MainStreet Macro: What’s next for small businesses?

Last week, the ADP Research Institute looked at how the first two months of the COVID-19 pandemic affected U.S. employment one year later. During the 2020 lockdown in March and April, the U.S. lost 20 million jobs, or about 15% of total employment.

The market has come a long way since. We’ve recovered 10 million jobs, but we’re still missing another 9.5 million, or 6%. We still have a long way to go before we see a complete jobs recovery.

Moreover, a return to the growth trajectory the economy was on prior to the pandemic will require an additional 1.5 million jobs. That’s 11 million total to capture the job creation the economy would have delivered if the pandemic had never happened (Main Street can dream). 

This week, the country will be taking a hard look at March jobs reports from ADP and the Bureau of Labor Statistics to see whether the employment rebound we saw at restaurants and bars in February continued or even picked up steam. 

Part of the answer will hinge on the recovery of small businesses. There are nearly 32 million small businesses in the U.S., and these employers will power the economy’s post-pandemic job growth for two big reasons.

First, although small businesses employ less than half the workforce, over the past decade they’ve created roughly two-thirds of net new jobs. Second, small businesses already have led the recovery from the pandemic lockdown.

To see that growth in action, channel your inner Michael J. Fox and follow me back to March and April of the year 2020 (those of you under 30 can just Google it). Don’t worry everybody, we won’t stay here long.

During those two months, when most businesses around the country closed due to pandemic-related social-distancing restrictions, the U.S. economy shed 20 million jobs. Employers with fewer than 50 workers accounted for about 27% of the jobs lost in March and April, roughly in line with their pre-pandemic share of total employment.

Now fast forward a year, back to the present. Small employers have recovered 66% of jobs they lost in those traumatic two first months of the pandemic. Businesses with more than 500 employees on the payroll have recovered only 42% of the jobs they shed over the same time period. 

Source: https://www.adpresearch.com/covid-19-toll-on-us-employment-one-year-look-back/

A big part of the recovery to date can be attributed to the Paycheck Protection Program, part of the massive stimulus plans Congress passed to rescue the economy. The program provided forgivable loans to small businesses to help them retain workers. 

ADP data shows that the Paycheck Protection Program, or PPP, boosted employment for eligible firms by an estimated 3.25% on average. I know, I know: “Big whoop!” you say, and it does sound like a tiny percentage. 

But put that number in context. During the hiring surge last June, the employers added 2.3 million jobs because of the PPP.

PPP loans are still in demand. Since late December, more than half of small employers had either applied for the program or asked for loan forgiveness, according to the Small Business Pulse Survey from Census.

A year later after the 2020 spring lockdown, the key question is what’s next for small businesses.

Let’s break that question down.

1. How long will it take to get back to business as usual?

Forty percent of small firms said it will take more than six months. to get back to a normal level of operations, according to this month’s Small Business Pulse Survey from Census.

Source:  Small Business Pulse Survey, March 8-14, 2021. U.S. Census

1. Can the momentum in hiring continue?

In February, small businesses created 51,000 jobs. I’ll be watching ADP’s National Employment Report on Wednesday to see if that pace of hiring decelerated, continued or accelerated.

• Are new businesses forming? 

We saw a surge in new business applications late last year. But more recent projections from the US Census are less encouraging. The number of business that are projected to advance from the application stage to opening their doors and hiring workers fell 13% in February from the month before. 

My take

The answers to these questions will determine how long it takes for Main Street to get back to normal and for the U.S. to return to full employment.

However, getting back to full employment is just half the struggle. The term itself is ambiguous. What is full employment? There’s no shame asking, because no one, even the experts, really knows.

Generally, full employment is thought to be reached when unemployment falls to between 4% and 5%.

That definition isn’t particularly useful, though, when lots of people, especially women, have exited the labor market entirely due to, say, health concerns or family responsibilities. When people in large numbers abandon work, they artificially suppress the unemployment rate by masking the true extent of involuntary joblessness. And quitting work because you lack adequate childcare does count as an “involuntary” job loss. 

A return to pre-pandemic levels of employment would be more meaningful than full employment. And it will be much harder to achieve, because it requires recapturing all 9.5 million jobs that still haven’t returned. A stretch goal would be to add those 1.5 million positions whose theoretical existence was stamped out by the coronavirus.

While there’s still a lot of uncertainty about the pace of the recovery and even what recovery looks like, we do know this. Small businesses will play a critical role in getting us there.

Mom-and-pop firms punch above their weight. They create the lion share of new jobs.  And despite unprecedented pain, they’ve led the jobs recovery. This makes small businesses the backbone of not only Main Street but the U.S. labor market.