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Small-business job growth as a gauge of US economic health

22 July 2014 James Diffley

Small businesses with fewer than 50 employees comprise 95% of all companies in the US and play a central role in driving the economy. Tracking the employment trends of these businesses is a valuable way to gauge both the small-business employment picture and trends within the larger economy.

The Paychex/IHS Small Business Jobs Index, launched earlier this year, analyzes year-over-year worker count changes, trending the results to reveal movement in small-business employment conditions-with an upward trend representing a strengthening job market and a downward trend signifying a slowdown. Each month, the index provides two numbers-the absolute level of the index (using 100 as a base), and the growth or decline of the index from month to month expressed as a percentage-for the US as a whole; for each of the nine US Census regions; for the country's 20 most populous states; and for the 20 most populous metropolitan regions (see figure).

Published on the Tuesday prior to the first Friday of each month, the index is derived from a comparison of the change in employment in about 350,000 small businesses during the previous year. The index released at the beginning of July 2014, for example, is based on the change in small-business employment from June 2013 to June 2014. The growth of the index compares this change with the change in employment from May 2013 to May 2014. In this way, normal seasonal variation is filtered out to provide as accurate a picture as possible of underlying employment and economic growth.

The index relies on actual payroll information from a large subset of Paychex clients, rather than surveys, to generate the data each month. As such, the index is not intended as a predictor of future trends. By the same token, since the index is based on actual payroll data, rather than estimates, monthly revisions are not needed.

The methodology uses a "same-store" approach that incorporates in the data analysis only those small businesses that were open a year earlier-just as large retailers do to compare sales over a certain period with the same time period from the past. Retailers use this method to understand revenue gains or losses from existing stores, eliminating the distortion generated by the opening of new stores during the period being analyzed. In the case of the index, this apples-to-apples comparison allows for analysis of worker-count changes during a 12-month period.

Index data tracking back to 2005 is available on the Paychex/IHS Small Business Jobs Index website to allow for comparison of current economic performance against past periods-making the index potentially valuable to business leaders, policymakers, analysts, and economists. Additional data is available for a fee.

Jim Diffley Senior Director, US Regional Economics, IHS Economics
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