This week’s employment reports by the Bureau of Labor Statistics and the data processor ADP suggest a sea-change in the US economy marked by the return of small business to the hiring market. The economic indicator that best explains the jump in employment is the National Federation of Independent Business index of business optimism, which leapt to its highest level since 2004 after the presidential election.
Economists will debate whether the sharp improvement in labor markets came from previous economic momentum, or from the promise of pro-business policies from the new administration. The data show strong indications that a turnaround in confidence buoyed employment, as small business expanded in anticipation of an improved regulatory and tax environment under the new Trump administration. Small business owners supported Trump by a margin of nearly 60:40. Now they are voting with their wallets.
By two measures, the new readings of the labor market were extraordinarily strong for what economists usually consider an end-of-cycle expansion.
- The two-month change in goods-producing employment was the highest in percentage terms since 1994.
- The two-month change in ADP’s measure of private payrolls was the second highest since the recovery began.
Construction, to be sure, probably benefitted from unusually warm weather, but the rise in the goods-producing sectors was nonetheless exceptionally strong.
The ADP reading of 297,000 new jobs in February followed an upwardly-revised print of 236,000 in January, for a two-month average of 279,000, barely below the high-water mark set in April 2011. Big jumps in employment are typical of the early stages of a recovery but extremely unusual in a late-stage expansion. As the chart below indicates, the economic data point that best foreshadowed the jump in hiring was the small business optimism index, which rose from a pre-election level of 93 to a post-election level of 106, the highest since 2004.
The backward-looking components of the NFIB’s optimism index showed little change. Profits and sales, for example, actually showed a larger number of decliners than gainers. The forward-looking variables, in particular, hiring plans, explained the unprecedented jump in the index.
Before the election, about 10% more small businesses planned to increase rather than reduce employment. This margin rose to 18% after the election and led the overall rise in confidence.
What explains the burst of animal spirits among small businesses in the seventh year of an expansion? The likely explanation is that this expansion was like no other in the past two generations. Small business sat on the sidelines, and virtually all the recovery in employment from 2010 through 2015 occurred among large companies. That was drastically at odds with the pattern of recoveries since the Reagan era when startups and small businesses accounted for more than 100% of all employment growth. Established firms, that is, never recovered their previous level of employment while emerging companies more than made up the difference.
Obamacare, for example, required small business owners to offer health insurance once they reached the threshold of 55 employees, an important disincentive to expansion. Regulation costs the average small business $83,000 in the first year of operation. Small businesses typically pay the full 35% corporate tax rate or the personal tax rate, while the average tax rate for American businesses is just 15%. Large corporations, that is, have means to defer or avoid taxes. Their smaller competitors do not.
During several years after 2008, more small businesses closed than opened, for the first time since the Census Bureau began collecting the data.
This fostered an anti-competitive, cartelized economic environment—the rigged system against which Trump inveighed during the campaign. Nearly half of the increase in corporate profits during the past decade stemmed from regulatory rent-seeking by large corporations, according to a June 2016 study by Boston University economist Jim Bessen. According to Bessen, “Investments in conventional capital assets and R&D account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.”
Companies represented in the S&P 1500 Index accounted for all of the employment growth between 2010 and 2014, for example.
Trump can take credit for the economic equivalent of a 21-gun salute from American businessmen. He has to deliver on his promises of tax cuts and deregulation, to be sure, in order to sustain their support. But the first month of the Trump Administration recalls the old joke about the benefits of hitting your head against a wall: It feels good when you stop.
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I like the final sentence: "It feels good when you stop". Perhaps Trump should take a break from trying to fulfill every single promise he made during the campaign. We will all feel good when he stops.