One thing the Federal Reserve Board of Governors has made clear is that removing imbalances in the labor market is sine qua non for fighting inflation. So far, though, progress is barely detectable, especially among small businesses.
The imbalance between the supply and demand of workers peaked last March, according to Fitch Ratings economists, at 5.9 million excess jobs. It’s down to about 5 million.
At one point, economists expected labor force participation (supply) to rise post-pandemic, but it has hovered around 62% for a year — about four percentage points below the pre-pandemic level.
Federal Reserve Chair Jerome Powell finally admitted in his last press conference that labor supply is not rebounding; indeed, the FOMC’s goal is now to reduce labor demand.
But monetary policy has yet to loosen the small business jobs market.
For many, hiring and job openings are still on the menu. Private firms with 10 to 49 employees signed on about 2 million workers in October, up from about 1.8 million a year ago, according to the Bureau of Labor Statistics (BLS). Hiring slowed down slightly for 1-9 employee companies. (See chart, Small Business Hiring Relatively Steady)
According to a different data set of 3,500 companies with 300 or fewer workers, the CBIZ Small Business Employment Index, small business hiring increased in November, with about 21% of employers boosting headcount.
And job openings at small businesses are still stubbornly above what they were in 2021. The latest BLS report showed 10.3 million job openings among all employers nationwide. Nearly 2 million of those are at businesses with 1 to 9 employees, and 3 million at businesses with 10 to 49 employees. (See chart, SMBs Have Millions of Job Openings.)
According to Aneta Markowska, chief financial economist at Jefferies, cited by S&P Global Market Intelligence, there are currently 3 million more job openings in the small-business sector (categorized by Jefferies as companies with fewer than 250 employees) than there were prior to the pandemic.
Economists postulate that small businesses are still making up for the loss of employees due to the COVID-19 pandemic. They can’t offer the same level of benefits as midsize and large employers can, for one.
But unslackening demand, according to Markowska, may also be due to the lag in impact of the Fed’s monetary tightening cycle. Higher rates are increasing the cost of credit, whether through bank loans or credit cards, but it takes time.
Healthy consumer spending may be boosting labor demand and hiring. “Small businesses responded to consumer support of restaurants and businesses that provide recreational services,” Anna Rathbun, CFA, chief investment officer of CBIZ Retirement & Investment Solutions, said of the November hiring numbers.
But there’s little doubt SMBs may soon feel the ramifications of the turbulent economy — if interest rates don’t get a small business, inflation might.
October saw a slight hint of it with layoffs and discharges at businesses of 1 to 9 employees rising to 305,000, up from 177,000 a year ago. The monthly totals are still largely below where they were in 2021. (See chart, Layoffs Not Hitting Small Businesses Yet.)
More striking is economic data about small company rents from a monthly poll by Alignable Research Center, a Boston-based trend-tracking company. It showed that 41% of surveyed U.S.-based small business owners could not pay their rent in full and on time in November, a new record for 2022. (The poll had 6,326 small business owner respondents.)
In addition, 41% said they were generating half or less of what they earned monthly prior to COVID-19, according to Alignable. Not a good sign going into 2023, as numerous small business sectors normally get a holiday sales bump.