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Franchise Industry to Strengthen in 2012

Chart: BMM. Data: IHS Global & World Bank

WASHINGTON — A trade association for franchising companies has developed a new economic index that measures the economic health of the franchise sector. The trade group says that the Franchise Business Index (FBI) was up 1.4 percent last month compared to February 2011.

Designed to provide more consistent and timely tracking of franchised businesses in the U.S. economy, the index was developed by IHS Global Insight on behalf of the International Franchise Association. The index combines indicators of growth in the industries where franchising is most prevalent and measures the general economic environment for franchising.

The adjacent chart tracks indices of gross domestic product and the Franchise Business Index.  Annual gross domestic product figures that are issued after the close of the year have been set at a baseline of 100 for the year 2000. That year the country's GDP was $9.8 trillion. The monthly Franchise Business Index also has been set at 100 as of January, 2000.

According to the franchise index figures, franchises have struggled to keep pace with the general economy.

"The franchise industry is a unique business sector and a vitally important contributor to the U.S. economy spanning some 300 lines of business, supporting nearly 18 million jobs, 825,000 establishments and providing for over $2.1 trillion in economic output," said IFA President & CEO Steve Caldeira. "Measuring the strength of the franchise industry through the Franchise Business Index provides another indicator of the health of the economy as a whole. While the index shows we are moving in the right direction, more certainty in the tax and regulatory environments would help franchise businesses grow faster, creating more jobs and economic output at the local, state and national levels."

Number of businesses that pay salary and wages versus number of franchised business establishments
Growth in number of establishments. Data: IHS Global, IFA

Following a period of flat to declining values in mid-2011, the report by researcher IHS Global says that the franchise index turned up in September and has shown increases of 0.3 percent in three of the last five months.

The researcher concluded that increases in the general labor market and small business optimism contributed most to the February gain in the FBI. An improvement in consumer demand, which had been flat at the end of last year, gave a small boost to the index. Credit conditions showed no change in February.

The trade group also released an update to its 2012 economic outlook prepared by IHS Global Insight in December 2011. The updated forecast shows little change from the initial forecast.

"Since our December 2011 forecast report was prepared, there have been a number of positive economic releases," said James Gillula, managing director at IHS Global Insight. "However, negative factors that could restrain an economic rebound remain."

U.S. business establishments as a whole that pay wages and salary are growing, up at the end of 2011 by 1.3 percent over the previous year. According to the IFA, franchise units during that year contracted (see all business vs franchised unit chart).

2012 looks to be much better for the industry than the previous years. The association says that a revised forecast shows that the number of franchise establishments in the United States will increase by 1.6 percent when 2012 is finished, down slightly from the original forecast of 1.9 percent.

Employment and economic output growth forecasts are unchanged at 2.1 percent and 5 percent respectively.

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