The country added only 80,000 jobs in June, a sign of a still-sluggish economy. Moreover, after showing a steady decrease during the past several months, the U.S. unemployment rate rose slightly to 8.2 percent in May and subsequently held steady at that mark last month — an issue of great concern to small business owners.
“The fear now is that we may be running out of runway before the onset of another recession,” said Brian Hamilton, CEO of financial information firm Sageworks Inc. “We will not be surprised to see continued growth in GDP given the fact that privately held companies continue to grow at a healthy rate. However, what is becoming slightly concerning is that the unemployment rate is not decreasing at a fast enough rate.”
What’s behind the too-sluggish job creation is unclear. Experts say said strong sales growth and profitability among privately held companies indicate it’s not a lack of genuine improvement in business conditions.
One factor could be the cost and time required for smaller businesses to find and hire employees, according to Jerome Ternynck, founder and CEO of SmartRecruiters, which has developed software that aggregates hundreds of employment services in a free, open platform.
The firm notes that companies have open requisitions for at least 3.5 million jobs at a time 12.7 million Americans are unemployed, and filling existing open positions would push the unemployment rate down by 3 percent.
“We’re clearly seeing that small businesses have the ability to create more jobs proportionately than bigger ones,” Ternynck said. Bigger businesses are typically tied to budgets that must be revised before headcounts can be created, so hiring tends to move more slowly, he said.
But big businesses incur about half of the costs of a small business when it comes to hiring, and many smaller operators don’t have the time it takes, 100 days on average, to recruit and hire, he said. That’s why they often rely on external services, such as employment agencies, he said.
As a result, the fortunes of many employment agencies are beginning to improve.
Privately owned temporary help services and job placement companies are seeing strong sales growth, and net profit margins have recovered to pre-recession levels, according to a recent financial statement analysis by Sageworks.
Employment services firms have experienced nearly 21 percent sales growth over the last 12 months. The growth follows 21 to 22 percent increases in both 2010 and 2011 after a 3 percent decline in 2009. Recent sales growth has outpaced that of all private companies, according to Sageworks’s analysis.
Net profit margins, meanwhile, have more than doubled from 2009, when they were about 2 percent. Margins topped 5 percent over the last 12 months, compared with about 4 percent in 2006 and 2007.
Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, and aggregates the data at an approximate rate of 1,000 statements a day. Net profit margins are adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies’ operational performance.
Sageworks analyst Robb Granado said the strong growth in employment services sales isn’t surprising, considering firms will often use placement firms to hire temporary help if they want a hedge on the investment of a full-time worker, or if they need stop-gap help until they can find qualified full-time help.
“If you’re coming out of a recession and a period of slow growth, you’re a bit more cautious on all of the investments you’re going to make as a business owner,” Granado said. “Employment decisions are certainly one of those investments with which you use caution. And if you’re not finding the right ‘inventory,’ or exactly the right fit for a hire, you can take a safer approach with a temporary hire.”
The more temporary costs associated with a contractor or temporary employee are easier to dial back if necessary than the fixed costs of a full-time, permanent hire, he said. “That allows employers to take a ‘wait-and-see’ approach, whether that wait and see is about sales growth or regulatory issues or other uncertainties.”
Mary Ellen Biery is a research specialist at Sageworks, Inc., a Raleigh, N.C.-based financial information company that collects and analyzes data on the performance of privately held companies.