The battered U.S. job market may be losing one of its last remaining sources of strength as small businesses begin aggressively cutting payrolls in the face of a dismal holiday shopping season.
A report on Wednesday showed private sector job losses of 693,000 in December, far greater than economists had expected. Small businesses accounted for an unusually large 40 percent of the decline, according to the figures from ADP Employer Services and Macroeconomic Advisers.
Small businesses (and small-cap publicly held companies) are usually the last to report the results of an economic downturn and the first to show signs of life in an upturn. That's because they have a lot more flexibility in decisionmaking on pricing, ordering, and hiring or firing people. The news that small biz is just now beginning to react to a recession that is over a year old signals that they've absorbed as much pain from declining earnings as they can stand and will have to seriously cut costs, starting with employee headcount. The economy has a lot farther to fall.
Oh, by the way, when the economy does recover, fixed-income retirees (Baby Boomers who didn't save) risk having a lot less spending power:
Volatile markets have saddled U.S. companies with a $409 billion deficit on pension plans, reversing a $60 billion surplus a year earlier, and will cut into earnings in 2009, consulting firm Mercer said.
(snip)
The shortfall suggests that more companies will have to pump cash into their pension plans to ensure they can meet their commitments to retirees.
The article notes that the pension plan deficits will negatively affect corporate balance sheets. I'm sure they will also have to impact income statements as cash is diverted from other uses to fund the plans. Companies are now faced with the unpleasant choice of cutting pension benefits or funding plans to the point where their business prospects (and thus future share prices) are decimated. Say goodbye to earnings growth!
No wonder the markets finally dropped today. Investors will hopefully start shedding the optimistic sentiments they've been harboring since Christmas. When they've finally capitulated, I'll be ready to buy.
Nota bene: Anthony J. Alfidi has uncovered short calls on SPY and IWM in anticipation of further declines in price.
