What Will It Take for Small Businesses to Resume Hiring?

In 2003, Mirage Spa and Recreation was booming. With 10 employees and $3 million in revenue, the St. Louis-based hot-tub business owned by Karen Port and her husband was having its busiest year since it was founded in 1988.

Within two years, however, Port started to notice the early trends of what would become the largest economic downturn since the Great Depression.

“Things were not improving, even though the Dow kept going up,” Port says. “We started to notice that people weren’t coming in as frequently.” By 2008, the company’s workforce was down to five people -- the same number it had started with.

Since then, Port and her few remaining full-time employees have managed to keep the business afloat by taking on more responsibilities. But the company hasn’t hired a new employee since 2006.

Small businesses such as Mirage Spa employ half of all private sector employees and account for two-thirds of new job growth, according to the U.S. Small Business Administration. For the country’s unemployment rate to fall, small businesses need to start hiring. But what will it take for this to happen?

“For small businesses, hiring is the last thing that comes around,” says Donald Dutkowsky, professor of economics in the Maxwell School at Syracuse University. This is because for most small businesses, payroll is a major expense. And for some, it’s their largest.

Dutkowsky says that small business owners need to be confident in the economy and the availability of credit before they can even think of adding new employees.

And credit has been tight. Between 2008 and 2009, big banks -- the primary source of credit for small businesses -- cut 9 percent of their small business loan portfolios, according to a report prepared by the Congressional Oversight Panel. In 2010, the SBA backed $16.8 billion in loans, down 20 percent from 2007.

Demand Determines Hiring

But for many small businesses, the decision whether to hire has little to do with access to credit or the owner’s understanding of economic indicators. For most, it comes down to something far simpler: demand.

For Port, this means an improvement in the housing market. She says that the housing crisis has had a “significant” effect on her business. Spas are a luxury item, Port says, and something consumers buy after they've already owned a home for a year or two. Fewer people buying homes means fewer investing in home spas.

And though the crisis has made her business leaner and more efficient, Port says she would hire new workers immediately if she could. “We're at the point of being barebones,” Port says. “The extras that we'd like to get done, they just can't [be] done.”

Still, over the past year Port has noticed increased confidence among her customers and a willingness to spend. She's optimistic that within the next year or two she'll be able to hire a technician to help with the bump in business.

Richard Hayman, who runs Just Moulding, a custom-molding design and installation franchising company outside Washington, D.C., also emphasizes the importance of consumer confidence. He says that government programs to make lending easier for small businesses don’t make a difference to him.

“My problem is I need more customers,” Hayman says.

Revenue at Hayman's 12-employee company dropped 25 percent from 2008 to 2009. Though it has since recovered, it still hasn’t returned to its pre-recession levels.

But last year's upward trend seems to be continuing. Hayman points to a number of indicators: a 3 percent rise in housing values last year, increased home construction, and a sharp decline in the local unemployment rate. More important, Hayman, like Port, is hearing good things from his customers.

“Our customers are telling us that they waited and waited and finally decided to pull the trigger. We are very optimistic about 2011,” he says, adding that he plans to hire three employees next year.

Still, Hayman remains cautious. Unlike a large company, a small business doesn’t have a lot of extra money in the bank, Hayman says, so he can add to his staff only when it will have a direct effect on his revenue stream.

Hiring IS Happening

Of course, some small businesses are already hiring. According to the Intuit Small Business Employment Index, small business employment grew by 0.3 percent every month from December through February (a total of 157,000 jobs), continuing an upward trend that began in October 2009. The index is based on figures from the 60,000 businesses of 20 employees or less that use Intuit’s online payroll service.

Temporary staffing is also on the rise. From July to September of last year, small businesses employed 2.6 million temporary and contract workers per business day, according to Rob Wilson, president of staffing company Employco USA, which provides HR outsourcing to more than 400 small and mid-size businesses nationwide. This is 24.9 percent more daily-staffing employees per day than in the same quarter last year, and an increase of 8.1 percent in average daily staffing employment over the second quarter of 2010, according to a report by the American Staffing Association.

“The more the economy recovers, the greater the use of temps becomes,” Wilson says, adding that his firm has seen a large increase in the amount of temps hired by small business, which he says tends to predict increases in full-time hiring.

In another positive sign, the Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, rose 14 percent in January compared to a year earlier -- extending its string of consecutive monthly increases to 11, even as seasonally adjusted borrowing actually fell to just below November's level.

“We’re not out of the woods yet,” says William Phelan, PayNet’s president. “But we’re moving in a positive direction.” The numbers provide “definitive proof that small businesses are starting to grow again.”

But as small business owners have made clear, access to credit is only part of the story. The real key to a robust resumption of hiring depends on one thing: rising demand from customers. The more products and services people want to buy, the more people small businesses will be able to hire. Everything else is just wishful thinking.