IMGCAP(1)]The big economic question these days is when is hiring going to pick up and the unemployment rate drop?
The key is not held in the proposed or approved plans of either the Democrats or Republicans; the key is in privately held companies in the United States. The Small Business Administration estimates that approximately 65 to 70 percent of new jobs are created by companies with fewer than 500 employees, the vast majority of which are privately held (those companies whose shares are not traded on a stock exchange). Until these companies hire people, the unemployment rate will remain largely stuck and too high.
One absent factor in discussions around this issue is the relationship between private company revenues and employment. It seems as if the unemployment conversation almost always turns political and that some crucial facts are left unguarded. Over the last two years, the revenues of private enterprises have decreased an average of 5.8 percent in 2008 and 4.7 percent in 2009 from the previous years. These are, respectively, significant and devastating decreases since they are compounded and consecutive results.
So, what do small business owners do when profits are down? They can go out of business (which would result in not paying their personal mortgages, credit cards, or kids’ tuition), or they can cut their highest costs – people. By far, labor and salaries are a company’s most significant costs, representing up to 80 percent of each revenue dollar.
Smaller businesses typically have to keep their profits about the same each year since their profits are what they use to pay their personal bills; profits are their personal operating capital. The people who run these businesses are like the rest of us; they have bills to pay. Until they see revenues rebound, they will not hire, and the unemployment rate is likely to remain a dismal statistic.
It is important to also consider that there are 27 million companies in the United States, only 4,000 to 5,000 of which are publicly traded. The vast majority of economic activity is generated by privately held companies. (Interestingly, the revenues of publicly traded companies are rising at the current time, but the revenues of privately held companies are going down, which is troubling. It is also unusual to the extent that smaller companies tend to be more adaptive to economic conditions).
So, the final question is: What, if anything, can “we” do to stimulate demand and revenues for these companies? That is exactly where all agreement ends. Republicans say that health care reform has stalled businesses from hiring, which is a strong argument since the legislation calls for significant expense increases after hiring a 50th employee.
Most fast-growing companies (the ones that create jobs) are smaller ones, and this group of businesses will rightfully pause when their head count reaches this threshold. Republicans also argue that cutting or maintaining tax rates will increase hiring. Yet, if you look at the revenue data objectively, it is clear that we have a revenue and demand problem that is not directly tied to taxation debates.
Democrats argue that government action stimulates economic growth and that we need to spend more on targeted growth strategies. However, this strategy has clearly not paid off yet. Moreover, our national debt mounts each day.
But the real issue is simple and has little to do with the political economy – the revenue of small, privately held companies is down. Ultimately, this is a demand issue and, until consumers and businesses begin to buy more products and services from smaller companies and stimulate private company revenue, job growth may be tough to achieve. While they are often un-discussed and under-reported on, privately held companies hold the key to the economic recovery of the United States, a recovery that doesn’t have to be “jobless.”
Brian Hamilton is the co-founder and CEO of Sageworks, a financial information company, and Inc. 500 honoree. Hamilton is an original co-developer of “FIND” (Financial Information into Narrative Data), Sageworks’ core artificial intelligence technology which converts financial numbers into plain language and is the basis of the company's ProfitCents and Sageworks Analyst applications.
