The stock market was rattled on Tuesday by underperforming manufacturing data.
The Richmond Federal Reserve Index, which measures manufacturing performance in the upper Southeast and mid-Atlantic regions, fell to -11 in July, down from a 7 in June. This signals a significant drop in new orders and shipments.
This comes just a week after the Philadelphia Federal Reserve Index reached a two-year high, which had rallied the market. Such a drastic swing in confidence in the manufacturing sector suggests that uncertainty will stretch into the late summer.
The data comes at a pivotal time for the Obama administration. For the 11th time in his presidency (by ABC News' count), Obama announced that he will pivot his attention back to the economy in an effort to create jobs, with a strong emphasis on U.S. manufacturing.
Even though the New York Stock Exchange (NYSE) recently touched all-time highs, American companies are reluctant to hire, particularly with greater uncertainty on the horizon.
Perhaps if the President wishes to create new jobs, the administration should address the primary reasons why companies are not hiring in ways that would generate stronger economic growth.
Here are five reasons why companies are not hiring right now.
1) Companies Cannot Find Qualified Applicants.
Despite the fact that millions of Americans are out of work, more than three million jobs out there are unfilled because companies cannot find qualified workers. Within manufacturing, there are more than 400,000 open positions, but employers say they can't locate the right human capital to fill them.
However, this problem could be the fault of the companies and a lack of an intelligent human resources strategy.
In a 2012 Gallup poll, two in three U.S. business owners say that word-of-mouth is one of the most important ways they find new workers. The second most popular source of locating workers is "referrals from existing workers."
Only 15% use the Internet as a critical source, 9% use newspaper ads, and 4% cite recruiters. Encouraging business owners to harness technology to find talent would be an important first step. Unfortunately, mobility and the willingness to move to places where jobs are available are limited by employees owning homes or due to their bias against where work is available.
2) Robots Have Replaced Human Productivity
The reality is that workers in American aren't competing against each other for jobs. They're actually competing against technology. In New York, fast food workers are demanding an increase in wages from $7.25 an hour to $15. While doing so, they will seal their own fate, and ultimately be replaced by more automation.
In the past three decades, new technology has been one of the greatest dividers of wealth in this nation. Jobs that tell technology what to do are in high demand, but few people are qualified (these are very high paying jobs in design, engineering, and analytics).
Jobs in which technology tells people what to do are low-paying, low-skilled jobs, the types that are emerging in an economy now dominated by automation and increased scale.
Technology is now deciding how much workers make, and college-educated, white-collar employees are no longer immune.
A Stanford professor recently commented that technology and scale are greater drivers of job displacement than previously expected. The famed economist David Ricardo noted this trend in technological unemployment a long time ago, but it completely seemed to have disappeared as a story for 190 years.
How did modern economists ignore this trend for so long?
Two reasons. First, they can't place radical innovation into their models.
Second, they fear being labeled Marxist for talking about ownership of the "means of production."
3) Regulatory Uncertainty Hammers Small Business
The delay in the employer mandate of the Affordable Healthcare Act is now affecting hiring.
Come 2015, companies will not be able to hire more than 49 full-time workers without offering costly healthcare, unless they are prepared to pay a $2,000 penalty per employee. In the law's Orwellian language, this penalty is called "a shared responsibility payment."
Of course, they can have more than 49 workers and not pay offer healthcare, but the workers must be part-time and work fewer than 30 hours a week. This doesn't bode well for hiring, particularly as the Obama administration continues to delay its own laws because implementation is extremely difficult and the rules are still quite vague.
Not only has Obamacare shuffled the deck on how business owners operate, but also Washington's meddling in other areas of people's lives has continued to drive greater uncertainty.
4) Hiring Isn't Cheap
In addition to the increase in healthcare costs, there are also increases in payroll taxes that companies have to take into consideration in 2013. The social security payroll tax returned to its pre-Bush levels, driving up costs on small businesses and entrepreneurs.
A simple solution would be to introduce an across-the-board payroll tax cut, and find ways to raise that revenue by closing tax loopholes elsewhere (the mortgage interest reduction would be a good place to start).
Unfortunately, Democrats don't believe that companies will hire more if wage costs fall slightly. Certainly, companies could invest in innovation or more automation. However, Democrats don't understand that sales positions would likely see an uptick in hiring, as it takes human capital to sell products for companies, and hiring talent is certainly motivated by a reduction in upfront costs.
5) They Don't Have to Hire
Finally, companies don't just have to hire because someone says they should. Businesses enter cycles and expand during periods of growth. Without enough demand for their products, they won't hire, but they also will not hire and expand if they do not feel comfortable yet.
As any small business owner knows, going from five workers to 10 is actually a massive change, and it requires a significant amount of knowledge to manage and coordinate a business.
Despite the fact that manufacturing is struggling in the United States, our Shah Gilani exposes the best job market out there in America: Being a lawyer in Washington D.C.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.