Paychex reported a continuing decline in the rate of growth in jobs and wages at small businesses in July, a sign that tax reform isn’t boosting the economy as much as the latest GDP numbers suggest.

According to the Paychex | IHS Markit Small Business Employment Watch, the Small Business Jobs Index was 99.34 in July, down 0.63 percent year-over-year. Hourly earnings growth was 2.42 percent, the payroll giant reported Tuesday. That was up $0.63 from a year ago, but since last July, hourly earnings growth has slowed 0.54 percent.

“We had a small drop in July in the monthly jobs growth rate,” said Paychex president and CEO Martin Mucci in an interview Thursday. “It’s down about 0.6 percent from last July, but there’s still moderate job growth. However, it’s been slower than where it’s been the last few years. We’re in a tight labor market and we would expect that to some degree.”

Employment growth was strongest in the South in July, while the West remained the best region for wage growth. With an index below 99, the Northeast was the weakest region for small business employment growth. The South has been the highest region for more than two years, but its employment growth has slowed the most year-over-year, by 0.79 percent.

“Pretty much all regions are down,” said Mucci. "The Midwest was up for the quarter a little bit in job growth, but all regions are down from last year, and under 100 on the index. They’re growing moderately in jobs for small business, but at a lower rate than they were in our index rate, which was 2004. The South is still the strongest. Manufacturing is up. Construction continues to be pretty good, particularly in the South, but it’s down from last year.”

With its fourth monthly jobs increase in a row, Arizona surged to become the top-ranked state for small business jobs, according to Paychex. At 100.91, Arizona’s employment growth increased 0.72 percent in July and 1.43 percent year-over-year. Michigan continued its recent surge with its third consecutive large gain, improving to 100.74. However, Michigan’s neighboring state to the south, Indiana, at 98.51, plummeted to last place among states and is at its lowest level in nearly eight years.

“Arizona and Michigan are the top states and Phoenix is the top city from a job growth perspective,” said Mucci. “You’re seeing the high minimum wage states like California, New Jersey and New York are in the bottom four from a jobs index basis.”

In terms of industries, the leisure and hospitality sector has dropped from above 100 in July 2017 to below 99 this July. With its 10th decrease in the past 12 months, the “Other Services (except Public Administration)” category of mostly discretionary services has slowed 2.70 percent, performing worst among industry sectors.

“Other Services are still number one, but certainly down for 10 months, but they’re down about 2.7 percent from last year,” said Mucci. “For Other Services, those discretionary services that people are spending money on, the job hiring rate is down, but it’s still a little higher than it was in our base year. Construction maintains pretty steady growth as well at 100 on the index. We’ve certainly seen a moderation in job growth in all sector categories.”

Wage growth has been growing steadily, according to official reports from the U.S. Bureau of Labor Statistics, but the survey from Paychex and its partner IHS Markit indicates it’s still lagging at small businesses.

“Wages continue to be the big question,” said Mucci. “Hourly earnings growth slowed a little bit year over year. It’s down to 2.42 percent. That’s still a little surprising given the tight labor market that wages aren’t going up a little bit more, but when we further survey small businesses, many of them said they did not have the profitability to increase wages to a certain amount. There’s been more investment in other things like automation, so I think they’re looking more longer term. There’s probably a need for it in the marketplace. They’re investing a little more in automation and don’t have as much left over for wage increases.”

The savings from the new tax law appear to be going to further automation in the workplace at many small businesses rather than wage and hiring boosts.

“I think many small businesses didn’t gain as much from tax reform as the large businesses,” said Mucci. “You do see a pickup in investment in automation in some of these small businesses. I think that’s a need of the market too, making sure they have the best websites. They’re spending on search engine tools and things like that because more prospects and customers are going on the web and looking for them. You’re seeing some investments being made in automation and in the web. They’re also sometimes giving more in benefits than wages and they’re hiring a little more part-time to make sure they meet all the demand. Many small businesses aren’t able to raise prices right now in the market, so they’re not feeling they have the profitability to be able to turn around and raise the wages at this stage.”

He believes accountants can help their small business clients by acting as trusted advisors to help them comply with labor laws, immigration and drug enforcement, and HR matters.

“As trusted advisors I think they could be asked more and more about human resource employee issues,” said Mucci. “We surveyed HR specialists who provide HR services to thousands of small businesses. Some of their biggest issues today are ICE enforcement actions, making sure they hire people who are U.S. citizens or legally OK to be hired, employee absenteeism and how to deal with that, and employee marijuana use. We have so many states that have different rules with medical marijuana or recreational marijuana, and drug testing. What do you do? Do you drug test and what do you do with the drug test results? It’s more of an HR thing, but as trusted advisors, I’m sure accountants are being asked about these things more and more.”

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