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SMEs leading the charge

Published on Friday, 09 Aug 2013
Recovering US industries such as garment-making, housing and transportation are providing fertile ground for SMEs to boost their employment numbers back to pre-recession levels.
Photo: Bloomberg
Rising sales of new homes are helping drive US job creation.
Photo: Bloomberg

Employment at US small businesses tops pre-recession levels while large firms lag behind

It took Chris Yura about six months before he could afford to hire the first employee for the clothing company he started in the US in June 2009. SustainU Clothing now has 20 workers – about half of which are part time – and has plans to hire three more full-time staffers by the end of the year, Yura said.

The company, which sells shirts made from recycled cotton and polyester, is among the small businesses behind much of the current job creation in the US. In addition to its staff, SustainU contracts out most of its garment-making processes, such as spinning thread, cutting fabric and sewing shirts, to about seven factories in the Carolinas, Tennessee and Pennsylvania. According to Yura, this supports another 300 to 400 workers.

“For the first three years, I knew it would be really tough because of the general economic climate,” said Yura, 32, a former model and American football player who started the business in his hometown of Morgantown, West Virginia. “People didn’t think it was going to work. But for me, that just gave me more motivation.”

Employment at small and medium enterprises (SMEs) in the US with fewer than 50 workers, such as SustainU, is stronger now than before the last recession, while larger businesses are still lagging behind, according to data from Automatic Data Processing (ADP), a manager of employer payrolls. Figures from the US Labour Department also show that firms with less than 10 employees are hiring at a faster rate than before the economic downturn began in December 2007.

“Small businesses were slow out of the gate, but now they’re increasingly running in stride,” said Mark Zandi, chief economist at Moody’s Analytics in West Chester in the US state of Pennsylvania. Moody’s produces the employment figures with ADP.

Businesses with fewer than 50 employees added 82,000 jobs in July and 85,000 the month before, ADP data shows. These businesses accounted for about 42 per cent of US employment in July.

“The foundation of growth is really those high-flying gazelles,” Zandi said, referring to companies that offer an innovative product or service and grow exponentially in five to 10 years.

The age of a small business, as well as its size, makes a difference in hiring, according to research by the Ewing Marion Kauffman Foundation, which focuses on entrepreneurship. Job creation at new companies – those less than a year old with one to four employees – rose 5.4 per cent in 2011, rebounding from four straight years of decline, according to business dynamics statistics from the US Census Bureau that were analysed by the foundation.

“There was a hold-up in hiring,” said Dane Stangler, director of research and policy at the Kauffman Foundation. “It’s getting better among the newest, smallest companies, but for whatever reason, companies that normally come into existence with 10, 15, 20 or 30 employees – so think restaurants, retail stores, things like that – they continue to have a slower pace of job creation.”

Small businesses are also “getting a nice boost from the housing recovery”, Zandi said. Sales of new homes rose in June to the highest level in five years.

Moving franchise Two Men and A Truck, which averages about 50 employees at locations from Washington state to Florida, is among the housing-related companies adding employees.

“We’re having tremendous success this year with growth,” said Jeff Wesley, chief financial officer of the Michigan-based company. “We’re looking to hire a lot of people.”

Wesley said the company pushed to collect 10,000 applications in April. After receiving about 9,000 responses, it is still looking for qualified movers, drivers, managers and others, he said.

Other reports indicate the small-business hiring rebound will continue. Insperity, a company which said it processes payrolls for about 5,500 clients with an average headcount of 23 employees, forecasts that its customers’ average number of worksite employees paid per month will increase by as much as 2.7 per cent to 130,500 in the third quarter of 2013, from 127,096 a year ago. The Texas-based business said the estimate reflects increased hiring by its clients, as well as new sales.

The number of small businesses planning to hire rose in July to 9 per cent, from 7 per cent a month earlier, according to data from the National Federation of Independent Business (NFIB). That matches the second-highest level since February 2008. The number of firms with a job opening that is hard to fill rose to 20 per cent.

Rising residential property values also serve as a source of capital for those who want to start companies. The S&P/Case-Shiller index of property values in 20 US cities increased 12.2 per cent in May from the same month in 2012, the biggest year-over-year gain since March 2006.

“We’ve seen household wealth rebound pretty well, as well as owners’ real estate and equity, so that’s going to help fund a lot of new businesses,” said Sarah Watt, an economist at Wells Fargo Securities in Charlotte, North Carolina.

Not all the signs are positive, though. The NFIB’s optimism index fell to 93.5 in June from 94.4 the month prior and is below a decade high of 107.7 in November 2004. While access to credit appears to be improving, financing remains an obstacle for newer companies. A quarterly report from the Small Business Administration shows business loans of less than US$100,000 grew by 1.6 per cent in March 2013 from December 2012, following a 0.2 per cent gain the previous period.

Companies younger than six years old have a “relatively difficult” time obtaining financing, with 54 per cent of those surveyed unable to get a loan compared with 27 per cent of older businesses, according to a first quarter 2013 report from the Federal Reserve Bank of Atlanta. The survey was completed by 478 small businesses in the US’s southeastern states.

According to US Labour Department data analysed by Wells Fargo Securities, new businesses are starting with fewer employees. The average number of employees at a new establishment, which includes franchises, fell to 4.7 in 2012 from 7.5 in 1994.

Wells Fargo attributes some of that change to online stores, reducing the need for staffing at bricks and mortar locations.

A leaner staff might also be a sign of caution among small companies that are seeing if demand justifies hiring. One such watchful business owner is Lisa Goodbee, a civil engineer who heads a firm based in the US state of Colorado that specialises in transportation projects.

She hired one full-time and one part-time worker last autumn, after waiting until business had recovered sufficiently after the recession to sustain the additional overhead. The 19-year-old firm has a total of five full-time and eight part-time employees.

“State funding for transportation projects was really, really lean in 2010,” said Goodbee, 51, who estimated her gross revenue fell to about half of its US$2 million target that year. “I didn’t have to lay anybody off, but we definitely had a slowdown in our business. Then, in 2011 and 2012, we picked right up.”

SustainU’s Yura said he never doubted his ability to succeed. After graduating from college in 2003, he worked as a model in New York. As he helped market environmentally friendly clothing, he said he realised he could make better products with US labour. His father took out a third mortgage to provide the initial US$30,000 to finance the idea.

“Right now is a great time to be in business in America if your business is focused on the right things,” said Yura, who is aiming for US$1.5 million in sales by year-end. “My only worry is making sure I get every order out every day.” Bloomberg

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