The Economy and Small Business Trends: First Quarter 2007

June 6th 2007

The Economy and Small Business Trends: First Quarter 2007


Overall economic growth slowed in the first quarter of 2007. Real gross domestic product grew at an annualized rate of 1.3 percent, down from 2.5 percent in the fourth quarter of 2006. Industrial production also grew slowly. Weakness in the housing sector is the primary reason for the slower growth. Housing starts averaged 2.1 million in 2005 but fell to an annualized 1.5 million in March 2007. Real gross private fixed investment fell by an annualized 6.5 percent in the first quarter. Most of the decline is attributable to housing. Excluding residential investment, investment grew by an annualized 2 percent. Real personal consumption expenditures increased by an annualized 3.8 percent.

Consumer and small business confidence remain at their 2006 averages, which is less optimistic than the past few years. The National Federation of Independent Business survey shows this pessimism affecting some small business owners’ view of the next three months; fewer of them are planning to expand their businesses or hire new workers. With that said, these survey responses are not evident in the economic statistics: personal consumption and the nation’s employment picture remain bright spots overall. These confidence indicators have tended to vary inversely with the price of oil; if the cost of filling up the gas tank is higher, the public tends to be more pessimistic on these surveys, and vice versa.

The unemployment rate in March 2007 was 4.4 percent, matching its recent low in October 2006—the lowest rate since May 2001. The economy generated 455,000 net new jobs in first quarter 2007 and almost 2 million since first quarter 2006. Employment rose in every industry except manufacturing. The bulk of these new jobs stemmed from trade, transportation, and utilities; financial activities; professional and business services; education and health services; and leisure and hospitality. Small businesses make up at least 40 percent of these sectors. Meanwhile, incorporated self-employment increased slightly.

Interest rates remained virtually unchanged over the previous year, after several increases in 2005 and 2006. Since first quarter 2005, rates for the smallest loans have risen over 2 percent. Higher rates may be beginning to affect the demand for small business loans. While most senior bank officers see no change in demand, a growing minority is observing weaker loan demand. At the same time, venture capital investment increased to a recent high of $7.1 billion in the first quarter, albeit with fewer deals.

The consumer price index rose 2.8 percent since March 2006 and the producer price index rose 4.6 percent. Core inflation, which excludes energy and food costs, is lower, especially at the producer price level. Private sector wages and salaries have grown 3.5 percent and benefits, 2.3 percent, since first quarter 2006.

Source SBA.