Job seekers fill out applications at a job fair in New York.
The latest jobs report was a big dud, with the economy creating just 69,000 jobs in May, when economists had been expecting about 165,000. But a quick scan of the world economic environment makes it easy to see why CEOs are cautious and companies are reluctant to hire.
[See a collection of political cartoons on Occupy Wall Street]
Deciding whether to hire more workers isn't as complicated a decision as politicians and pundits make it seem. It doesn't usually involve tax levels or regulatory burdens or vulture capitalism or any of the charges that Mitt Romney and Barack Obama are flinging at each other. Companies hire new workers when they're needed to help meet demand for whatever it is they sell. If demand is flat or companies worry that it will decline in the future, they don't hire.
It's mostly the future that companies are worried about right now. You can't blame them. The financial crisis in Europe has been festering for several years, but it's clearly getting worse, not better. Many analysts now place even odds on the likelihood of Greece leaving the euro zone. That might be manageable, or it might be catastrophic.
[Jobless Rate Increased in May]
"If the euro zone fractures, the U.S. economy will have a big problem," writes economist Mark Zandi of Moody's Analytics. Here's the scenario he envisions if Greece leaves the euro zone: European banks will suffer deep losses on debt that Greece defaults on. They'll rapidly rein in lending as a result, including loans made to U.S. firms. U.S. banks are healthy, but they won't be able to make up the difference. That will generate a credit crunch similar to what happened in the fall of 2008.
Europe, meanwhile, would enter a deep recession, with sharp cutbacks in U.S. exports to Europe and European investment in the United States. That would curtail demand for many American products. Stock markets would tank, making U.S. consumers even more nervous. Nobody's sure where it would end.
The U.S. economy is in considerably better shape than Europe's. The housing market is healing. Lending has picked up. Consumers are spending money on cars and lots of other things. There's even a manufacturing revival. But there's one huge caveat: The so-called fiscal-cliff, which the economy will tumble over if tax cuts that are set to expire are not extended and spending cuts slated to kick in at the end of the year actually go into effect. If all those measures happenas scheduled, it would knock a couple points off GDP growth and most likely trigger a new recession, according to the Congressional Budget Office.
[See what nobody's telling American workers.]
The conventional wisdom is that Congress will intervene at the last minute, during the lame-duck session following the November elections, and postpone many of those measures until the economy is stronger. But who trusts Congress to get it right? Last summer, when Congress had to make a comparable economic decision, it led to an unnecessary crisis over raising the government's borrowing limit. That prompted the first-ever downgrade of the U.S. credit rating, and contributed to a two-month swoon in the stock market. Maybe Congress will do better the next time, but would you bet your own money on it?
So if you're a business owner looking ahead, you see a few couple of huge things that could go wrong, and bunch of small things that might go right. If there's no urgent need to hire, you probably wouldn't.
There's one upside to all the hand-wringing about hiring. Many companies have cut as deeply as they can, and are ready to hire once they feel stability is settling in. That could mean a big pickup in hiring if the storm clouds over Europe and Washington recede. But for now, bring your umbrella.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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