NABE Business Conditions Survey

July 2022

NABE Survey Panel Indicates Some Slowing in U.S. Economy

As Input Costs Remain High and Profit Margins Moderate

The July 2022 NABE Business Conditions Survey report presents the responses of 58 NABE members to a survey conducted July 5-July 13, 2022, on business conditions in their firms or industries, and reflects second-quarter 2022 results and the near-term outlook. 

“The results of the July 2022 NABE Business Conditions Survey show indications of a slowing U.S. economy,” said NABE Vice President Julia Coronado, founder and president, MacroPolicy Perspectives LLC. “A majority of surveyed firms still reports rising sales, but that share declined sharply from last quarter.”

“Rising materials and labor costs are squeezing profit margins at many firms,” added NABE Business Conditions Survey Chair Jan Hogrefe, chief economist, Boeing Commercial Airplanes. “The July survey shows more firms reporting declining profit margins than rising margins for the first time since the October 2020 survey.”

“Perceived recession risks are also rising among respondents,” continued Hogrefe. “While a small majority still puts the chances of a recession in the next 12 months at less than 50-50, 43% of panelists rate a recession in that time as more likely than not, compared to 13% who held that view in the April survey.”

HIGHLIGHTS

• Nearly half (47%) of respondents reports rising sales in the second quarter (Q2) of 2022—a drop of 14 percentage points from the share of respondents reporting rising sales in April. The Net Rising Index (NRI) for sales—the percentage of panelists reporting rising sales minus the percentage reporting falling sales—decreased to 30 from the April survey, down 22 percentage points, and the lowest reading since the July 2020 survey. The forward-looking NRI for anticipated sales over the next three months also fell to its lowest level since July 2020.

• The share of respondents reporting rising profit margins at their firms declined to 22%, down from the 26% share in the April survey. The NRI for profit margins is -9, falling into negative territory for the first time in almost two years and the lowest NRI for profit margins since the July 2020 survey.

• The NRI for prices charged in the second quarter (Q2) of 2022 fell to 42, down from 46 in Q1—putting the NRI 11 points off its record high in the January 2022 survey. Looking ahead, 50% of respondents expect the prices their firms charge to increase, up one percentage point from the April 2022 survey.

• The NRI for materials costs in Q2 2022 is 76, the highest reading since the question was first asked in 1994. Seventy-eight percent of panelists report rising materials costs at their firms, while only 2% indicate falling materials costs.

• Fifty-five percent of respondents report that wages rose in Q2 2022, down from a record-high 70% in the April survey. The outlook for wage increases is moderating as well, with the NRI for expected wages declining to its lowest reading since April 2021.

• The share of respondents reporting rising employment at their firms (38%) is at a four-year high. Looking ahead, however, respondents are less optimistic than they were in the April survey. Twenty-four percent of respondents expect employment to rise at their firms in the next three months, the smallest share since the October 2020 survey.

• Capital outlay increases were less prevalent at panelists’ firms in Q2 2022, with the NRI for capital spending falling to 22 from 40 in the April survey. Pessimism regarding capital spending carried into the forward-looking NRI, with 28% of panelists anticipating rising spending in the next three months, down from 43% in the April survey.

• The NRI for equipment, information, and communications technology spending fell to 38 from 47 in the April 2022 survey. The forward-looking NRI for equipment and IT spending also fell, declining to 30 in the current survey from 48 in the April survey.

• The NRI for capital spending on structures is 15, the highest reading since the October 2015 survey. However, the NRI for anticipated capital spending on structures fell to 0 from a multi-year high of 18 in the April 2022 survey.

• Record-high percentages of panelists report shortages of materials inputs at their firms, in a series dating back to 1987. More than one in five respondents (21%) report a shortage of intermediate inputs, while 16% report a shortage of raw-material inputs. In addition, the share of respondents reporting labor shortages at their firms remains elevated: 52% report shortages of skilled labor and 16% report shortages of unskilled labor.

• About one-third (35%) of panelists expects labor shortages at their firms to last until 2023 or later. Fourteen percent expect material and other input shortages at their firms to abate in 2023 or later.

• Overall, panelists report that the biggest downside risks to their firm’s outlook are increased cost pressures (cited by 31%) and higher interest rates (22%), followed by rising COVID-19 cases (12%) and supply chain disruptions (10%).

• Panelists report the biggest upside risks for their firms are faster-than-expected ramping-up of supply chains (22% of respondents), lower-than-expected interest rates (19%), rapid increase of people returning to the labor force (12%), and falling input costs (10%).

• A majority of respondents indicates their firms are passing on cost increases to customers. Fourteen percent of respondents report their firms are passing on all or nearly all cost increases to customers, while 48% indicate their firms are passing on some cost increases.

• A minority of respondents indicates higher interest rates are affecting their firm’s investment decisions. Fifty-six percent of respondents report interest rates do not affect their company’s investment strategies. However, 18% note that higher rates have resulted in the postponement or cancellation of some projects.

• Thirty-four percent of panelists report that their firms are monitoring regulatory changes to factor climate change into their operations. Thirty-one percent are making changes to the products or services being offered by their firms, and 22% of respondents are making changes to input sourcing.

• The largest share of panelists (43%) in the current survey puts the probability of a U.S. recession in the next 12 months at greater than 50%, a sharp increase from the 13% of panelists who held this view in the April 2022 survey. (The “next 12 months” extends through Q2 2023 in the July survey, and through Q1 2023 in the April survey.) Another 40% of panelists rate the odds of recession in the next 12 months at 26-50%. The remainder places the odds at 11-25% (14% of panelists) or 0-10% (3% of panelists).