The small-business hiring engine is sputtering. Why that's a red flag for the economy.

By Hardika Singh

Without small businesses and their hiring, already precarious economic growth could be prone to a pullback

Red-flag warning: Without small businesses and their hiring, already precarious economic growth could be prone to a pullback.

The percentage of small businesses with unfilled job openings fell to 32% in August from the month before, hitting its lowest level since July 2020.

Main Street businesses - known for jobs that you can stick with through thick or thin - are no longer leading U.S. jobs growth. That's a worrying sign for the labor market's overall health.

The percentage of small businesses with unfilled job openings fell to 32% in August from the month before, hitting its lowest level since July 2020, according to the National Federation of Independent Business monthly survey. That's troubling because robust small-business hiring has contributed to more than half of the U.S. economy's jobs creation in recent years.

Fresh Job Openings and Labor Turnover survey data paints a similarly concerning picture. In June and July, the number of workers at small businesses (fewer than 250 employees) hired over the ones who were laid off or quit has lagged their bigger peers. The last time that happened for two straight months was in May 2020, according to Fundstrat macro data scientist Max Motz's analysis.

Without small businesses and their hiring, already precarious economic growth could be prone to a pullback. That's because the jobs these employers add are less sensitive to business cycles compared to larger companies, research published in August by the Federal Reserve Bank of Chicago shows.

Small businesses are tied to the local economy and don't have shareholders to answer to. They don't need to lay off workers to show how much money they're saving to boost near-term share prices. They also likely don't have jobs they can easily train people for either, and since it's a smaller company, maybe there's an emotional aspect to laying off your colleague, too.

Bigger companies aren't like that. At the first sign of trouble, you can trust they will be agile and more likely to cut you off - at least for the economy as its been since March 2020.

When the unemployment rate is high, a sign that the economy might be contracting, large firms' advantage in terms of how many jobs they're adding shrinks over the small ones, the Fed researchers wrote. But when the unemployment rate is low, such as it is now, large firms can "pull ahead" of smaller firms.

Here's why that's worrying in our current environment: Let's say a recession strikes while a greater share of the workforce is clocking in at bigger companies. This could very much "amplify" the job losses, the researchers said, leaving the economy in a particularly vulnerable position.

This recent hiring pace reversal among small businesses resets a key narrative that had become a hallmark of the post-pandemic economy.

From the beginning of 2021 to the second quarter of 2024, small businesses engaged in a hiring bonanza so intense that they were responsible for about 53% of the total net job creation in the U.S., according to BLS data.

Thanks to them, the economy kept chugging along. But since then, the labor market has dramatically slowed, influencing the Federal Reserve's "risk-management" quarter-percentage-point interest-rate cut last week. Yet rate cuts can only do so much. It'll likely take months for small businesses to see any relief from the monetary-policy easing.

For smaller companies that are looking to hire, 81% in August said there are few or no qualified applications for the positions they're trying to fill, NFIB data show.

The situation is particularly dire in the construction industry, where close to half of the small businesses reported they had a job opening they could not fill. Manufacturing and transportation, sectors that are the heart of the U.S. economy, also are struggling to fill positions.

Some of that may be due to a labor quality issue, which more than 20% of owners cited as their single most important problem. It could suggest employers are receiving unqualified applicants, or maybe there aren't enough people locally with the appropriate qualifications.

It could also be that these companies can't afford to pay as much as some of the bigger ones can, so they're not attracting the right workers.

For an idea of the financial stress small businesses are under, loans that are 90 days or more past due have climbed past the highs seen in 2020 and 2021, while defaults have inched higher than the early COVID pandemic highs, Equifax data show.

Left unchecked, the challenges now facing neighborhood stores, local construction companies and other Main Street businesses will have consequences not just for individual communities, but for the broader U.S. economy as well.

Hardika Singh is an economic strategist at Fundstrat Global Advisors, an investment research firm. Follow her on LinkedIn and TikTok. You can read her disclosures here.

More: The job market's hidden flaw is now obvious - and rate cuts might not fix it

Also read: Russell 2000 scored fresh record for the first time in 4 years. Why the small-cap rally still has room to run.

-Hardika Singh

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-27-25 1311ET