The small story of 2012: Growth for small business

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This is the time of year to look back and reflect. What happened in 2012? A lot of things happened, and yet when we look at the political and economic situation it appears that almost nothing happened at all. About US 1.6M jobs were added during the year, but growth (change in GDP) remains at a near-recession 2% or less. Politically, the election produced the same President and Congress who remain mired in gridlock, currently unable to get out of the “Fiscal Cliff” trap of their own making. Europe has gone from bad to somewhat worse, proving that austerity isn’t going to help anyone.

What should we make of this year? Not much, really. There was not a big story in politics or economics that is worth re-hashing. But there is a small story that has not been told. Where did those 1.6M jobs come from, anyway?

As discussed here previously, job growth has been leading economic growth consistently since just after the end of the official recession – improvement has been consistent, if slow, since the summer of 2010. The official Bureau of Labor Statistics report has been noisy and unreliable, suggesting that changes are not coming in larger companies that are easy to find. That’s where the ADP report, which measures actual payroll data, becomes even more useful. The key is buried in the numbers.

Below is an ADP chart of employment by company size, normalized to January 2008 – the start of the last official recession and the point just before we lost 8M jobs. It shows what a “restructuring” looks like, the kind of odd economic growth where employment leads the economy rather than lags it:

As you can see, the smallest companies of less than 20 employees have proven to be the most stable. In fact, their total employment is already back to where it was before the last major downturn. It’s hard to credit small companies with a lot of the job growth, given that they didn’t have the losses in the first place. But to understand this we have to get into what it means to be a small company in the first place.

Companies of less than 20 employees rarely stay there. Some fail and simply go away, and a lot more grow to be larger companies. It is reasonable to assume that some of the improvement in the next highest bracket, 20-49 employees, comes from small companies that grew.

That’s not to say that the very largest aren’t starting to accelerate and hire people at a much more rapid clip. But we can see that at the very smallest companies employment has been much stronger overall, and probably points to a lot of new businesses that are succeeding and growing.

While the curves have all been pointing upward in a fairly constant slope since 2010, this year was the year when they were believed. The growth of 2011 kept on keepin’ on, and the gradual rise in consumer confidence certainly reflects this. It also explains the re-election of President Obama, as predicted here at the start of the year. Apparently, enough of those jobs came in Ohio to make them happy with the current administration.

But the growth we are seeing comes from smaller companies. It’s a small story written in a year when the big stories largely failed to add up to anything significant. So let’s call 2012 the year of slow, steady, and small progress.

You won’t find that headline written in the big media, but that’s OK. It’s not the only important story they’ve completely missed this year.