2008 is officially over and it's time to tally up how the small business economy performed over the course of a year that many of us are only too eager to forget.
Throughout 2008, we helped over 20,000 small businesses process payroll. Indeed, $4.5 billion in payments to employees and contractors flowed through our payroll service just last year alone.
As part of our SurePayroll Small Business Scorecard, we crunch the numbers and evaluate the trends in our customers' small business payrolls to determine whether small businesses are hiring or firing, salaries are going up or down and if small businesses are becoming more or less reliant on independent contractors.
2008 Hiring Increase
Despite the economic woes of 2008, small businesses managed to increase in size on average.
For 2008, our SurePayroll Hiring Index started the year at 10,893 and ended the year at 11,274.
This index is a proxy for the average size of a small business in the United States. Hence, with all the numbers in for 2008, we can say that small businesses hiring was up 3.5%.
Fourth quarter hiring increases (0.77% growth) slowed relative to third quarter hiring increases (1.1% growth).
In addition, over the course of Fourth Quarter 2008, hiring increases declined with each passing month. October month-over-month growth was 0.28%. November dipped to 0.26% and December, at 0.22%, showed the slowest growth rate for the quarter.
Given this trend, we expect a further slowdown in hiring to continue in early 2009.
Small Business Salaries Decline in 2008
Small business salaries declined 3.1% in 2008.
To be precise, our Pay Index started the year at 1,061 and ended the year at 1,028. The average small business salary in the United States now stands at $31,610.
While this has made life difficult for many small business employees, it has been good news for small business owners who can pay less for talent now than they had to pay one year ago. At a time when many other business costs are rising, this is welcome relief.
Looking at salaries on a quarterly basis, we see acceleration in salary declines. Salary drops for Q408, Q308, Q208 and Q108 were -1.28%, -1.13%, -0.59%, -0.09% respectively. In other words, as the year progressed, salaries dropped at a faster rate.
With record unemployment levels, we expect this trend to continue into 2009.
Wait a month to get a job and you may find that the salary you get will drop relative to what you would have gotten just one month earlier. From a hiring perspective, owners can wait a month and pay less.
In our experience, small businesses typically hire when they absolutely need a body to do some work that cannot be put off, so we don't expect salary deflation to curtail hiring in the same way that deflation can curtail consumer spending.
One thing that small businesses will do, however, is to use more independent contractors, which is certainly another trend we are seeing in the marketplace.
Use of Contractors Increases
In times of uncertainty, small businesses will hire human capital on a plug-and-play basis. They will avoid bringing on full-time equivalents if they can avoid it. This is in part to avoid a longer-term liability of one extra full-timer on the payroll. But, it is also a way to lower expenses because employer payroll taxes and benefits costs are not required when a small business uses a contractor.
In 2008, use of contractors increased by 8.3%, our largest yearly increase since 2004.
Our contractor index currently stands at 3.74% as of the end of December 2008.
When we say the Contract Index is 3.74%, that means that for every 100 workers engaged by small businesses in December, 3.74 were 1099 independent contractors and 96.26 were W2 employees.
Optimism Rebounds
With the start of the New Year, we are seeing optimism strongly rebound in the small business economy.
Our prior reading was that 56% of our small business survey respondents indicated that they are optimistic about the economy. In our newest survey, we surveyed 260 business owners during the week of December 29, 2008 and found that 73.2% were optimistic about the small business economy.
We might chalk that up to holiday cheer, but our conversations with small business owners suggest that many business owners are assuming a recovery in 2009 and are looking beyond that time period.
We can only hope that their optimism is well served and that things do turn around for the better, sooner rather than later.
Regional and State Performance
The Midwest, Northeast, and South experienced hiring growth in December, whereas the West experienced a contraction in hiring.
Monthly hiring gains for these regions were 0.5%, 1.0%, 0.4%, and -0.3% respectively. The Northeast led the country in small business growth in December.
In December, average salaries declined in the Northeast and South, at -0.5% and -0.6% respectively. Salaries stayed flat in the Midwest and the West.
On a year-to-date basis, hiring changes for the Midwest, Northeast, South and West now stand at 7.4%, 10.1%, 6.4%, and -0.8% respectively. In 2008, the West was the only region where hiring was down year-to-date.
Year-to-date salary changes for the Midwest, Northeast, South and West are -1.8%, -7.2%, -9.2%, and 5.3% respectively. In 2008, salaries dropped the greatest in the South.
As depicted in the graphic below, year-to-date results vary from state to state. The Scorecard comprises data from all 50 states but we pay close attention to states that we have earmarked as "benchmark states": Arizona, California, Colorado, Florida, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New York, Oregon, Pennsylvania, Texas, Utah and Washington.
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 malter@surepayroll.com or by phone at (847) 676-8420 ext. 7229.
Best regards,
Michael Alter
President
SurePayroll, Inc.
Small Business Scorecards Archive:
