Assessing the health of the US labor market is of utmost importance for both the Federal Reserve and bond investors. Given employment’s significance, you might expect consensus on its current state. Yet, as with many economic metrics, interpretations vary depending on perspective.
One key factor driving differing conclusions is the monthly increase in US jobs. Undeniably, the average number of jobs added each month highlights the strength of the domestic labor market. With average monthly job growth for 2024 just below 200,000, as defined by the Bureau of Labor Statistics (BLS), the US is creating jobs at an impressive rate. This figure naturally raises the question: “Where are these jobs coming from?”
The explanation is clearly illustrated in the chart. Over the past 18 months, large and mid-sized firms have been the primary drivers of job growth, while small businesses—those with fewer than 50 employees—have remained relatively stagnant. Given that small businesses accounted for over 45% of all US jobs in 2024, this divergence is particularly significant.1 Several factors contribute to this trend. First, much of the recent hiring has been concentrated in two major sectors—healthcare and local government—both of which are typically dominated by larger organizations. Second, small businesses have faced weakening profitability, partly due to higher interest rates, which has constrained their ability to expand employment.
Whether or not weakness in small business employment is deemed a significant concern, the trajectory of small business job growth in 2025 will be critical. Encouraging signs are already emerging, including improved business confidence and increased hiring intentions among small business owners. In addition, the lower federal funds rate along with expectations for further rate cuts all suggest that small firms are poised for job growth. This momentum could help dispel any notions of “weakness” in the labor market.
1 US Small Business Administration, “Frequently Asked Questions About Small Business,” July 2024
Kevin O'Neil
Associate Portfolio Manager & Senior Research Analyst
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