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

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

HIGHLIGHTS

• The Zions Bank Small Business Index for Utah was 108.1 in January 2008, down from a revised 108.6 in December 2007

• Utah’s unemployment rate was estimated at 3.2% in the latest month, up sharply from the 2.8% rate of the two prior months.  Total Utah employment is up an estimated 44,800 jobs during the past 12 months

• Aggressive interest rate cuts in recent days by the Federal Reserve will benefit Utah’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 two 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 Utah.  We assume that most small businesses are net borrowers, with interest rate cuts reducing borrowing costs.

UTAH EMPLOYMENT
The Utah unemployment rate—the most heavily weighted component of the Zions Bank Small Business Index for Utah—was estimated at 3.2% in the latest month, up sharply from the 2.8% rate of the two prior months.  The 3.2% rate compares to a 2.5% rate during the same month one year ago.  A jobless rate of 2.3% in February 2007 ranked with the lowest ever recorded in the state and was the lowest in the continental U.S.  A higher Utah unemployment rate is a positive contributor to the Index as it implies increased access to Utah labor.

Utah’s unemployment rate averaged 2.6% in 2007, 2.9% in 2006, 4.3% in 2005, and 4.9% during the 2000-2004 period.  These rates compare to an average Utah unemployment rate of 3.5% between 1995 and 1999.

Total Utah employment rose by an estimated 44,800 jobs (up 3.6%) over the past 12 months.  The 3.6% rise is one of the stronger annualized Utah gains in more than 10 years, and is the strongest job growth rate in the nation.  This rise compares to a revised gain of 52,100 jobs in the prior year-over-year period. 

Utah added 53,200 jobs in 2007, 55,200 jobs in 2006, 43,700 jobs in 2005, and 30,200 jobs in 2004.  These totals compare to gains averaging 38,000 new jobs annually during the 1994-2000 period and a net loss of 1,300 jobs in 2001 through 2003.  More recently, weaker job gains, leading to lesser income creation and softer retail spending, have a negative impact upon Utah’s small businesses…and therefore, the Index. 

The Zions Bank Small Business Index for Utah was 108.1 during January 2008, down from a revised 108.6 during December 2007.  The Index measures business conditions from the viewpoint of the Utah small business owner or manager.    

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

LOCAL PERFORMANCE

Cache County employment grew by 1,200 jobs (2.3%) in the latest 12-month period.  The area’s jobless rate was 2.0%, up from the 1.8% rate of one year ago.

Weber County experienced job growth of 2,500 jobs (2.6%) from a year ago.  Joblessness registered 3.1%, up from the 2.7% unemployment rate one year ago.

Davis County payrolls expanded by 2,200 jobs (2.2%) in the past year.  The unemployment rate was 2.6% in the latest month, up from 2.4% one year ago.

Salt Lake County employment rose by 23,000 jobs (3.8%) over the year.  The county’s unemployment rate was 2.5% in the latest month, up from 2.3% last year.

Utah County employment grew by 7,300 jobs (4.0%) over the last 12 months.  The area’s jobless rate was 2.3%, up from the 2.2% rate of one year ago.

Washington County payrolls expanded by 2,100 jobs (4.0%) in the past year.  The unemployment rate was 2.8% in the latest month, up from 2.5% one year ago.

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 Utah will be released on March 11, 2008.

©Copyright 2007 Thredgold Economic Associates