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Why Hiring Is Sluggish, But A Perfect Storm Is Brewing

During an economic expansion it is imperative that employers hire at a rapid pace. Economic expansion (i.e. GDP expansion) and hiring are two concepts that essentially tied hand in hand, courtesy of how GDP is calculated, because you cannot have an economic expansion without an increase in production and expenditures, among many other things. And you cannot have consistent consumer expenditures without wage paying jobs. Similarly, businesses are not going to produce new goods if consumers are not spending (i.e. housing inventories over the last four years). Thus, you get a scenario where hiring is extremely sluggish as businesses are afraid to take the plunge and hire more employees. And when you throw in the Affordable Healthcare Act (ACA) you get a substantially more complicated situation.

A more down to earth way of putting this is: businesses (large and small) are not willing to hire until orders are placed. For example, a company that produces, let's say, wheels, will not embark on any substantial hiring until large enough orders are placed that cause the current labor force to, well, for a lack of a better word, labor. Furthering this example, if a customer orders 10,000 wheels, it is very likely that this wheel company will need to hire new staff because the alternative solution is delay the order and ruin your reputation. Think about what happens every time Apple (NASDAQ:AAPL) announces a delay in their latest gadget that everybody already has anyways.

Nevertheless, businesses are finding it hard to find a reason to hire in the first place, and the ACA is not helping. Regardless of whether business owners have correct knowledge about the new changes, most business owners are frozen with fear and are not willing to hire. There are, however, obvious provisions/subsidies in the ACA that can and will help the smallest businesses save up to 50% on their healthcare costs. Unfortunately, despite these facts, business owners are struck with fear and unwilling to hire without new business orders. This cycles back to the fact that consumers are not able to place orders if they do not have jobs in the first place. Likewise, other businesses are not able to place new orders with other businesses without the income from consumers.

What we have is an economic scenario where businesses are hiring too slowly to make any immediate or meaningful impact on the country's employment situation. Many detractors will point out that the UE rate is decreasing because, for the most part, consumers are leaving the work force in droves. I for one do not care how the UE rate declines, as long as QE ends, and I am expecting an announcement of a slow winding down of QE to begin in 4Q13 or 1Q14 to occur shortly.

Nevertheless, there will be a point when a perfect storm is created and hiring jumps substantially. I am expecting to see, at some point, consumer expenditures reach a specified unknown amount that causes business to hire. And once a majority of businesses begin to hire the avalanche will begin. In this scenario you can expect to see consumer expenditures increase and subsequent hirings to follow. When will this be? Good luck on that one.

One final thought to take home is that the current economic expansion cannot take full effect without decent amounts of employment. Therefore the current expansion will in all likelihood last longer than previous expansionary phases. The difference will be that GDP and other economic indicators will appear sluggish, but at the end of the expansionary phase, the nominal data will be the same as the previous shorter expansionary phases.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.