PricewaterhouseCoopers’ most recent survey indicates that a recent drop in economic optimism is offset by a fundamentally strong revenue outlook – at least for the next 12 months.
Confidence in the US economy dropped sharply this past quarter among private company executives surveyed for PricewaterhouseCoopers (PwC) US’s Private Company Trendsetter Barometer. Just 27 percent of executives expressed optimism, down 16 points from last quarter. The percentage of executives voicing uncertainty, meanwhile, continued to rise, increasing to 49 percent, which represented a seven-point jump from last quarter, still well above those who previously expressed outright pessimism (24 percent).
Among international private companies, pessimism about the global economy (28 percent) exceeded optimism (21 percent), with 51 percent of those surveyed voicing uncertainty.
This represents an optimism drop for a second straight quarter. However, revenue forecasts and planned operational spending should remain strong, according to survey results. Indeed, the Trendsetter-surveyed executives forecasted a 7.2-percent average revenue growth for the next 12-month period.
As has generally been the case these past couple of years, international marketers project higher levels of revenue growth than their domestic-only peers (7.6 versus 6.8 percent). Seventy-eight percent of private companies expect continued growth over the next 12 months: 30 percent predict double-digit growth and 48 percent forecast single-digit growth.
The Hiring Scene
While planned hiring for the next 12 months has eased (down 10 points, to 48 percent of respondents), just three percent of private companies intend to reduce their number of employees, with an overall planned increase of 1.6 percent in private companies’ composite workforce.
“On the face of it, the drop in optimism is significant because the reading hasn’t dipped this low since a couple of years ago,” says Ken Esch, a partner with PwC’s Private Company Services practice.
But private companies are in a much different place now – an important point to consider. “Back in early 2009, outright pessimism among Trendsetter executives was considerably higher than what we’ve seen this past quarter, because many companies were fighting for outright survival,” Esch describes. “This time, uncertainty ranks highest, with twice as many private companies registering that sentiment as those citing pessimism.”
Such companies, having made it through the 2008 economic crisis, recognize the difference between the need to navigate a stop-and-start economy or positioning themselves in the survival mode, adds Esch.
As such PwC isn’t witnessing companies simply retrenching. “We’re seeing them continue to increase operational spending and make strategic hires,” says Esch.
This is quite different than 2009.
Operational Spending: Strong IT Focus
While the percentage of private companies planning major capital investments for the next 12 months declined slightly this quarter to 38 percent, nearly three-quarters (72 percent) plan to increase operational spending over the same period. Consistent with what PwC has seen for some years now, international Trendsetter companies lead their domestic-only peers in planned operational spending: 83 percent versus 63 percent. Information technology remains the top area of operational spending for Trendsetter companies overall (39 percent), followed by new products/services (34 percent), marketing and sales promotion (23 percent), geographic expansion (22 percent), and facilities expansion (21 percent).
Trendsetter companies’ focus on IT spending mirrors what PwC sees among its clients, says Esch. “Increasingly they’re looking to leverage technology to drive profitability. Many of them are sitting on a wealth of data—about customers, their buying habits, etc.—which they recognize is an asset, and yet they haven’t fully figured out how to mine, analyze, and monetize it. But that’s apt to change. The hiring numbers suggest this. More private companies say they plan to hire technicians over the next 12 months than other types of employees.”
The breakout of spending by international versus domestic-only companies is shown below (including a breakout of higher spending in key fast-growth markets abroad):
Growing Concern: Potential Decrease in Margins as Costs Rise and Prices Lag
The percentage of private companies concerned about profitability/decreasing margins as a barrier to growth rose seven points this quarter to 37 percent. Overall, costs rose for a net 17 percent of Trendsetter companies, while prices saw an increase for only 10 percent (net). Gross margins remained flat for a third consecutive quarter.
“Much of the concern around margins is tied closely to commodity prices and labor,” notes Esch. “That includes labor abroad, prompting private companies to rethink the location of their manufacturing operations. While higher wages for workers in fast-growth markets like China and Brazil make those countries increasingly attractive places for Western companies to sell their goods and services, those locations simultaneously become less attractive as manufacturing sites – particularly when you combine higher wages abroad with foreign exchange issues and shipping costs. We may start to see manufacturing for US customers migrate back to the United States as a result of these pressures.”
Other top barriers to growth include lack of demand (77 percent of respondents), legislative/regulatory pressures (54 percent), and increased taxation (34 percent) – similar to the percentage of Trendsetter executives citing these barriers last quarter. The percentage of respondents voicing concern about oil/energy prices, however, dropped 12 points to 33 percent, while the percentage registering concern about lack of capital for investment rose six points to 26 percent. “Barriers to growth notwithstanding, cool heads are prevailing among leading private companies,” says Esch. “Having learned a good deal from weathering the economic crisis a few years back, most of them are well equipped to ride out this current rough patch. The real question is whether they will make the strategic decisions to distance themselves from their competition as the economy improves.”
PwC’s Private Company Trendsetter Barometer tracks the business issues and standard industry practices of leading, privately held US businesses. It incorporates the views of 240 leading executives [CEOs/CFOs] from 132 companies in the product sector and 108 in the service sector.