Big & Small: A Tale of Two Labor Markets

Michael Normyle – Nasdaq’s US Economist joins IBKR’s Jeff Praissman to discuss the current state of the US Labor market and how it differs for big versus small companies.

Summary – IBKR Podcasts Ep. 163

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman 

Hi everyone. I'm Jeff Praissman with Interactive Brokers. It's my pleasure to welcome you back to our monthly podcast with Nasdaq's Michael Normyle. Hey, Michael, how are you? 

Michael Normyle 

Hi I'm doing well. Thanks for having me back. 

Jeff Praissman 

Oh, always my pleasure. And for our listeners, every month Michael and I get together and we discuss the economy and different subjects in it.  

Today we're going to talk about labor markets. And so I wanted to kind of kick it off and kind of a general question, Michael, in general, how is the overall US labor market doing in 2024? 

Michael Normyle 

I think the labor market is off to a good start this year. We've added nearly 1,000,000 jobs in just four months. But there have been some hints of cooling. April was the weakest reading of the year, but not a weak reading, you could say, adding 175,000 jobs. So still a pretty solid number.  

We've also seen the unemployment rate tick up to 3.9% from 3.7% at the end of last year, and job gains have become more narrowly driven. 57% of gains this year have come from government and education and health services. But these sectors only account for 31% of total employment, so kind of an outsized proportion of jobs coming from those couple sectors. 

Jeff Praissman 

So a little bit of a mixed bag, then, it sounds like. And with the labor market, is this across the board with large and small companies or are they kind of trending in different directions? 

Michael Normyle 

There's definitely a difference, I think, between large and small companies, both for their current situation and their outlooks as well. 

Jeff Praissman 

Let's go with the corporate labor market because that's all the big companies everyone knows. How is that market doing? 

Michael Normyle 

Well, at the moment, larger companies, say 250 employees or more, they've seen their labor demand return to pre-pandemic levels from the highs that we saw a couple of years ago and really extreme highs.  

So according to the JOLTS data, the Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics, hiring is back down to 2017 levels for those companies with 250 or more employees.  

And that's down almost 30% from the post-pandemic peak. And job openings are down 40% too. So the difference is, though, going forward, surveys of CEOs and CFOs show hiring plans are picking up at large companies. 

Jeff Praissman 

So overall, it's like an optimistic look for the future for the corporate labor market.  

So let's take the other side of that. The small businesses, obviously less than 250 employees, how are they holding up during this time? 

Michael Normyle 

Yeah. So for small businesses, we really see the opposite situation, especially at really small businesses. So the JOLTS data shows that for companies with fewer than 10 employees, job openings are nearly double their 2019 average. And hires are about 15% higher than they were in 2019.  

But looking ahead, the NFIB Survey of Small Businesses shows that hiring plans for the next three months are around the lowest they've been since 2016.  

And about 3/4 of firms that they survey have fewer than 10 employees. So based on their recent relationship with nonfarm payrolls, this suggests that we could see monthly job gains fall close to zero in the next few months, but that could be offset by those improving prospects for larger companies. 

Jeff Praissman 

For our listeners, NFIB stands for the National Federation of Independent Businesses. Michael, could you kind of expand a little bit more on what they do? 

Michael Normyle 

Yeah. So the NFIB, it's an association of small businesses and it advocates for small businesses, which are really a key part of the US economy. Some research shows that up to 50% or close to 50% of people work at small businesses in the US, and personally as an economist, I'm thankful that they have this really great survey that they do each month with insights into things like hiring plans, which we've already discussed.  

But also sales expectations, pricing plans, credit availability, all sorts of other things about the aspects of running a small business in the US, which really helps get a pulse on the economy since they’re such a big piece of it.  

Jeff Praissman 

It almost seems like it's easier sort of to track large businesses, right? Like everyone wants to track the Apples and the Googles and everything else.  

However, America is made-up of a ton of independent businesses that could be like a small grocery store, it could be a small electronics company, a plumber, whatever. So they do a really important function for everyone to be able to track these items. 

Michael Normyle 

Yeah, exactly. 

Jeff Praissman 

And kind of going back to the original question of this divergence. Why do you think the labor markets for large and small companies are moving in different directions? 

Michael Normyle 

A lot of it has to do with the impact of the Fed this rate hike cycle. Smaller businesses are just much more reliant on bank credit to operate, which means they're exposed to what has happened with floating interest rates. And they've obviously increased significantly in recent years with the Fed increasing rates 525 basis points since the beginning of 2022. 

And credit availability can be more challenging for smaller companies. So the NFIB survey, again, shows that small businesses are currently paying over 9% interest on their loans. And on top of that it shows that credit availability is the worst it's been since 2014.  

So it's become harder to borrow, and if they can get credit, it's at pretty high rates. Meanwhile, for large companies, especially really big companies that have access to fixed rate debt, they were able to lock in low rates a few years ago.  

And so that's partly insulated them from those rate hikes. And we've seen really strong earnings growth at big public companies for the last few quarters, including Q1 where earnings growth has been 4-6% for the last three quarters, year over year.  

So with strong profits growth, after there was some cautious hiring with concerns about a recession last year and that's showing up in in the JOLTS data, these big companies have gone through the worst of it now that the Fed is planning to cut rates at some point this year.  

And so, if you look at the Business Roundtable CEO Survey, they have an employment sub-index and that's increased for two quarters in a row. And that's a survey of over 200 of the CEOs of the biggest companies in the US.  

So they’re planning to increase hiring over the next six months. 

Jeff Praissman 

Yeah, I was going to ask, are there differences in how large and small companies handle downturns and upturns, just based on their general structure and the resources they have available to them? 

Michael Normyle 

Well, I think it depends on the cycle. And I think we're in a relatively unique situation currently where really big companies were able to lock in those low fixed rates. But that wasn't really true for small companies. Except to the extent that they benefited from things like the pandemic era PPP loans, which could be forgiven in their entirety. And idle loans, but those programs ended a couple of years ago.  

And then also the state of the labor market more generally matters too, right? Depending on how much leverage employers have or employees have. And so in tight labor markets, it's been relatively easier for big companies to hire since they can often be more competitive with pay, while smaller companies, based on their hiring rates still being above where they were in 2019, they're still playing catch up as wage growth has slowed back down.  

But if the labor market is quite weak, I would say it's probably less of a difference between big and small companies managing the ups and downs, because really the power is with the employers and less so with the employees in that situation. 

Jeff Praissman 

Generally, how accurate are leading or lagging initial claims? Does it matter what size the company is? 

Michael Normyle 

Initial claims for unemployment insurance. So one of the kind of key things that we watch the labor market to see if people have been getting laid off and now need government unemployment insurance. And so initial claims data that they do get revised. But I think we can generally take them at face value. Often people look at the four-week moving average because the data can be noisy.  

And plus, there's some trickiness to seasonally adjusting weekly data when we have holidays that move around from year to year. So it can create challenges, especially around weeks where holidays move around.  

And it doesn't matter if you're applying for these benefits coming from a large or small company, but in terms of the leading and lagging question, they tend to increase ahead of the start of a recession, but they tend to turn down roughly coincidentally with the end of a recession.  

Relative to employment, though, when an upturn in employment begins, companies typically stop firing before they start hiring again. So that's a case where claims will lead. But at the start of a downturn, companies typically cut back on hiring before resorting to layoffs. So that's a case where claims might be coincident or even lagging at downturns. 

Jeff Praissman 

And how do you think the rest of the year looks, both for small and large businesses? 

Michael Normyle 

Well, I think for big companies things are looking good. The CEO confidence has been picking up. Earnings are expected to keep growing. And so those should be supportive of hiring as well as supporting the economy going forward.  

For small companies, they're going to likely face headwinds until we start to see rates come down, which should help them with borrowing costs and also just generally if to the extent that cutting rates helps demand. But that's not likely until the second-half of this year.  

So it's going to be a little bit tougher until those rate hikes start coming through. And of course the more that they come through, the better that will be for small businesses, assuming of course it's coming through because we're having this soft landing and not because of recession. 

Jeff Praissman 

Michael, this has been great. Are there any final thoughts you want to leave the listeners with in regards to these differences in labor markets? 

Michael Normyle 

Well, I guess right now I'm hopeful that we might see this kind of point where we're going to have to muddle through a little bit with some weaker jobs data if that NFIB surveyis a guide. 

But as we see rates come down later this year, that will help demand, like I said, and help small companies. And so if big companies are already planning to increase hiring, then hopefully we can get past a little bit of a weak point maybe this summertime. 

Jeff Praissman 

Michael, thanks again for swinging by the IBKR podcast studio! 

For our listeners, Michael Normyle and Nasdaq are frequent contributors to our webinars, our podcasts. You can find everything from them on our website under Education.  

Just click on that you can look for our contributors or go right to the podcast. We do a monthly podcast on the economy. Definitely a worthwhile listen for everyone.  

And once again I'm Jeff Praissman with the Interactive Brokers. Thank you.