Why Employers Are Not Hiring

by Don Azarias
July 16, 2012
If business, indeed, has picked up, why is it that American companies seem too nervous to step up hiring? For that, there are lots of reasons but no easy solutions. Hiring by U.S. employers has slowed for four straight months, while retail sales contracted in May and new applications for jobless benefits have risen for five of the last six weeks.
With the economic outlook still looking dim and uncertain, many employers have decided to forgo their timetable for hiring and just stick with the current number of employees they have who are more than willing to do extra work for the sake of job security. Given the economic climate, companies don’t believe that customer demand for the goods that they produce will grow. They are also concerned with the European Union’s debt crisis that could adversely impact the U.S. and global economies. Slowing economies in Asia are also contributing to a more cautious approach to hiring. There’s not much confidence in the U.S. economy, either. Or they are uncertain as to what the U.S. Congress will do about taxes and government spending in coming months.
Let’s not also forget state and local government’s budget deficits that are causing spending cuts for schools, transporation projects and services that also result in employee layoffs and hiring freeze.
This will give us a clearer picture of why U.S. employers added just 69,000 jobs in May, the fewest in a year and the third straight month of weak job growth. Many companies appear to be getting more out of their current employees rather than adding new staff. However, many employers are simply facing uncertainty about the direction of the economy.
According to the Federal Reserve, manufacturing output contracted in May for the second time in three months and families took a dimmer view of their economic prospects in early June in signs the American economy’s recovery is on shaky ground. Factory production shrank 0.4 percent last month. It’s clear that the economy is stuck in low gear. Production output sank at American plants and factories making everything from cars to computers. Consumer confidence in the economy is falling amid adverse economic factors. It could lead consumers to cut back on spending, that will further stunt economic growth.
Furthermore, disappointing numbers on housing and unemployment and cautious words from the Federal Reserve have sent stocks lower. Wealthy American consumers aren’t spending the way they used to. And the rest of us are feeling the unpleasant effect. The question is whether the rich will cut back so much as to tip the economy back into recession or if they will spend at least enough to sustain the recovery.
Their cutbacks help explain why the rebound could be stalling. Economists say overall consumer spending has slowed mainly because the richest 5 percent of Americans those earning at least $207,000 are buying less. They account for about 14 percent of total spending. These shoppers have retrenched as their investment values have sunk and home values have languished.
Think of the wealthy as the main engine of the economy: When they buy more, the economy hums. When they cut back, it sputters. But the plunge of stock market prices have shrunk Americans’ wealth. And the rich are once again more cautious about spending.
Those wealthy Americans went back to tightening their belts. At the same time, government reports show shoppers are cutting back on their spending. As a result, companies have responded by refusing to step up hiring. The housing market is stalling. And Americans are seeing little or no pay raises.
The fact that they turned more cautious is why the recovery is losing momentum. If they panic again, that would be the fodder for a double-dip recession. That’s because whether they’re saving or spending, the wealthy deliver an outsize impact on the economy. What’s not clear is whether they will remain too nervous to spend freely again for many months. That’s what happened when the recession hit in December 2007 and then when the financial crisis ignited in September 2008.
As their stock holdings and home values sank, the affluent lost wealth. Their jobs weren’t safe, either. Bankers, lawyers, accountants and mortgage brokers were among those getting pink-slipped. Those who did have jobs feared losing them. Employers usually hire temp workers if they need more output but don’t want to hire permanent employees. But firms aren’t even adding temporary workers right now. That includes those working part time who would prefer fulltime work and unemployed workers who’ve given up on their job hunts.
Without more jobs, consumers won’t see the gains in income needed to encourage them to spend more and support economic activity. Even those with jobs may not feel confident enough to ramp up their spending.
Let’s all be realistic and face the sad truth: There is really no easy way to fix the slumping economic recovery. The lingering effect of this stubborn recession is causing world leaders, including U.S. President Barack Obama and his fellow Democrats, a lot of grief.
The sluggish economic recovery is further exacerbated by unwelcome news that Americans spent less at most retail stores. However, the biggest obstacle is that American workers are worried about their jobs that borrowing is the least of their priority. They would rather save than spend in order to build up “rainy day funds” because of economic uncertainties. And since the volatility in the stock market is in full swing, who can blame them for not spending? Also, in today’s economic climate, can you blame the banks for being cautious when it comes to lending?
But Democrats and Republicans are divided on what to do. Most Republicans want to make permanent the tax cuts enacted under President George W. Bush in 2001 and 2003. That would amount to nearly $3 trillion over the next decade. Democratic leaders want the cuts for the wealthiest Americans to expire but they don’t want to cut or reduce funding for those unaffordable social service programs. What gives? .
A rebound in housing is considered critical for a sustained economic recovery. But builders continue to struggle with weak demand for new homes caused by high unemployment and a glut of foreclosed homes on the market. Builders say consumers remain worried about the weak economic recovery and the large number of unemployed workers. Since this is a buyer’s market, many of those buying are opting for deeply discounted foreclosed properties. I, personally, believe that this is a bad sign for the long anticipated economic recovery.
As to when companies will start hiring again is anybody’s guess. Mainstream economists and analysts don’t seem to have the answer. They are still baffled by the strength and resilience of the economic downturn that just hit us which is called the Great Recession.