SurePayroll's Small Business Scorecard Review
2006 won't go down as a favorite year for most small business owners in the United States.
There's been very little growth in the small business economy this year.
The only growth of note has been in the salaries that small business owners must pay their employees.
These increasing salary demands put inflationary pressures on small businesses. Small business owners either have to raise prices or live with lower profits. There's no silver lining in either of those choices.
Those are the highlights of the SurePayroll Small Business Scorecard for October 2006 as we approach the high-stakes November 7, 2006 mid-term elections.
Let’s take a look at things on a more detailed level. Based on our payroll data for our over 17,000 small business customers, here's what's happened in the small business economy this past month.
Small Business Hiring is Down — What Else is New?
Small business hiring decreased in October.
The Scorecard hiring index ended the month of October at 10,432 nationwide. That's a 7-point drop from where we were at the end of September.
The hiring index is derived by calculating the average size of the businesses in our customer base, which we believe is an accurate proxy for small businesses nationwide. We use a twelve-month trailing average calculation on all of our economic indicators to eliminate seasonality effects.
The baseline for the SurePayroll hiring index was set to 10,000 for the January 2004 SurePayroll Scorecard. October's 10,432 hiring index value means that small businesses in the United States have increased in size by 4.3% since January 2004.
In terms of absolute numbers, the average small business in the United States now has 5.85 employees.
The 7-point decrease in the hiring index last month, a drop from 10,439 to 10,432, implies that small businesses decreased in size by .07% last month.
October's hiring decrease is relatively small, but the trend has been down all year. We've only had three months this year in which hiring increased. Nonetheless, the dips have all been modest. Year to date, small business hiring has decreased 0.3%.
The key takeaway? It's been a yawner of a year for the small business economy. The year's almost over and we can definitively say that there’s been very little growth in the small business economy.
In addition to the Scorecard's payroll data analysis showing decreased hiring in October, a SurePayroll survey of 258 small business owners confirms that employers are not doing much hiring.
11.4% of respondents indicated that they had hired new employees in October — in the prior month's survey, 14.6% of respondents indicated that they had hired new employees.
In addition, 8.1% indicated that they had downsized their staff in October — in the prior month's survey, 3.6% of respondents indicated that they had downsized. In other words, small business downsizing is on the rise.
80.5% of the survey respondents said that they ended October with exactly the same number of employees that they had at the end of September. Most small businesses have been standing still this year, staying on an even keel.
Small Business Salaries — Up, Up and Away!
Salaries continue to trend higher. October marked the fourteenth consecutive month in which small
business salaries have increased!
The SurePayroll Pay Index clocked in at 1,011 at the end of October, up four points from September, or 0.5%. The average small business salary across the nation now stands at an annualized rate of $31,083.
That's the highest salary levels we've seen since we released the first Scorecard in January 2004. From January 2004 to August 2005, we watched average small business salaries plummet, down to a low of $28,589. Since then, they’ve been steadily recovering.
That's good news and bad news. Consumers have more spending money, which can help sustain economic growth. At the same time, business owners have higher operating costs, which can create inflationary pressures and discourage investment in economic growth.
In our survey of small business owners, we discovered that 47.3% of small business owners say that they now have to pay more for a given employee than they had to pay one year ago. This represents an increase from the prior month’s survey, in which 37% of employers indicated that they had to pay higher salaries. We’ve watched that statistic increase steadily over the months, implying that small businesses are indeed experiencing significant salary inflation.
It may seem strange to some that hiring is down while salary demands are rising. Normally, we'd expect increasing salaries to be accompanied by increased hiring, suggesting that employers have to bid higher to acquire scarce resources. However, the small business economy doesn't exist in a vacuum. Small businesses must compete against larger businesses for talent. We believe larger business are bidding up salaries and making it harder for small businesses to acquire scarce talent.
It's the worst of both worlds for small business owners. Your business isn't growing, and, by the way, your employees want more money. Nonetheless, it could be worse. If small business hiring growth was materially down — say, by 5% year to date — then it would truly be a dire situation for small businesses.
If you want to look at the glass as being half full, observe that despite rising salary costs this year, the average small business hasn’t had to downsize much.
Year to Date Results and 2006 Projections
For 2006, our year-to-date growth number for small business hiring is -0.3%. If this pace continues,
the average small business in the United States will have shrunk by approximately 0.4% at the end of the
year. It's a decline — but it's a fairly modest decline.
Year-to-date, small business salaries have increased 6.7%. That translates to a projected annualized increase in salaries of 8.1% for 2006 if the current pace continues.
Independent Contractors
As of the end of October, the SurePayroll Contractor Index stands at 3.4 percent, exactly where we were
at last month. This means that for every 100 workers engaged by small business, 3.4 are 1099 independent
contractors and 96.6 are W2 employees.
In our October survey of small business owners, we found that 58% of respondents indicated that they do not use independent contractors. In September that number was 69%, suggesting that more small businesses are starting to use independent contractors.
Optimism Down
Small business optimism took a dip last month. 78% of the small business owners we surveyed in our
October survey indicated they are optimistic about the economy. In September, 82% of survey respondents
were optimistic. In August, 78% of survey respondents were optimistic.
Regional and State Performance
Three regions — the Midwest, Northeast, and South — have experienced year-to-date decreases
in small business size. Only the West shows increased hiring, with a 0.9% year-to-date increase.
The Northeast has experienced the biggest drop in small business hiring, with a 4.5% year-to-date decrease.
Salaries are up year to date in all four regions: the Midwest, Northeast, South and West. Salary gains are highest in the West, where the average small business salary has risen 10% year to date. The Northeast is a close second, with a 9.8% year-to-date increase. It will be interesting to see which of these two regions ends 2006 with the highest salary increases.
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 20 of our 21 benchmark states. Florida remains the only state where salaries have shrunk since December 2005. Firms have increased in size in 10 of our 21 benchmark states. Data for our benchmark states is available — just send me an e-mail 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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