Small business job growth slackened in February

Small businesses lost 96,000 jobs in February, according to ADP, although the private sector overall added 475,000 jobs for the month. However, another payroll company, Paychex, reported national small business job growth remained at consistent levels in February and hourly earnings growth continued to increase for workers.

Small businesses with between one and 19 employees lost 95,000 jobs in February, and those with between 20 and 49 employees lost 1,000 jobs, according to the ADP National Employment Report. In contrast, medium businesses with between 50 and 499 employees gained 18,000 jobs last month, and large businesses added 552,000 jobs, including 23,000 in companies with between 500 and 999 employees, and 528,000 in organizations with 1,000 employees or more.

The service-providing sector accounted for most of the job gains last month, with 417,000 jobs, including 72,000 in professional and business services like accounting and tax preparation, 11,000 in financial activities like banking, and 170,000 in leisure and hospitality. The goods-producing sector added 57,000 jobs, including 30,000 in manufacturing and 26,000 in construction. Franchise businesses gained 45,000 jobs in February.

An ADP sign at the TechFair LA job fair in Los Angeles.

Patrick T. Fallon/Bloomberg

ADP and its partner Moody’s Analytics also upwardly revised the total payroll gains for January to 509,000. “This year, the jobs market is set to post strong gains, even amid ongoing labor shortages and now new developments in Ukraine and Russia,” said Nela Richardson, chief economist at ADP, during a conference call with reporters Wednesday. “We’ve seen jobless claims have settled back to near the lowest level since the pandemic began, and it’s reflective of how reluctant firms are to lay off workers in the current tight labor market environment. Omicron, which is now fading across most of the country, did not have as much of an economic impact as was expected or even seen in previous waves, but it may have had an effect of keeping some workers on the sidelines due to health concerns.”

She noted that an ADP small business survey that was conducted in December found that hiring remained the number one challenge despite strong demand.

Paychex also found leveling off in its small business employment figures on the Paychex | IHS Markit Small Business Employment Watch. The national jobs index was unchanged for the month at 101.33, matching the record level set in January and increasing 7.83% over the past year. Hourly earnings growth reached a new record high, however, growing to 4.82% year-over-year. “The flagship index number was completely flat, but the good news is there’s still growth,” said Frank Fiorille, vice president of risk management, compliance and data analytics at Paychex. “It’s still running at a record level. It’s been growing pretty steadily the past several months. It’s still pretty strong, but growth has decelerated a little bit, but that’s probably to be expected.”

Hourly earnings growth reached a new record high, growing to 4.82% year-over-year. “Wages continue to have pretty heavy growth,” said Fiorille. “Over the past month, it was the highest we’ve seen in our index. A lot of the areas where we’re seeing rapid growth are states putting in minimum wage increases. Hours worked were down, but people are starting to come back to work.”

Fiorille just returned from a trip to Washington, D.C., where he heard talk about the Biden administration trying to resurrect its Build Back Better plan, which remains stalled in the Senate. President Biden discussed the topic during the State of the Union address on Tuesday evening. “The one thing all Americans agree on is that the tax system is not fair,” said Biden. “We have to fix it. I’m not looking to punish anyone. But let’s make sure corporations and the wealthiest Americans start paying their fair share. Just last year, 55 Fortune 500 corporations earned $40 billion in profits and paid zero dollars in federal income tax. That’s simply not fair. That’s why I’ve proposed a 15% minimum tax rate for corporations. We got more than 130 countries to agree on a global minimum tax rate so companies can’t get out of paying their taxes at home by shipping jobs and factories overseas. That’s why I’ve proposed closing loopholes so the very wealthy don’t pay a lower tax rate than a teacher or a firefighter.”

Biden also discussed his plans to tackle inflation, and Paychex saw similar concerns in a recent survey. “When we survey our small businesses, that’s everybody’s biggest concern right now is inflation,” said Fiorille. “What are they going to do? Are they going to raise prices, or will those prices hold. It’s not just the supply chain. It’s also labor and everything is up. It’s going to be challenging for small and medium-size businesses.”

Paychex found the South led the way among regions in terms of hourly earnings growth, while the leisure and hospitality sector led the way among sectors with 10.40% hourly earnings growth. North Carolina surpassed Texas as the top state for small business job growth. Dallas extended its position for the sixth month in a row as the top metropolitan area for small business hiring.

“Dallas continues to be very strong, and North Carolina on a state basis was the strongest state this month,” said Fiorille.

He is keeping an eye on the money supply as the Federal Reserve is expected to take steps to rein in inflation this year. “What’s really going to be interesting to watch on the macro side is the money supply with consumers and balance sheets,” said Fiorille. “The conventional thinking is that everybody has a ton of money and when that starts to drop and things get unwound, they’ll start looking for jobs again. When we look at that, it’s still pretty high. I don’t know when that’s going to flip or change, but that’s something we’re watching really closely as well.”

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