Small Business Hiring Surges, Complicating Fed's Effort to Cool Economy

If small businesses in the US ramp up hiring, it could interfere with the Federal Reserve's plans to keep inflation in check.

‍
Small companies have been responsible for the vast majority of job growth in the United States since the onset of the Covid-19 pandemic. According to a Wall Street Journal review of labor data and an analysis by Jefferies, small companies account for almost four out of five available job openings. This is a remarkable achievement, given the difficult circumstances that small businesses have faced over the past year.

‍
Small businesses have been hiring more people than larger businesses since February 2020, despite some sectors of the economy seeing rapid expansion. This is according to data from the government's Job Openings and Labor Turnover Survey.

‍
"Small businesses are playing a vital role in supporting the labor market," said Aneta Markowska, Jefferies chief economist.
Elizabeth Trenbeath, franchise president at Snelling Staffing in Lexington, S.C., said she has seen a surge in inquiries from small and medium-size businesses seeking workers in recent months. She attributes this to the improving economy and increasing confidence among businesses that they will be able to find the talent they need to grow.

‍
Ms. Trenbeath, whose company is part of HireQuest Inc., said that they were receiving more and more unsolicited calls from all sorts of industries, asking for help to get back up and running. She said that it often felt like desperation when she would pick up the phone.

‍
Small business hiring is on the rise, and this is being closely monitored by investors. This could have significant implications for financial markets.
The logic of Wall Street can be confusing at times. For example, good news for the economy, like a surge in hiring by small businesses, can actually be bad news for markets. That's because as long as the job market is strong, the Federal Reserve will have a tough time slowing down the economy and curbing inflation. And if the Fed can't slow things down, it will have to keep raising interest rates.

‍
Small businesses have been a major source of job growth in the United States in recent months. According to calculations by Ms. Markowska, small businesses accounted for 78% of all job listings in November, and 91% of the increase in job openings since the pandemic began. Fed Chairman Jerome Powell has cited this data as an example of the "economic dislocation" that is keeping inflation at unacceptably high levels.

‍
Central bankers have pointed to the labor market as a primary driver of high inflation. Even though wage increases have lagged behind overall inflation, they believe that the labor market is still a key factor in driving up prices. The Fed’s rate increases have already had a profound effect on markets and the economy. The S&P 500 last year suffered its worst annual loss since 2008, and bonds had their worst year on record.

‍
Joe Amato, president at Neuberger Berman, warned that if the Fed is unable to slow down the labor market and weaken the economy, policy makers will have to stay vigilant. "That increases the likelihood that the car…runs into a deeper ditch," he said.

‍
Large businesses typically raise money from outside investors by issuing bonds or selling new shares of stock. However, the downturn in both stocks and bonds in 2022 made it more difficult for businesses to access cheap funding, leading many to stop or slow hiring. Many companies have laid off workers and ordered hiring freezes in recent weeks, after their stock prices plummeted last year. This has been seen across a variety of sectors, with many big companies affected.

‍
Small businesses are continuing to struggle to find workers. Many businesses are having to raise wages in order to attract potential employees.
Small businesses typically rely on current consumer spending patterns to determine whether to increase or decrease their staff levels. Data shows that Americans are slowing down their spending but are still spending a lot overall. U.S. retail sales declined in consecutive months at the end of 2022 for the first time since November and December 2020. However, November and December's readings were still up 7.6% and 6%, respectively, from their 2021 levels.

‍
The National Federation of Independent Business's latest survey of small companies found that demand for labor is still high and that many are unable to fill open positions. While the percentage of companies with job openings that they were unable to fill fell to its lowest level of the year in December, when 2022 and 2021 are excluded, that reading would be the highest on record, dating back to 1986. This indicates that small businesses are still struggling to find the workers they need.
According to Holly Wade, executive director of the NFIB Research Center, many businesses are still increasing compensation for open positions. Wade oversees the group's survey and says that businesses are generally planning to increase compensation in the near future.

‍
Gary Weiner, president and CEO of Saxon Shoes in Richmond, Va., hoped to double his sales staff in 2022 by hiring 15 people. However, he was only able to hire half that number. This left his staff scrambling for much of the year. Weiner is hoping to add more workers this year. "It was a tough market out there," Mr. Weiner said. "We tried to compete by raising our opening salaries, but it was a feeding frenzy for people looking for jobs."
The good times for small businesses may be coming to an end.

‍
The Fed has said it plans to continue to increase rates this year. That is expected to slow the economy, with the central bank projecting U.S. economic growth of just 0.5% in 2023. The economy grew at an average pace of 2.1% from 2012 to 2021, but most economists and big banks are now predicting a recession.
Small businesses have always been the first to feel the effects of an economic downturn, and they typically suffer greater losses than larger businesses. This appears to be the case again, as data from the NFIB's small-business optimism survey shows a decline in December, to almost 10 points below the 49-year historical average. The index has been falling for 11 straight months now, and shows no signs of recovery.

‍
According to Bill Dunkelberg, chief economist for the National Federation of Independent Business (NFIB), small-business owners are not optimistic about 2023. In a recent survey release, Dunkelberg said that sales and business conditions are expected to deteriorate over the next few years. According to the NFIB survey, more small-business owners said their sales shrank over the past three months than those who said their sales increased. And more are expecting real sales volumes to decline than increase over the next six months.

‍
The Fed's rate increases are making it more difficult for small businesses to find or afford outside funding. The prime 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. Data from the Fed show that banks have tightened their lending standards in recent months and are giving out fewer loans.

‍
Ms. Markowska, the Jefferies chief economist, said that last year was a pretty good year for small businesses, but that this is slowly starting to change.