Jobs outlook for small businesses may be getting bleaker

For the recovery to gain steam, most economists believe small businesses need to be strong enough to hire new workers. But according to one measure, the employment picture in this sector is weakening.

Intuit Inc., which provides payroll services for small employers, says the nation’s tiniest companies had fewer new hires last month than any time since October.

The data are further evidence of a trend that has had many economists worried for months and intensifies concerns that smaller firms may not be robust enough to help lead the country out of its financial slump. The slowdown in hiring is particularly troublesome, experts say, because small businesses typically hire first during a recovery. A reluctance by little companies to add positions could mean that the big firms, which typically lag behind, will add jobs even more gradually.

“It’s a bad sign,” said Susan Woodward, an economist who tracks small business employment for Intuit. “Small businesses hire first — and they’re losing their steam.”

To calculate its estimate of national hiring, Intuit uses payroll information from its 56,000 small-business customers. The company defines small businesses as those with fewer than 20 employees.

Intuit’s data show that small businesses hired just 18,000 additional workers last month. That’s still positive territory, but it’s less than a third of the 60,000 that were added in February, when it seemed that an employment recovery was imminent. Additional hiring dropped steadily during the spring, to 40,000 in April and 32,000 in May. Another payroll company, Automatic Data Processing Inc., painted an even gloomier picture, saying that small businesses lost 1,000 jobs nationwide in June.

“It’s disappointing,” Woodward said. “Considering how many unemployed people there are, it’s disheartening.”

Business owners say they’ve ridden a roller coaster over the last several months, cheering when good times seemed to be back — only to be disappointed as customers backed away again this spring. Many had planned to hire new people but pulled back in recent weeks.

Tulsa Rib Co., a restaurant in Orange, needs to hire two people to replace workers who left their jobs recently. But Liz Parker, who owns the eatery with her husband, Steve, said business was too inconsistent to justify the hires.

“One week we’ll have all of our lunches and dinners filled, and we’ll feel real super that customers are going to come back,” she said, “and then the next week it falls off a cliff.”

Robert Alva, who owns Super Cool Air Conditioning in South El Monte, said he’s been trying for months to expand his four-person shop to about 10 people to break into the potentially lucrative business of installing solar energy systems. But customers are reluctant to buy new cooling systems right now or even repair their old ones, he said. Whereas he would normally be able to finance a modest expansion by obtaining a loan, Alva said, he’s been turned down twice for a small-business loan — squeezed by the credit crunch that has affected thousands of small firms.

To understand the oversized importance of these little businesses to the U.S. jobs picture, consider that the smallest firms — those with fewer than 20 employees — employ more than one-sixth of the nation’s workers. But so far this year, these companies have provided about one-third of all new private-sector jobs, said Brian Headd, an economist with the Small Business Administration. So any cutbacks would be felt disproportionately throughout the economy.

“Small-business hiring is right at the heart of it because small businesses usually are the engine of job creation in the U.S.,” said John Challenger, president of the employment consulting firm Challenger, Gray & Christmas. “It’s small businesses that drive the unemployment rate down, and if the small businesses are faltering, that suggests that the risks of recession are growing.”

Last week, the federal government reported that employment fell nationwide as temporary jobs with the U.S. Census Bureau ended. Private-sector employment remained essentially flat, adding about 83,000 jobs. Just under a quarter of those were at companies with fewer than 20 employees, according to Intuit.

Jim Spletzer, senior research economist for the U.S. Bureau of Labor Statistics, said his agency tracks hiring by small businesses, but in a delayed form. The most recent information, for the quarter ending September 2009, shows that the smallest companies lost about 300,000 jobs during that period.

The data are delayed, he said, because it takes six months to gather the information and two more months to process it.

Neither he nor another economist at the bureau, John Wohlford, would comment on Intuit’s numbers. Another federal system, aimed at releasing estimates of small-business hiring in a more timely manner, is under development, the economists said.

Headd, of the Small Business Administration, said that many economists look to numbers generated by Intuit for more recent information about hiring among small businesses. Economists also consider data from ADP.

Headd said that July’s hiring figures will be key to understanding the full importance of the slowdowns in May and June. It’s quite possible, he said, that new jobs will pick up next month. He pointed out that small businesses also added jobs in fits and starts as the economy recovered from recessions in 2003 and 1992.

“Rebounds can be choppy,” Headd said.