May 5, 2005--Slower growth in the gross domestic product (GDP), rising energy costs, and increasing interest rates dampened economic conditions for small businesses during the first quarter of 2005, according to the Small Business Administration Office of Advocacy's Quarterly Indicators: The Economy And Small Business report released today.

Small business owner and consumer optimism has weakened from highs in 2004, yet the direction is still positive, said the Small Business Administration (SBA). The National Federation of Independent Business Optimism Index averaged 103.3 during the quarter, indicating that the small business sector is still growing, according to the SBA.

Overall, real GDP increased at 3.1% during the first quarter of 2005, compared to 3.8% during the same period last year.

"The economy cooled in the first quarter of 2005 as higher energy costs weighed on the public's mind," said Dr. Chad Moutray, chief economist for the SBA's Office of Advocacy.

Energy prices played a key role in the first quarter of 2005. The average price of West Texas crude reached $54.31 a barrel in March 2005 -- almost $11 more than the December 2004 average.

Higher energy costs increased consumer prices. Between December 2004 and March 2005, consumer prices rose at an annualized rate of 4.25%, with 1.37 percentage points of the rise attributable to energy costs. Producer prices followed a similar pattern, said the SBA.

Real personal consumption expenditures and capital spending saw annualized growth rates of 3.5 and 5.0%, down from 4.2 and 10.5%, respectively. However, there has been an increased demand for goods and services in trade sectors. Real exports and imports rose at annualized rates of 7.0 and 14.7%, respectively.

This has sustained the appetite for small business commercial and industrial loans, despite rising interest rates, said the SBA.

In the first quarter, interest rates rose as policymakers tried to reduce inflationary pressures. The average prime-lending rate rose to 5.4%, compared to an average of 4.3% in 2004. On Wednesday, the Federal Reserve hiked the federal funds interest rate by a quarter-percentage point to 3%.

For small loans, the variable rate for short-term loans between one month and one year increased to 6.6%, up from 6.1% during the first quarter of 2004.

The positive news seems to be on the job creation front. The unemployment rate fell to 5.2% in March 2005, down from 5.4% in February. The current unemployment rate is lower than the 5.5% registered in 2004. Additionally, the economy has added 477,000 new jobs so far in 2005. Incorporated self-employment has grown to 5.4 million, up 500,000 for the year. All industries except for manufacturing, which lost 20,000 jobs during the first quarter, contributed to the gains.

The four industries with the largest percentage of small business employment -- construction, other services (business, IT, health, etc.), wholesale trade, and leisure and hospitality -- added 135,000 new jobs.