Liz Looks at: Small Businesses

Small But Mighty

It likely comes as no surprise that small businesses are a critical part of the US economy. They are responsible for more than 40% of our nation’s GDP and they employ close to 50% of the private (non-government) labor force.

Although there are plenty of economic statistics to watch, many of which I’ve covered in previous columns or will cover in future ones, the statistics surrounding small businesses are at the top of my priority list.

This week, the National Federation of Independent Businesses (NFIB) released data from its Small Business Optimism Index, and the numbers caught my attention. The index level came in at 99.6 vs. expectations of 101.0. Though it’s a miss, it’s narrow—and not terribly concerning. The index, after all, is still markedly higher than it was at the start of the year.

The Stat That Gave Me Pause

What gave me pause then was the data around hiring. A record 48% of small business owners reported unfilled job openings, and 93% of those businesses reported finding few or no qualified applicants. Yet 27% of small businesses plan to create more jobs in the next three months. Unless there is a flood of qualified applicants who suddenly enter the labor force, the gap will widen.

It’s true that it’s better to be creating jobs than losing jobs. What concerns me is that if small businesses can’t find workers to fill the spots, they can’t reopen to full capacity. They can’t meet the demand without sacrificing quality or service to do so. That could limit revenue and in turn, limit private sector growth and the private sector’s contribution to GDP.

The Bottom Line

This recovery has been predicated on reopening the economy and the growth that will result. Labor market health has a large impact on growth potential and, I’m guessing, is mainly why the Federal Reserve continues to watch labor data so closely. If its goal is to stimulate growth to a point where policy support is no longer necessary, the Fed knows we need the labor market to create durable growth, not a flash in the pan.

The stock market seems optimistic that small businesses have a bright future, with the small-cap Russell 2000 index up 18.6% YTD while the S&P 500 is up only 12.7%. I mostly agree with the positive sentiment and believe that small businesses can drive us out of this and come roaring back. We just need the labor market to roar back with them.

-Liz Young Thomas, Head of Investment Strategy at SoFi

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