A small leak will sink a great ship. – Benjamin Franklin
A small leak will sink a great ship.
Small-firm hiring has taken a meaningful turn downward. According to ADP, “small firms,” businesses with one to 50 employees, shed roughly 120,000 jobs in November, the weakest reading since the pandemic. The three-month average has slipped to nearly negative 60,000, indicating that this is not a one-off fluctuation but a downtrend.
In most years, ADP functions as a secondary data source behind the U.S. Bureau of Labor Statistics (BLS), but this year is different because of the extended government shutdown. The federal shutdown delayed BLS releases and paused normal surveying, forcing the Federal Reserve and market participants to rely on alternative sources of data such as ADP’s small-firm series.
Small firms matter because of both their scale and behavior. They tend to respond to shifting economic conditions earlier than the rest of the labor market because their operations are more sensitive to changes in demand and costs. Weakness in this segment does not guarantee broader deterioration, but historically it has signaled a shift in momentum before it has become visible in aggregate payroll data.
The ADP series has been gradually weakening all year, transitioning from modest gains to marginal losses and now to a level of contraction rarely seen outside periods of demand softening or tightening credit conditions. The recent trend suggests that small employers are contending with both weaker demand and tighter credit conditions.
There is also a structural layer to consider. In Rethinking Payroll Signals, we reviewed the consequences of slowing labor-force growth driven by reduced immigration, lower birth rates and elevated retirements. Slower labor-force growth reduces the number of monthly job gains needed to keep unemployment stable. Fed Chair Jerome H. Powell has referenced this dynamic several times, noting that far fewer monthly job gains are now needed to keep unemployment steady.
Immigration policy might particularly influence labor-market conditions for small firms, which rely heavily on workers in industries with high immigrant participation, including construction, hospitality, logistics and local services.
Taken together, the message is that small-firm hiring is contracting at a time when the headline economic narrative points to resilience. It highlights a gap between the strength implied by aggregate payroll data and softness emerging beneath the surface. With official data still stabilizing from the shutdown and demographic forces reshaping the labor market, the ADP small-firm series offers one of the clearest indications of how conditions are evolving. The next few months will be important in determining whether this downtrend remains contained to small businesses or broadens into a broader cooling of labor demand.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
