Written by Jeff Thredgold, President, Thredgold Economic Associates
Economic Consultant to Zions Bank

IDAHO’S SMALL BUSINESSES TO BENEFIT FROM RECENT AGGRESSIVE INTEREST RATE CUTS BY THE FEDERAL RESERVE

• The Zions Bank Small Business Index for Idaho registered 89.2 in January 2008, down from a revised 90.4 in December 2007

• Idaho’s unemployment rate was estimated at 3.1% in the most recent month, up from the 3.0% rate of the prior month.  Idaho employment rose by an estimated 9,100 jobs during the past 12 months

• Aggressive interest rate cuts in recent days by the Federal Reserve will benefit Idaho’s small business sector

• The U.S. economy lost an estimated 17,000 net jobs in January, sharply below expectations.  The U.S. unemployment rate moved from a two-year high of 5.0% to 4.9%

AN AGGRESSIVE FED

The Federal Reserve, the nation’s central bank, sharply reduced its key interest rate—the federal funds rate—twice during the past few weeks.  These policy moves were undertaken in an effort to prevent a U.S. recession from occurring or to minimize the impact should a recession occur. 

The surprising 0.75% rate cut announced on January 22, 2008 was the largest single rate reduction in 24 years and the first rate cut to occur outside of the Fed’s regular meeting schedule in six years.  This aggressive move was followed by another 0.50% cut at the Fed’s regularly scheduled FOMC meeting on January 30, 2008. 

The Federal Reserve had previously reduced the federal funds rate by 0.50% on September 18, followed by 0.25% cuts on October 31 and on January 11.  The federal funds target rate is now at 3.00%, down sharply from the 5.25% level of mid-September.  Our forecast assumes that the Fed will follow with another 0.50% rate cut on or before March 18, 2008.

Weakness in the nation’s housing sector, bolstered by the national media’s constant negative reporting, has now spread to other sectors in the economy.  In addition, domestic and global credit markets have been at a heightened state of anxiety since August 2007, inhibiting credit flows around the globe.  The Federal Reserve and other central banks around the world, particularly the European Central Bank, have provided credit markets with enormous amounts of temporary liquidity to enhance credit flows.

Financing costs are a component of the Zions Bank Small Business Index for Idaho.  We assume that most small businesses are net borrowers, with interest rate cuts reducing borrowing costs.

IN IDAHO
The Idaho unemployment rate—the most heavily weighted component of the Zions Bank Small Business Index for Idaho—was estimated at 3.1% in the most recent month, up from the 3.0% rate of the prior month.  The estimated 3.1% rate is above the 3.0% rate of one year ago.  A higher Idaho unemployment rate is a positive for the Index as it implies greater labor availability for Idaho’s small businesses.

The Idaho jobless rate averaged an estimated record low of 2.6% in 2007, 3.4% in 2006, 3.9% in 2005, and 5.0% during the period 2000-2004.  By comparison, the Idaho jobless rate averaged 5.6% during the 1990-99 period.

The latest 12-month rise in Idaho employment estimated at 9,100 jobs (up 1.1%) compares to a gain of 11,100 jobs in the prior year-over-year period.  Idaho added an estimated 16,000 jobs in 2007, 28,300 jobs in 2006, 23,400 net new jobs in 2005, and an average of 7,100 jobs annually during the 2001-2004 period. 

These totals also compare to gains averaging 17,600 net new jobs annually during the 1991-2000 period.  More recently, weaker job growth, leading to slower income creation and softer retail spending, has a negative impact upon Idaho’s small businesses…and therefore, the Index.

The Zions Bank Small Business Index for Idaho came in at 89.2 during January 2008, down from a revised 90.4 during December 2007.  The Index measures business conditions from the viewpoint of the Idaho small business owner or manager. 

A lower Index number is associated with less favorable business “conditions” for Idaho’s small businesses.  The Index uses 100.0 for calendar year 1997 as its base year.  The Index also includes revisions to various historical and new forecast components as they become available.

NATIONAL EMPLOYMENT
The U.S. Department of Labor reported a net decline of 17,000 jobs in January 2008, the first decline in more than four years, and below the consensus forecast of a gain of 70,000 jobs.  The previously reported employment gain for December 2007 was revised higher by 64,000 jobs to 82,000.  

The U.S. unemployment rate was 4.9% in January, down slightly from December’s 5.0% rate, the highest in two years.  March’s 4.4% jobless rate matched that of October and January 2006 as the lowest in more than five years.  The average hourly wage rose 0.2% (four cents) to $17.75 hourly, a rise of 3.7% over the past 12 months.

Goods-producing employment continued to decline in January, with a net loss of 51,000 jobs.  Manufacturing lost another 28,000 jobs, while construction employment fell by 27,000 positions.

Service-providing employment led the way in January with a rise of 34,000 net new jobs.  The education & health services sector added 47,000 net new jobs, while the leisure & hospitality sector added 19,000 jobs.  The professional & business services sector lost 11,000 jobs during the month, while the government sector lost 19,000 jobs. 

Revised estimates now suggest the U.S. economy added 1.14 million net additional jobs in 2007, an average of 95,000 net new jobs monthly, and the weakest year for job gains since 2003.  The 95,000 average monthly gain was down 46% from the 175,000 average monthly gain in 2006. 

The February 2008 Zions Bank Small Business Index for Idaho will be released on March 12, 2008.

©Copyright 2007 Thredgold Economic Associates