Orange County’s business executives have tempered their outlook for the short term, according to the latest business expectations index from California State University, Fullerton, registering the first quarterly decline in a year.
The index is based on a survey conducted by the school’s Mihaylo College of Business and Economics. A reading of more than 50 generally indicates expectations of future growth.
The index slipped from a reading of 93.9 three months ago—the highest level in nearly a decade—to 85.2 for the fourth quarter.
Local executives remain optimistic compared with the same time a year ago, when the index fell slightly to 70.5.
The timing of the latest survey—which was conducted from Sept. 24 to Oct. 2—likely contributed to the decline in business expectations, according to Anil Puri, dean of the Mihaylo College who oversees the quarterly index project.
“The survey was conducted when the government shutdown happened,” Puri said. “I think the next-quarter survey will tell whether this is a trend or whether this is a jolt and things will get better. That will depend on how long the closure will last. Right now, it’s just creating a lot of uncertainty, and we’ve lost some of the upward momentum we built earlier this year.”
The survey asks for participants’ outlook on several fronts, such as the overall economy, their own business sectors, profit projections and hiring plans.
The latest index was based on responses from 60 business owners and executives.
About 61% of respondents—down from 68% a quarter ago—said they expect “significant or some” growth in their industries for the remainder of the year. Nearly 12% said they’re anticipating weaker business, compared with 4% last quarter.
Wayne Foss, president of Foss Consulting Group in Fullerton and a respondent to the survey, said he’s observed indications of the general economy’s improvements, which he said have helped his real estate-focused business.
Foss Consulting provides market studies, litigation support, and appraisal services for various property sectors, including residential, retail, industrial and hospitality.
“Interest rates have jumped about a percent in the past six to eight weeks,” Foss said. “Interest is a direct reflection of the demand for money. This [represents] … the steady growth in employment levels that’s been ongoing. If people are working, they’re going to spend money and buy on credit, and interest rates reflect that demand.”
The fall season, however, typically brings a slowdown in the real estate business, Foss said.
“In the last 30 days, the real estate market has come to a halt,” he said. “Part of that is because of interest rates. Another part of that is in the fall, residential sales dry out. They don’t pick up again until about February. Families with children want to get into a home and settle down before the school year starts. And now every four weeks, there’s a holiday of some sort. [People don’t want to be] buying a house in the middle of all of that.”
The survey also asked whether firms are planning to increase their workforces in the next three months.
About 32% of respondents said they’re looking to hire, compared with 54% last quarter. About 62% said they intend to make no changes—up from 41%.
Sales expectations also dampened, as 10% of respondents said they expect revenue to fall, versus about 7% last quarter. Those who expect to see revenue increases accounted for 67% of the survey pool, down from 72%.
About half of the firms said they expect to see higher profits this quarter, compared with 57% last quarter. About 32% said they’re anticipating a flat quarter, up from 26%.
Newport Beach-based accounting firm DBBMcKennon enjoyed a 33% revenue increase for the first nine months of the year compared with the same period last year, according to Founding Partner Michael McKennon, who participated in the survey. He said the firm hasn’t held back on spending money on marketing and networking efforts, which he said has helped boost business.
“We invested and continue to invest in technology,” he said, adding that the firm plans a few hires for the fourth quarter.
Survey responses were mixed regarding plans for investments in inventory and equipment. The proportions of those who said they’re likely to increase inventories, as well as of those who expect to make cuts, declined. More have indicated plans to keep inventories at the same level, with 62% of respondents saying they plan to do so. The results indicate a “conservative bent of mind,” Puri said.
The survey asked local executives to name the most significant concerns they have for their companies. The state of the overall economy remained the biggest worry, at about 47%. Government regulation was the next major concern, at 33%, up from 27% three months ago.
Concern over labor costs fell to about 2%. Labor costs were cited in the previous survey as a key concern by 8% of respondents, mainly driven by uncertainties regarding elements of healthcare reform, including some that took effect last week.
“It appears that the concerns over the healthcare act and government shutdown are being reflected in the ‘government regulation’ factor,” Puri said.
In a repeat question, the survey asked for projections of Orange County housing prices through the end of 2014. The majority of respondents said they expect a decline in prices, with 56% indicating prices will likely fall, compared with 37% last quarter. About one in five said prices will rise by 5% or more.
