NABE Business Conditions Survey

 

July 2016

 

NABE Panel Reports Improved Sales, Flat Profits, and Small Price Rises; Lower Expectations for Prices, Future Profits, and Overall GDP

NOTE: This is a summary of the survey.  NABE Members can download the full report here.

The July 2016 NABE Business Conditions Survey report presents the responses of 110 NABE members to a survey on business conditions in their firms or industries conducted between June 20 and June 29, 2016, and reflects second quarter 2016 results and the near-term outlook.

COMMENTS: “The results of the most recent NABE Business Conditions Survey are mixed,” says NABE President Lisa Emsbo- Mattingly, CBE, director of research, Global Asset Allocation at Fidelity Investments. “Sales growth rebounded strongly in the second quarter among survey participants’ firms, but profit margins were flat, on balance. While net capital spending and employment trends were steady, the number of firms that cut employment and capital spending declined notably. In addition, panelists have ratcheted down their expectations for overall growth, with nearly two-thirds expecting GDP growth of 2% or lower over the next four quarters.” 

“Panelists are more concerned about the potential impact of more-protectionist trade policies on their businesses than they are about rising oil prices, the outcome of the presidential election, or the Zika virus,” noted Survey Chair Patrick Jankowski, senior vice president of research at the Greater Houston Partnership. “Across all sectors, a majority of panelists indicates more protectionist policies would have a negative effect on their firms.” 

HIGHLIGHTS 
• Forty-two percent of panelists indicate sales rose at their firms during the second quarter of 2016, a significant rebound from results in the April 2016 survey. Seventeen percent report falling sales, a smaller share than the 25% in the April survey. The net rising index (NRI)—the percentage of respondents reporting rising sales at their firms minus the percentage reporting falling sales—rose to 25, up sharply from the index of 4 in the April survey, but still below recent trends. Moreover, the NRI is higher than in April for firms in all four sectors—goods-producing; transportation, utilities, information, communications (TUIC); finance, insurance, real estate (FIRE); and services. 
• Just under half (48%) of respondents expect sales at their firms to increase in the third quarter of this year, a small uptick from the 46% in April. Only eight percent expect sales to decrease over the quarter, a slight improvement from the 12% who held this view in April. 
• On balance, profit margins remained flat over the second quarter of 2016, as 23% of panelists report rising profit margins while 23% report a decline. The resulting NRI of 0 is an improvement over the NRI of -5 reported in the April survey. Still, the NRIs reported in the January 2016, April 2016, and July 2016 surveys are among the lowest index readings since 2009. Expectations for profit margins are evenly balanced, as 17% of panelists expect profit margins to increase during the third quarter, while another 17% expect a decrease. 
• The NRI for prices charged by respondents’ firms rose from 9 in the April survey to 12 in the July survey as a marginally larger share of panelists reported rising prices. Among the industry sectors, only the TUIC sector registers an NRI that reflects net falling prices during the second quarter of the year. • Expectations for price increases slowed for the first time in over a year. Fifteen percent of respondents expect prices to rise over the next three months—less than half of the 32% who reported expectations of rising prices in April. With a smaller share of respondents expecting prices to increase, the NRI declined from 26 in the first quarter to 9 in the second. 
• The share of respondents reporting rising costs at their firms rebounded to 20% in the July survey after falling from that same level in the January survey to 15% in the April survey. The share of respondents reporting a decline in costs fell to a two-year low of 12%. As a result, the NRI turned positive—to a reading of 8—for the first time in a year. The NRIs for both the goods-producing and services sectors are positive at 19, while those for the TUIC and FIRE sectors are negative at -17 and -6, respectively. 
• Expectations for cost increases in the next three months are virtually unchanged from the April survey, with 24% of respondents expecting increases and 8% anticipating decreases. On balance, more respondents from all sectors except TUIC expect cost increases than expect decreases. 
• The share of respondents reporting that wages and salaries had risen at their firms in the past three months matches the April survey result of 43%. The share of respondents reporting wage and salary decreases dipped to 3% from 8% in the April survey. The NRI for wages and salaries is 40, midway between the NRIs in April (35) and January (45). All sectors have positive NRIs. 
• Expectations for wage increases over the next three months are similar to results in prior surveys dating back to January 2015. Roughly half of respondents from each sector expects their firms to raise wages and salaries. Virtually none expect a decline. 
• The NRI for employment is 19, indicating job gains were more common than job losses in the second quarter at respondents’ firms. The NRI matches the level reported in the October 2015 and January 2016 surveys but is an increase from 11 in the April 2016 survey. The 30% share of respondents whose firms added workers is close to previous levels, but the 11% share reporting their firms had fewer workers is the smallest since the April 2015 survey. Job cuts in the second quarter of 2016 were more common than job gains in the goods-producing and TUIC sectors, which have NRIs of -12 and -8, respectively. Employment gains outpaced job losses in the FIRE sector (NRI of 34) and services sector (NRI of 27). 
• The share of panelists who anticipate their firms will add workers in the next quarter declined to 29% from 35% in the April survey, while the share expecting job reductions held nearly steady at 18%. The NRI of 10 is the lowest index reading since the NABE survey first asked this question in July 2014. As with responses covering the past three months, respondents in the goods-producing and TUIC sectors expect reduced headcounts at their firms, while respondents in the FIRE and services sectors expect their firms will add employees. 
• Capital spending increases were about as widespread, but cuts were less common, among respondents’ firms in the second quarter of 2016 than in the first. The NRI for capex rose from 14 in the first quarter of 2016 to 23 in the second quarter, close to its 2015 year-end level. There are variations across sectors, with NRIs ranging from 13 for goods-producers to 17 for TUIC, 23 for services, and 32 for FIRE. NRIs for both goods-producers and services firms improved from last quarter but those for the FIRE and TUIC sectors moderated. 
• Expectations for future spending are marginally weaker on balance, even though the underlying sectoral variations are markedly different than in the April 2016 survey. The overall NRI fell to 24, below the 26 in the previous four surveys. The NRI for the goods-producing sector, which was substantially negative (-19) in April, rose markedly to 31 in July. The NRI for services firms rose from 5 to 25. The NRI for the TUIC sector slipped from 25 to 17, and the index for the FIRE sector fell sharply from 54 to 21. 
• The share of respondents whose firms increased spending on information and communications technology (IT) is unchanged from that reported in the April survey at 32%. The NRI for IT spending is also unchanged at 22. As with overall capital spending, increased IT spending in the second quarter of 2016 was most prevalent in the FIRE sector, which has an NRI of 33, although this figure is a steep retreat from the NRI of 63 in the April survey. NRIs are positive for services firms (31), but negative for the TUIC sector (-8). The NRI for the goods-producing sector is 0. 
• The outlook for IT spending in the next three months is strongest in the services sector, with an NRI of 39, followed by the FIRE sector at an NRI of 30. While both of these NRIs reflect declines from the April survey results, the goods-producing NRI of 21 is a significant increase from the NRI of -9 in April. The NRI is negative (-17) for the TUIC sector. 
• Spending on structures was slightly more widespread among respondents’ firms in the second quarter than in the previous two quarters. The NRI for structures spending in the July survey is 9, an increase from 4 in the January survey and 2 in April. The share of respondents reporting rising investments on structures grew marginally, from 23% in April to 24% in July. At the same time, the share reporting a decline in spending fell from 21% in April to 15% in July. Spending was weakest in the FIRE sector, which has an NRI of -6, and strongest in the TUIC sector, with an NRI of 27. 
• Expectations for spending on structures in the third quarter of 2016 remain weak, with an NRI of 1. The NRIs for the goods-producing, services and TUIC sectors are positive, but offset by a sharply negative -35 NRI in the FIRE sector. 
• Slightly less than one-third (31%) of survey respondents reports that their firms experienced shortages of skilled labor during the past quarter, a decrease from 34% in the previous survey. As was the case in the previous four surveys, there were few reports of shortages of other inputs. 
• The NABE panel’s expectations for inflation-adjusted gross domestic product (real GDP) are less optimistic than in the last survey, as nearly two-thirds (64%) of panelists expect real GDP growth to be less than 2% over the next four quarters (that is, second quarter of 2016 to second quarter of 2017). Only 1% of panelists expect real GDP growth to top 3%, far less optimistic than the expectations reported a year ago. 
• Forty percent of respondents report that their firms had difficulty filling open positions during the second quarter of 2016, a slight decline from the 42% reported in the April and January surveys. 
• Barely one in ten respondents (11%) reports their firms have postponed hiring or investment decisions pending the outcome of the November 2016 Presidential election. 
• A majority of respondents (64%) reports that more-protectionist trade policies would negatively impact their businesses. Only 3% indicate that such policies would have a positive impact. Almost nine in 10 respondents (88%) in the goods-producing sector, 82% of those in TUIC firms, and 62% of respondents from FIRE-sector companies suggest that more-protectionist policies would hurt their firms. Respondents from services firms also see protectionist policies as more harmful than beneficial, with 51% reporting that there would be a negative impact, although 46% indicate there would be no impact. 
• The majority of respondents (59%) reports that the recent run-up in energy prices has had no impact on their firms. 
• Only a handful of respondents (6%) reports that their firms have reduced overseas travel due to concerns about the Zika virus. 

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