Small Businesses Fuel Booming Labor Market

Continued hiring challenges may mean more Fed interest rate increases to rein in inflation.

January 26, 2023

ALEXANDRIA, Va.—Nearly four out of five available job openings are at small businesses, and they have been responsible for all of the net job growth in the United States since the onset of the COVID-19 pandemic, reports The Wall Street Journal.

However, what may seem like good news for the economy can be bad news for markets. If the job market remains strong, analysts expect the Federal Reserve to continue to increase interest rates in efforts to slow down the economy and minimize inflation.

“Small businesses are literally holding up the labor market,” Aneta Markowska, Jefferies chief economist, told the Journal. She said small businesses were responsible for 78% of the U.S. job listings in November and 91% of the post-pandemic increase in job openings.

Small businesses (those with less than 250 workers) have hired 3.67 million people since February 2020, whereas large businesses (more than 250 employees) have reduced headcount by 800,000 since then. The Small Business Administration reports that two out of every three jobs were created by small businesses over the past 25 years.

Central bankers say a strong labor market is the main reason for high inflation, despite wages not being able to keep up with rising costs. The Federal Reserve increased interest rates seven times last year, and Fed Chairman Jerome Powell has pointed to the 10.5 million job openings compared to the six million available workers as an example of “economic dislocation” keeping inflation high.

If the Fed is unable to slow down the labor market and weaken the economy, policymakers will have to stay vigilant, Joe Amato, president at Neuberger Berman, told the Journal. “That increases the likelihood that the car … runs into a deeper ditch,” he said.

Americans are spending less, but they are still buying a lot. Retail sales were down a seasonally adjusted 1.1% in December, the sharpest monthly decrease last year, and have slipped three of the past four months. However, November and December still showed an increase of 7.6% and 6% year over year, respectively.

Many small businesses are looking to hire and are increasing pay, according to the National Federation of Independent Business (NFIB), but these businesses are struggling to find workers. The hiring boom could be coming to a halt, as the Fed plans to continue rate hikes this year, which is expected to slow the economy. Most economists and banks believe a mild recession is on the horizon, although GDP increased a healthy 2.9% in the last quarter of 2022.

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

NFIB found that small-business optimism is down almost 10 points below the 49-year historical average. The index fell year over year for 11 months straight in 2022. Also, more businesses say that sales have slipped over the past three months than say that sales have increased.

“Last year was a pretty good year for small businesses,” Markowska told the Journal. “That is slowly starting to change.”