Pay growth slowed at small businesses in May

Hourly earnings growth for U.S. workers decelerated to 4.33% in May, while small-business job growth declined slightly by 0.04% from April, payroll provider Paychex reported Tuesday.

The Paychex | IHS Markit Small Business Employment Watch indicated weekly earnings growth is now at 3.96%, while one- and three-month annualized growth are 2.42% and 2.40%, respectively.

The National Small Business Jobs Index slowed 0.24% in April and moderated 0.04% in May to 99.45. At 99.45, small-business employment growth was 1.41% lower compared to a year ago when the index was at 100.87. Meanwhile, the steady deceleration in hourly earnings growth continued in May, with the rate slowing to 4.33%. Weekly earnings growth also dropped in May to 3.96%. Year-over-year weekly hours worked growth kept moderating as well, falling to -0.36% in May. 

Despite the current challenges, small businesses remained resilient, with steady job growth — and they may get some relief when hiring, as the pace of wage growth slows consistently.

"Small businesses are still adding employees, but that change in growth has slowed for the past 12 months pretty consistently until the first couple of months of this year, when we actually saw it rise a little bit," said Frank Fiorille, vice president of risk management, compliance and data analytics at Paychex. "Now, for the last couple of months, that growth has definitely slowed, although this month, it slowed much less than it did last month."

Hourly earnings growth has slowed over 11 of the past 12 months, he noted, with significant slowdowns in the leisure and hospitality industry. He attributed the slowdown in wage growth to the Federal Reserve's successive interest rate increases since last year.

"It looks like wages are starting to come off the boil," he said.

The interest rate hikes are affecting small businesses' ability to access capital, however. with 77% of respondents to a recent survey by Goldman Sachs reporting they are concerned about their ability to access capital, a major shift from a year ago, when 77% said they were confident in their ability to access capital. In addition, 47% of banks surveyed by the Federal Reserve said they had tightened lending standards to small businesses that earn less than $50 million in the first three months of this year, according to Axios.

On the Paychex survey, the South led the way on small-business employment growth among regions for the 14th consecutive month at 100.47. North Carolina led in job growth among states for the 11th consecutive month at 101.48. Texas ranked in first place among states for both hourly (5.46%) and weekly earnings growth (4.99%). Houston was once again the top metropolitan area for small-business job growth for the seventh straight month. Houston also ranked in first place among metros for hourly earnings growth (5.34%) in May.

"Houston continues to be interesting in that they're not only the top metro on the index with the most employment but they're also the top on wages too," said Fiorille. "Typically, you don't see that. Typically, it's the other way around. It's interesting to see how strong Houston is, but Houston is very volatile. Depending on what happens with energy prices, Houston can be top for a long time and then go right to the bottom very quickly."

In terms of employment growth on an industry basis, "other services (except public administration)" maintained the top spot among sectors with a modest 0.10% increase in May to 101.39,  At 100.81, education and health services continued its strong pace of small business employment growth in May, moderating just 0.03%. Leisure and hospitality remained strong at 100.52 in May, but was 3.38% behind its job growth pace set last year (104.04).

Construction was the top sector for all three wage data components:  hourly earnings growth (4.89%), weekly earnings growth (5.00%) and weekly hours worked growth (0.35%).

Education and health services showed the weakest earnings growth among sectors, with hourly earnings growth of 3.69% and weekly earnings growth of 2.92%.

Hourly earnings growth in leisure and hospitality (4.74%) slipped below 5% for the first time in more than two years. Leisure and hospitality averaged 7.75% hourly earnings growth from April 2021 through April 2023.

The debt limit deal reached over the weekend in Washington may remove some of the uncertainty for small businesses about the economy, though it will mean roughly $20 billion less in funding for the Internal Revenue Service over 10 years.

One of the main challenges currently facing small businesses is the accounting pipeline. "We've been watching the shortage of accountants have an effect on small businesses," said Fiorille. "Firms are trying to do various things to increase the brand and dispel some of the negative perceptions of the industry."