IFA: Franchise Businesses Outperform Economy 0.6% in August

WASHINGTON, Sept.  20-The franchise industry continues to outperform the overall economy, according to the latest Franchise Business Index (FBI), which showed an increase of 0.6 percent in August, erasing declines of 0.3 percent in each of the previous two months.  A dip in the unemployment rate due to 368,000 people dropping-out of the workforce, and a rise in the number of self-employed in the economy contributed most to the gain in the index. The small business optimism index also rebounded in August after three consecutive months of decline, and the composite indicator of employment in franchise-intensive industries continued to make a positive contribution to the index.

“Franchises remain a bright spot in the economy, consistently growing and creating jobs despite inaction by Congress on tax extenders or addressing the impending fiscal cliff. A short-term deal that prevents the fiscal cliff at the end of the year would serve as a critical bridge and provide some much-needed certainty, until lawmakers in the next Congress can consider a comprehensive overhaul of the tax system, so extending the tax rates would be a great place to start,” said IFA President & CEO Steve Caldeira. “The closer we get to the fiscal cliff, the less confidence both prospective and existing franchisees will have about investing in franchise businesses.”

Designed to provide more-timely tracking of the growing role of franchise businesses in the U.S. economy, the Franchise Business Index was developed by IHS Global Insight on behalf of the IFA Educational Foundation. The FBI combines indicators of growth in the industries where franchising is most prevalent and measures the general economic environment for franchising.

Among other components of the index, consumer spending in franchise-intensive categories of goods and services increased marginally, and the small business credit conditions component showed no change.  The FBI was up 2.0 percent on a year over year basis in August.

“Although the growth of franchise business sales continues to be hampered by weakness in consumer spending, the franchise sector continues to slightly outperform the economy as a whole in growth of employment and the number of business establishments,” said IHS Global Insight Senior Economist James Gillula.

New franchise business formation for 2012 is down from previous forecasts and job creation remains flat amid uncertainty about the impending fiscal cliff,  anticipated higher taxes and lack of credit , according to a third quarter update of IFA’s 2012 economic forecast released this month.

According to IFA’s updated 2012 forecast, prepared by IHS Global Insight:

  • The number of franchise establishments in the United States will increase by 1.5 % in 2012 (down from the initial forecast of 1.9 % growth), to 747,069 or 10,955 new businesses. This growth compares to a decline of 3,984 establishments in 2011 and is the first time since 2008 the industry will add new units.
  • Since 2008, the industry lost more than 23,000 establishments due to the recession and its lingering effects on consumer confidence, the housing market, credit access, and jobs.
  • Direct employment in franchise establishments will increase by 2.1% in 2012, from 7.9 million to 8.1 million, or 167,000 new jobs. This growth compares to 150,000 new jobs in 2011. The rate of job growth compares favorably to the overall private sector, with an estimate of only 1.8 % in 2012. 
  • The economic output of franchise establishments has been revised slightly downward to show a 5.2% increase in 2012 (down from the midyear forecast of 5.3%). Output of the franchising industry will increase by $39 billion in 2012 compared to a $35 billion gain in 2011. 

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