Why Aren't Companies Hiring?

Why aren't companies hiring? There are all kinds of theories. Taxes too high. Taxes too low. Too much regulation. Too much speculation. Everyone has an idea.

The best way to find out why businesses aren't hiring (and they are hiring -- just not enough) is to ask them. That's what the Philadelphia Federal Reserve's Business Outlook Survey does. Here's what its most recent reading shows:


Source: Philadelphia Fed.

Lots of things are holding businesses back from their potential, but the two largest are:

  • Sales are too low.
  • Since sales are low, businesses are keeping profits up by keeping expenses (like employment) down. That's why profit margins are near record highs.

This closely matches other private business surveys like the National Federation of Independent Businesses survey and the PricewaterhouseCoopers' Annual Global CEO Survey. All have told a similar story: Bad regulations and uncertainty from Washington are a problem, but low sales are by far the biggest worry.

That will eventually change. Despite naggingly high unemployment, sales are coming back and consumer spending is holding up. It's still well below where it should be, but business investment is coming back, too: Capital expenditures among S&P 500 (INDEX: ^GSPC) companies hit a new record late last year. Capacity utilization is also springing back close to normal levels.

Another more subtle point holding back hiring: Businesses shook out a lot of redundancies and inefficiencies during the recession -- teaching one person to do a job that used to be done by three -- and they aren't likely to go back to the old ways. After describing a friend whose moving business slashed employment, wages, and benefits, Berkshire Hathaway (NYS: BRK.B) Vice Chairman Charlie Munger was asked if his friend would ever revert to the old way of business. He replied: "No, it's never going back. He squeezed the cost out. That's one of the main troubles of the economy, that everybody has done what my friend in the moving business has done. It's perfectly logical."

"That's the way capitalism works," he said.

At the time this article was published Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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