Macro Morsels: ADP shows small business deterioration

As Ayesha and I have discussed previously, small businesses are among the most vulnerable to rising rates. Those that do have debt tend to have revolving loans, and that means the price of that debt is on the rise as the Fed raises rates.

We’ve also seen banks tighten lending standards, meaning credit is less available to more risky borrowers, and banks tend to look at many smaller businesses through that lens.

As a result we saw a rather significant deterioration in the smallest businesses, those with 1-19 employees, shedding 56,000 jobs over the February ADP payrolls reporting period. Suggesting that many of these businesses are beginning to make very difficult decisions about their future, choosing to let go of employees as business conditions deteriorate.

Late last year we heard that almost half of small business owners were struggling to pay rent, so perhaps this was inevitable, but it is a growing concern. Small businesses tend to be the largest creators of new jobs and play a key role in the economy.

Seeing them struggle as they are is a warning sign for the broader economy, particularly if we see a continuation of this trend and a growing impact spread to mid-size and eventually larger firms as the year goes on.