Trouble for Small-Business Employment

Job creation slows among small firms as a possible recession looms.

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Last month, I declared small-business employment "not too shabby" after looking at May's survey from Automatic Data Processing and the consulting firm Macroeconomic Advisers. For the June report, perhaps the best way to sum it up is "starting to look shabby." For small businesses (defined as those with fewer than 50 employees), total employment was up only 7,000 in June, compared with an increase of 61,000 in May.

The slower growth was mainly because of sharper declines among small businesses that produce goods (down 27,000 jobs) and more shallow growth among service-based small businesses (up 34,000). As a whole, ADP's survey shows the slowest level of job creation since November 2002, when the economy was last recovering from a recession.

Joel Prakken, chairman of Macroeconomic Advisers, told me that the hammer that the housing crisis has dropped on small construction firms appears to be driving the employment decline in the goods sector. Meanwhile, "anything related to travel and transportation is under pressure in the service sector," he says.

But things could be much worse. Prakken notes that while the decline in small-business job creation is "notable," it's not "recessionlike." Also, as was true in May, small businesses continue to do better than larger ones at cranking out jobs. There are two explanations, according to Prakken:

1. Small businesses are much more service-based than goods-based, and it's the goods-based sector that is bearing the brunt of the economic slowdown.

2. Small firms have fewer jobs to shed. "They don't have the layers of middlemen to be pared down in tight times," Prakken says.