With Small Businesses Sidelined, the U.S. Job Market is Headed for a Double-Dip

After showing some improvement over the past year, the U.S. job market is now beginning a double-dip.

The reason is simple: The number of start-up businesses has hit its lowest level since at least the early 1990s.

Indeed, small businesses are the main drivers of job growth and no amount of stimulus can compensate for their absence.

For instance, between the recession that ended in late 2001 and the start of the most recent recession in late 2007, businesses that employed fewer than 500 workers added nearly 7 million employees, according to ADP payroll services. Larger businesses cut nearly 1 million employees in that period.

However, in the 12 months through March of last year, just 505,473 new businesses started up in the United States, according to the Bureau of Labor Statistics (BLS). That's the smallest number since the BLS began tracking the data in the early 1990s.

That's not all.

Businesses with fewer than 50 employees added just 27,000 jobs in May, compared to 84,000 in April and more than 100,000 in December and January.

So it's not surprising that the national unemployment rate in April climbed for the first time in six months to 9%. And after falling as low as 8.8% in March, the unemployment rate rose even higher in May, to 9.1%. Employers added just 54,000 workers in May - the smallest number in eight months.

Much has been made of the fact that many larger businesses say they plan to increase hiring during the months ahead, but that tide is beginning to turn. Optimism among U.S. chief executive officers in the second quarter actually fell from a record high in the first quarter, according to the Business Roundtable's economic outlook index.

The index decreased to 109.9 for the April-June period from a record high 113 reading in the previous three months. The Business Roundtable is an association of executives of corporations representing a combined workforce of more than 13 million employees and almost $6 trillion in annual revenue.

But what's worse is that small businesses are even more disillusioned.

In fact, a national survey of small business owners, released yesterday (Tuesday), showed declining optimism among owners of small businesses - the third straight monthly drop. That survey was conducted by the National Federation of Independent Businesses and polled 733 small businesses across the country.

"Only the big banks and the big manufacturers are winning," the NFIB said. "Earnings trends for small business are distressingly negative and the recovery is two years old."

Indeed, the biggest reason for the pessimism among small businesses is that U.S. consumers - who have been battered by tumbling home prices, tight credit, and exorbitant gas prices - aren't spending enough. Retail sales fell 0.2% last month, the U.S. Commerce Department said yesterday.

Of course, Money Morning Contributing Editor Martin Hutchinson has another explanation. He blames the worsening job picture on Washington's faulty policies.

"Washington's fiscal stimulus - including the government dumping nearly $1 trillion into such unproductive pursuits as ‘new energy' projects and state employee labor union contracts -- has generated massive budget deficits and given banks no incentive to play its key job-creation role by lending to small businesses," said Hutchinson. "Instead, the stimulus has provided temporary jobs with the government -- and those jobs are now disappearing as Washington's money runs out."

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