NABE Panel: Pessimism Prevails Regarding Sales, Profits, Costs, GDP

“Respondents to the April NABE Industry Survey were notably downbeat about their own companies and the overall economy,” said Ken Simonson, Chief Economist, Associated General Contractors of America. “For the first time in five years, reports of falling profit margins outnumbered reports of rising margins in the first quarter of 2008, while demand at respondents’ firms grew more weakly than at any time since the recession of 2001. Thirty percent of panelists expect gross domestic product to decline, net of inflation, in the first half of 2008, while most others expect growth of less than 1%. Seventy percent say they are more pessimistic than three months ago. Roughly two-thirds paid more for materials last quarter and expect higher input prices in the April-June quarter as well. On balance, panelists expect to increase capital spending and hiring in the next few quarters, but more respondents than in recent surveys expect decreases. More respondents than previously reported negative effects from credit tightening. Nearly all expect the housing slowdown to continue over the next six months, but they split regarding its severity and whether it will affect their own business. Overwhelmingly, panelists expect no effect on their business from the depreciation speed-up in the fiscal ‘stimulus’ act or the Federal Reserve’s rate cuts and credit access liberalization steps.

The April 21, 2008, report presents the responses of 109 NABE members to a survey on business conditions in their firm or industry conducted between March 24 and April 8, and reflects first-quarter 2008 results and the near-term outlook. (Find out more about the survey at the bottom of the page.)

Highlights

Fewer than a fifth (19%) of NABE panelists said they expect inflation-adjusted gross domestic product (real GDP) to grow at an annual rate above 1% in the first half of 2008. Thirty percent of respondents expect real GDP growth to be negative. This is a much gloomier outlook than respondents reported in the previous survey. Seventy percent of panelists said they were more pessimistic about the outlook for the year as a whole compared with their views in January.
Growth in demand for goods and services at respondents’ firms fell dramatically into barely positive territory in the first quarter of 2008. Such a result is consistent with other evidence that the U.S. economy is slowing and may be in recession. Goods-producing firms fell into negative territory again, but this has occurred without recession in the past. Services-sector firms reported dramatically worse results this quarter, driving the total industry results down. Panelists in the other two sectors—transportation, utilities, information, communications (TUIC), and finance, insurance, real estate (FIRE)—reported little change from January.
Nearly two-thirds (66%) of respondents reported paying more for materials in the past quarter, the highest share since 2004 and second-highest since the question was first asked in 1994. Wage increases were more prevalent than in the previous two quarters. More than two-thirds (68%) expect non-labor input prices to rise in the next three months, while only 3% expect a decrease.
Weakening market conditions and soaring commodity prices are squeezing profit margins. For the first time since the spring of 2003, reports of falling profit margins (28% of respondents) outnumbered reports of rising margins (18%).
There was an increase in the percentage of respondents whose firms raised prices in the latest quarter, with 60% of goods-producing firms in the panel having done so. But only 34% of respondents, far fewer than in January, expect to be able to raise prices in the coming quarter, while 13% of respondents expect to cut prices.
Tight credit market conditions appear to be having a larger impact on the economy compared with the January survey. Thirty-nine percent of respondents stated that tightening credit conditions have negatively affected their business, up from 26% in January. Roughly one-in-five respondents stated that actions by the Federal Reserve of either lowering interest rates or credit access liberalization had a positive effect on their business, with the finance sector experiencing the greatest impact.
Fewer than half of the respondents (45%) expect a further substantialslowdown in housing markets over the next six months, down a bit from January. Still, another 47% expect a mild slowdown in housing. Respondents in the TUIC (66%) and goods-producing (55%) sectors were affected to a greater extent.
Capital spending growth in the first quarter declined from the last survey, although spending was still above its historical average. Capital spending plans for the coming year pulled back in the most recent survey. This decline was spread across all sectors, especially in services. Expectations decreased for computer and communications equipment outlays and for structures investment, with the services sector reporting the largest declines in plans. Only 8% of respondents said they would add or accelerate investment as a result of depreciation provisions of the “stimulus” bill.
Employment conditions are beginning to weaken, with fewer firms hiring and more firms reducing payrolls. During the first quarter, 23% of respondents reported rising employment at their firms, while 15% reported job cuts, resulting in the smallest positive margin in four years. Hiring plans for the next six months are cautious: 34% of firms plan to increase employment, while 22% will cut jobs.
Skilled labor remains the only major input that is in short supply. Some 38% of firms reported a shortage of skilled labor, little changed from the quarterly surveys of the past two years.

The full report is for NABE members only. If you are a member, get the full report here. Not a NABE member? Find out more about NABE