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Economists forecast continuing financial challenges for small businesses across Utah

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Utah's small businesses will continue to fight the headwind of rising short-term interest rates

Economic forecasts suggest that Utah's small businesses will face increased challenges in the viewable future.

Jeff Thredgold, economic consultant for Zions Bank, indicated that the challenges will occur due to a variety of factors, most notable unemployment rates and interest rates.

As a result, the state's small business index for Utah declined to 114.3 in June 2005, down from 14.6 in May 2005.

"Oil-induced inflation fears in the American economy will lead to additional monetary tightening by the Federal Reserve in coming months. We expect a tenth 0.25 prcent tightening move on Aug. 9, with the likelihood of one or two further moves on Sept. 20 and/or on Nov. 1," said Thredgold.

The United States Federal Reserve's open market committee surprised no one on June 30 with its ninth consecutive 0.25 percent monetary tightening move within the FOMC framework.

The open market committee meets roughly every 45 days and reassesses the current level of monetary policy.

"The Fed has been very deliberate in its tightening moves since June 2004. The most recent move increased the federal funds rate - arguably the most important of all interest rates - to a new target level of 3.25 percent from the prior target of 3 percent," commented Thredgold.

An analysis of the June 30 FOMC statement suggested that more tightening moves are on the way.

The index assumes that most small firms are borrowers. As a result, rising short-term interest rates are a negative contributor to the index.

The Utah unemployment rate - the most heavily weighted component of the small business index - was estimated at 4.9 percent for the latest month.

The latest unemploynent level compares the 5.3 percent joblessness reported statewide last year.

"A lower Utah unemployment rate is a negative contributor to the Index as it implies decreased access to Utah labor," said Thredgold.

Utah's unemployment rate averaged 5.2% in 2004, 5.7% in 2003 and in 2002, and 4.4% in 2001. By comparison, the 3.4% average during 2000 was one of the lowest annual rates since the early 1950s. These rates compare to an average Utah unemployment rate of 3.5% between 1995 and 1999.

Total Utah employment rose by an estimated 36,900 jobs (up 3.4%) over the past 12 months. This rise compares to a revised gain of 37,300 jobs in the prior year-over-year period. 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.

"Stronger job gains, leading to greater income creation and rising retail spending, has a positive impact upon Utah's small businesses," summarized Thregold.

The Zions Bank Small Business Index for Utah was 114.3 during June 2005, down from a revised 114.6 during May 2005. 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 also includes revisions to various historical or forecast components as they become available.

The U.S. Department of Labor reported a gain of 146,000 net new jobs in June 2005. Gains for April and May were revised upward by a combined 44,000 jobs. The U.S. economy added 1,088,000 net new jobs in 2005's first six months.

The U.S. unemployment rate was 5.0% in June, down from May's 5.1% rate. The 5.0% rate was the lowest since September 2001. June 2003's 6.3% rate was the highest in nine years.

Goods producing industries saw a loss of 4,000 jobs in June, led by the loss of 24,000 manufacturing jobs. Construction added 18,000 jobs last month. Service providing industries added 150,000 positions in May, with health care and professional and business services leading the way.

"Solid U.S. and global economic growth remains on track. We expect an average gain of 170,000-190,000 net new jobs monthly this year, in line with the 183,000 average monthly gain during 2004. Reasonable job gains should occur even as short-term interest rates continue to rise," said Thredgold.

The July 2005 Zions Bank Small Business Index for Utah will be released on August 9.

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