Here's what's happened in the small business economy in 2007.
Positive Year for Small Business Owners
With small businesses representing 99.7 percent of all employer firms in the United States, the answer to the question "How did the U.S. economy do in 2007?" can be answered in large part by asking "How did the small business economy do in 2007?"
To create the SurePayroll Small Business Scorecard, we analyze the payroll data for over 18,000 small businesses to estimate how small business owners are faring. This dataset represents small businesses in every state and spans a representative set of industries and firm sizes, making it an excellent proxy for the entire small business economy.
This is economic data that is not available anywhere else. As one of the nation's largest payroll providers and as a payroll service that is focused exclusively on serving small businesses, we are exclusively privy to whether small businesses are hiring or firing, paying more or less, and whether they are becoming more or less reliant on subcontractors.
December 2007 is now in the history books. We've just processed the last paychecks of 2007 and can now tell you exactly how well small businesses did in 2007.
Overall, it was a good year, especially given that many Chicken Littles were saying that the economic sky was falling and that we were on the verge of recession.
Small business hiring increased 4.3% in 2007. To put that in perspective, small business hiring declined by 0.2% in 2006. In other words, it was a great year for small businesses as they were able to grow in size materially even as a number of negative economic factors were in play.
Here's another encouraging sign. Entrepreneurs were able to hire these new employees even while their labor costs were rising. Small business salaries rose 4.2% in 2007. To be precise, the average small business salary for the United States now stands at an annualized rate of $32,609.
In 2006, salaries increased 7.4%. So, we are seeing a dampening in salary inflation relative to the previous year. That's good news for small business owners. Yet, at the same time, there is a nice balance for small business employees – they are still getting more money in their pocket. That can fuel future consumer spending, which in turn cycles back to fuel future small business growth.
Thirteen Straight Months of Small Business Hiring Increases
The SurePayroll Hiring Index ended the month at 10,893, a 30-point increase (0.28%) from November. December marked the 13th straight month of growth in the Hiring Index, which is based on employee counts reported in company payroll submissions.
In a SurePayroll survey of small business owners, 80.8% indicated that they were not hiring new employees in December. 10.4% were hiring new employees, and the remaining 8.8% were downsizing.
As we have discussed in the past, it appears that national hiring growth is largely being fueled by those companies that are doing well. However, it's great to see that more than 80% of small businesses are staying level, even in rough economic times.
It could be much worse. Imagine a scenario where 10% were hiring while 50% were downsizing and only 30% were staying level. That would be cause for concern.
Instead, our small business data and our small business owner surveys lead us to be cautiously optimistic about 2008.
Small Business Optimism Increases
We are not alone in being optimistic about the economy.
In December, 77.7% of surveyed business owners said they were optimistic about the economy, indicating a small uptick in optimism from the prior month.
Here are the optimism levels for the three preceding months:
Some of the optimism is certainly powered by companies that are doing well due to a weak dollar and a strong export market. Many people forget the role that small businesses play in our national export numbers. In fact, small businesses represent 97 percent of all United States exporters and they produced 28.6 percent of exported goods. While it's tough for a local dry cleaner to go global, many small business owners have found a way to diversify and grow revenues by selling their products and services abroad. The Internet has made it very easy for small firms to go global.
Small Business Salaries Experienced a Small Increase in December
The SurePayroll Pay Index was 1,061 at the end of December, up four points from the end of November.
Salaries rose in every region, except the Northeast where we saw a 0.6% drop last month.
While the SurePayroll Small Business Scorecard Pay Index is based on actual paycheck data, we also surveyed small business owners about pay trends in December.
Salary demands appear to be easing. In our latest survey, 38.2% of respondents indicated that they have to pay more to hire an employee this year than last year. Just a month ago, that statistic stood at 52.8%.
The number of business owners who say they can actually pay less for an employee now than they did last year increased. That statistic now stands at 4.1% versus 2.5% in the previous month.
The key takeaway here is that the rapid salary growth we saw in much of 2007 finally started to slow down as we got close to year end. That's good news because those rising salary costs create inflationary pressures. Generally speaking, if you have to pay employees more, you have to charge customers more.
So, we are very pleased with the slowdown in salary increases. It's a soft landing for a turbulent economy that many predicted would miss the runway altogether.
Reliance on Independent Contractors Increases
Small business reliance on independent contractors rose in 2007.
The SurePayroll Contractor Index started the year at 3.41% and ended the year at 3.45%.
That means that for every 100 workers engaged by small business, 3.45 are 1099 independent contractors and 96.55 are W2 employees.
We ended the year with six months in a row of increased reliance on independent contractors.
This is to be expected. When there is economic uncertainty, small business owners shift from hiring full-time equivalents to hiring more part-timers and more independent contractors.
Regional and State Performance
On a regional basis, hiring was up across the nation in 2007. Hiring rose most in the West (up 6.2%). Second place went to the South (up 3.6%). The Northeast (up 3.2%) took third place and the Midwest was the laggard with only a 2.6% hiring increase.
Salaries increased in the Midwest (up 1.7%), South (3.6%) and West (6.2%). However, salaries decreased in the Northeast (down 0.4%).
It appears that the West powered much of the economic growth in 2007. "Go west, young man" is apparently still good advice if you are looking for a job or want to get a higher salary.
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.
In 2007, firms have increased in size in 19 of our 21 benchmark states. Only two states – Maryland (down 3.0%) and Michigan (down 0.6%) – experienced decreases in hiring in 2007.
In 2007, salaries were up in 17 of our 21 benchmark states. Salaries decreased in four states: Utah (down 0.1%), Indiana (down 7.9%), Maryland (down 0.05%) and New York (down 6.2%).
Data for our benchmark states are 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 email@example.com or by phone at (847) 676-8420 ext. 7229.
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