THIRD QUARTER 2007: THE ECONOMY AND SMALL BUSINESS

Trends

Real gross domestic product grew 3.9 percent in the third quarter of 2007, much faster than anticipated and comparable to second quarter growth. Strong growth in exports (assisted by a weak dollar) and solid gains in consumer spending helped fuel the rise in output. Real investment grew at an annualized rate of 0.9 percent. Its tepid growth is due to weakness in the housing market, which saw another decline in new housing starts. The production picture is mixed: industrial production rose an annualized 3 percent for the quarter but the manufacturing purchasing manager's index fell 4 points between June and September.Small business owners were more optimistic in September than in June, according to the National Federation of Independent Business's Optimism Index. The percent of businesses that see the next three months as a good time to expand is below the annual average of the past five years. The University of Michigan's consumer sentiment survey also shows a subdued outlook. The American public has continued to spend despite this negative mindset, as in several previous quarters.Unemployment rose slightly, to 4.7 percent in September from 4.5 percent in June, but the expanding economy generated 282,000 more jobs than it lost. Job losses in construction and manufacturing were more than offset by job gains in professional and business services, education and health services, leisure and hospitality, and government. Unincorporated self-employment hovered between 10.5 million and 10.8 million. Incorporated self-employment remained steady at 5.7 million.In September, the Federal Reserve lowered its federal funds target rate by 0.5 percent. Interest rates paid by small businesses and consumers moved in tandem. Many observers contend that the move was necessitated by credit concerns in the financial markets related to sub-prime lending. The Federal Reserve's Senior Loan Officers' Survey shows continued weakness in small loan demand and somewhat tighter lending conditions on net. The number of venture capital deals and amount invested fell slightly; however, these figures are similar to the readings found in third quarter 2006, with the total invested up by $300 million.Overall inflation remained under control, with the consumer price index rising an annualized 1 percent and producer prices falling 0.5 percent. Year-to-year inflation figures show a more substantial increase. Consumer prices, for example, rose 2.8 percent from

September 2006 to September 2007. One culprit is higher energy prices. The price of a barrel of West Texas crude oil rose $12.45 in the quarter, averaging just below $80 a barrel in September. Wages, salaries, and benefits increased an annualized 3.1 percent in the third quarter; however, wage and salary growth has outpaced the rise in benefit costs year-to-year (3.4 percent to 2.4 percent).