New NABE Survey Shows Business Recovery Gaining Momentum, with More Jobs Ahead

The July 2010 NABE Industry Survey report presents the responses of 84 NABE members to a survey conducted between June 11, 2010, and June 29, 2010, on business conditions in their firm or industry, and reflects second-quarter 2010 results and the near-term outlook.

“NABE’s July 2010 Industry Survey confirms that the U.S. recovery continued through the second quarter, although at a slower pace than earlier in the year,” said William Strauss, Federal Reserve Bank of Chicago. “Industry demand increased for a fourth consecutive quarter, although at a slower pace. Price and cost pressures were contained, allowing profits to edge higher. The labor market continued to improve, with increases in current hiring and a rise in the percentage of firms planning to add workers over the next six months. Capital spending remained stable over the past year. Credit and debt issues in Europe will likely negatively impact just over a third of the surveyed firms over the next three months.”

Highlights

Industry demand increased for a fourth consecutive quarter in the latest survey period, but the pace of growth appeared to weaken during the latest quarter. After climbing to 51 in April—its highest level in more than four years—the Net Rising Index (NRI) slipped to 42 in July. This index measures the percentage of firms reporting stronger conditions less the percentage reporting weaker conditions. All four major industry sectors recorded demand growth, but NRIs varied widely—ranging from a high of 69 for the goods-producing sector to a low of 16 for the finance, insurance, and real estate (FIRE) sector.
Job creation trends continued to improve, with a second quarter of net positive payroll gains. The percentage of firms increasing payrolls increased to 31%—a dramatic increase versus a year ago when only 6% were seeing hiring gains. The percentage of firms cutting jobs continued to move lower—from 36% a year ago to 14% this July. The share of respondents expecting their firms to add employees over the coming six months rose to 39%, the highest level of hiring intentions since January 2008.
Expectations for economic growth in 2010 remained positive, though expectations declined slightly from the previous quarter. All NABE panelists again indicated business decisions are being made based on expectations for positive economic growth in 2010 (as measured by real GDP); however, only 20% of survey respondents believe real GDP will expand by more than 3% compared with 24% of survey respondents who expected that rate of growth in April. Sixty-seven percent of respondents still believe the economy will expand by more than 2.0% in 2010.
Profit margins expanded for a fourth consecutive quarter, but growth slowed to a crawl as the NRI slid to 4 in the July survey from 13 in April. The percentage of respondents reporting rising margins held steady at 25%, but the share citing declining margins jumped to 21% in July from 11% in April. One-fifth of firms raised prices last quarter, and only 6% reported cutting prices, compared with the nearly even split between increases and decreases reported in the first quarter. Fewer respondents than in April expect their firms to either raise or lower prices in the coming quarter.
About one out of four firms increased their capital spending over the prior quarter, similar to the results over the past year. Expectations for future capital spending rebounded slightly, with 44% of respondents in the latest survey expecting increases in the next 12 months, compared with 41% in April. As in the past five surveys, expectations were positive for spending on computers and communications equipment, but negative for spending on structures.
Materials costs continued to rise. The percentage of respondents reporting rising prices outpaced that of respondents reporting price declines for a sixth consecutive quarter, although the percentage of firms was slightly lower than in the prior quarter. • Firms with foreign-based operations reported that sales growth from those operations weakened in the second quarter. The NRI declined to 11 in July from 25 in April. Just over half of the NABE Industry Survey panelists reported that at least some of their firms’ sales came from foreign-based operations during the second quarter.
European credit and debt issues will have a negative impact on firms. While 59% of firms reported that the European credit and debt crisis will have no effect on their firm, 35% of firms indicated it will have a negative impact.

The entire Industry Survey, including the complete answers and historical data, is for NABE members only.

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