February 2008 SurePayroll's Small Business Scorecard Review
Salaries are dropping and just in the nick of time.
With recession fears looming, small business owners in search of good news can find it in this month's SurePayroll Small Business Scorecard.
After an amazing twenty-nine straight months of salary increases, the small business economy finally saw a decline in average salaries in February.
That's good news for small business owners, and it's allowed them to continue to grow despite the economic storm clouds overhead.
We'll jump into the details on the numbers shortly, but it's safe to say that this is good economic news.
The small business economy, which is a huge engine of growth for the overall economy, refuses to stall out. That's evidenced by the strength in hiring that we see in our economic data this month.
On the salary front, it's clear that softness in the economy is allowing employers to offer employees a little less money.
In effect, small business employees are making a small contribution to keep the economy moving forward…and hopefully that contribution will allow small business owners to make it through rough economic waters to a time when they can again grow while paying higher salaries.
Of course, the downside risk on lower salaries is that consumers will have less money in their pockets, and that may slow consumer spending, which we've become overly dependent on as an engine for economic growth.
Fifteenth Straight Month of Small Business Hiring
Small business owners were hiring in February.
The SurePayroll Hiring Index ended the month at 10,959, a 35-point increase (0.32%) from January.
Hiring in January was up not only nationally but also in all four regions we track – the Midwest, Northeast, South and West.
January marked the 15th straight month of growth in the national SurePayroll Hiring Index, which is based on employee counts reported in company payroll submissions for over 18,000 small businesses.
This is a new peak for the SurePayroll Hiring Index, the highest level since we initiated the SurePayroll Small Business Scorecard in January 2004. In January 2004, the Hiring Index was set to 10,000, a starting point indexed to the average number of employees in the small business dataset. In other words, you can interpret this month's 10,959 level as meaning that the average U.S. small business has increased in size by 9.6% since January 2004.
In a SurePayroll survey of small business owners, 76% indicated that they were not hiring new employees in February. 17% were hiring new employees, and the remaining 7% were downsizing.
One month prior, 80% indicated that they were not hiring new employees in January. 16% were hiring new employees, and the remaining 4% were downsizing.
We interpret this to mean that some sectors of the small business economy are feeling the pain of the subprime mortgage crisis, real estate slow down and credit crunch. Those firms are downsizing, and the number of firms that are downsizing is on the rise.
However, at the same time, many other small businesses are doing just fine, and on average, small businesses are still hiring.
Because many small businesses sell products and services to large businesses, the wildcard for the small business economy will be how well larger companies survive the economic downturn.
So far, so good…but it's too early to forecast a soft landing.
Salaries Fell in February
We've been seeing salary increases losing steam recently, and, lo and behold, the long run of salary increases finally came to an end in February.
The SurePayroll Pay Index was 1,061 at the end of February, down two points from the end of January and back to the same level we saw at the end of 2007.
While that sounds like a small drop, it's actually a big deal. For the last 29 months, we've seen salaries rising on average.
Clearly, the laws of supply and demand are at play. Dropping salaries have made it easier for business owners to hire new employees, which, as evidenced by the increase in the Hiring Index, they have continued to do.
Of course, employees don't like to hear that salaries are dropping but it does help to slow inflationary pressures on the economy. In contrast, when salaries are rising, employers feel pressure to raise their prices.
Small Business Optimism Stays Flat
Every month, we survey small business owners to find out if they are optimistic or pessimistic about the economy.
Small business optimism levels didn't change much from January to February. The percentage of optimistic small business owners remained at 70.1%.
Here are the optimism levels for the three preceding months:
Increased Reliance on Independent Contractors
It's a little disconcerting that a growing percentage of payroll dollars is going to independent contractors.
Small business reliance on independent contractors was flat in January.
The SurePayroll Contractor Index ended February at 3.47%, up from 3.45%.
That means that for every 100 workers engaged by small business, 3.47 are 1099 independent contractors and 96.53 are W2 employees.
While it seems like a small increase, when you extrapolate it across all the payroll dollars that flow through the economy, it can have a big impact.
It suggests that a growing number of citizens are working as free agents, without access to company healthcare plans and with responsibilities for their own self-employment taxes.
Usually, growth in our SurePayroll Contractor Index suggests that employers are less willing to hire full-time equivalents (FTEs) and that suggests that they are not confident about future business levels being strong enough to keep FTEs on staff.
From the employee perspective, it can mean that full-time jobs are harder to find, so they are filling the gap with contract work.
This is economic data that we will be paying close attention to in the months to come, with hopes that we don't see accelerating growth in the Contractor Index.
Regional and State Performance
On a regional basis, hiring was up across the nation in February and is up year to date in all four regions.
Year to date, the South is leading employment growth, with a 1.7% increase. Year to date hiring increases for the other regions are 0.8% for the Midwest, 1.3% for the Northeast and a modest 0.1% for the West.
Year to date, salaries have decreased in every region except the West (up 1.1%). Salaries in the Midwest are down 0.1%. Salaries in the South are down 1.5%. Salaries in the Northeast are down 0.6%.
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, firms have increased in size in 16 of our 21 benchmark states.
Year to date, salaries are up in 9 of our 21 benchmark states.
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.
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