Investors Look to Small Business Hiring Gauges: EcoPulse
Intuit, maker of financial and tax-preparation software, will release on July 30 its monthly small-business employment index, which measures hiring at companies with fewer than 20 workers. Insperity, which offers human-resource services such as payroll processing to small- and mid-sized enterprises, will report on Aug. 1 the average number of work-site employees paid per month by its customers.
These data offer an “accurate handle” on employment trends at small- and medium-sized businesses, said Walter “Bucky” Hellwig, who helps manage $17 billion in Birmingham, Alabama, at BB&T Wealth Management. In conjunction with other indicators from the private sector, investors can use the numbers to identify changes in hiring more quickly than relying on government data alone, he said.
“It’s important to follow this industry because historically, that’s where most of the job growth comes from,” Hellwig said. Small businesses have a “leading edge” because they have more flexibility to add headcount quickly when the economy improves, he said. Amid recent gains in total payrolls, “any divergence from that would call for further investigation.”
U.S. employers added 195,000 workers in June, the third consecutive month when gains exceeded the median estimate of economists surveyed by Bloomberg News. This capped 12 consecutive months above 100,000 -- the longest such streak since the 33 months ended in May 2000. The Labor Department will announce July figures on Aug. 2.
Intuit’s small-business employment index rose to 95.1 in June -- the highest since 2009 -- from 95 in May, according to data from the Mountain View, California company.
“These smallest employers are important to the economy as they comprise 87 percent of the total U.S. private-employer base and employ 19.4 million people,” Intuit said in a description of its index.
Insperity forecasts that its customers’ average number of work-site employees paid per month will increase by as much as 2.2 percent to 127,000 in the second quarter from 124,219 a year ago. The Kingwood, Texas-based company processes payrolls for between 5,000 and 6,000 businesses with an average headcount of “slightly less than 20 people,” so its report is “good for gleaning broader conclusions” about the pace of hiring, said Tobey Sommer, an analyst in Atlanta at SunTrust Robinson Humphrey Inc.
Insperity also will release its earnings and the results of its quarterly small-business confidence survey on Aug. 1. Owners were “showing a willingness to hire more employees amidst signs of expanding business activity,” the company said April 29 in releasing the previous survey.
Analysts and investors monitor both quantitative and qualitative measures of small-business labor demand, especially because “there hasn’t been a uniform trend” across a variety of metrics, Sommer said. “We’re still muddling forward.”
Hiring among these companies “is a challenging number to effectively capture,” so using a combination of data helps provide an “overall sense of what’s happening,” said Timothy McHugh, an analyst in Chicago at William Blair & Co.
The National Federation of Independent Business’s optimism index decreased to 93.5 in June from 94.4 in May, a one-year high. This showed that sentiment remained in “tepid territory,” the group said in a July 9 statement.
CBIZ Inc. (CBZ) echoed this, as “some small-business owners are still tepid about their growth prospects,” Philip Noftsinger, president of CBIZ Payroll Services, said in a July 5 statement. The company’s small-business employment index -- a barometer for hiring trends at companies with 300 or fewer workers -- fell by 0.21 percent in June from the previous month after a 1.91 percent increase in May, according to figures from the Cleveland-based company.
Paychex Inc. (PAYX)’s checks per payroll is another useful macroeconomic barometer, tracking changes in employment at the Rochester, New York-based company’s customers, McHugh said. Paychex, which processes payrolls and provides other human-resource services for small- and medium-sized businesses, said June 26 that the number rose 0.9 percent in the three months ended May 31, though the “trend is definitely towards moderation,” Chief Financial Officer Efrain Rivera said on a June 27 conference call.
Paychex also reported fiscal fourth-quarter revenue on June 26 of $585.3 million, falling short of the $586.2 million average analysts’ estimate, according to data compiled by Bloomberg. For fiscal 2014, sales are projected to be about $2.45 billion, based on the outlook provided by the company. That missed the consensus estimate of almost $2.47 billion. Revenue for the fiscal year ended May 31 totaled $2.33 billion.
Paychex shares lagged behind the Standard & Poor’s 500 Index by 4.3 percentage points on June 27, though the stock has rebounded to lead the broader market by about 2.8 percentage points since then. This shows that investor sentiment is improving despite the company’s sales outlook, said Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. and a chartered market technician.
Some “signs of life” that a slow recovery is under way would bode well for Paychex, as industries hardest hit during the recession -- such as construction -- are now in the early stages of a rebound, McHugh said. He maintains an outperform recommendation on Paychex in part because it would “benefit from a recovery in the small-business hiring environment.”
Shares of Insperity have outpaced the S&P 500 by 13 percentage points since April 26, the trading day before it announced first-quarter results. Intuit’s stock is leading the market by about 12 percentage points since May 21, when it announced fiscal third-quarter earnings.
Some obstacles remain for employment gains at small businesses. Many of the jobs they create are part-time positions, which could be exacerbated by regulations related to the Affordable Care Act, said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc. (FII), which oversees about $380 billion. Employers trying to bypass the government mandate to provide full-time workers with health insurance may split one 40-hour-a-week job into two 20-hour positions, he said.
“A job’s not what a job used to be,” which could reduce the usefulness of data he previously surveyed, Creatura said. “There may be more paychecks being issued, but that’s not necessarily a symptom that small business is thriving.”
President Barack Obama’s administration announced July 2 that it will delay the employer mandate until 2015, giving companies with 50 or more workers another year to plan for these changes. This postponement pushed out the sequence of events that’s making it difficult for business owners to estimate labor costs, Creatura said.
The Federal Reserve’s policy-making Open Market Committee noted concerns among some employers, particularly smaller ones, about the implications of the new regulations, according to the minutes of its June 18-19 meeting released July 10.
While McHugh says companies may wait until next year to take actions such as splitting full-time jobs, Hellwig said data from Paychex and Insperity could show whether the process has already begun. That’s why any evidence of a slowdown would be particularly disconcerting, Hellwig said, adding that investors would be wise to monitor comments from company executives about underlying demand.
“We still need to look at numbers like these to help build the fundamental case as to whether economic and employment growth are self-sustaining,” he said.
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