NABE Business Conditions Survey

October 2019

NABE Panel Reports Less Growth of Sales, Profit Margins, and Capital Spending Last Quarter, and Tariffs Are Disrupting Business Conditions

The October 2019 NABE Business Conditions Survey report presents the responses of 101 NABE members to a
survey conducted September 26–October 14, 2019, on business conditions in their firms or industries, and reflects
third-quarter results and the near-term outlook.

COMMENTS: “Results from the October 2019 NABE Business Conditions Survey show that the U.S. economy appears to be
slowing, and respondents expect still slower growth over the next 12 months,” said NABE President Constance Hunter, CBE,
chief economist, KPMG. “Many of the survey indicators in this report are at their lowest levels in several years. It is important
to note, however, that all respondents still expect the current economic expansion to continue over the next 12 months.
But, on balance, panelists expect slower growth than they did three months ago. After more than a year since the U.S. first
imposed new tariffs on its trading partners, higher tariffs are disrupting business conditions, especially in the goods-producing
sector. Two-thirds of respondents from that sector indicate that tariffs have had negative impacts on business conditions at
their firms.”

“More panelists report falling sales and anemic profit margins at their firms over the past three months than in the previous
survey,” added NABE Business Conditions Survey Chair Sam Kyei, CBE, chief economist, SAK Economics LLC. “Materials
costs rose, on balance, at respondents’ firms, marking a 14th consecutive quarter of higher costs. However, price increases
were only slightly more common than price cuts at respondents’ firms. Hiring was far less prevalent at panelists’ firms in the
third quarter, as was wage and salary growth. A majority of respondents (53%) expects wages and salaries to be unchanged
over the next three months.

“Capital spending decelerated among more surveyed firms in the third quarter than in the second,” continued Kyei. “Notably,
fewer respondents reported increased capital spending on equipment and information technology at their firms than at any
time in the past five years.

“Panelists have a less favorable view than in the previous survey of the Federal Reserve’s easing of its federal funds rate
policy. Only 35% of respondents view the easing as favorable, compared to the 50% who held this view in July.”


• Survey respondents’ consensus outlook for the U.S. economy, as measured by year-over-year growth in
inflation-adjusted gross domestic product (real GDP), remains positive, but has moderated since the July survey.
Sentiment has shifted toward growth expectations of 2.0% or less for the 12 months ending in the third quarter (Q3) of
2020. More than two-thirds (69%) of panelists expect real GDP growth of 1.1% to 2.0% over the coming year, while
only one out of five expects growth of 2.1% to 3.0%. In comparison, nearly half (48%) of respondents in the July survey
expected real GDP growth to exceed 2% between Q2 2019 and Q2 2020.
• The Net Rising Index (NRI) for sales—the percentage of panelists reporting rising sales minus the percentage
reporting falling sales—posted a second consecutive decline, falling to 22 from 28 in the July survey and 37 in
the April survey. On balance, panelists are less optimistic than they were in the two previous surveys that sales at their
firms will rise in the next three months.
• Equal shares of respondents report rising and falling profit margins in the third quarter of 2019. The NRI
for profit margins rose 6 points from July to a neutral reading of 0, but is a decline from 29 in October of 2018. The
forward-looking NRI for profit margins during the next three months is 1, down from 7 in July and 16 in April.
• A majority of respondents—64%—indicates that prices were unchanged during the third quarter of 2019.
Price increases were only slightly more common than price cuts at respondents’ firms, resulting in an NRI of 3. One-third
of respondents from finance, insurance, and real estate (FIRE) sector companies reports price cuts (for an NRI of -22), with
some price increases reported in other sectors, on balance.
• Materials costs rose, on net, for a 14th consecutive quarter, and register an NRI of 25. On balance, panelists
expect materials costs at their fims to rise further during the next three months (also an NRI of 25). Materials cost increases
are reported most by respondents from the transportation, utilities, information, communications (TUIC) sector, and
one-half of respondents from these firms expects costs to rise further during the next three months, for a forward-looking
NRI of 50.
• Wage and salary growth was much less widespread at respondents’ firms in the third quarter of 2019 than in
the previous four years. The NRI for wages and salaries declined to 30, down from 44 in the July survey. A majority of
respondents (53%) expects wages and salaries to be unchanged over the next three months. The forward-looking NRI for
wage costs is 44, down one point from July and 15 points from April.
• Hiring was far less prevalent at panelists’ firms in the third quarter. At a reading of just 8, the employment NRI is
at a five-year low. The index, which was stable between 22 and 25 for the previous four quarters, fell primarily because
of a significant decline in the percentage of respondents indicating employment at their firms was rising—from 34% in
July to 20% in October.
• There was a sharp decline in the share of respondents reporting a rise in capital spending at their firms in the
third quarter. The NRI is at its lowest level since 2016. Notably, fewer respondents report increased capital spending on
equipment and information technology at their firms than at any time in the past five years. The structures spending NRI
is barely positive.
• The percentage of respondents reporting skilled labor shortages declined for a third consecutive quarter.
Forty-three percent of respondents indicate shortages of skilled labor, less than the 47% in July. The share had been as
large as 53% in January of 2019.
• Most survey respondents report that their firms have taken one or more steps to address difficulties in staffing.
Raising wages remains the most common action taken by firms to address staffing difficulty, cited by 43% of respondents,
compared to 42% in July and 46% in April. Training internal staff for promotion has become more common, cited by
42% of all respondents compared to 36% in July. Twenty percent of panelists cite no difficulties in hiring, and 15% report
no open positions—results similar to those in the previous two surveys.
• For those respondents reporting difficulties in hiring, they indicate high-skill positions remain the most difficult
to staff. In October, 82% of respondents cite difficulty staffing high-skill positions, compared to 89% in July and 78% in
April. Difficulty filling mid-skill positions is cited by 45% of respondents (compared to 41% in July), and is most prevalent
among goods-producing firms.
• While roughly one-third (32%) of panelists reports no impact—in general or on net—at their firms from recent
tariffs, the share citing net negative impacts increased to 35% in October from 28% in July. The negative
impacts remain concentrated among goods-producing firms. The most common impacts are higher costs (cited by 30%
of respondents) and negative impacts to sales (cited by 19%).
• Thirty-five percent of respondents view the Federal Open Market Committee’s easing of the fed funds policy
rate as favorable to expectations for business conditions in 2019 at their firms. Fifty percent held this view in July.
• Forty-one percent of panelists do not expect to change their outlook for real GDP growth in light of recent
heightened Middle East tensions. But approximately 36% expect that real GDP growth could be reduced by 20 basis
points (bps) or less.

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