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:
Small business hiring was down in October, marking a second consecutive month of decreased hiring.
The Scorecard hiring index ended the month of October at 10,470 nationwide. That's a 0.09% decrease from where we were at the end of September, indicating a moderate decline in small business hiring last month.
In the past twenty months prior to October, there were only three months in which small business hiring declined. It's therefore fairly noteworthy that we've had two down months in a row. It appears that small business hiring may have reached an inflection point.
Interestingly, small business salaries are trending in the opposite direction. We've now had increases in small business salaries in four of the last five months, including October. Salaries are rebounding after a dreadful decline. In the past twenty months, including October, we've had only five up months. For fifteen of the last twenty months, small business workers saw salaries dropping.
Virtual Inflation Waning
For months, we've talked about stealth inflation occuring in the form of salary deflation. For months on end,
until recently, our data has showed salaries declining. In effect, that's virtual inflation. If your salary
drops and prices remain the same, it's not to different from a scenario in which your salary stays the same
and prices rise. In either scenario, everything costs more.
The principal difference between inflation and salary deflation is that salary deflation hurts workers who are in transition. As they jump from one position to a similar position at a different organization, they must accept a lower salary. Those who are not job hopping may not be getting raises, but they usually are not receiving pay cuts. In contrast, traditional inflation has a harmful effect on all workers.
The recent increases in small business salaries suggest that the virtual inflation we've seen in the past may be waning. Workers who are accepting new positions are able to demand higher salaries now than they were able to get, say, a year ago.
Why are salaries rebounding? That's the trillion dollar question. Normally, you'd expect to see salaries rise only when hiring was increasing. If hiring is on the rise, workers become scarce and the law of supply and demand pressures salaries higher. We're seeing some latency in the small business economy. The many hiring increases in the last twenty months have finally put some upward pressure on small business salaries. 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.
The SurePayroll Pay Index clocked in at 937 at the end of October, up five points from September, or 0.58%. The average small business salary across the nation now stands at an annualized rate of $28,801.
Year-to-Date Results
For 2005, our year-to-date growth number for small business hiring is 0.3%. That tracks to an annual growth in
small business hiring of just over 0.4% for 2005. Growth couldn't be much more anemic than that. In 2004, we
saw national small business hiring increase by 4.4%. The small business economy has been in slow motion
throughout 2005. We didn't just stand in place, but we didn't move much faster than that either.
Year-to-date, small business salaries have dropped 1.6%. That translates to a projected annualized decrease in salaries of 1.9% for 2005. While that might sound like bad news, it's actually good news because earlier in the year we were tracking on much steeper declines for 2005. Hopefully, this suggests that the threat of prolonged salary deflation is dwindling, but it's probably still too early to tell.
To put 2005's salary decline in context, it's worth noting that in 2004 the average check size dropped by 4.8%. Note also that 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 October, the SurePayroll Contractor Index stands at 3.29%, exactly where it stood at the end
of September and exactly where it stood at the end of August. That means that for every 100 workers engaged
by small business, 3.29 are 1099 independent contractors and 96.71 are W2 employees. 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, is up 8.7% year to date and has recorded fifteen straight months of increased hiring.
The West appears to be having a small hiring recovery, having recorded three straight months of increased hiring.
On the salary front, the South and the Midwest remain in positive territory, with year to date increases of 2.0% and 2.3% respectively. Salaries remain down year to date in the Northeast 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 15 of our 21 benchmark states, up from 13 in the previous month. Year-to-date, firms grew in size in 11 of our 21 benchmark states, down from 12 "up" states at the end of September.
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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