Private payrolls surged by 297,000 in February, the data processor ADP reported March 8, overwhelming a consensus forecast of just 187,000. Including an upward revision of the January numbers, the ADP data show the biggest two-month increase in payrolls since the beginning of the recovery in 2011.
Although detailed firm-level data won’t be available for months, the likely explanation for the unexpected spike in employment is a leap in confidence among America’s small businesses. The National Federation of Independent Business index of small business optimism leaped from 93 before the US presidential election to 106 in January, the highest level since December 2004.
Small businesses and growing startups provided virtually all of the employment growth during every US economic recovery since the early 1980s, but sat out the subpar recovery during the Obama years. Virtually all the employment growth in the US between 2010 and 2015 came from large firms listed on the S&P 1500 Index.
Small businesses were discouraged by a number of factors, including the high marginal cost of new employees under Obamacare, excessive regulation, and high corporate tax rates. Large corporations have armies of accountants and lobbyists to navigate federal regulations and tax laws, but the overhead of regulatory compliance is prohibitive for smaller firms. Obamacare required firms to offer health insurance after reaching the 55-employee threshold, a big disincentive to new hiring.
President Donald Trump’s election victory was viewed with chagrin by most academic economists and with mixed feelings by most large corporations, but it evidently revived the animal spirits of small businessmen who worked at a disadvantage during the two Obama administrations. The return of small business to the hiring market might spur US GDP growth well above the present consensus forecast of about 2%.