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January 2006
by James C. Musser, ASBA Washington Representative

The economic numbers are rolling in and 2006 is right on track for growth but there are also caution signs coming from abroad. The year ahead offers tantalizing potential for small business but dangerous developments in the Middle East could bring troubles especially in rising fuel costs. For now, however, the outlook is sunny based on strong growth in the last two quarters of 2005 and congressional promises to extend the Bush tax cuts for two more years or longer.

The U.S. economy grew at a robust pace in the last six months of 2005 averaging 3.7 percent during that time and unemployment dropped from 5% in November to 4.9 percent in December as more than 400,000 new jobs were created. The job creation in the aftermath of the damage caused by Hurricanes Rita and Katrina was indicative of the overall strength of the economy which added 2 million jobs for the year. Government forecasters are predicting that job growth will remain strong in 2006 and estimate that an average of 170,000 new payroll jobs will be added each month. As of this time, there have been 31 consecutive months of job increases which have added more than 4.5 million workers to the payroll. The Bureau of Labor Statistics is scheduled to report the employment numbers for January on February 3.

Despite the Federal Reserve’s policy of increasing short-term interest rates over the last year, long-term interest rates remain relatively low and, in fact, mortgage rates have gone down slightly after earlier increases. The stock and bond markets are eagerly waiting to see the results of the Federal Reserve Board’s next Open Market Committee meeting to see if the Fed is finished raising interest rates for now or if there will be further rate hikes to keep inflation out of the economy. The next rate-setting meeting is scheduled for January 31.

The Blue Chip Economic Outlook, a forecast based on a consensus of private forecasters, which is updated monthly, calls for healthy growth in 2006 averaging above 3 percent each quarter. Although consumer spending is expected to be down a bit in early 2006, increases in employment and wage gains and increases in business spending are expected to buoy overall spending in the economy.

The potential dark clouds in the economic outlook are a failure by Congress to extend the Bush tax cuts, which have been widely credited with fueling the economic expansion, and a crisis in the Middle East resulting from Iran’s drive to attain nuclear weapons. Congress is expected to take up the issue of extending or making permanent the Bush tax cuts after the President’s State of the Union Address at the end of January. Small businesses have much at stake in the bill including the permanent repeal of the Death Tax and permanent extension of the provision allowing for enhanced expensing for small business investments. Many small business owners would also benefit from proposed reforms of the Alternative Minimum Tax, reduced tax rates on capital gains and dividends, and all taxpayers stand to benefit from the permanent extension of the lower tax rates. ASBA will be closely monitoring all of these developments and reporting on any issues that might have an impact on small business people.

James C. Musser, Esq. is a legislative consultant based in Falls Church, Virginia. His reports are updated monthly.