NABE Business Conditions Survey

July 2019

Hiring Continues, but Filling High-Skill Jobs is Difficult;
NABE Panel Expects Slower Growth as Sales Slow and Profit Margins Narrow

The July 2019 NABE Business Conditions Survey report presents the responses of 119 NABE members to a survey conducted July 1-10, 2019, on business conditions in their firms or industries, and reflects second-quarter results and the near-term outlook.

COMMENTS: “One takeaway from the July 2019 NABE Business Conditions Survey is that slower growth is expected over the next 12 months,” said NABE President Constance Hunter, CBE, chief economist, KPMG. “It is important to note, however, that all respondents still expect the current economic expansion to continue during this timeframe. On balance, panelists expect slower growth than they were expecting three months ago. After more than a year since the U.S. first imposed new tariffs on its trading partners in 2018, higher tariffs are disrupting business conditions, especially in the goods-producing sector. The majority of respondents from that sector, 76%, indicates that tariffs have had negative impacts on business conditions at their firms.”

“More panelists report falling sales and lower profit margins at their firms over the past three months than in the previous survey,” added NABE Business Conditions Survey Chair Sam Kyei, CBE, chief economist, SAK Economics LLC. “Materials input costs remain elevated at respondents’ firms, but for the first time in seven years, price cuts were as common as price increases. Employment pressures appear to have moderated slightly. Although 47% of respondents indicate that their firms increased wages and salaries in the past three months, raises were less prevalent than at any time in the past year and a half. In addition, 47% of respondents also report skilled labor shortages, the first time since October of 2018 that the share is smaller than 50%. “Capital spending increased during the second quarter of 2019 among surveyed firms. However, capital spending for expansions, such as building new facilities, was not widespread. Spending on structures at respondents’ firms continues to be low. “Regarding monetary policy, panelists still generally see the Federal Reserve’s pause in raising short-term interest rates as being favorable to business conditions at their firms.”

“More panelists report falling sales and lower profit margins at their firms over the past three months than in the previous survey,” added NABE Business Conditions Survey Chair Sam Kyei, CBE, chief economist, SAK Economics LLC. “Materials input costs remain elevated at respondents’ firms, but for the first time in seven years, price cuts were as common as price increases. Employment pressures appear to have moderated slightly. Although 47% of respondents indicate that their firms increased wages and salaries in the past three months, raises were less prevalent than at any time in the past year and a half. In addition, 47% of respondents also report skilled labor shortages, the first time since October of 2018 that the share is smaller than 50%. “Capital spending increased during the second quarter of 2019 among surveyed firms. However, capital spending for expansions, such as building new facilities, was not widespread. Spending on structures at respondents’ firms continues to be low. “Regarding monetary policy, panelists still generally see the Federal Reserve’s pause in raising short-term interest rates as being favorable to business conditions at their firms.” 


HIGHLIGHTS

• All survey respondents expect the U.S. economy, as measured by the change in inflation-adjusted gross domestic product (real GDP), to increase over the next four quarters. However, expectations for growth have cooled, on balance, over the past two surveys. Forty-eight percent of panelists expect real GDP growth to rise by more than 2%, compared to 53% of respondents in April and 67% in January who held that view.

• The Net Rising Index (NRI) for sales—the percentage of panelists reporting rising sales minus the percentage reporting falling sales—is 28, a significant decline from 37 in the April survey. The decline was driven about equally by a decrease in the number of respondents reporting rising sales and an increase in the number reporting falling sales.

• Expectations for sales increases over the next three months are less widespread than they were three months ago. The forward-looking NRI is 35, down from 54 in the April survey.

• Profit margin decreases became more prevalent during the second quarter of 2019. The NRI for profit margins in the July survey plummeted to -6, compared to 17 in April and 26 in mid-2018.

• For the first time in seven years, price cuts were as common as price increases at respondent firms. The NRI for prices charged fell from 18 in the April survey to 0, the lowest reading since the second quarter of 2012.

• Materials costs rose, on balance, at respondents’ firms during the second quarter of 2019. However, materials cost increases were less widespread across firms than those reported for the last 11 quarters. The NRI of 21 is the lowest reading since the October 2016 survey. Costs declined (on net) at goods-producers, resulting in an NRI of -7. Materials cost increases were reported most widely in the transportation, utilities, information, communications (TUIC) sector, which has an NRI of 55. One-third of respondents anticipates costs will rise during the next quarter.

• Wage and salary growth at respondents’ firms was less prevalent during the second quarter than in the previous year and a half. The NRI for wages and salaries declined to 44 in July from 57 in the April survey. Less than half of respondents (47%) expects wage increases at their firms in the next three months. The forward-looking NRI for wage costs decreased from 59 in April to 45 in July.

• Firms continue to hire workers. The July survey results indicate a slight gain in hiring in the second quarter (Q2) compared to the first quarter (Q1) of this year. The NRI for employment is 24, up modestly from 22 in the April survey. Expectations for employment over the next three months suggest that third-quarter hiring growth may be similar to that in the second quarter. 

• Capital spending increased in Q2 2019 among surveyed firms. After two quarters during which 35% of respondents reported increases, in July 42% report rising investment. The NRI for equipment and IT spending improved similarly, with an NRI of 45, compared to 35 in April. Capital spending on structures at respondents’ firms continues to be low, with the NRI for July unchanged at 8. The goods-producing sector again had the highest NRI among sectors for capital spending on structures—at 25—although the index has declined steadily, from 67 in January and from 50 in April. 

• Capital spending expectations for the next three months rose to their highest level in a year, with 48% of panelists anticipating increased spending in the third quarter of 2019. The forward-looking NRI is 42, up from 32 in April. The outlook for capital spending on structures for the next three months also improved, with the NRI rising to 16, the highest level in more than a year. 

• Forty-seven percent of respondents report skilled labor shortages, a share below 50% for the first time since October 2018. The share reporting shortages in unskilled labor declined for the first time since October 2018. 

• Most survey respondents indicate that their firms have taken one or more steps to address difficulties in staffing. Raising wages remains the most common action to address staffing difficulty, cited by 42% of respondents, although this share is smaller than in recent surveys. Eighteen percent report their firms have had no difficulties in hiring, and 15% had no open positions, results unchanged from those in the April survey. 

• For those firms that have had difficulties in hiring, high-skill positions remain the most difficult to staff. Eighty-nine percent of respondents report difficulty staffing high-skill positions, up from 78% in April. Difficulty filling mid-skill positions is cited by 41% of respondents, and 15% of respondents indicate their firms are struggling to fill low-skill positions. 

• While most panelists report no impact—in general or on net—at their firms from recent tariffs, a majority of goods-producing sector panelists (76%) and 42% of TUIC panelists report negative net tariff impacts at their firms. For panelists reporting tariff impacts, the most common impacts are higher costs and negative sales. 

• Half of the panelists view the pause in federal funds rate increases by the Federal Reserve as generally favorable for business conditions at their firms, unchanged from April. Thirty-three percent of respondents anticipate no change in business conditions at their firms, and only 8% expect an unfavorable impact. 

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