The surge in small business hiring is complicating the Fed’s efforts to cool the economy

A surge in US small business hiring could run counter to the Federal Reserve’s efforts to cool inflation.

Small businesses have been responsible for all U.S. job growth since the start of the Covid-19 pandemic, accounting for nearly four out of five available jobs, according to a review of Wall Street Journal labor data and an analysis by Jefferies.

Since February 2020, small businesses — businesses with fewer than 250 employees — have hired 3.67 million more people than have been fired or resigned. Larger companies — those with 250 or more employees — have shed 800,000 net jobs during that time, despite some rapid pandemic-era expansions in industries like tech. This comes from data from the state survey on job offers and fluctuation.

“Small businesses are literally holding back the job market,” said Aneta Markowska, Jefferies chief economist.

Elizabeth Trenbeath, franchise president at Snelling Staffing in Lexington, SC, said she’s been inundated with inquiries over the past few months from small and medium-sized businesses looking for workers.

“We’ve had many more unwanted calls from all parts of the industry needing help getting back up and running,” said Ms. Trenbeath, whose company is part of HireQuest inc

“It was almost desperation when I picked up the phone.”

Investors are watching the rise in small business hiring closely as it could have a major impact on financial markets.

In the sometimes confusing logic of Wall Street, good news for the economy – such as a surge in small business hiring – can be bad news for the markets. As long as the job market is strong, the Fed will have a hard time slowing down the economy and curbing inflation and will continue to raise interest rates.

According to Ms. Markowska’s calculations, in November, the most recent month for which data is available, small businesses accounted for 78% of US job openings and 91% of the post-pandemic surge in job openings. Fed Chair Jerome Powell has contrasted the 10.5 million available job vacancies with data showing the US had 6 million unemployed this month as an example of the “economic dislocation” that is keeping inflation at unacceptably high levels.

Central bankers have pointed to the labor market as the main driver of high inflation, although wage increases have lagged well behind headline inflation.

The Fed’s rate hikes – seven hikes in the past year took US interest rates to their highest level since the global financial crisis – are already having a profound impact on markets and the economy. The S&P 500 suffered its worst annual loss last year since 2008 and bonds had their worst year on record.

If the Fed fails to rein in jobs and weaken the economy, policymakers must remain vigilant, said Joe Amato, president of Neuberger Berman. “That increases the likelihood that the car … will go into a deeper ditch,” he said.

Large companies get much of their debt financing by issuing bonds or selling new stock. The downturn in both stocks and bonds in 2022 caused many to stop or delay hiring because they could not tap the markets for cheap financing.

Many large companies across industries have laid off employees and imposed hiring freezes in recent weeks after their share prices plummeted over the past year.

Small businesses, meanwhile, have continued a frenzied rush for workers. Many have said they need to raise wages to attract potential employees.

Small businesses generally rely on what consumers are currently buying to decide whether to increase or decrease their headcount. Data shows Americans are slowing down but still spending heavily. US retail sales fell month-on-month in late 2022 for the first consecutive month since November and December 2020. However, November and December readings were still up 7.6% and 6%, respectively, from their 2021 levels.

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The latest survey of small businesses by the National Federation of Independent Business found that labor demand is still high and many vacancies are unfilled. While the percentage of companies with open positions they couldn’t fill fell in December to its lowest level for the year if 2022 and 2021 are excluded, that figure would be the highest on record and dates back to 1986.

“Many of those looking to fill open positions are still rising and planning to increase compensation,” said Holly Wade, executive director of the NFIB Research Center and leader of the group’s survey.

Gary Weiner, President and Chief Executive Officer of Saxon Shoes in Richmond, Virginia, wanted to double its sales force in 2022 by hiring about 15 employees. He was only able to hire about half that number, and he said his employees were forced to struggle for much of the year. He hopes to hire more staff this year.

“We’ve tried to stay competitive, stay in the market, raise our starting salaries, but it’s been a frenzy for people looking for jobs,” Mr. Weiner said.

But the small business bonanza could be coming to an end.

The Fed has announced that it will raise interest rates again this year. This is likely to slow the economy as the central bank projects US economic growth of just 0.5% in 2023. The economy grew at an average pace of 2.1% from 2012 to 2021. Most economists and big banks are predicting a recession.

Small businesses have historically been the first to be hit by economic downturns and generally suffer larger losses. The data shows that the hits have already started. The NFIB survey of small business optimism fell nearly 10 points below the historical average of 49 years in December. The index fell year on year for 11 months in 2022.

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“Overall, small business owners are not optimistic about 2023 as revenue and business conditions are expected to deteriorate,” said Bill Dunkelberg, chief economist at NFIB, in a recent survey.

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According to the NFIB survey, small business owners who said their sales have shrunk over the past three months outnumber those who said their sales have increased. And more and more are expecting real sales volumes to fall rather than rise over the next six months.

Additionally, the Fed’s rate hikes are making it harder for small businesses to find — or afford — external financing. The policy rate, which sets the floor for personal and small business loans, more than doubled from 3.25% in January 2022 to 7.50% in December. Fed data shows that banks have tightened their lending standards and are lending less in recent months.

“Last year was a pretty good year for small businesses,” said Ms. Markowska, Jefferies’ chief economist. “That’s slowly starting to change.”

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