Small Business Optimism Up

August 10, 2005--The Federal Reserve raised interest rates by a quarter-point for the tenth straight time Tuesday, lending credence to reports that the small business climate is improving.

The hike brings the Fed funds rate to 3.5%, up from 1% in June 2004, when the central bank first began raising rates. In a statement, the Federal Open Market Committee cited growth in productivity, increased spending, and improvements in the labor market as evidence of the economy's strength. Despite the possibility that the Fed's action could discourage consumer spending, University of Rochester economist Mark Zupan said that the announcement was a good sign for small businesses.

"The Fed is inferring that the economy is stronger than expected," Zupan said. "If you are a small business owner this is a signal that you should be bullish." Zupan added that despite the rate hikes, long-term interest rates remain at historically low levels.

The National Federation for Independent Business released a report Tuesday that could indicate small business owners are already feeling bullish. The association said that its "optimism index," a component of its monthly small business trends survey, had increased slightly in July after remaining unchanged in June, thanks largely to improved sales expectations, increased hiring, and strong capital spending. But the survey's authors cautioned that rising oil prices and a slowdown in the housing market represent potential threats to small business.

A separate report issued by the Labor Department offered more good news, as second quarter productivity gains outpaced increases in labor costs -- a sign that employers are getting more bang for their labor buck.

Sounding a different note, productivity grew by only 2.2%, slowing from its 3.2% pace in the first quarter. As well, unit labor costs went up by just 1.3%, down from 3.6%. Zupan said that the productivity slowdown should not be a cause for concern since labor costs slowed down more dramatically. "[The report] indicates that the cost of doing business is going down," he said. "This should fundamentally help consumers and free up purchasing power."