Small businesses continued to add jobs in October, but the question remains whether this will be a sustainable trend given growing uncertainty about the economy and looming fiscal issues.
Employment in private small business (companies with one to 49 employees) payrolls rose by 50,000 in October on a seasonally adjusted basis, according to the ADP Small Business Report released Thursday. This is the largest payroll increase since July and accounts for 32 percent of employment gains across all company size groups.
Within small businesses, 37 percent of the employment growth contribution was associated with companies having between one to 19 employees while 63 percent of October's small business growth was driven by companies with 20 to 49 employees.
Many small businesses remain confident in the economy's future growth despite and a recent study by Kauffman/LegalZoom Startup Confidence Index suggested that the credit crunch for small businesses may be easing.
Nonetheless, it's unclear how various factors weighing on the economy will impact small business job growth going forward. All eyes are looking toward January, when a convergence of tax increases and spending cuts -- known as the "fiscal cliff" -- has the potential to throw the just healing U.S. economy back into recession.
At this point, economic uncertainty hasn't yet translated into employment figures. That may be because of the "draconian cuts" that occurred during the most recent recession, according to Mark Zandi, chief economist of Moody's Analytics, which collaborated on the ADP report.
However, the uncertainty is showing up in business investment, with new orders for software, machinery, aircraft, durable goods and the like falling substantially in the past few months, Zandi says.
Another disturbing trend is that business formation, which collapsed during the recession and is key for long-term job growth, is very low by historical standards. "This is the thing that worries me about the economy in the long-run," Zandi says.
One area where small businesses may get a lift in terms of job growth going forward is construction. Of companies that employ 20 or fewer employees, roughly one fifth are related to construction, housing and commercial real estate in one form or another, Zandi says. "If the construction cycle turns, that should be a big boost to small business."
Many small businesses in this sector may also need to ramp up hiring to aid reconstruction efforts in the wake of Hurricane Sandy, which recently swept through a good portion of the East Coast. While many small businesses were affected and many continue to suffer from business interruption, construction-related businesses, small grocery stores, small hardware stores and similar businesses may see a boon as reconstruction gets underway.
The ADP Small Business Report is a subset of the ADP National Employment Report. The report, which is derived from ADP's actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. The report is produced by the ADP Research Institute in collaboration with Moody's Analytics Inc.