Business Conditions Survey

October 2021

NABE Survey Panel Foresees Further Economic Growth Over Next 12 Months,

While Shortages, Higher Resource Prices Start to Affect Firms’ Decision Making

The October 2021 NABE Business Conditions Survey report presents the responses of 91 NABE members to a survey conducted October 6-14, 2021, on business conditions in their firms or industries, and reflects third-quarter 2021 results and the near-term outlook.

COMMENTS: “The results of the October NABE Business Conditions Survey show that conditions remained strong during the third quarter of 2021,” said NABE President David E. Altig, executive vice president and director of research, Federal Reserve Bank of Atlanta. “Two-thirds of respondents—66%—anticipate an increase in real GDP between 3.0% and 5.9% from Q3 2021 to Q3 2022, while 28% of respondents forecast real GDP to grow between 0.1% to 2.9%.”

“It is clear that the finance, insurance, and real estate sector experienced a strong third quarter according to survey respondents, while the transportation, utilities, information, and communications sector suffered the largest deterioration across the board,” added NABE Business Conditions Survey Chair Eugenio J. Aleman, chief economist, Energy Information Administration (EIA). “One-third of panelists indicates that the biggest downside risk to their company’s outlook is increased cost pressures,” continued Aleman, “while the biggest upside risk to their company’s outlook is a subsidence of COVID-19 cases and fears in the U.S., cited by 31% of respondents.”

HIGHLIGHTS

• Forecasts for real GDP growth over the next four quarters (Q3 2021 through Q3 2022) have shifted ever-so-slightly downward relative to those in the July survey (which covered Q2 2021 through Q2 2022). Two-thirds of respondents (66%) anticipate an increase in real GDP between 3.0% and 5.9% from Q3 2021 to Q3 2022, while 28% of respondents forecast real GDP to grow between 0.1% to 2.9%, up from only 2% of respondents who held this view in the July survey.

• Almost two-thirds (65%) of respondents report that sales at their firms increased in the third quarter (Q3) of 2021—slightly less than the 66% who reported increases in the second quarter in the July survey. The share reporting a decrease in sales, however, increased from 3% in the July survey to 6% in the current survey.

• The net rising index (NRI) for profit margins—the percentage of panelists reporting rising profits minus the percentage reporting falling profits in Q3 2021—is 25, a strong reading, but also a marked decline from the Q2 2021 record high of 35. This is the fifth consecutive survey in which the NRI is positive. The services sector has the largest profit margin NRI for the quarter at 35.

• The NRI for prices charged during Q3 2021 rose 12 points to 40, up from the Q2 2021 reading of 28. No respondents indicate their firms charged lower prices during Q3, and none expect their firms to cut prices over the next three months. Goods-producing firms lead the increase in price hikes, with 85% of respondents from that sector reporting that their firms charged higher prices in Q3, and 92% expecting price increases during Q4.

• The NRI for materials costs in Q3 2021 rose to 70—up from 59 in the previous quarter, and the highest reading since Q2 2008. Seventy percent of respondents report cost increases in Q3, up from 61% in Q2. NRIs for all sectors are positive, led by the transportation, utilities, information, and communications (TUIC) sector at 100, and followed by the goods-producing sector at 92. The NRI for expected costs in the next three months rose to 69 in the October survey, up from 50 in the July survey.

• The percentage of respondents indicating that wages rose in Q3 increased to 58% from 51% in the July survey. This is the fifth consecutive increase in the NRI for wages.

• Hiring decelerated during Q3 2021, resulting in the NRI for employment declining from 28 in the July survey to23 in the October survey. Thirty percent of respondents cite increased employment at their firms during Q3, with 7% reporting declines. NRIs for all sectors are positive, led by the finance, insurance and real estate (FIRE) sector at 44. The forward-looking NRI for employment fell to 24 in the October survey, down from 36 in the July survey. Panelists from the services, goods-producing and FIRE sectors anticipate that their firms will add to rather than decrease headcount in the next three months.

• The share of respondents reporting shortages of skilled labor continued its ascent trajectory during Q3 2021. Forty-seven percent of respondents report shortages of skilled labor during the quarter, compared to 32% who reported such shortages in the July survey (covering Q2 2021). The share reporting shortages in unskilled labor, however, declined from 16% in the July survey to 11% in the October survey.

• Investment remained strong for companies in Q3 2021, with the NRI for capital spending unchanged from the previous survey at 33. Thirty-eight percent of respondents report that capital spending rose at their firms during Q3, up from 34% in Q2, with 5% noting declining investment over the third quarter.

• The NRI for equipment, information, and communications technology spending is 33, declining from 38 in the July survey. Thirty-seven percent of respondents note rising activity in Q3, down from both the 47% in the April survey and the 38% in the July survey; 4% cite declines over Q3. The FIRE sector has the highest NRI among all the sectors—47— unchanged from the reading in July.

• After the NRI for capital spending on structures turned positive in the July survey for the first time since the COVID-19 pandemic began, it slipped back to neutral in October. Nineteen percent of respondents cite both rising and falling capital spending on structures for Q3, with 61% noting no change in activity.

• According to panelists, the biggest downside risk to their company’s outlook is increased cost pressures, cited by 33% of respondents. This is followed by rising COVID cases, cited by 28% of those surveyed. One-fifth of respondents cites supply-chain disruptions as their firms’ biggest downside risk. Twelve percent indicate tax increases as their biggest concern.

• Nearly-one third (31%) of panelists indicates that the biggest upside risk to their company’s outlook is a subsidence of COVID-19 cases and fears in the U.S. This is followed by 26% of respondents who cite a ramping up of supply chains, led by those from the goods-producing sector, and 25% noting an increase in people returning to the workforce, led by the services and TUIC sectors. Only 10% of respondents indicate federal spending increases as an upside risk.

• The COVID-19 pandemic pushed many companies to institute work-from-home policies. Almost two-thirds (65%) of respondents indicate that their firms will implement a flexible/hybrid work environment even after the pandemic subsides— up from 61% in the July survey.

• Forty-seven percent of panelists indicate that their companies are experiencing a worker shortage, up from 39% in the July survey, with the shortfall most prevalent in the goods-producing sector. The reasons vary: 27% of panelists cite a shortage of applicants—up from 14% in the July survey—and 20% report that there are plenty of applicants but inadequate matches, up slightly from 17% in the July survey.

• None of the panelists indicates that their firms’ labor shortages (if applicable) will abate by the end of 2021. Thirty-six percent of panelists expect this will happen sometime in 2022, and 14% specify it will happen in 2023 or later. Compared to results in the July survey, these shares are up from 18% and 10%, respectively. Nearly a quarter (24%) of panelists cites “Don’t know/NA,” indicating the uncertainty in the labor market.

• Half of the panelists indicates that their companies are experiencing delays or shortages in receiving materials or other inputs, up from 40% in the July survey, with those from the goods-producing sector accounting for the largest share holding this view. Nineteen percent of all respondents specify that the shortages have not affected output, while 18% note a minor impact. Thirteen percent of panelists indicate that delays/shortages have had a major impact on output, led again by the goods-producing sector, and up from 5% in the July survey

• Despite the increase in shortages and delays compared to those reported for Q2 in the July survey, panelists indicate that their firms are slightly less willing to push the higher costs on to customers. Indeed, 19% of panelists indicate that their firms are passing along these higher costs to their customers, down moderately from 22% in the July survey, with the largest share coming from the goods-producing sector. Twenty-one percent of panelists indicate that their firms are experiencing shortages, but not passing along the higher costs, up from 17% in the July survey.

• Thirty percent of panelists—led by those from the more labor-intensive services and FIRE sectors—anticipate that if their firms are experiencing higher input costs, they expect them to be permanent. This is up from the 22% who cited this in the July survey. Twenty-one percent of respondents anticipate that the increase in costs will be only temporary, down from 34% in the previous survey, and led by respondents from the more materials-intensive goods-producing sector. Nearly one-third (32%) of respondents indicates that their firms are not experiencing any significant cost increases, up from 27% in the July survey.

• Sixty-one percent of panelists indicate that their firms’ sales volumes have already returned to their normal level of operations relative to the pre-pandemic period, matching results in the July survey, and led by the services and FIRE sectors. Seven percent expect this to happen by the end of 2021. Ten percent of respondents anticipate that sales will return to their “normal level of operations” in the first half of 2022, and another 10% expect this to occur in the second half of next year. Six percent do not anticipate normalcy until 2023 or later, up from 1% of panelists who held that view in the July survey.