Here's what's happened in the small business economy this past month, based on payroll data for our over 15,000 small business customers:
The year is now officially over. So, how did the small business economy fare in 2005?
For small business owners, 2005 ended with a whimper, not a bang.
Small business hiring was flat in December, ending a three-month run of decreased hiring. The Scorecard hiring index ended the month of December at 10,466 nationwide. That's exactly where we were at the end of November.
Some people got jobs, and some people lost jobs in December. Net new small business hiring in, however, was statistically equivalent to zero.
With December 2005 now in the history books, we can state for the record that small business hiring grew only 0.3% in 2005.
It was a yawner of a year for small business growth. 2004 was a much better year. In 2004, we saw national small business hiring increase by 4.4%.
Perhaps the most interesting thing about the small business economy is that small businesses appear to have transitioned from being recovery leaders to recovery laggards. GDP is tracking on 3.8 percent annualized growth based on the first three quarters of 2005, yet small businesses don't appear to be driving that growth. If they were driving GDP growth, they'd be hiring at a growth rate much higher than 0.3%.
So, it appears that larger companies are outperforming smaller companies in driving growth and in reaping the rewards of changing economic factors. No surprise here. There are many reasons that the deck is stacked in favor of larger companies. Larger companies can engage high-paid lobbyists who promote laws that give them an advantage over smaller companies. Small businesses have to deal with higher health insurance costs and higher costs of capital. Larger businesses can invest in technology and boost their productivity at faster rates than small businesses can. They also gain purchasing economies of scale because they buy in larger volumes.
For the little guy, it’s getting harder and harder to compete with the big boys.
Being a laggard in an economic recovery is a double-whammy. Top-line revenues are not keeping pace with overall economic growth. At the same time, larger companies are doing well and are accordingly bidding up salaries in the hunt for talented workers. Small businesses are finding that they have to pay more money for salaries because otherwise they will lose quality employees to larger companies.
Salaries Down Slightly in 2005
Salaries were slightly down for the year, although there was a slight up-tick in December.
The SurePayroll Pay Index clocked in at 948 at the end of December, up eight points from November, or 0.8%. The average small business salary across the nation now stands at an annualized rate of $29,126.
Despite the increase in December, small business salaries ended 2005 down 0.5%. Salaries recovered substantially in 2005. Earlier in the year, it looked like salary declines would be steeper. A turnaround in salaries occurred in June 2005. It's starting to get tougher to find good people, and small business owners are having to up the ante with higher salaries — even though the pace of hiring is slowing down.
To put 2005's salary decline in context, it's worth noting that in 2004 the average check size dropped by 4.8%.
Salary declines are a mixed blessing. Lower salaries are good news for small business owners but are bad news for workers whose fortunes ultimately affect small business owner fortunes — if salaries drop too much, employees stop spending and that lowers consumer spending which ultimately can adversely affect small business revenues.
Independent Contractors
As of the end of December, the SurePayroll Contractor Index stands at 3.26%. That means that for every
100 workers engaged by small business, 3.26 are 1099 independent contractors and 96.74 are W2 employees.
It's been hovering close to that range consistently for the last six months. Despite the recent flatness
in our contractor metric, the use of contractors is generally on the rise relative to prior months. At
the end of 2004, the metric clocked in at 3.20%.
Regional and State Performance
On a regional basis, the hiring story has been the same for the past four months. Small business size
is down year-to-date in every region except the Northeast. Small business size in the Northeast, measured
by the number of employees, ended up 10.4% year-to-date and has recorded seventeen straight months of
increased hiring.
On the salary front, the Midwest garnered the distinction of being the only region where average small business salaries rose in 2005. Salaries declined in the Northeast, South and the West.
As depicted in the graphic below, results varied from state to state. The Scorecard comprises data from all fifty states but we pay close attention to 21 states that we have earmarked as "benchmark states:" Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia, and Washington.
Year-to-date, salaries are up in 16 of our 21 benchmark states. Year-to-date, firms have increased in size in 11 of our 21 benchmark states. Data for our benchmark states is available — just send me an email and let me know if you want the data for your state.
Data for our benchmark states is available — just send me an email and let me know if you want the data for your state.
I welcome any and all questions or suggestions regarding our Small Business Scorecard initiative. Feel free to contact me at malter@surepayroll.com or by phone at (847) 676-8420 ext. 7229.
Best regards,
Michael Alter
President
SurePayroll, Inc.
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