Job Growth Sputters
The services sector in the U.S. is dominated by small businesses and has been a source of economic strength since the last recession. But it is starting to show signs of weakness according to the ISM Services Index and, being labor intensive, that weakness is showing up in the employment statistics. May employment came in at 139,000, but revisions in the prior two-month estimates totaled 95,000 lower than previously reported, producing a net gain of only 44,000 jobs. The number of part-time workers wanting a full-time job is at the highest level seen since 2019. Growth was concentrated in the private sector, education, health care, and leisure and hospitality. Government sector growth remained depressed, down by 59,000 jobs since January, after months of leading job growth.
According to NFIB's Small Business Economic Trends survey, the percent of firms increasing total employment has languished since 2020. Changes in economic policy have been major drivers of employment. The 2016-2019 period was very different from that of 2020-2025, especially with Covid related business restrictions early on, heavily impacting economic activity.
Overall, while hiring plans are positive, there are plenty of job openings, especially in the transportation, construction, and manufacturing industries, small business employment is also losing steam. The hiring pressures of a few years ago have tapered off. Small businesses are more uncertainty about economic conditions going forward and are holding on tighter to their wallets. The number of owners increasing compensation has eased and fewer are planning to increase going forward. And most telling, labor quality is no longer the top problem for small business owners, it's been replaced by taxes. Sixteen percent of small business owners named labor quality as the single biggest problem compared to 24 percent of owners reporting the same two years ago. Job reductions were strongest in retail, along with cuts in services. Most manufacturing firms in the U.S. are 'small' and specialized, and have the lowest level of employment reductions.
Job openings remain eleveated (JOLTS, NFIB), and owners continue to complain of too few qualified applicants for the openings they are trying to fill. In May, 55 percent reported hiring or trying to hire in May, down 1 point from April. Eighty-six percent of those hiring or trying to hire reported few or no qualified applicants for the positions they were trying to fill. The impact of DOGE reductions is yet to be felt, as compensation will continue until September for most, and even until the end of the year for others. While labor market pressures are easing, it's not signaling any distress alarms so far.
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