate the economic in what should be a time of recovery. That the rest of the world appears to be doing better by following paths that used to be perceived as American only highlights doubts about the direction policymakers are dedicated to here. We have a government dominated by ideologically driven people who show no sign of a reassessment after the failure of every remedy to work as they anticipated. Hip-deep in evidence that their actions are not working, or counter-productive, ideological blindness wins, and they continue on or even double down.

Looking back, it is certainly not hard to recognize the very significant role political factors had in leading to the recession, Fannie and Freddie chief among them. Then, in spite of 10% unemployment, the ideology of the leaders led them to impose such initiatives as ObamaCare, Wall Street reform, and carbon policies that could only hurt the very businesses that needed to be revived to increase employment. The evidence that all this was not working and likely to be obstructing a recovery is overwhelming. Yet they persist in their agenda, because that is what ideologically driven people do. Worse, the president and those around him, being ideologues, are unconstrained by popular opinion — or even constitutional law.

On what basis should a business owner believe that the worst is behind, and therefore become aggressive again? With the next election two years away?

The negative outlook is made much worse by the sheer lack of experience and competency in this government. Much has been made of the absence of business people in this administration and throughout the executive branch. There has never been a group that inspires less confidence in economic and business management, and yet there has been no apparent effort to make it even appear that it matters at all, much less build a more experienced team. Does anyone believe that business could rely on Eric Holder and the Justice Department to guard its legal interests? That Carol Browner even cares what effects the EPA has on a company? That Tim Geithner was expecting anything that has happened in the last two years? Does anyone see anything but imperious arrogance in Janet Napolitano or Robert Gibbs? Even the WikiLeaks emails convey a sense of amateurism that seems so pervasive in this government.

The point is made not in any one individual, but rather that the group as a whole does nothing to give confidence that some hugely damaging economic initiative, perhaps energy or currency related, will have any common sense arrayed against it within the circles of power in Washington. In this government being competent or knowledgeable means far less than being an ideological fellow traveler. As a result, what might have once been considered a most unlikely government economic body blow now seems all too possible. Just ask the oil drilling industry.

What is often not recognized is just how vulnerable small businesses are. They are notoriously undercapitalized, dependent on one or two major customers, with little cash reserves and limited ability to weather adversity. Individual labor costs are much more concentrated. Where a major company might follow labor costs from thousands of employees on a graph over many years, a small business might hire one person that costs 3% or more of total sales the moment that person is hired.

So when small business owners take stock of the current situation they are battered by two difficult years behind and a very uncertain period ahead. It is entirely reasonable for them to be extremely tight-fisted. The fact that risk is seen as being from Washington by leaders who will be in place for at least two more years makes it even more difficult to consider expansion. Decisions and policies made in Washington matter a great deal and affect small business in ways both immediate and life-threatening in consequence. Just a few examples:

  • Increasingly, even small businesses buy major materials on a global basis. Managing the global currency market and the decline of the dollar can increase costs effective with the very next purchase order.
  • The largest customers tend to be large multinational companies that source globally, so small companies must compete directly with foreign suppliers, and as a result have very limited pricing power. Inflation from any domestic source, particularly energy, matters a great deal because increased costs frequently can't be passed on and are a loss to the business.
  • Small private companies tend to be very illiquid, with most of the year's profit invested in business assets. Taxes require a critical outflow of cash that must be paid immediately. Cash lost to taxes is wholly unproductive, a pure loss of the most precious of assets.
  • The health and stability of customers matters. When they downsize, close a plant, or move it to a better environment in another country the business is almost always lost. If it is a major customer it may be fatal to the business.
  • Special favors matter. When the government grants waivers of costly changes to big corporations, smalls lose competitiveness because they are not exempt and must bear an even greater share of the cost.
  • When special groups are empowered, such as tort lawyers, unions, or other so-called progressive activists, big companies settle for what to them is a nominal amount. Threats of this type are almost always life and death affairs for a small business.

The actions of Congress and the administration have been decidedly negative on the above issues, and on so much more. There is every reason to believe they are capable of even more damage if they can find a way to do so. The political environment in this country is toxic to small business with a dramatic, immediate, and negative impact in ways most of the parties involved simply do not appreciate. Business owners are far more politically aware than the average person because it matters so much to them and they are seriously influenced by activities in Washington. In short, politics has a profound and direct impact on the decisions made by small businesses.

This is particularly true when it involves financial risk-taking and preservation of the business. Large corporate CEOs might risk their jobs making decisions for the future, but small business people risk their whole business and frequently all they own. The current political and economic environment makes them adamantly cautious, because the future looks so uncertain and the government so threatening. Caution means holding on to cash, keeping costs at a minimum, and not risking loss on new or expanded operations. Cash is security, survival, and the ability to protect oneself against long-term adversity. New hiring is a looking-forward commitment of very significant cash and resources, something that is decidedly not attractive today and highly unlikely to be so in the foreseeable future.

So we have a real problem. Businesses are reluctant to hire due to two hard years behind and concern about the future policies of an ideologically driven government that is clearly not pro-business ahead. Business conditions in 2010 are a little better than 2009, but nowhere near the prior levels that might encourage a more aggressive view. The three major forces in policymaking, President Obama, Harry Reid, and Nancy Pelosi, continue to hold office and make no secret that they desire to advance their agenda with or without regard to the Constitution. They and their anti-business orientation will remain in place for at least two more years. On the other side of the aisle, most of the senior Republicans who were so ineffective over the past decade will retain the same ability to compromise away government restraint for the next two years. The November elections may have helped the situation, but the Republicans have a long, long way to go to prove they are up to the generational level change it will take to turn things around. Worse, it is becoming easier to accept the possibility that the corruption between all the special interests, including corporate, and government is just too firmly entrenched and too lucrative to break apart at all. If that is true, nothing changes until an ultimate collapse.

What to do? Stay locked down, very conservative, and prepared for at least two more years wandering in the employment desert.

Mr. Pope runs a manufacturing company in the Midwest.


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