NABE Business Conditions Survey

October 2017

NABE Panel Reports Moderating Sales and Profit Growth in Third Quarter, Remains Optimistic for Coming Months on Improving Sales Expectations


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


The October 2017 NABE Business Conditions Survey report presents the responses of 85 NABE members to a survey on business conditions in their firms or industries conducted between September 21 and October 4, 2017, and reflects third-quarter results and the near-term outlook. 

COMMENTS: “The results of the October 2017 NABE Business Conditions Survey reflect some softening in the business environment during the third quarter of 2017, with moderation in profit margins driven by slower sales growth and continued materials cost increases,” said NABE Vice President Kevin Swift, CBE, chief economist, American Chemistry Council. “However, expectations for sales in the coming three months are stronger. This may be driven in part by improved expectations for economic growth, which have strengthened materially since the July survey. Eighty-four percent of respondents now expect growth in real gross domestic product to be above 2% in the coming four quarters.” 

“Labor markets remain tight, with 26% of panelists reporting that their firms have taken steps to address difficulty in hiring, but hiring expectations for the fourth quarter remain stable,” noted Survey Chair Emily Kolinski Morris, CBE, chief economist, Ford Motor Company. “Policy developments, including those affecting the North American Free Trade Agreement, remain on the panel’s list of concerns, but continue to have limited impact on business decision-making with regard to hiring or investment. The recent hurricanes appear to have had relatively limited impact on respondents’ firms, with more than 80% of panelists reporting no anticipated impact on their business in the third or fourth quarters due to Hurricanes Harvey and Irma.” 

HIGHLIGHTS:

Just under half of the panelists participating in the October 2017 NABE Business Conditions Survey indicate that sales at their firms rose in the third quarter of 2017. Forty-six percent of respondents report gains—a slight decline from the 50% in the July survey. The Net Rising Index (NRI)—the percentage of panelists reporting rising sales minus the percentage reporting falling sales—decelerated from 33 in the second quarter to 24, as the share of respondents reporting falling sales at their firms increased to 22%.

The panel remains optimistic regarding future sales. The NRI is 51, the highest index reading of the past four quarters. A majority of panelists—61%—expects sales to rise over the next three months; only 10% expect sales to fall.

Profit margins lost momentum in the third quarter, dampening the gradual improvement reported in the last three surveys. Twenty-one percent of respondents report rising profit margins at their firms, a decline from the 29% share in July. The percentage that cites falling profits increased slightly, resulting in a decline in the NRI from 14 in the July survey to 5 in the current survey. The NRI for expected profits over the next three months also declined, as fewer panelists expect profit margins to rise in the coming quarter.

The NRI for prices charged retreated in October to its lowest level since 2015. The share of respondents reporting rising prices declined to 17% in October from 29% in July, while the share reporting falling prices rose by four percentage points. However, on balance, panelists from all sectors except the transportation, utilities, information, and communications sector (TUIC) expect improvement in pricing power over the next three months.

The NRI for materials costs rose to 33, up from 27 in July but still below the January and April readings. Respondents’ expectations for cost increases over the next three months also increased, with the NRI for forward-looking materials costs rising to 36 from 30 in July.

The NRI for wages declined eight points, from 45 in the July survey to 37 in the October survey. However, expectations for wage and salary increases in the next three months are little changed, with an NRI of 46.

The NRI for employment fell 15 points from the July survey reading to 10 in October—the lowest level in over a year. This marks a sharp reversal from the July results, when the NRI jumped to its highest level in over two years. Despite the weaker NRIs for the third quarter, hiring expectations for the fourth quarter remain stable, with the forward-looking NRI of 18 unchanged for a third consecutive survey.

The NRI for total capital spending rose to 28 in the October survey, up from 24 in July. October’s NRI is the highest since the July 2015 survey. The NRI of 30 for expected capital spending represents an increase of 7 points from July and 14 points from April, but is still slightly below the most recent peak of 33 in the January 2017 survey.

The panel’s outlook for growth in real gross domestic product (GDP) has improved materially from the July survey, and surpasses the relatively positive assessments in the April and January surveys. Eighty-four percent of panelists now expect real GDP growth in excess of 2% in the coming four quarters.

A majority of respondents indicates that their firms are not being impacted by tightening labor markets. Forty-two percent report that their firms are hiring without difficulty. About one third—32%—reports that their firms are not hiring, while 26% report that their firms have taken steps to address difficulties in hiring. Of those experiencing difficulty in hiring, the tools being used to address that difficulty are fairly balanced between internal training programs, automation, and higher wages.

More than 80% of panelists report no impact on their firms from Hurricanes Harvey and Irma, either in the third quarter or expected in the fourth quarter. For those whose firms were impacted, responses are split between positive and negative impacts.

A majority of respondents continues to anticipate that their firms will not alter hiring or investments in response to potential changes in economic policy, although the percentage holding that view has declined to 65% from 76% in the July survey and 81% in April. Those making changes are nearly evenly split between those accelerating hiring or investment and those delaying such decisions.

The panel’s expectations for 2018 are broadly positive, with 69% of respondents expecting higher sales than in 2017. Two-thirds—67%—also expect higher health care costs. More firms expect to increase hiring than reduce hiring. A majority of respondents expects no changes to capital spending, although 30% expect their firms to increase spending in 2018 compared to 10% whose firms plan cuts. 

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