MainStreet Macro: Small business Buffeted but not bowed

Running a small business is not for the faint of heart, especially as the economy continues to swerve, pivot, and switch gears at a dizzying clip.

This week, we reveal new insights from research on the changing small business landscape. Since May, ADP has been surveying about 2000 small employers every three months to find out what’s driving them – and what’s driving them crazy.

They’ve had plenty to say. Here are the three big takeaways you need to know. 

The hiring headache

Since we began our quarterly small business outlook in May, ADP clients surveyed have cited the process of hiring qualified workers as their biggest challenge. 

The obstacles increase dramatically with company size. Among businesses with fewer than 50 employees, nearly 2 in 5 said hiring was a top operational challenge. At medium-sized companies – those with between 50 and 500 employees – nearly two thirds complained about being able to recruit qualified staff.

Retention, too, is a growing problem. A third of medium-sized employers named it a top concern. More than 40% of smaller firms and half of medium-sized companies plan to increase wages in the first half of 2022.

Workers are in demand and hard to find partly because employers are growing their payrolls. Nearly 1 in 4 ADP clients said they’ve added new staff in the past six months. More than a third are planning a hiring increase in the next six months.

Whether or not employers can increase their headcount will depend on their ability to compete with larger companies for workers.

Small businesses were the first to hire after the onslaught of COVID-19 wiped out 22 million jobs in the spring of 2020.

In the first nine months of 2021, those small employers held their own in the competition for talent. But that took a turn in the fourth quarter, when small businesses created just 15% of new jobs, compared to 31% in the previous quarter.

The scarcity of stuff

Small businesses aren’t immune to the supply chain disruptionsplaguing the broader economy.

When we first asked about supply constraints in May, only 17% of small employers cited supply challenges as a top issue. By December, that figure had grown to 26%. Small businesses said they also were struggling with higher production costs, higher input prices, and shipping delays.

Late last year, it looked like the supply chain logjam was starting to loosen up. Inventories held by retailers, suppliers and manufacturers jumped in November from a year earlier, the Commerce Department reported.

Then the omicron variant hit. Now it’s likely that the pandemic again has slowed progress on import of goods and inputs from overseas.

Here at home, things look a bit better. The economy grew 6.9% in the last three months of the year, compared to a lackluster 2.7% in the third quarter. The biggest driver of that year-end expansion was a record $174 billion buildup in inventories, which accounted for the lion’s share of quarter-over-quarter growth.

Small businesses will be affected by how quickly these inventories are depleted in 2022.

The revenue recovery

The combination of pay increases and costly or hard-to-find inventory will force many businesses to raise prices over the next six months, our survey found. Among those with fewer than 50 employees, half said they plan to increase prices for customers. Most said those price hikes will be permanent.

The good news is sales also are going up. More than three-fourths of small companies said revenue will hold its own or increase in the first half the year.

Forty percent said revenue is back to pre-pandemic levels. And more than 40% think revenues will recover by the end of the year.

Only 10% of respondents said revenues have been lowered permanently because of the coronavirus pandemic.

My Take

If consumers are the beating heart of Main Street, small and midsize businesses are its life’s blood, pumping out two-thirds of net new jobs in the decade leading up to the pandemic.

Across industries, what we see happening in the small business sector reflects what we see in the broader economic recovery, with all its post-pandemic twists and turns.

Despite hiring and supply chain challenges, small businesses, as a group, continue to speed ahead.

For more insight from our new quarterly small business survey, tune in to our special webinar, “Small Business at Work”.