Business Conditions Survey

October 2016

NABE Panel Sees Increased Pressure on Corporate Profit Margins, Upgrades GDP Outlook; Respondents Weigh in on Impact of Presidential Election Uncertainty, Minimum Wage Increase

The October 2016 NABE Business Conditions Survey report presents the responses of 104 NABE members and selected other industry economists to a survey on business conditions in their firms or industries conducted between September 20-October 4, 2016, and reflects third-quarter 2016 results and the near-term outlook.

COMMENTS: “The results of the most recent NABE Business Conditions Survey appear consistent with an economy in its eighth year of recovery,” says NABE President Stuart Mackintosh, CBE, executive director, Group of Thirty. “Sales growth is easing, and profit margins are under pressure from rising costs, including wages. At the same time, capital spending increases are expected by more than half of respondents, and the outlook for hiring has improved modestly. Panelists also modestly increased their expectations for economic growth, with over 40% now expecting GDP growth above 2% in the coming quarters.”

“Over 40% of panelists report that their firms are increasing investment to support new product lines or for capacity expansion,” noted Survey Chair Emily Kolinski Morris, CBE, chief economist, Ford Motor Company. “Election uncertainty and potential increases in the minimum wage do not appear to be impacting business decisions in the aggregate, although these issues are a greater concern for panelists in some subgroups.” 

HIGHLIGHTS

• Survey results reveal that sales growth at respondents’ firms was less widespread than in the second quarter. While similar shares of respondents in October (43%) as in July (42%) report rising sales, a marginally larger share reports falling sales (21% in the current survey versus 17% in July). The net rising index (NRI)—the percentage of respondents reporting rising sales at their firms minus the percentage reporting falling sales—declined to 22 from 25 in July. The weakness was led by the goods-producing sector, which has an NRI of -24, while respondents from the finance, insurance, real estate (FIRE) sector are the most upbeat, with that sector registering an NRI of 44.

• More favorably, 54% of survey panelists expect sales to increase during the fourth quarter of 2016—the largest share expressing this view since the second quarter of 2015.

• A slightly larger share of NABE panelists expects profits to decline rather than rise at their firms in the fourth quarter of 2016—21% vs. 20%—resulting in a NRI of -1. The overall NRI for expected profits would be positive if not for the transportation, utilities, information, communications (TUIC) sector, which has an NRI of -50.

• Panelists’ expectations for prices charged by their firms over the coming quarter stabilized after slowing sharply in the July survey. The NRI moved up from 9 in July to 12 in October. Only 18% of respondents expect their firms to raise prices during the next three months, up slightly from the 15% who held this view last quarter, but noticeably lower than results from earlier this year.

• The share of respondents reporting rising materials costs continued to grow in October, reaching 33%—the highest reading in the past year. Meanwhile, the percentage of respondents reporting a decline in costs moved up slightly to 14% from a two-year low of 12% in July. Expectations for cost increases in the coming three months also moved higher, with 35% of respondents anticipating rising costs, compared to 24% who held that view in the July survey.

• The share of respondents reporting that wages and salaries had increased at their firms in the past three months rose 2 percentage points from the July survey result. All sectors have positive NRIs for wages and salaries, but the FIRE sector has the highest index by a wide margin of nearly 20 points over the second highest, the goods-producing sector. Expectations for wage increases over the next three months are modestly weaker than in recent surveys, but nearly half of respondents in each sector still expects their firms to raise wages and salaries.

• The NRI for employment is unchanged from the July survey at 19, in line with readings for most of the previous four quarters. However, the result reflects an increase in responses for both rising and falling employment, while fewer respondents saw employment at their firms unchanged. The share of panelists who anticipate their firms will add workers in the next quarter rose to 33% from 29% in the July survey, helping to drive the NRI up to 17, more closely in line with readings over the previous four surveys.

• A smaller share of respondents reports that their firms increased capital spending in the third quarter of 2016, reflecting a rise in the number of companies actively cutting capital budgets. The NRI for total capital spending declined to 19 from 23 in the July survey, nearly matching the dip to 14 in the April survey. Spending was weakest in the goods-producing and services sectors, while spending rose for TUIC firms and held steady for FIRE firms. On balance, respondents in all sectors expect some pick up in spending in the coming three months, driving the overall NRI for expected spending up to 28 from 24 in the July survey.

• Thirty-seven percent of survey respondents report that their firms experienced shortages of skilled labor during the last three months of 2016, up from 31% 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 growth in inflation-adjusted gross domestic product (real GDP) over the next four quarters are modestly more optimistic than those reported in the July survey. Forty-four percent expect real GDP to grow more than 2% from the third quarter of 2016 to the third quarter of 2017. That is an increase from the 36% who held this view in the July survey for GDP growth from the second quarter of 2016 to second quarter 2017. Growth between 1.1% and 2% remains the most frequent response, with 48% of respondents citing this range.

• Forty-three percent of respondents report that their firms had difficulty filling open positions during the third quarter of 2016, a slight increase from the share in July citing difficulties in hiring during the second quarter, albeit consistent with levels reported in the three previous surveys. Respondents from goods-producing firms continue to report significantly greater difficulty in hiring, and those from all sectors except services report more difficulty in hiring than in the July survey.

• Thirteen percent of respondents indicate that their firms postponed hiring or investment decisions pending the outcome of the November 2016 Presidential election, up 2 percentage points from the July survey results. The percentage reporting delays differs by firm size. While only 6% of respondents from large firms (over 100 employees) indicate their companies delayed decisions, 23% of those from smaller firms suggest that uncertainty about the upcoming election caused a delay in hiring or investment decisions.

• Thirty-five percent (35%) of respondents report no significant new capital spending plans. Of the remaining 65%, a plurality indicates that the primary factor driving increased spending was expanding into new markets or product lines, representing 23% of survey responses. Expanding capacity for current products was a close second at 19%.

• Only respondents from the TUIC and FIRE sectors indicate that regulatory requirements are driving capital spending, while respondents from TUIC and goods-producing firms account for larger shares citing expanding capacity for current products. The majority of panelists that cite productivity improvements as a primary factor in driving capital spending are in the FIRE and services sectors.

• Almost three-fourths of survey respondents (74%) indicate that an increase in the minimum wage would have little or no impact on their firms. Twenty-two percent report that a higher wage would have a negative impact on their firms, either through compressed profit margins (13%) or reduced hiring (8%). The remaining 6% of respondents indicate a positive benefit from an increase in the minimum wage, mostly through an improved ability to recruit and retain employees (5% of total). Results indicate that firms in the services sector would experience the greatest impact, as one-third would be affected by a change—the highest proportion among the four industry sectors. 

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