Wage Growth Signals Pain Ahead for Main Street’s Small Businesses

For Main Street small businesses, the margin pressure will continue.

Government data on the labor market released Friday (April 7) show that U.S. hiring backed off from a formerly relentless pace. The latest tally is a marked slowdown from the Labor Department’s previous reports that showed average monthly gains of around 334,000.

But wage growth is still in the picture, indicating that 1) companies have to keep boosting wages to keep talent on board, battle inflation, and 2) bring applications in for the roles that are open.

In terms of the headline numbers, employers added 236,000 workers.

Average hourly earnings were up 4.2% in March from a year ago to $33.18 per hour.

On a sector-by-sector basis, the leisure and hospitality industry added 72,000 jobs in March, lower than the average monthly gain of 95,000 over the prior six months, the Labor Department said. Employment in retail trade changed little in March, and was down by 15,000 positions.

The latest information dovetails with the overarching trends revealed in other jobs reports this past week. As reported here, hiring is decelerating. Our fourth-quarter survey of the small and medium-sized businesses (SMBs) that power the U.S. economy — the Main Street companies — have been steeling themselves against the recession that seems all but certain to be coming soon, if it is not here already. As many as 64% of Main Street firms expected the U.S. economy to enter a recession, and some 41% said a recession was already in the works. About 20% said that they believed a recession would come in the next six months, which points to what may be a significant summer slowdown.

Inflation is a Top Challenge

Four in 10 Main Street SMBs highlighted inflation as their top challenge as they headed into 2023 — that’s up from 23% as 2022 dawned. Inflation, we note, comes in many forms. The prices of the raw materials and the finished goods that line Main Street’s (brick-and-mortar and virtual) shelves has gotten more expensive. But so has the operational cost of staffing the businesses themselves, as evidenced in the wages data. In the meantime, consumers are pulling back on discretionary spending, which clouds the revenue picture for these companies.

But automating some of the daily operational tasks, and cutting costs, can be a way to combat mounting challenges. There’s ample room to do so: PYMNTS data show that only 11% of SMBs have sought to cut costs, where the modus operandi through the last few years has been to hike prices.

Automation’s “low-hanging fruit” may lie with the functions most directly tied to cash flow management, via accounts payable and receivable activities. As many as 35% of companies that we have surveyed in recent months state that manual reconciliation of billing and collections activities have been a pain point. Better (and quicker) workflow processes may wind up having a salubrious effect on margins without forcing companies to keep pulling on the “price increase” lever or simply cutting staff to the bone — which then exacerbates operational challenges if companies run too lean.