Job Growth Stalls As New Businesses Fail To Take Off

Job GrowthBy Jeremy Greenfield

As the Great Recession gives way to a non-recovery, the American dream of starting a business and making it big is dying -- and with it, the most significant driver of new jobs in the U.S. economy.

New, experimental data from the Bureau of Labor Statistics illustrates the phenomenon. During the recovery that followed the 2001 dot-com bust, small businesses employing 10 to 249 people hired vastly more than they have during the recovery that officially began in June 2009. These businesses typically account for the majority of new hires, as much as two-thirds. But in this anemic recovery, their growth is being strangled by lack of demand and thus, so is job creation.

"Productivity gains and new innovations are the engine of the economy," said Troy Davig, a senior U.S. economist at Barclays Capital who has looked at the new data. "These things come from small companies."

In 2004, these small businesses made about 37 million hires, or nearly two-thirds of the nation's total. In 2010, that number was just 27 million, or about 63 percent of the total. In the 30 months from January 2004 to June 2007, establishments with 10 to 249 employees created about 135 million new hires. From July 2007 to December 2010, those businesses created about 107 million new hires.

The new data comes from the BLS' "Job Openings and Labor Turnover Survey," which measures job openings, hires and separations in the U.S. labor economy. It takes the nationwide numbers reported to the media in the second week of every month and breaks them down by business establishment size, showing just how much hiring and firing occurs at establishments of different sizes.

It's Not Small Businesses

It's not small businesses, per se, that are crimping job growth, but the lack of hiring by new businesses: firms like Man Cave, an Eden Prairie, Minn.-based establishment that markets and sells meat, grilling utensils and bar supplies, or, well, Groupon, the social couponing website.

According to Ron Jarmin, assistant director for research and methodology at the Census Bureau and co-author of a widely circulated August 2010 paper, titled Who Creates Jobs? Small vs. Large vs. Young, it's young businesses that are able to survive their first years and take off that create the most jobs. Groupon is an extreme example of this effect; in 2009 it had 37 employees, today it employs 9,625.

"Basically, we observe in the data that young businesses have higher rates of growth than older businesses," said Jarmin, "There are two kinds of young firms: There are those that grow rapidly, conditionally on survival, and there are those that die. Some don't grow much and live, but what you see is that the fastest-growing businesses tend to be young."

Even during recessions, entrepreneurs start and attempt to grow new businesses. Those that survive benefit from the updraft of the recovery. There is something about this recovery, however, that is strangling their growth.

A lack of consumer demand is the culprit, according to E.J. Reedy, a research fellow at the Kauffman Foundation, a Kansas City, Mo.-based entrepreneurship advocacy organization. Reedy cited a recent survey from the National Federation of Independent Business, a small-business research organization, which showed that just over half of small businesses cite lack of demand as their biggest challenge.

"It's about customers, it's about certainty," said Reedy. The foundation's surveys of new businesses, a subset of small businesses, has similar findings.

Even during a booming economy, generating revenue at a new business is hard work, said Carol Lopucki, state director of the Michigan Small Business & Technology Development Center, one of many organizations nationwide that help small businesses. Lack of demand is exacerbating those normal challenges, said Lopucki.

Some have blamed lack of credit for stunting small-business growth and hiring, however, numerous surveys, including those from the NFIB, debunk this theory.

The U.S. Small Business Administration, a governmental agency which helps small businesses get loans, supported more lending in the first quarter this year than ever before, said Hayley Meadvin, an SBA spokesperson. The private small-business loan market is also coming back, she added.

"For years, the mantra was the absence of credit. Bologna! It's the absence of demand," said Ira Davidson, the director of the Pace University Small Business Development Center in New York.

Restoring demand, however, is a broad economic problem that Congress and the Obama administration seem unable to conquer. Temporary payroll tax credits, convoluted regulations on healthcare and Dodd-Frank financial reforms don't create the certainty business demands, economists say.

"At some point, the government has to find a way to long-term financial stability while providing long-term fiscal stimulus," said Davig, the Barclays economist. "One way of doing that is having a long-term plan and that's hard in the U.S. because of the framework that we have to impose fiscal policy."

The No-Demand Recovery

Lack of demand is what tripped up Nick Beste, 24, founder of Man Cave, a business modeled on Tupperware parties but focused on men. Beste launched the business in November 2008 with an ambitious business plan, energized management and clever marketing that boosted sales of steaks, grilling supplies, beer mugs and other products of typical male interest.

An aggressive growth plan backed by brisk early sales spurred Beste and his management team to adjust sales projections for the year upward and to expand the company to 15 employees, with plans for more. Sales growth, however, didn't keep up with the new projections. Man Cave had been too optimistic, and in the summer of 2010, it all came to a head, Beste said.

"Last June, we were bleeding cash," he said. "So we put together a plan to bring down the business to bare bones and rebuild based on a new infrastructure."

Now, with five employees, the company is close to being back in the black and ready to grow again. Demand for shot glasses and pork chops has continued to grow at a slower pace, so Man Cave has pushed back expansion plans several years.

Dynamic Drape and Décor, a North Bergen, N.J.-based company launched in February 2010 that supplies drapery and builds props for events and parties, averages between 10 and 14 employees these days, depending on the level of business.

Jeff Guberman, the company's president, had thought that by the end of the company's second year, it would be employing 20 people.

"I don't believe we're going to be there," he said, because of a lack of revenue. Organizations are holding fewer events and scaling back the ones they did have, he said.

Memphis, Tenn.-based Clarion Security is another company that has revised hiring plans because of lower-than-expected sales. The security guard contracting company founded in September 2009 passed the 50-employee threshold six months ago and currently has 84, but hiring really hasn't taken off the way Kim Heathcott, 46, the company's CEO, expected.

"I'm 25 percent behind in budget, in terms of headcount," she said. "I am selling people -- security guards -- so my headcount is directly correlated to my sales and revenue."

To be sure, there is a small but highly visible segment of the economy where startups are seemingly exploding: technology.

Kevin Malik, chief information officer of Phoenix-based i/o, a data-center solutions firm, has hired 60 people this year. The company, founded in 2007, now has 130 employees and 50 open positions.

"In the next 12 months, I expect to double, at a minimum," he said.

Founded in January 2009, Applico, a mobile application development firm, now has about 40 employees. President and CEO Alex Moazed, 23, said the firm will have 50 to 75 employees by the end of 2011.

"We're hiring a few people every week," he said.

For these fast-growing firms in red-hot segments of the economy, sales aren't the issue -- it's finding qualified warm bodies to fill positions.

"We spend a lot of time finding experienced, talented IT people. It's not an easy field to recruit for," said Malik of i/o.

Moazed said that his company would be at 100 employees by the end of the year if only it could find the right people.

"If we were able to go out and find amazing people or even pretty good people, we'd be able to hit 100 or break 100. That's been one of our biggest constraints," he said.

Meanwhile, back at Man Cave, finding the right people is a concern Beste hopes to have in several years, when sales accelerate again.

"Long term, we want to be worth hundreds of millions of dollars and we definitely have the capability of getting there, especially now that we're a lean, mean fighting machine," he said.

When asked when that's going to happen and how many employees he'll have, he said coolly, "In five years, and I know it will be hundreds."

Write to Jeremy Greenfield at

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