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For May 2009, we saw a rebound in small business owner optimism levels.
Based on our latest survey of small business owners, 73 percent of respondents indicated they are optimistic about the small business economy.
That's an improvement from April when only 66 percent of respondents were optimistic.
The optimism appears to be fueled by the fact that many small business owners have managed to maintain or grow revenues and profits, even in a down economy.
As one of our optimists put it: "Everything has cycles. There is money to be made in an up and down economy, depending on how you look at the opportunities."
Another optimist opined that good execution will get a small business owner through even the most difficult economic times: "Hard work and great customer service always prevail."
Another small business owner suggested that large company troubles are creating opportunities for small business owners: "With big companies flailing about and thus receiving scrutiny, smaller companies have an opportunity to step in and make up the difference."
Those business owners who are pessimistic cited many reasons for their pessimism, including increasing regulation; intensified competition from big box stores and large company competitors; loss of major customers; and declining customer demand.
The May survey was completed on May 29. It consisted of 267 respondents randomly selected from the 25,000 small businesses we use to calculate our economic indicators.
The overall message is clear. This down economy has adversely impacted many small businesses, but the vast majority of small business owners have figured out ways to hang on or even take advantage of events to continue to grow their companies.
This is a testimony to the resilient nature of entrepreneurship and to the inherent nimbleness of small business that allows small firms to survive situations that might otherwise be very challenging.
The SurePayroll Hiring Index
The optimistic outlook of small business owners translated into a positive reading on small business hiring for May 2009.
Our SurePayroll Hiring Index rose 26 points to 11,430 in May, up from 11,404 at the end of April. The uptick was 0.2 percent from the prior month, suggesting that on average small businesses were hiring last month.
Year-to-date, the Hiring Index is up 1.4 percent, which puts small business hiring on track to increase 3.3 percent for calendar year 2009. The results are fairly surprising, given the state of the economy. It suggests that the U.S. economy is in much better shape these days than many may realize. Small businesses often lead economic recovery, so it is good to see that small businesses are continuing to add new employees.
The SurePayroll Hiring Index is calculated from the actual payroll payments made by over 25,000 small businesses that use our payroll service. The Hiring Index tracks the total workforce for a small business, including employees and contractors.
Salaries Dip
One of the reasons that small businesses have been able to add new employees is that the price of a new employee has never been lower.
A recent study led by Till von Wachter of Columbia University determined that laid off workers in a down economy experience a 30% drop in earnings after returning to work. Even after 15 years, these workers are making 20% less than peers who were not laid off during the economic downturn.
While this research is based on data from the 1982 recession, we see similar salary trends in this recession. Average salaries are dropping precipitously, allowing small business owners to fill positions for much less money now than they would have had to pay one year ago.
We track small business salaries with our SurePayroll Pay Index, a proxy economic indicator for the average salary paid by a small business. The Index now stands at 992, down from our April reading of 1,001. That's a one-month drop of 0. 9 percent, matching the decline we saw in the previous month. That's four consecutive months of deep salary cuts.
Year to date, salaries are down 3.6 percent. The average small business annual paycheck in the United States is now $30,482. In May 2008, it was $32,528. That's a fairly large drop in purchasing power for the average American. Year over year, that equates to a 6.3% drop in salaries.
This does not mean that small business employees are all getting 6% pay cuts. The driving lever in declining salaries is in new hires. In other words, if you were unfortunate and lost your job, you may have to be willing to accept approximately 6% lower salary when you return to work. Business owners can pay less because the supply of qualified available workers is so high.
Independent Contractor Usage Accelerates
Last month, we commented on the growing reliance of small businesses on independent contractors.
The May 2009 data suggest that this trend continues to gain steam.
The economic index we generate to track this trend — the SurePayroll Contractor Index — represents the percentage of employed individuals who are working as independent contractors.
As of the end of May 2009, the Contractor Index now stands at 4.00 percent, up from 3.94 percent at the end of April.
This means that for every 100 workers engaged by small businesses in May, four are 1099 independent contractors and 96 are W-2 employees.
There are two main factors driving the growing use of independent contractors.
First, there are more independent contractors looking for work. Unemployed individuals are making ends meet by freelancing or taking on contract work. These are folks who would much rather have full-time jobs, but those are tough to find these days. So they opt for contract work.
Second, small business owners view the use of contractors as more cost efficient and lower risk. It's much easier to terminate a contractor than it is to terminate an employee. Plus, contractors don't come with a heavy payroll tax and benefits burden.
A growing supply of contractors and higher demand for contractors — those are the two factors fueling the transition to a free agent economy. As the economy recovers, we expect this transition to slow down, but it's also our estimate that even with a full economic recovery, we will still see heavier use of contractors than in years past.
Regional and State Performance
Three regions – the Midwest, Northeast, and South – experienced hiring growth in May. Hiring was down only in the West. On the pay side of things, all four regions experienced salary declines in May.
Monthly hiring gains for the Midwest, Northeast, South and West were 0.5 percent, 0.6 percent, 0.3 percent and -0.2 percent, respectively. As it did in April, the Northeast (0.6 percent) led the country in small business growth for May, although the Midwest (0.5 percent) also showed very respectable growth.
As mentioned above, average salaries declined in all four regions last month. In the Midwest, Northeast, South and West, salary changes were -0.9 percent, -1.2 percent, -0.7 percent and -0.2 percent, respectively. Salaries fell most precipitously in the Northeast (down 1.2 percent).
With respect to year-to-date performance, hiring changes for the Midwest, Northeast, South and West are 2.5 percent, 3.5 percent, 2.3 percent and -0.9 percent, respectively. Year-to-date salary changes are -2.5 percent, -4.8 percent, -3.5 percent and -0.5 percent, respectively.
As depicted in the graphic below, year-to-date results vary by state. The Scorecard comprises data from all 50 states, but we pay close attention to states that we have earmarked as "benchmark states," specifically Arizona, California, Colorado, Florida, Illinois, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Pennsylvania, Texas, Utah and Washington.
Data for our benchmark states are available — just send me an email requesting the data for your state.
I welcome any questions or suggestions regarding our Small Business Scorecard initiative. You may contact me at malter@surepayroll.com or by phone at
(847) 676-8420, ext. 7229.
Best regards,
Michael Alter
President
SurePayroll, Inc.
Questions regarding the SurePayroll Small Business Scorecard can be directed to Lori Bolas or Melinda Brodbeck. Lori can be reached at loriann.bolas@surepayroll.com or by phone at 847.676.8420 ext. 7248. Melinda can be reached at mbrodbeck@kruppnyc.com or by phone at 212.886.6705.
