Bank of America reports small business hiring down 6.7% year-over-year amid tariff surge

Bank of America data reveals a significant slowdown in small business hiring, with a 6.7% year-over-year decline on a three-month moving average, marking the third consecutive monthly decrease in July. This trend is primarily attributed to a nearly 170% surge in tariff payments for importing firms and persistent workforce shortages. The report highlights decelerating small business profitability and their limited capacity to absorb rising costs or adapt supply chains compared to larger corporations, indicating sustained pressure on this key economic sector.

Analysis

Bank of America's proprietary data reveals a significant contraction in the small business sector, with hiring payments declining 6.7% year-over-year on a three-month moving average as of July. This marks the third consecutive monthly fall and a sharp reversal from early-year trends. The primary driver is a substantial increase in operational costs, highlighted by a nearly 170% surge in tariff-related payments for importing firms since the beginning of the year. This cost pressure is compounded by ongoing labor shortages, creating a dual challenge for smaller enterprises. While small business profitability growth remains positive, it is decelerating, and the National Federation of Independent Businesses (NFIB) reports that poor sales are now the top concern for the highest share of owners since February 2021. The data indicates a sectoral divergence, with hiring in construction and manufacturing accelerating while retail and services decline. This underscores the disproportionate impact of tariffs on small businesses, which, unlike larger corporations, possess limited capacity to absorb costs within their thinner margins or reconfigure their supply chains, signaling increasing financial strain and potential headwinds for this segment of the economy.

Key Decisions for Investors

• Investors should scrutinize portfolios for exposure to companies heavily reliant on the small business sector, as decelerating profitability and hiring in this segment could signal future revenue and credit risks.
• Consider a tactical rotation by underweighting consumer discretionary and service-based stocks with high small business concentration, while evaluating opportunities in industrials and construction which are exhibiting hiring resilience.
• Prioritize companies with robust and flexible supply chains and demonstrated pricing power, as they are better positioned to navigate rising input costs driven by tariffs and protect profit margins.
• Monitor upcoming labor market data and small business sentiment reports (e.g., NFIB) closely, as continued weakness could be a leading indicator of a broader economic slowdown, warranting a more defensive portfolio posture.