The 35-day partial government shutdown had a negative impact on the outlook for small business owners, although there was a slight uptick in hiring and wages last month, according to payroll giant Paychex.
Paychex found the shutdown negatively impacted business outlook for 19 percent of the 300 small business owners surveyed. But despite the length of the shutdown, the future outlook for 68 percent of the business owners polled was unaffected. On the other hand, 13 percent of the business owners polled reported that the shutdown had a positive impact on their business outlook. The survey found that 21 percent of business owners were directly impacted by the shutdown, while the other 79 percent indicated they were not impacted.
“We did see a little bit more disproportionate impact on some small businesses in the Virginia and Washington, D.C., area,” said Paychex president and CEO Martin Mucci. “When you think about restaurants and discretionary services, they definitely were impacted by a large number of federal workers being out of work and not spending as much. Hopefully many of them were able to weather that, but it certainly was difficult and will be if it happens again.”
Of those small businesses that said they were experiencing the effects of the shutdown, the decrease in federal worker customers had the biggest impact (41 percent), followed by a payment delay from government contractors whose services their businesses rely upon (33 percent), the inability to apply for a Small Business Administration loan (29 percent), a wait in approval on an SBA loan application submitted before the shutdown (24 percent), suspension of data services regularly provided by the federal government (22 percent), and inability to access the federal government’s E-Verify system for checking the status of an immigrant’s legal right to work (17 percent).
“New business startups had a difficult time getting new federal ID numbers for their businesses,” said Mucci. “Small Business Administration loans were also delayed, so that impacted some businesses from either starting or expanding. Then, generally, if you were a business that had either payments directly from the federal government, or through another business that had payments through the federal government, it at least impacted cash flow during that period of time, which got pretty extended for some of these small businesses. It will be interesting to see if there’s an additional impact in February on hiring. We see at least 20 percent have a more cautious outlook on the future, not knowing if it [the shutdown] is going to happen again. Does it go on a long time again? If it does, they might plan for it a little bit more, and play it a little bit more carefully in hiring or spending.”
Paychex also released its monthly survey Tuesday on small business hiring and wages. The Small Business Jobs Index went up 0.04 percent in January to 98.92, though it remains down 0.96 on a year-over-year basis. At 2.49 percent ($0.65) in January, hourly earnings growth has improved each month since August, with hourly wages now at an average of $26.88. Weekly earnings growth has dipped below 2 percent, though, as weekly hours worked have declined.
“There was a slight uptick in January in the jobs index,” said Mucci. “The job growth rate is still down about 1 percent from last January, so the index is just under 99. But we’d expect that, reflecting the tight labor market and the unemployment rate being as strong as it is. Smaller firms — those businesses with under 50 employees — have a little bit more difficult time recruiting and hiring. Many times they have less work flexibility for hours and job sharing. Benefits are usually not as strong as the larger companies, and the technology that people get to use is sometimes not quite the same. It makes recruiting in a tough labor market a little bit more difficult.”
Paychex did see a slight uptick in hourly earnings growth in January of about 2.5 percent, but the number of weekly hours worked declined somewhat. “Interestingly, there was a decrease in the weekly hours worked of about 0.4 percent,” said Mucci. “I can’t really explain that one. I’m not sure why the weekly hours would decrease given the tight labor market, but maybe it had something to do with the shutdown. People are being more careful, and maybe some of those hours got worked into that.”
Several minimum wage increases went into effect in different parts of the country on January 1, and that helped with the wage numbers. “Hourly earnings for hourly employees were up about 3.4 percent, whereas salaried employees saw more like a 1.6 percent increase,” said Mucci. “That now averages to about 2.5 percent.”
The top region for both employment and wage growth was the West. Wisconsin was the strongest state in January in terms of small business job growth, while California took the top spot among the states in terms of wage growth. Among metropolitan areas, Dallas remained in first place on job growth, while Riverside, California was once again the top metropolitan area for wage growth. In terms of industries, construction was again back above the 100 mark, thanks to a 0.14 percent increase in January, and ranked second among industries on jobs growth. The leisure and hospitality sector also had a good month, thanks to the minimum wage increases in places like New York and the District of Columbia.
“You see it in things leisure and hospitality in particular,” said Mucci. “They’re seeing the bigger increases because of the minimum wage.”
Besides the minimum wage increases, Mucci advises accountants keep an eye on proposed changes in the federal overtime rules, and a recent report from the Treasury Inspector General for Tax Administration recommending the IRS improve its ability to identify small businesses that are erroneously claiming the research tax credit payroll offset. “It looks like there might be some more audits on that,” said Mucci.
Meanwhile, accountants will be busy dealing with tax season and the many changes from the Tax Cuts and Jobs Act for their clients. “We’re already hearing some feedback that, even though you had a tax rate reduction and you had a little bit more net pay during the year, you should make sure that you’re going to be OK at filing time,” said Mucci. “I think some people are being surprised already that their refunds are a lot less because either they had a lot more net pay or some of their deductions changed, like for those of us in New York, New Jersey and California with the high property taxes that aren’t being deducted anymore. That’s a little bit of a surprise to many people. I’m sure accountants will be very busy this tax season.”