NABE Business Conditions Survey
January 2019
NABE Panel Reports Less Growth in Sales, Pricing, and Profit Margins Last Quarter; Panelists Trim Expectations for Investment, Hiring, and GDP in 2019
The January 2019 NABE Business Conditions Survey report presents the responses of 106 NABE members to a survey on business conditions in their firms or industries conducted between December 17, 2018, and January 9, 2019, and reflects fourth-quarter results and the near-term outlook.
COMMENTS: “The results of the January 2019 NABE Business Conditions Survey indicate that most respondents do not expect a recession within the next 12 months, but fewer respondents than previously expect robust economic growth in the year ahead,” said NABE Business Conditions Survey Chair Sam Kyei, CBE, chief economist, SAK Economics LLC. “Respondents are nearly unanimous that growth in inflation-adjusted gross domestic product—real GDP—would remain positive through the end of 2019. Two-thirds of respondents expect growth to exceed 2%, however, that share is smaller than the 90% of respondents in the previous survey—which covered the outlook from the third quarter of 2018 to the third quarter of 2019.
“Additionally, fewer survey respondents report rising sales at their firms in the fourth quarter of 2018 compared to the third quarter. Profit margin increases became significantly less widespread in the fourth quarter of 2018. Materials input costs are rising at respondents’ firms, especially goods-producing firms. Fifty-three percent of survey respondents report shortages of skilled labor at their firms and the current tight labor market conditions continue to push firms to raise wages, increase training, and consider additional automation. However, prices charged by respondents’ firms appear to be anchored at the previous quarter’s levels. Two-thirds of respondents indicate their firms’ prices were unchanged during the fourth quarter of 2018.”
“After a year of robust capital spending, business investment has cooled a bit, and expectations for the next three months slackened similarly,” added NABE President Kevin Swift, CBE, chief economist, American Chemistry Council. “Indeed, the capex story is really a tale of two cities. Fewer firms increased capital spending compared to the October survey responses, but the cutback appeared to be concentrated more in structures than in information and communication technology investments.
“A large majority of respondents—84%—indicate that one year after its passage, the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans,” continued Swift. “The goods-producing sector, however, has borne the greatest impact, with most respondents in that sector noting accelerated investments at their firms, and some reporting redirected hiring and investments to the U.S. Seventy-seven percent of respondents indicate that trade concerns have not caused their firms to change investment, hiring, and pricing plans, a result similar to that in the previous survey. But, a larger share of panelists from the goods-producing sector compared to those from other sectors reports that adjustments are being made at their firms, with higher selling prices and delayed investments cited as the most prevalent changes.”
HIGHLIGHTS
• Most survey respondents do not expect a recession within the next 12 months. Nearly two-thirds—64%—of respondents expect expansion.
• Fewer survey respondents report rising sales at their firms than in the previous survey. Respondents report a significant deterioration in sales activity in the fourth quarter of 2018, with 47% of panelists indicating that sales at their firms rose in the final quarter of last year, down from 61% in the October survey. Moreover, 17% of respondents in the January survey report falling sales at their firms, up from 6% in the October survey. The difference between the rising and falling shares—the Net Rising Index (NRI)—tumbled to 29 in January from 55 in October.
• Expectations for sales increases over the next three months also deteriorated sharply from the expectations reported in the October survey. The NRI for expected sales plunged to 26 from 56 in the October survey.
• Profit margin increases became significantly less widespread in the fourth quarter of 2018. The share of respondents reporting rising profit margins fell to 23%, while 20% report deteriorating profit margins. The NRI fell from 29 in October to 3, a two-year low.
• Prices charged by respondents’ firms appear to be anchored at the previous quarter’s levels. Two-thirds of respondents indicate their firms’ prices were unchanged during the fourth quarter of 2018. The NRI for prices charged is 19, down from 37 in the previous quarter. NRIs are similar for three of the major industry sectors: finance, insurance, real estate (FIRE) (an NRI of 17); services (16); and transportation, utilities, information, communications (TUIC) (14). Respondents from goods-producing firms cite broader price increases, resulting in an NRI of 45.
• The overall NRI for materials costs for the fourth quarter of 2018 is 37, down from 53 in the October survey, and the lowest reading since the October 2017 survey. But, all four sectors have high NRIs for materials costs, led by the goods-producing sector with an NRI of 64. All major industry sectors also expect a rise (on net) in materials costs during the next three months, with respondents from FIRE firms expecting more widespread cost increases than those from firms in other sectors.
• The NRI for wages and salaries remains strong, rising in January to a new all-time high of 58. Wage increases are likely to remain widespread over the next three months, as the NRI for expected wage costs is very high at 74.
• Employment growth improved modestly in the fourth quarter of 2018 compared to the third quarter. The NRI ticked upward to 25 in January from 23 in October. Slightly more than one-third (35%) of respondents report rising employment at their firms over the past three months—up from 31% in the October survey—while 10% of respondents report falling employment—up from 8% in the previous survey. The forward-looking NRI is 25, down from 29 in October.
• After a year of robust capital spending, investment cooled a bit; the NRI fell from 39 to 26. Expectations for the next three months slackened similarly, with the NRI falling from 37 to 20. The capex story is really a tale of two cities. Businesses are spending more for replacement than expansion. The NRI for information and communications technology (IT) capital spending remains strong at 45, only slightly down from the October reading of 49, but higher than the other readings in 2018. On the other hand, capital spending on structures has not been as robust; the current NRI of 9 has been almost constant for a year.
• More than half of survey respondents (53%) report shortages of skilled labor at their firms. This is an increase from the 47% in October, and the highest percentage since October 2000.
• Roughly two-fifths (41%) of respondents report their firms have either no difficulties hiring experienced workers (22%) or no open positions (19%), percentages that have held steady since the October survey.
• For respondents reporting difficulties in hiring, the positions that are most difficult to staff are high-skill positions—cited by 74% of respondents. This is followed by difficulty filling mid-skill positions, cited by 52% of respondents. Only 27% of respondents report difficulty filling low-skill positions.
• The majority—84%—of respondents indicates that one year after its passage the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans. This is similar to the 81% in the previous survey.
• A majority of respondents (77%) indicates that trade concerns have not caused their firms to change investment, hiring, and pricing plans—a percentage equivalent to that in the previous survey. But sizable shares of responses from goods-producing panelists report their firms are raising prices (36%) and delaying investments (27%).
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