Quarterly Trends Display Challenges Facing Small Business

This morning, the Small Business Administration's Office of Advocacy released its "third quarter trends" analysis. While these trends have been reported previously, seeing them all together underscores the challenging times small businesses in the U.S. are moving through. Following are the major trends, according to the report. (A PDF of the full report can be downloaded at the SBA Office of the Advocacy website.)
· The U.S. economy experienced weaknesses in the third quarter, as real gross domestic product fell 0.3 percent. Consumers, who helped lift GDP in the second quarter with their economic stimulus checks, reduced their spending by an annualized 3.1 percent in the third quarter, and real gross private domestic investment continued to fall, with an annualized 1.9 percent decline. Real exports remained strong, growing an annualized 5.9 percent; real imports declined 1.9 percent annually, resulting in an improved trade deficit. Meanwhile, manufacturing output declined, with the Institute for Supply Management’s manufacturers’ purchasing index down from 50.2 in June to 43.5 in September and the Federal Reserve’s industrial production index down an annualized 6.0 percent.
· Small business owners and consumers are pessimistic about the economy, with the University of Michigan’s consumer sentiment survey and the National Federation of Independent Business’s optimism index lower than desired. According to the NFIB survey, the next three months are not a good time to expand operations, to hire new workers, or to invest in new capital projects.
· The unemployment rate in August and September rose to 6.1 percent, its highest point since September 2003, and the U.S. economy has lost jobs each month in 2008, with 760,000 fewer nonfarm payroll jobs since December 2007. Every industry has seen employment losses, with the exception of four – education and health services, government, natural resources and mining, and other services. Some of the hardest hit industries were construction, manufacturing, retail trade, financial activities, and professional and business services. In the third quarter, unincorporated self-employment fell from 10.5 to 10.1 million; incorporated self-employment remained around 5.8 million.
· The Federal Reserve has expressed concern about weaknesses in the economy and in the credit markets. It has worked closely with the U.S. Treasury and Congress to shore up the health of banking and other financial institutions and to stimulate the economy. (The Emergency Economic Stabilization Act was enacted on October 3, and the Federal Reserve cut the federal funds target rate by another 50 basis points on October 29. The prime rate is now 4.25 percentage points lower than in September 2007.) Small business lending demand remains weak, according to the Federal Reserve’s Senior Loan Officers’ Survey, and venture investment has also fallen in the third quarter.
· Inflation remains an issue, although growth in producer prices has tapered off. Consumer prices rose an annualized 6.7 percent in the third quarter; when energy and food prices were excluded, the consumer price index grew 3.2 percent annually. The producer price index, which increased nearly 14 percent between September 2007 and September 2008, was up an annualized 2.5 percent in the third quarter. Wages and salaries and the cost of providing benefits rose 2.2 percent and 2.3 percent, respectively, on an annualized basis. The price of oil has fallen dramatically since peaking at over $145 per barrel in July. The average cost of West Texas crude was $103.90 in September. (It fell further to around $66 a barrel by the end of October.) Nonfarm labor productivity grew an annualized 1.1 percent in the third quarter.