T. Rowe Price says this is potentially bad news for the labour market because small businesses account for the majority of US jobs. It is also why there is an urgent need for Fed policymakers to cut rates even though inflation hasn’t yet returned to their 2% target.
According to an update by T. Rowe Price on Sept 13, profit margins for smaller US companies are a reason for concern. “Small companies typically carry higher debt burdens than larger firms, so higher interest rates have taken a proportionally larger bite out of their profits. When profit margins shrink to low or even negative levels, companies are often forced to lay off workers,” T. Rowe Price explains. Profit margins for smaller companies, as measured by the S&P 600 Index, have been deteriorating for more than two years the report adds.
(The S&P 600 Index is a stock market index that measures the performance of 600 small-cap companies in the US. It is part of the S&P Dow Jones Indices and is designed to provide a benchmark for the small-cap segment of the US equity market. The index includes companies with a market capitalisation typically ranging from about US$300 million to US$2 billion.)
