July 2008 SurePayroll's Small Business Scorecard Review

On the bright side, July witnessed the highest hiring levels year to date for the small business economy

In fact, as far as we can tell, small businesses are a rare bright spot in an otherwise mostly bleak economy.

So, small business hiring is up. That's the good news.

The bad news is that small business salaries have dropped once again. As a small business employee, you've got less money in your pocket from payroll while your gas, grocery and other living expenses are on the rise.

The bottomline for today's workers?

In this economy, getting a job is relatively easy. Getting a job that pays well is very difficult.

How Our Economic Hiring Indices Fared in July

The average small business in the United States increased in size in July by 0.4%, bringing year to date growth to 2.0%.

The SurePayroll Hiring Index ended the month at 11,111, a 45-point increase from June. This was the 20th straight month of growth in the national Hiring Index and, on a percentage basis, it was the largest month-over-month increase so far this year.

In a related survey that we conducted, 13.3% of small business owners said they had hired additional staff in July. Others did not fare as well with 8.4% of respondents indicating that they downsized in July. The remainder, 78.3%, stayed the same size in July.

Business Optimism Dips

Even though many small businesses are still hiring, small business optimism is down.

For our July survey, only 63% of surveyed business owners said they were optimistic about the economy. That's up just slightly from 62% in June, but if you've followed our optimism survey, you know that the ranks of the optimistic are at an all-time low point for these last two months.

Here's a quick sampling of what the pessimists are saying:

      -   "Economy is terrible, fuel prices have severely limited non-essential spending in most
           households."

      -   "The economy is in a recession so I feel pessimistic across the board, not just about
            the small business economy."

      -   "The impact of higher oil prices and the cost of the war in Iraq on our economy is a
            ticking time bomb."

Our expectation is that the ranks of the pessimistic will grow in August.

We believe small business hiring is up principally because larger companies are cutting staff and filling the gap with outsourced small business services. In fact, many of the folks who are being hired by small businesses are exactly the same people who have recently been laid off by larger companies.

In addition, larger companies that normally purchase from other large companies are increasingly looking for better deals at smaller companies, which may be willing and able to accept lower profit margins. This is no doubt fueling some of the small business growth.

So, while small businesses are hiring, the storm clouds ahead are dark indeed. The growth in hiring is largely a shell game in which small businesses are winning at the expense of larger businesses. But, that kind of growth is not sustainable, and the straw that is going to break the camel's back is the cost of salary deflation that is evident in our salary data.

Small Business Salary Down Again - Stealth Inflation Up

The SurePayroll Hiring Index clocked in at in July at 1,051, dropping 3 points.

This means that small business salary levels retreated in July, dropping 0.3% on average. Year to date, small business salaries have dropped 1%.

In other words, a job that used to pay $30,000 might now pay only $29,700. In this case, the small business employee is getting $300 less in total salary each year.

However, their costs are going up. The cost of gas is up. Grocery prices are up. The imported products that we covet cost more because of the weak dollar.

It's a double whammy for small business employees. You are making less but things are costing more.

In part, this is an artifact of global outsourcing. Wages are being pressured downward domestically because salaries are lower abroad. Indeed, in recent years thousands of domestic jobs have become fungible with those same jobs being performed remotely abroad…and being performed at a lower cost.

So, small business salaries are down. That's big news. Don't forget that most of us are small business employees. More than half of the private sector work force is employed by small businesses, and 99 percent of all businesses are small businesses.

With our intense focus on the Dow Jones Index, we often ignore what's happening in the economy that really matters: the small business economy.

With the average annualized small business employee salary in the country now at $32,290, it's clear that stealth inflation in the form of lower salaries and lower purchasing power is the real economy killer that we've got to watch out for.

With small business employees being squeezed on both ends, don't be surprised if small business economic growth and overall economic growth start to sputter even more in the months to come.

Contractors

Last month, we chronicled the growing use of contractors by small businesses, which we take as a negative economic signal for reasons we've outlined in the past.

That trend continues. The SurePayroll Contractor Index ended July at 3.57%, up from 3.54% in June and 3.52% in May. At the end of 2007, the Contractor Index stood at 3.45%.

That means that for every 100 workers engaged by small businesses in July, 3.57 are 1099 independent contractors and 96.43 are W2 employees.

This is the sixth straight month in which small business reliance on independent contractors has risen, suggesting that small business owners are not confident about future business activity.

Regional and State Performance

On a regional basis, the Midwest, Northeast, South and West experienced hiring growth in July. Notably, the West reversed course from prior months when it was negative…but growth in the West in July was just barely positive.

In July, average salaries declined in all regions, except the West. Relative to June, salaries in the West were up 0.6%. You can get paid well in the West but it's tough to find a job. (To our mind, salary growth in the West is powered by a shortage of talented knowledge workers. Those scarce employees can still demand and get a high salary.)

On a year-to-date basis, every region except for the West remains in positive territory with respect to hiring. Similarly, salaries are down in every region except the West year to date.

As depicted in the graphic below, year-to-date results vary from state to state. The Scorecard comprises data from all fifty 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, Virginia, 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.

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