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

A SEVENTH INTEREST RATE CUT BY THE FEDERAL RESERVE WOULD HELP IDAHO’S SMALL BUSINESSES

• The Zions Bank Small Business Index for Idaho registered 78.8 in March 2008, down from a revised 79.5 in February 2008

• Idaho’s unemployment rate was estimated at 3.0% in the most recent month, up from the 2.8% rate of the prior month.  Idaho employment rose by an estimated 2,200 jobs during the past 12 months

• U.S. employment weakness suggests another interest rate cut later this month by the Federal Reserve, benefiting Idaho’s small business sector

• The U.S. economy lost an estimated 80,000 net jobs in March.  Data for the two prior months was revised to show even larger job losses.  The U.S. unemployment rate rose sharply to 5.1%

A FED SEVENTH
Weak March employment data, combined with greater job losses in the two prior months, strongly suggest that the Federal Reserve will cut its key interest rate on or before April 30 for a seventh time.  The Fed has already sharply reduced its federal funds rate six times since September 2007 by a total of 3.00%, pushing the rate to a current level of 2.25%.

While an additional rate cut is currently expected by financial market participants, the size of the next likely cut is subject to debate.  Some suggest that the Fed will need to cut the rate by an aggressive 0.50%, pushing the rate to 1.75%.  Others suggest that a 0.25% cut to 2.00% is more likely, which allows the Fed greater flexibility later if needed.  Still others suggest the Fed will do nothing in late April.

It is important to note that the Fed does not know at this time what it may do on April 30.  If financial market anxiety diminishes and equity markets perform better, the Fed may stay on the sidelines.  Conversely, if financial markets freeze up further, or equity markets see major price declines, the Fed will be more aggressive. 

Financing costs are a component of the Small Business Index for Idaho.  We assume that most small businesses are borrowers, with 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 3.0% in the most recent month, up from the 2.8% rate of the prior month.  The estimated 3.0% rate exceeds the 2.8% 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 2,200 jobs (up 0.3%) compares to a revised gain of 8,200 jobs in the prior year-over-year period.  Idaho added 17,200 jobs in 2007, 27,100 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 78.8 during March 2008, down from a revised 79.5 during February 2008.  The Index measures business conditions from the viewpoint of the Idaho small business owner or manager. 

NATIONAL EMPLOYMENT
The U.S. Department of Labor reported a net decline of 80,000 jobs in March 2008, the worst monthly decline in five years, and below the consensus forecast of a loss of 60,000 jobs.  Previously reported employment losses for January and February 2008 were revised lower by a combined 67,000 jobs. 

The U.S. unemployment rate was 5.1% in March, up sharply from February’s 4.8% rate.  The current 5.1% jobless rate is the highest in more than two years.  The average hourly wage rose 0.3% (five cents) to $17.86 hourly, a rise of 3.6% over the past 12 months.

Goods-producing employment continued to decline in March, with a net loss of 93,000 jobs.  Manufacturing lost another 48,000 jobs, while construction employment fell by 51,000 positions.

Minimal service-providing employment led the way in March with a rise of 13,000 net new jobs.  The education & health services sector added 42,000 net new jobs during the month, while the leisure & hospitality and the government sectors each added 18,000 jobs. 

The professional & business services sector lost 35,000 jobs during the month.  The estimated net decline of 232,000 jobs during 2008’s first quarter was a painful contrast to the estimated rise of 241,000 net new jobs during 2007’s final quarter.

The April 2008 Zions Bank Small Business Index for Idaho will be released on May 7, 2008.

©Copyright 2007 Thredgold Economic Associates