The pace of small business job growth dropped slightly in May after a strong start earlier in the year, according to a new report from the payroll giant Paychex.

The Paychex | IHS Small Business Jobs Index, which the company compiles with the research firm IHS, declined 0.18 percent in May, from 100.77 to 100.59. Nevertheless, the pace of small business employment growth has increased 0.22 percent since the beginning of 2016.

“It’s roughly flat compared to a year ago, but the pace of small business job growth slowed a bit in May after a pretty hot start in ’16,” said Paychex president and CEO Martin Mucci. “We had a good start, but it’s dropped off a little bit. We’ll see if it’s a trend or not, but at this point we still feel like we’ve got pretty good job growth in small business, despite a little slowdown in May.”

At 101.72, the East South Central region topped the other regions on the index, gaining 0.40 percent, the best one-month growth rate. Washington remained the top-ranked state index, with its fifth consecutive increase in 2016. Continuing to hold the top spot among metro areas, Seattle’s index increased for the fifth straight month, hitting a record level in May of 104.97. After holding steady in April, small business growth slowed in every industry sector analyzed in May.

“About six of the nine regions decreased in May, but most of the positive results have been in the South, either the South Atlantic region or the East South Central, so the Southeastern states have been the most positive,” said Mucci. “That’s Florida, Georgia and North Carolina. The cities are hanging in there as well. Seattle still tops the index and had some nice growth over last year, but where you’re seeing some positive move is in Atlanta, Miami and places like that.”

Washington remained the top-ranked state index with its fifth consecutive increase in 2016. Georgia surged past its southern neighbors into second place with a 0.85 percent increase from April to May. Virginia was the only state to outpace Georgia in May, gaining 0.94 percent from the previous month as its index climbed five spots to sixth place. With Georgia, Florida, North Carolina, and Virginia, four of the top six states are located in the South Atlantic.

Small business employment growth slowed the most in Texas as its index hit a five-year low at 100.96, decreasing 0.74 percent in May. Illinois and neighboring Indiana had the two lowest 12-month growth rates among states, down 2.51 percent and 2.00 percent respectively from last year.

Continuing to hold the top spot among metro areas, Seattle’s index increased for the fifth straight month hitting a record level in May of 104.97. With the best one-month growth rate, at 0.82 percent, and boosting its index to 102.92, Atlanta overtook Dallas to become the second-ranked metro index. Dallas is at a four-year low, but remains in strong growth territory with an index above 102. May marks the seventh consecutive monthly increase for New York City, which has gained 1.85 percent year-over-year, second only to Seattle. San Francisco slowed 1.30 percent, its lowest one-month growth rate in more than seven years.

After holding steady in April, small business growth slowed in every industry analyzed in May. Top-ranked Other Services (except Public Administration) fell 0.23 percent in May from the previous month. At 98.82, Manufacturing remained the lowest industry index, but had the best month, declining only 0.02 percent. Education and Health Services is up 0.64 percent so far in 2016 and, at 101.08, is trending near levels not seen since early 2014. Construction maintained the second-highest ranking among industries, but had the lowest one-month growth rate once again in May. Employment growth slowed further in Professional and Business Services as its index level fell to 99.47, down -0.58 percent from last May and representing a four-year low.

“All sectors of jobs showed some decrease in May over April,” said Mucci.

So far, he hasn’t seen much impact on small business job growth from the Labor Department’s new overtime rule, expanding overtime pay to roughly 4.2 million more workers, but he noted it hasn’t gone into effect yet (see Obama Administration Expands Overtime Pay Eligibility). The new rule will take effect on Dec. 1, 2016. However, laws mandating minimum wage increases in different states and cities may be having some impact on job growth.

“We looked at states where there is a minimum wage increase, and where there is not,” said Mucci. “Those states that have a minimum wage increase seem to have a bit slower job growth for small businesses than those that don’t. Their index is lower, and their job growth is definitely lower.”

On the other hand, Seattle signed a minimum wage increase into law over a year ago, and it retains the top spot among metropolitan areas on Paychex’s index. In second place is New York City, which along with New York State will be seeing a minimum wage increase that was signed into law in April.

Mucci believes overregulation and the increase in licensing also could be having an impact on small business job growth. He cited a study by the Beacon Center of Tennessee that showed back in the 1950s, one in 20 businesses had to be licensed, compared to one out of three today.

“The costs of getting the license, the training and the fees have hurt some small businesses,” said Mucci. “Anything from pet grooming to shampooing hair seems to need a license now. We’ve gone amok with licensing.”

He advises accountants to be aware of the changing regulations faced by their clients in complying with all the new requirements. “Make sure that clients have the right wages in place under the rules for overtime and for paid leave,” said Mucci. “In the absence of federal online sales tax legislation, states are looking to pass more laws mandating the collection of sales tax if you have an online business. CPAs will want to watch that closely if they have clients who have online sales to make sure they’re following the right sales tax rules.”

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