Jobs, Small Businesses, Payrolls, and the Economy
Consider the dismal real estate and economic news of last week:
- Pending home sales dropped 30 percent. That was twice as much as most economists expected, with further declines to come.
- The unemployment report was awful. A scant 83,000 private-sector jobs were created (far less than what was expected), while 200,000 people were laid off from temporary Census jobs, for a net job loss of 125,000.
- The Pew Research Center found that 55 percent of Americans have seen a decline in income since the Great Recession started. This is even higher than the 45 to 50 percent I've been saying all along.
- Consumer confidence plummeted. It dropped 20 percent from a month earlier.
- The stock market took a dramatic hit. The Dow Jones fell 4.5 percent in a week.
This is the picture of an economy in recovery?
But bad as this sounds, if you dig a little deeper, you'll get a sense of why small business owners, which drive around 90 percent of the hiring, have decided to hold off, despite the HIRE Act.
I spent a few minutes on the phone with Michael Alter, president of SurePayroll, talking about small business psychology. SurePayroll processes payrolls for roughly 30,000 small businesses, and their scorecard is widely quoted because it's extremely accurate. (Full disclosure: I use SurePayroll to process the payroll for my two companies, one of which created some video for SurePayroll.)
When it comes to jobs and small business, what are you seeing?
What we're seeing is a lot of caution and uncertainty and cause for concern. There are four things we look at when calculating our small business scorecard: The number of people on a payroll, the average paycheck, the percentage of workforce that is contractors (on a 1099 vs. W2) and the level of optimism, or emotional confidence a small business owner has.
As we look at those items, we see the hiring index going up slightly, which is positive. Optimism is holding steady at about two-thirds or 66 percent.
The things that give me cause for concern are the other two data points: year-to-date, we've seen the average paycheck - the take-home pay for a small business employee - go negative with a sharp drop in June. We're down .4 percent for the year.
The other thing we see is that of the growth that's out there for the small business workforce, more of the growth being driven by contractors (1099s) than full-time employees (W2s).
Play those cards forward, and you think about how most small business employees are consumers and if they have cash, they'll spend money with other small businesses on Main Street. And when they take home less, and have less security in their jobs because they're contract employees rather than full-time, they'll be more conservative and less likely to consume and spend. That translates into less revenue for small businesses.
Less revenue means no one hiring.
But some sectors of the economy are growing, right?
We're seeing a little bit of hiring because there are sectors of the economy where there are customers coming in and there's sufficient revenue. Companies that can hire are doing it at a lower cost than in the past, so that's positive for them.
The thing to note is that the hiring they're doing is more likely to be contract employees, so no benefits, and no Social Security and Medicare contributions from the employer.
It's ironic to me. The HIRE Act was designed to get people to hire those who have been unemployed by giving a credit for the employer's portion of the Social Security tax (6.2 percent).
But we're seeing is that small businesses have figured out if they can categorize a job as a contract employee, they can save even more money without the paperwork or hassle. They've essentially created their own HIRE Act.
What do you see happening with jobs and small business through the rest of 2010 and into 2011?
I see more of the same for the rest of the year. There will be slight growth in hiring. And we're going to see flat to slightly down paychecks. We'll continue to see optimism bouncing at two-thirds level.
By the way, on the surface, small business owners optimism at two-thirds seems good but it isn't. That's because small business owners are "glass half full" kinds of people. In normal times, we see this number at 90 percent. It's been around 66 percent for 9 months.
What's scaring you about jobs and small business?
The scariest thing to me is all of the uncertainty in the marketplace. Small business owners have a lot of uncertainty around the new health care legislation, and what - if any - impact the upcoming financial reform legislation will have on their business.
There are also a number of things going on in Europe and overseas that are concerning small businesses owners that have export business. There are ongoing issues with the Gulf oil spill. The government is continuing to spend heavily on two wars.
All of those things create uncertainty for someone running a business because they don't know what the costs or what the economic climate will be.
And if you're uncertain, you freeze. You don't place a big bet. So I expect we'll see the same sort of level we're at rather than real growth.
How do small businesses come out of this cycle and start hiring?
It's a good question. We have to change the emotional mindset that there is an upside. We have to drive optimism up. There are two ways to do this for a small business owner: (1) Create certainty around what my costs will be and what will it cost me to operate my business; and, (2) the government has to be clear and declarative and consistent about legislative matters, especially health care - and the sooner the better.
We have to stimulate demand in the economy. Small business owners won't hire employees because of a tax break or a discount unless they believe they have enough revenue coming in to justify the expenses. Fewer small business owners are spending or hiring because the risk to a business with 5 employees is too great. With an IBM, you can afford to be wrong. You fire 1,000 people and move on. But if you have 5 people and buy a delivery truck that you can't afford because the business doesn't come in, you're out of business.
We need to stimulate demand and the way to do that is through a stimulus package. I'd like to see lower taxes for small business owners. They're not making as much money as they could and they're not investing in their businesses. It would be way more efficient than the HIRE Act.
This interview was edited and condensed slightly for clarity.
Read More:
- Loan Modification Hell: Income Requirements for New HAMP Rules
- Want A Loan Modification? The New HAMP Rules For Trial Loan Mods Start June 1
- Gulf Coast Homeowners Get Relief From Foreclosures and Mortgage Payments
- Real Estate Values: Does Your Home Value Matter If You're Not Selling Or Refinancing?
- Mortgage Rates Hit Record Low While Purchase Applications Plummet
- Mortgage Interest Rates Could Hit Rock Bottom Today
- Strategic Defaults Increasing As Homeowners Choose Not To Pay Their Mortgage
- Foreclosure Coming? Perhaps You Should Bulldoze Your House
- Are You In Loan Modification Hell? Join The Club
- Underwater? Maybe You Should Walk Away from Your Mortgage
- Will.i.am Saves Two Families From Foreclosure
Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com.
