Small Business Isn't Driving Job Growth This Time

A view of Main Street in Sedan, Kansas on Jan. 10, 2004. Don Ipock / The New York Times-Redux

Raymond Arth knows he should feel better about the economy. Sales are up at Phoenix Products, the faucet company he runs in a suburb west of Cleveland. He had a good 2010, and he’s on pace to have an even better 2011. His company hasn’t returned to its pre-recession revenues selling its wares to the makers of RVs and manufactured homes, but Phoenix Products is making a profit again and has enough orders that Arth decided to add eight workers to his core staff of 25 full-time employees. So why are the new hires all temp workers?

Like too many other small-business proprietors, Arth doesn’t fully trust this economic recovery. While he says he’s “guardedly optimistic” about it, his actions are all about the first half of that phrase. He worries that rising gas prices will tamp down RV sales. The volatility in the price of metals and other commodities has brought a spike in the cost of his raw materials. “There’s still just too much uncertainty out there,” Arth says.

In the Labor Department’s latest snapshot of the country’s job market, the private sector added 268,000 jobs in April, the largest gain in five years and the third consecutive month of solid job growth. Austan Goolsbee, chairman of the president’s Council of Economic Advisers, says the economy is clearly on track, despite an unemployment rate of 9 percent.

Yet a more sobering account of where the economy might be headed—and arguably a more accurate barometer of the near-term future—is the monthly report published by the National Federation of Independent Business. After all, it’s small businesses, which have created two out of every three new jobs the economy has added since the early 1990s, that historically have led the country out of recessions. And it’s the owners of small businesses (defined as enterprises with fewer than 500 employees) that the NFIB surveys each month for its Small Business Optimism Index.

On that front the news is anything but good. The index is down for the second straight month. Fewer small-business owners expect conditions to improve over the next half year—a drop of 18 percentage points from January. The bulk of new hiring must be happening inside larger corporations, since their smaller counterparts on Main Street say they are generally reluctant to create new jobs. “Owners simply find no reason to be optimistic about the future, and therefore they find no reason to pick up the pace of spending and hiring,” says Bill Dunkelberg, NFIB’s chief economist.

That aptly sums up the sentiments of Scott Lipps, the president of the Sleep Tite Mattress Factory near Dayton, Ohio. Before the downturn, Lipps says, his sales were about evenly split between his medical clients (hospitals and nursing homes) and consumers buying mattresses through a factory outlet. But sales to the general public plummeted starting in 2008.

“The families affected most by the economy have stopped buying,” Lipps says. “And those who say ‘We have to have a new mattress’ are downgrading to a medium-quality mattress.” Despite a 20 percent drop in sales, Lipps and his partner tried to forestall the inevitable by putting up $70,000 of their own money. But in 2010 they laid off three of their 18 full-time employees. “It should have happened in 2009, but we let our hearts run the company instead of our billfolds,” Lipps says.

In Bartlesville, Okla., Mat Saddoris is feeling relatively more upbeat. Saddoris is the third-generation owner of United Linen, a restaurant-supply company that cut its workforce by more than 10 percent during the downturn’s darkest days. Revenues are back up to pre-2008 levels, and United Linen is back to its pre-recession staffing of 135 employees.

But will he take the risk of growing the company? “I talk to my customers and they’re optimistic—to a point,” he says. “They’ve all come back from the pits, if you will, and things have been getting better in the past six or seven months.” But, he says, “I don’t think they’re ready to announce that things have turned around.” Likewise, when Saddoris is asked if he might be adding to his staff, he has to acknowledge that he has no plans to create new jobs any time soon.