SurePayroll's Small Business Scorecard Review
Here's what's happened in the small business economy this past month, based on payroll data for our over 18,000 small business customers.
The year is now officially over. So, how did the small business economy fare in 2006?
For small business owners, 2006 ended on an encouraging note. Still, the overall story for the year was not much of a thriller.
Small business hiring jumped in December, marking only the fourth month in 2006 in which hiring increased. The Scorecard hiring index ended the month of December at 10,442 nationwide, up 15 points from the end of November.
With December 2006 now in the history books, we can state for the record that small business hiring decreased by 0.2% in 2006.
The small business economy has been stagnant for quite a while now. In 2005, we saw national small business hiring increase by a mere 0.3%. In other words, over the past two years, we've seen little movement in the average small business size.
In 2004, things were quite different. We saw small businesses increase hiring by 4.4% in 2004. We believe that growth was driven largely by the 2003 tax cut stimulus, which had a positive, albeit short-lived, effect on the small business economy. There was a sense of a larger economic turnaround in process, but that turnaround never gathered momentum. As a result, small businesses have been much more guarded in hiring over the past 24 months.
In our discussions with small business owners, the mantra is to hire to handle sold business — rather than hire in anticipation of selling more business. Small businesses are very leery of having idle human capital on staff that is not producing income.
For 2007, we are projecting a modest up tick in small business hiring. The housing recession does not appear to be dragging down the rest of the economy. Energy prices are reasonable at this time, and we expect the Middle East conflict to get better. Our estimate for 2007? We project that small business hiring will increase by 1% in 2007.
Salaries Skyrocketed in 2006
Small business salaries increased throughout 2006, although there was no material change in salary levels in December.
The SurePayroll Pay Index clocked in at 1018 at the end of December, showing no change from the end-of-November benchmark. The average small business salary across the nation now stands at an annualized rate of $31,292.
Small business salaries ended 2006 up a whopping 7.4%. It's clear that labor scarcity is going to be a big issue for small business owners in the years to come. It's tough for employers to find good people, especially individuals with advanced skills. This issue will become a bigger challenge as more baby boomers gradually drop out of the work force.
Given labor shortages, small businesses increasingly must bid for talent against larger companies, who have much deeper pockets. That, in our opinion, is the major driver of employee salary increases in the small business economy.
To put 2006's salary increase in context, it's worth noting that in 2004 the average check size dropped by 4.8%, and in a 2005 the average check size dropped by 0.5%. One can argue that the salary increases we saw in 2006 simply are making up for the salary cuts workers experienced in prior years. Indeed, relative to January 2004, salaries have only increased by 0.2%.
Nonetheless, there are implications to rising salaries. Small business owners can either raise prices to stay even or take less profit out of their businesses. In effect, rising salaries put inflationary pressure on the economy, something that the Fed is no doubt closely monitoring. At the same time, more money in the pockets of small business employees means more consumer spending — and it's commonly agreed that consumer spending has been the life source for this economy for the past 18 months.
Looking on the bright side, small business owners have been able to afford higher salaries without much business growth to back it up. This suggests that small businesses are growing more productive, able to make money and pay higher salaries without having to hire additional full-time employees. The counterargument is that profitability is being threatened by higher salary costs, and we may see many small businesses falter in 2007. As is often the case with economic prognostication, only time will tell.
Independent Contractors
As of the end of December, the SurePayroll Contractor Index stands at 3.41%. That means that for every 100 workers
engaged by small business, 3.41 are 1099 independent contractors and 96.59 are W2 employees. At the end of 2005,
the metric clocked in at 3.26%.
That's a 4.7% increase in the use of independent contractors, which, by our standards, is a material jump. It tells us that small business owners are being cautious, hiring plug-and-play independent contractors rather than bringing on employees full-time. On a related note, our research shows that healthcare expenses are a major concern of small business owners — the trend towards using contractors certainly is fueled in part by high healthcare costs and a desire by employers to tap into talent without having to pay the benefits that come with full-time employment.
Regional and State Performance
On a regional basis, Small business size is down year-to-date in every region except the West. Small business size
in the West, measured by the number of employees, ended up 1.4% year-to-date. Hiring decreased by 1.4% in the
Midwest, 6.2% in the Northeast and 1.7% in the South.
On the salary front, every region witnessed rising salaries, with the West showing the highest growth. Salaries increased in the West by an amazing 17.3% on average. We attribute this to two factors. First, the West was hit hardest by the dot com bubble crash earlier in the decade, so this is a recovery, more so than a boom. Second, there is a mini-boom going on in the tech world and much of this is powered by the West; as such, labor shortages for skilled workers are most acute in the West and it makes sense that salaries are rising there more so than in other regions.
We also saw significant salary growth in the Northeast, where salaries rose 12.3%. That was powered in large part by a record year for Wall Street, which plays a major role in the Northeastern economy. In the South, salaries rose 7.5%.
The Midwest was the salary laggard of the group, achieving only 4.7%. In 2005, the Midwest garnered the distinction of being the only region where average small business salaries rose.
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 19 of our 21 benchmark states, with Georgia and North Carolina being the only states where salaries declined.
Year-to-date, firms have increased in size in 9 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.
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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