What's happening right now in the small business economy is puzzling.
The small business economy is defying gravity.
Despite the economic downturn, small businesses are hiring.
It has to be tough to grow a business in this economic climate.
You're like a goldfish swimming upstream into a firehose.
Yet, despite the odds against them, the SurePayroll Small Business Scorecard data shows definitively that small businesses have been increasing their payrolls.
To our mind, there are three key factors that are making it possible for businesses to grow:
That's the macro view of what we see happening in the market. Here are the national and regional year-to-date trends. This is effectively our First Quarter 2008 summary, since, amazingly, we are already three months into 2008.
A quick tangential note before we get to all the details on this month's data…
If you are new to the SurePayroll Small Business Scorecard, we should explain ourselves – and it's a good refresher for those of you who regularly review our economic indices, whether you use the data to predict the jobs numbers, trade stock index options based on the trends, or are simply an armchair economist with a passion for good data.
To create our economic indicators, we aggregate real payroll data for over 18,000 small businesses across the country. As a leading national payroll provider, we alone know exactly what small businesses are paying their employees and their contractors. (OK, ADP and Paychex also have similar data, but they tend to skew to larger businesses)
To us, small business is a business with between 1 and 100 employees. Our dataset's demographic is nearly identical to the national small business demographic, and therefore is an excellent proxy for national, regional and state trends.
Among other things, we have visibility into job growth, salary levels and reliance on independent contractors.
All of our data has been extracted to form economic indices, similar to the Dow Jones Index. Our indices are calculated using 12-month trailing averages to eliminate seasonality effects.
In January 2004, we baselined our Hiring Index at 10,000 and we baselined our Pay Index at 1,000. Today, the National Hiring Index is at 10,990. You can interpret that to mean that the average size of a small business in the United States has increased by 9.9% since January 2004.
Sixteenth Straight Month of Small Business Hiring
Small businesses ramped up on employees in March.
It's a whole new kind of March Madness.
Hiring in this terrible economic environment? You must be mad!
The SurePayroll Hiring Index ended the month at 10,990, a 31-point increase (0.29%) from February.
For Q1 2008, hiring is up not only nationally but also in all four regions we track – the Midwest, Northeast, South and West. Hiring growth has been strongest in the South.
March marked the 16th straight month of growth in the national Hiring Index.
It's another record-breaking month for the small business economy. This is a new peak for the SurePayroll Hiring Index, the highest level it has hit since we initiated the SurePayroll Small Business Scorecard.
Again, as outlined above, we believe the growth in hiring is fueled by lower salaries, sector and industry variances, and large business revenues/expenses converting over to small business revenues.
Based on what we are seeing, our expectation is that the rest of 2008 will be stronger economically than what many have anticipated. Small businesses have adjusted well to credit shortages, high fuel prices and other negative factors – their economic troubles have been overstated.
Despite potentially adverse consequences in the long term, the short-term news of the $168-billion stimulus package and the bailout of troubled financial sector players appear to have provided confidence to business owners and consumers.
They are beginning to believe the economy is on the road to recovery. Clearly, there is also no small amount of optimism regarding November 2008 and the changes that will come post-election, regardless of whether the Republicans or the Democrats secure the Oval Office.
Salaries Fell in March…Again
Salary increases were the norm for 29 months prior to last month, when we finally saw salaries dip in February.
The dip continued in March. Small business salaries dropped once again.
The SurePayroll Pay Index was 1,060 at the end of March, down one point from the end of February and dropping salaries to the same levels we saw in December 2007.
In this case, what's good for the gander is not good for the goose. Lower salaries have allowed small business owners to hire more people, but the common good comes at the expense of the individual. Those who are accepting new jobs today are getting paid less than they would have received for the same work in the past. Needless to say, that puts a dent in the employees' pocketbooks and may lower their consumer confidence.
However, a modest reduction in salaries is much healthier for the economy than the alternative scenario, that of growing unemployment levels. An unemployed worker is much more depressed than an employed worker who can no longer afford their daily latte.
Small Business Optimism Dips
Every month, we survey small business owners to find out if they are optimistic or pessimistic about the economy.
Small business optimism levels decreased from February to March. The percentage of optimistic small business owners was 67.3% in March.
Here are the optimism levels for the three preceding months:
How does one explain dropping confidence while owners are hiring? That's a tough one, but suffice it to say that people's beliefs don't always correlate to their actions. For example, you might be feeling sick, sad or depressed but you still go the office and get your job done. Our sincere belief is that the economy is much better than most people know.
Increased Reliance on Independent Contractors
Just in case you thought that we have a bias towards good news, here's some news from our data that suggests that the economy is not doing so great.
Last month, small business reliance on independent contractors jumped to its highest levels we've seen since we started publishing the SurePayroll Small Business Scorecard.
The SurePayroll Contractor Index ended March at 3.5%, up from 3.47%.
That means that for every 100 workers engaged by small business, 3.5 are 1099 independent contractors and 96.5 are W2 employees.
Growth in the SurePayroll Contractor Index suggests that employers are less willing to hire full-time equivalents (FTEs). That usually happens when they are not confident about future business levels being strong enough to keep FTEs on staff.
It can also mean that they are trying to avoid the costly burden of benefits, such as health insurance and payroll taxes.
We will watch the Contractor Index in the months to come. If it continues to increase, we may need to reduce our own guarded optimism for the rest of the year.
Regional and State Performance
On a regional basis, hiring was up across the nation in First Quarter 2008. Every single region experienced hiring increases in March.
The South had the most economic growth in the First Quarter and was also the biggest gainer in March. For Q1 2008, the South is leading employment growth, with a 2.4% increase.
For First Quarter 2008, salaries dropped in every region except the West (up 1.7%).
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.
For the First Quarter, firms have increased in size in 16 of our 21 benchmark states.
For the First Quarter, salaries have decreased 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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