Small companies, giant job losses

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Job cuts on Main Street

Small companies account for more than 40% of the nation's payroll - and as the economy worsens, their staffing cuts reverberate through local communities.

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Preparing for a layoff

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(CNNMoney.com) -- The small businesses sector in December suffered its largest one-month jobs decline in at least a decade, according to an employment report by payroll processor ADP, which estimates that small companies shed 281,000 jobs last month.

ADP (ADP, Fortune 500) defines small companies as those with 49 or fewer employees. Add in companies with staffs of less than 500 and the job-loss number increases to 602,000 - 87% of the total number of private sector jobs lost last month, according to ADP's National Employment Report.

"I'm not surprised by ADP's numbers," said Bill Dunkelberg, chief economist for the National Federation of Independent Business. "Retailers and restaurants all count on the fourth quarter to make it. But it was a really bad fourth quarter. Profits were killed, and because 80% of costs for small businesses are labor costs, they had to take drastic action."

With December's report, ADP significantly reworked the methodology for its report to more closely align its monthly employment estimates with those published by the Bureau of Labor Statistics, which typically releases its report several days after ADP's. In the process, ADP revised its historical figures for 2008.

Previously, ADP estimated that small companies added jobs to the economy every month until October. Its new, revised estimates show a net loss of small business jobs beginning much earlier in the year, starting with a February loss of 27,000 positions. Still, December's loss of more than a quarter of a million jobs was by the far the year's largest.

"Though the severity of job losses in recent month among small-size businesses has been less than that at larger-size ones, today's employment declines clearly indicate that the recession has widened to include businesses of all sizes," said Joel Prakken, chairman of ADP's research partner, Macroeconomic Advisers, in a statement accompanying the report.

In a conference call with reporters, Prakken said the hardest-hit sector was construction, and in particular, residential construction - an industry dominated by small proprietors. Manufacturing is also on the decline, shedding jobs in 27 of the last 28 months, according, to ADP's estimates.

Entrepreneur Linda Lankford, a hostel owner in Denver, is among those who had to cut staff in December. Lankford has been running Hostel of the Rockies for five years, and recently laid off three of her six full-time employees. She's also cut the hours of the hostel's housekeeper, which means that desk staffers must now take on cleaning responsibilities. Repairs to the hostel's 105-year-old building are being made with used materials from Habitat for Humanity's thrift store.

"When people were planning vacations months ago, gas was too high to travel, and the price of airfare has impacted my overseas guests," Lankford said. "My landlord is now waiting for my overdue rent, and to cover costs, I'm turning two dorms into apartments that I will lease for six months."

If Lankford doesn't get enough bookings for her high season, which starts in June, she says she will have to do the same for her remaining nine dorms and shut down the hostel.

Michael Thurmond, commissioner of labor in Georgia, described ADP's results as "deeply troubling," adding that small business, the backbone of the country, should be the primary generator of new jobs.

"This shows the rippling of economic pain," he said. "It began in housing and broadened to other sectors of economy. The credit crunch exacerbated the situation, which began to impact consumers, which then hit small businesses."

Thurmond expects that because most small businesses are in the service sector and depend on consumers who use credit cards, the nation can expect more rounds of deep layoffs.

"This data does not bode well for the future," he said. "We're in a terrible economic cycle."