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Written by Jeff Thredgold, President, Thredgold Economic Associates
Economic Consultant to LibertyBank
OREGON’S SMALL BUSINESSES TO BENEFIT FROM RECENT AGGRESSIVE INTEREST RATE CUTS BY THE FEDERAL RESERVE
Highlights
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 LibertyBank Small Business Index for Oregon. We assume that most small businesses are net borrowers, with interest rate cuts reducing borrowing costs.
In Oregon
The Oregon unemployment rate—the most heavily weighted component of the LibertyBank Small Business Index for Oregon—was estimated at 5.6% in the most recent month, up slightly from the prior month’s 5.5% rate, and slightly above the 5.4% rate of a year ago. A higher Oregon jobless rate is a positive contributor to the Index as it suggests greater access to labor for small businesses.
Oregon’s unemployment rate averaged 5.3% in 2007, 5.4% in 2006, 6.2% in 2005, and 7.4% during the period 2001-2004. By comparison, the Oregon unemployment rate averaged 5.2% during calendar year 2000, one of the lowest average annual rates in a generation. Oregon’s unemployment rate averaged 5.9% during the 1990s.
Oregon job creation was estimated at 26,700 jobs (up 1.8%) over the most recent 12-month period. This compares to a revised gain of 24,300 jobs in the prior year-over-year period. The economy gained 23,100 jobs in 2007, 47,700 jobs in 2006, 47,800 jobs in 2005, 32,400 jobs in 2004, lost a combined 43,500 jobs in 2001-2003, and gained 31,800 jobs in 2000.
Recent job gains compare to gains averaging 36,900 net new jobs annually during the 1990s. More recently, stronger job performance, leading to greater income creation and faster retail sales, has a positive impact upon Oregon small businesses…and therefore the Index.
The LibertyBank Small Business Index for Oregon registered 87.7 during January 2008, down from a revised 88.1 during December 2007. The Index measures business conditions from the viewpoint of the Oregon small business owner or manager. A lower Index number is associated with less favorable business “conditions” for Oregon’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 LibertyBank Small Business Index for Oregon will be released on March 12, 2008.
Jeff Thredgold
Thredgold Economic Associates
Economic Consultant to LibertyBank
(801)614-0403
©Copyright 2008 Thredgold Economic Associates
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