American Small Businesses Hiring Cautiously

BusinessWeek looks at how small businesses are still being impacted by economic conditions. While things are progressing, business owners are moving forward carefully:

As the U.S. economy gains momentum, small business employment is lagging behind other drivers of the recovery. Past rebounds were led by companies with fewer than 500 employees as they added full-time workers. Now some owners say they’ll rely on part-time help and push their staffs to be more productive as they wait as much as a year for demand to improve. "I’m not sure we’ll ever return to the type of full employment we’ve had in the past," says Charles W. McMillion, president and chief economist at forecasting firm MBG Information Services in Washington, who has studied labor markets for 30 years.

In the first 12 months following the recession that ended in November 2001, small businesses added 81,000 workers. After the most recent downturn, companies cut 480,000 during a comprable time period, according to data from ADP Employer Services. "Normally we look to small firms to account for a lot of the job growth," says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla.

Instead, investors are "rewarding" the efficiencies that publicly traded small businesses adopted to battle the recession, says Michael Shaoul, chief executive officer of New York-based Oscar Gruss & Son, which provides research to institutional investors. Since Sept. 1 the Wilshire Micro-Cap Exchange Traded Fund (WMCR), which includes companies with fewer than 500 workers and tracks shares of the Wilshire Index’s 2,500 smallest stocks, has gained around 33 percent, vs. 19 percent for the Standard & Poor’s 500 ETF Trust.

Small businesses "definitely have cut costs in terms of reducing workforces," says Joseph Kremer at Fifth Third Asset Management in Cleveland, who helps oversee $250 million in small- and micro-cap stocks. "That’s good for their efficiency, but not necessarily good for the unemployment rate."

Underemployment was 17 percent in November. That includes people without jobs and those who gave up looking, as well as those who work part-time but want full-time jobs. Many of the latter are "in trouble in terms of paying the bills" even though they are "still going to work," says Dean Baker, co-director of the Center for Economic and Policy Research in Washington.