The Art Of Doing Business: Finances, Taxes, The Economy and Profits

Real gross domestic product increased at an annualized 3.2 percent in the first quarter of 2010, its third quarter of positive growth and a sign of continued economic recovery. Overall output was buoyed by higher expenditures across the board, as consumers and businesses began to spend again. Real gross private fixed investment was up 14.8 percent on an annual basis, while real personal consumption and real exports rose an annualized 3.6 percent and 5.8 percent, respectively. Manufacturing output continued to rise, with both the Institute for Supply Management’s manufacturing index and industrial production figures up for the quarter.

Unemployment remained high at 9.7 percent, but nonfarm payroll increased by a net 283,000 jobs—a positive sign that hiring has turned a corner. Most major industries experienced net job growth during the first quarter of 2010, with the exception of construction, financial activities, and information. Unincorporated self-employment remained stable. Nonfarm labor productivity grew more modestly by an annualized 3.6 percent, somewhat less than last quarter’s 6.3 percent rate.

Mirroring broad economic trends, overall optimism was higher in the first quarter, especially relative to one year ago. While small business owners remain cautious and poor sales remain a top concern, a number of surveys (American Express, Discover, Intuit) indicate that many owners are also more hopeful than last year, and more willing to hire and invest in their businesses.

Interest rates remained low, with the Federal Reserve Board maintaining its target federal funds rate of near zero percent. Rates on small firm short-term borrowing of less than $100,000 ranged from 4.24 percent for less than one month to 5.55 percent for less than one year. The Senior Loan Officers’ Survey improved from the previous quarter but still reflected tighter lending conditions and overall weakened demand. There were fewer venture capital deals in the first quarter, but the $4.7 billion invested was 40 percent higher than last year. Meanwhile, SBA guaranteed lending volumes saw dramatic increases, particularly in the 7(a) loan program.

Overall inflation remained in check, with the consumer price index increasing by less than one percent on an annualized basis in the first quarter; the “core” inflation measure, which excludes food and energy costs, fell for the quarter. The producer price index, however, rose 12.2 percent on an annual basis for the quarter, reflecting higher prices for intermediate goods. The price of a barrel of West Texas crude oil, for instance, rose $7 for the quarter and $33 since March 2009. Average benefit costs for private sector employees increased an annualized 5.6 percent for the quarter, compared with a 1.4 percent rise in wages and salaries.