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6 months of job losses

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(Fortune Small Business) -- Small businesses drove much of the employment growth in July, according to a report released Wednesday by payroll manager Automatic Data Processing (ADP, Fortune 500). Firms with fewer than 50 workers added 50,000 new non-farm jobs to the private sector this month, which offset the 41,000 jobs dropped at medium and large companies.

ADP partnered with research firm Macroeconomic Advisers to measure the change in headcount at 400,000 of ADP's U.S. clients. Most gains came in the services sector, which includes fields such as education, financial services, health, hospitality, retail and transportation. Small services firms added 56,000 new jobs in July, according to ADP's count.

Small companies are a reliable source of new jobs: While businesses with 50 or more employees have posted net job losses for the past six months straight, small-business employment has expanded every month since November 2002, according to ADP's study. Last month, with a net gain of 7,000 workers, was the smallest increase in six years.

"Small businesses have been somewhat of the employment savior," said researcher Joel Prakken, chairman of Macroeconomic Advisors. "When I look at this report, I see a continuation of a pattern that's been in play for a while. We have a sharp contraction going on in manufacturing and construction, offset roughly by continued, modest expansion in the service sector."

Small businesses weren't immune to the downturn in contracting industries: employment at "goods-producing" small companies, which include manufacturing, mining and construction businesses, dropped by 6,000 jobs in July, according to ADP. Even at small companies, that sector hasn't shown job growth since June 2007.

ADP's findings offer some uplifting news amid a troubled economic landscape. The Labor Department reported a net loss of 62,000 jobs in June, marking the sixth straight month of decline. Recent surveys suggest that while entrepreneurs are still hiring, they're anxious about the economy: 80% of small-business owners polled by Suffolk University earlier this month said they think the country is in an economic recession, and 86% feel the government isn't doing enough to help small businesses.

The latest installment of the Small Business Economic Trends Report, a monthly study from the National Federation of Independent Business (NFIB), found that optimism among those polled is the lowest its been since 1986.

Even Prakken points out that his firm's findings do not suggest a strengthening economy: "If you look at our numbers for small-business employment growth, you'll see that employment is not growing as quickly as it was two years ago," he said. "I expect overall employment numbers to continue to be weak going forward for medium and large business, but they will be offset by modest gains in small businesses."

In the NFIB's June report, 14% of the business owners polled said they plan to create new jobs in the next three months, while 8% said they foresee staffing reductions.

"[Small-business owners] are more cautious about hiring, but they are still moving forward and still creating jobs out there," NFIB chief economist William Dunkelberg said.

Macroeconomic Advisers' Prakken, a small-business owner himself, views even modest employment creation among small businesses as a sign that the U.S. is still innovating.

"I'm always happy to see small-businesses numbers up, because it means that even in a soft economy, entrepreneurs are still looking for ways to expand and grow," he said. "A lot of dynamism in the U.S. economy comes from the creation of new businesses."