MainStreet Macro: What are small businesses telling us about inflation?

I spend a lot of time talking about small employers because they punch above their weight when it comes to the economy. Companies with fewer than 500 employees created two-thirds of net new jobs leading into the pandemic, and they led the recovery afterward.

For the past few months though, small employers seem to be losing ground. They’ve been challenged by a tight labor market, higher costs and ongoing shortages.

Each quarter, we at the ADP Research Institute survey our small company clients to gather their insight on the business landscape. This quarter, they wanted to talk about the macroeconomy and – no surprise — inflation. 

Here are three things clients are telling us. I think all of them are rooted in our current inflation woes.

1. It’s become more difficult to find workers

The share of companies that said hiring was a top challenge jumped significantly in the last three months. For the smallest companies, the share reporting hiring as a top challenge jumped to 55 percent in April from 39 percent in January.

The larger the employer, the greater the challenge. Finding qualified workers continues to be the primary challenge for ADP clients with between 50 and 499 employees. In this group, 79 percent said hiring was a top challenge, up from 62 percent. Forty percent also cited retention challenges, up from 34 percent.

One reason for today’s high quit rates are wages. Workers know they can get better pay by switching jobs, so they do.

That means more companies are offering signing bonuses and higher pay to maintain their current workforce and attract new hires. Nearly 1 in 4 employers told us they’re offering financial incentives to keep people on board.

2. The economy is a small but growing concern

Supply-chain disruptions, rising input prices and production costs, and the strength of the overall economy also have Main Street employers worried. 

Just 27 percent of companies said the economy was a challenge, but that’s up from21 percent at beginning of the year. Like the labor shortage, I think that this broad economic concern likely is rooted in our current inflationary environment, given the high number of survey respondents fretting about input and production costs. 

3. The good side of inflation

Though Main Street employers are struggling to hang on to workers, they’re having no trouble keeping their customers. Only 16 percent of the smallest companies said demand was a problem. For employers with 50 or more workers, the share was only 8 percent.

So, despite having to dole out signing bonuses and higher pay, small companies report that their labor costs are manageable, at least for now, and not making a dent in revenue.

Only 1 in 10 are scaling back business due to labor costs.

My Take

There’s no question that inflation has hit companies from multiple directions at once. But its effect on labor costs and business growth remains to be seen and will depend on how long we remain in this high-inflation economy.

On Friday, the U.S. government reported that wages grew 0.3 percent in May from the previous month.  That’s impressive growth, but it’s down from the 0.4 percent reported in April.

Things aren’t great, but they’re moving in the right direction. If you’re worried about labor costs, don’t panic yet.

Discover our latest quarterly survey from April 2022 that provides new data on small businesses under our small business section or HERE.