Zions Bank Small Business Index for Idaho
June 2008 Release
July 9, 2008

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

IDAHO’S SMALL BUSINESSES IMPACTED BY RISING INFLATION PRESSURES…THE FED TO THE RESCUE?

Highlights

• The Zions Bank Small Business Index for Idaho registered 72.9 in June 2008, down from a revised 74.6 in May 2008

• Idaho’s unemployment rate was estimated at 3.8% in the most recent month, up from the 3.6% rate of the prior month.  Idaho employment declined by an estimated 3,200 jobs during the past 12 months

• Rising inflation pressures have hurt thousands of Idaho’s small businesses.  The likely inflation “remedy” may not feel much better

• The U.S. economy lost an estimated 62,000 net jobs in June, matching expectations.  The U.S. unemployment rate remained at 5.5%, a four-year high

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Inflation…and the Fed

Ever increasing energy and food prices have placed greater pressure upon the Federal Reserve, the nation’s central bank, to address the inflation issue.  The Fed’s primary focus has now shifted from A) providing liquidity and monetary ease in whatever amount necessary to deal with one major domestic and global financial crisis after another, to B) making it clear that its primary focus is now inflation containment.

Even as the Fed undertakes this shift in focus, the path will be littered with obstacles.  The Fed cannot force energy prices lower.  It can, however, tighten monetary policy enough to minimize the impact of high energy costs on longer-term prices.  The most favorable development would be to see energy prices decline sharply during the next 6-12 months.

Financial markets are already “pricing in” expectations that the Fed’s next change to its key short-term interest rate—the federal funds rate—will be to move it higher.  The federal funds target rate has been at 2.00% since April 30, following seven rate cuts totaling 3.25%.  Some suggest the Fed could push its key rate higher as early as August 5, although most forecasters suggest that the Fed is more likely to keep the rate unchanged until later in the year…or early in 2009.

The Fed is not alone in its newfound focus on inflation containment.  Other central banks around the globe are also seeing opportunities to turn their primary attention away from the global credit squeeze and toward constraining inflation.

The state’s small business sector has been hurt by sharply higher costs for energy and numerous materials.  The inflation “medicine” that the Fed may deliver during the next year will also be painful to many small businesses.  The Idaho Small Business Index makes the assumption that most small businesses are net borrowers of operating funds.  As a result, higher short-term interest rates would be a negative development for many small businesses. 

Idaho Employment

The Idaho unemployment rate—the most heavily weighted component of the Zions Bank Small Business Index for Idaho—was estimated at 3.8% in the most recent month, up from the 3.6% rate of the prior month.  The estimated 3.8% rate exceeds the 2.7% 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 decline in Idaho employment estimated at 3,200 jobs (down 0.5%) compares to a revised gain of 1,500 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.

National Employment

The U.S. Department of Labor reported a net decline of 62,000 jobs in June 2008, matching economists’ consensus view, and the sixth monthly decline in a row.  Losses of the two prior months were revised to even greater declines by a combined 52,000 jobs. 

The U.S. unemployment rate was unchanged at 5.5% in June.  The 5.5% rate is the highest since October 2004.  The current 5.5% jobless rate compares to a 4.5% rate of one year ago.  The average hourly wage rose 0.3% (six cents) to $18.01 hourly, a rise of 3.4% over the past 12 months.

Goods-producing employment continued to decline in June, with a net loss of 69,000 jobs.  Construction employment fell by 43,000 positions, while manufacturing lost another 33,000 jobs.

Service-providing employment was also weak in June with a rise of only 7,000 net new jobs.  The education & health services sector added 29,000 net new jobs during the month, while the professional & business services sector lost 51,000 jobs.  The government sector added 29,000 net new jobs during the month, while the leisure & hospitality sector added 24,000 jobs. 

The estimated net decline of 438,000 jobs during 2008’s first half was a painful contrast to the average annual gain of 1.9 million net new jobs during 2005 to 2007.  However, the average loss of 73,000 jobs monthly during 2008’s first six months was much less painful than the 181,000 average monthly job loss during the 2001 recession.

The July 2008 Zions Bank Small Business Index for Idaho will be released on August 6, 2008.

Jeff Thredgold
Thredgold Economic Associates
Economic Consultant to Zions Bank
(801)614-0403

©Copyright 2008 Thredgold Economic Associates