ANALYSIS-Job cuts soar as small U.S. firms fight to survive

By Emily Kaiser

WASHINGTON, Jan 7 (Reuters) - 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. (http://www.adpemploymentreport.com/pdf/FINAL_Report_December_08.pdf)

If a government report on December employment on Friday is as dire as the data from ADP, it may be a sign that another pillar of the economy -- small business -- is buckling as the recession drags on into a second year.

"Everybody is trying to hang on now," said William Dunkelberg, chief economist for the National Federation of Independent Business.

"More and more of these firms are in survival mode. They kept thinking consumers will make it, but then December rolls around and sales are still not going anywhere -- in fact they're going down -- and finally (small businesses) run out of money," he said.

The spike in job cuts at small companies is particularly worrisome for the U.S. economy because these firms are the biggest source of non-government employment. If they are starting to ramp up the job cuts, that could mean the worst is still to come for the labor market.

ADP's data shows small businesses employ 50 million people, compared with just under 19 million who work at large firms.

The U.S. economy shed jobs every month in 2008, according to government figures, and the pace picked up in October after the financial crisis intensified following the failure of Lehman Brothers in September.

Larger companies have been quicker to slash jobs, starting before the recession began in December 2007, and they continued to outpace small firms up until the last few weeks, according to ADP's figures.

Big companies, or those with at least 500 employees, trimmed payrolls in 17 of the last 18 months. Businesses with fewer than 50 workers didn't start cutting jobs until February, and even then they moved at a slower pace.

That changed last month, when small business jobs declined by 0.56 percent, by far the biggest drop in ADP's database going back to December 2000. Large company payrolls fell by 0.48 percent, the worst since October 2001, which was at the tail end of the last recession.

It was only the second time small companies have cut a bigger percentage of jobs than large companies in the eight years of monthly ADP data. The other time was in November, when the difference was .001 percent.

"Sharply falling employment at medium- and small-size businesses clearly indicates that the recession has now spread well beyond manufacturing and housing-related activities," said Joel Prakken, chairman of Macroeconomic Advisers.

FIRING SALLY

To be sure, some economists have raised questions about whether ADP's report is an accurate indicator of what the data from the Labor Department will show on Friday.

ADP's methodology was changed with the December data, which added to economists' doubts. Prakken said the shift would make the report a better predictor of the government's employment figure, which he expects to show a decline of 670,000 jobs.

Other small business surveys and anecdotal evidence tell a similar story about the state of small firms, which suggests that ADP is indeed picking up on an important economic trend.

Dunkelberg pointed out that his group's latest survey of small business owners showed the most widespread sales declines in the report's 35-year history. He expects December's data to look even worse.

He said around 30 percent of small businesses are in retailing and restaurants, which have been pounded by declining consumer spending. The International Council of Shopping Centers forecast last month that the holiday shopping season would show its first decline since the organization began tracking sales in 1969.

Michael Alter, president of payroll services company SurePayroll, said small business owners tend to be very reluctant to cut jobs because it's often a matter of firing a relative or friend who has been with the company for years.

Business owners' first inclination may be to absorb a few bad months by taking home less profit rather than axing jobs, which could help explain why larger firms were quicker to cut when the economy starting to sour.

The longer the recession lasts, the more small companies will have to face an unpleasant choice of "either I continue to make less money or I have to let Sally, who's been with me for 20 years, go," Alter said. (Additional reporting by Nick Zieminski in New York; Editing by Tom Hals)