June 2008 SurePayroll's Small Business Scorecard Review

The US small business economy appears to be making more extensive use of independent contractors.

The SurePayroll Contractor Index ended June at 3.54%, up from 3.52% in May and 3.50% in April. At the end of 2007, the Contractor Index stood at 3.45%.

That means that for every 100 workers engaged by small businesses in June, 3.54 are 1099 independent contractors and 96.46 are W2 employees.

This is the fifth straight month in which small business reliance on independent contractors has risen.

The economic interpretation is relatively straight-forward. Small business owners are not confident about future business activity, given all of the negative factors in the current economy. As such, they prefer not to add full-time employees (FTEs) to their payrolls.

Hiring full-time employees is like getting married. Hiring a contractor is like dating.

There's less risk in making a big mistake when you are dating than when you tie the knot and get married.

Notably, hiring a contractor eliminates the requirement to pay burdensome payroll taxes and offer expensive benefits, such as healthcare insurance. As such, demand for contractors is up, as it represents a significant cost savings to employers and maximizes organizational flexibility.

The supply of available contractors has also increased, as a result of a 5.5 percent nationwide unemployment rate. For unemployed workers, beggars can't be choosers. If no full-time jobs are available, they are going to grab up available contractor positions.

Despite Tough Economy, Small Businesses Are Still Hiring

Even though the economy is in a vicious cycle of negative news, small businesses resisted the temptation to downsize in June.

The average small business in the United States increased in size in June by 0.3%, building on similar growth levels in the prior month.

The SurePayroll Hiring Index ended the month at 11,066, a 31-point increase from May. In a rare bit of good economic news, June marked the 19th straight month of growth in the national Hiring Index.

In addition to the raw payroll payment numbers that power our indices, we also survey small businesses about hiring. Surprisingly, 20% of surveyed small business owners said they had hired additional staff in June. That powered growth in the average business size, as only 7% indicated they had downsized and the remaining 73% stayed the same size in June.

Business Optimism Dips

For our June survey, only 62% of surveyed business owners said they were optimistic about the economy. This was down from 80% in the previous month's survey.

In the June survey, the primary reasons cited for not being optimistic included the high unemployment rates announced in early June, the weak dollar, the credit crunch and rising fuel costs. The timing on our survey probably contributed to the downtrend in optimism, as we sent it out on the same day that the Department of Labor announced the big increase in unemployment.

Nation's Average Small Business Salary Decreased in June

Small business salary levels retreated in June, dropping 0.4% on average. The SurePayroll Pay Index ended the month of June at 1,054, down 4 points from May.

The average annualized small business employee salary in the country is now at $32,386.11.

Since the beginning of the year, the average annualized U.S. small business salary has dropped $223. Extrapolated to the estimated 40 million small business employees in the country, that's over $9 billion worth of purchasing power that is not going into small business employee's wallets.

It's no surprise that tax rebates are not giving the economy the hoped-for boost. With lower paychecks and higher costs for everything from gas to food, small business employees are barely staying above water.

Regional and State Performance

On a regional basis, the Midwest, Northeast, and South experienced hiring growth in June. However, in the West, the size of the average small business grew smaller in June (down 0.1%).

In June, average salaries declined in all regions, except the West. Relative to May, salaries in the West were up 0.7%. With higher salary demands in the West, it's no surprise that small business owners in the West were not in a hiring mood in June.

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, Indiana, 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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