Orange County executives are expecting a slow fourth quarter amid uncertainty about the economic recovery, according to economists at California State Univer-sity, Fullerton.
The school’s quarterly index of local business expectations sank by more than a third to 46.3, its lowest level in two years.
A reading of 50 or higher for the index signals expectations of growth in the local economy.
The index had been above the break-even mark for seven quarters prior to the latest reading.
“This has been a much sharper drop,” said Anil Puri, dean of the Mihaylo College of Business and Economics at Cal State Fullerton, speaking of the latest decline.
A blend of troubling economic indicators such as stubborn unemployment and the federal debt at home and Europe’s shaky financial system— mixed with concerns a slowdown in China—drove local expectations down, according to Puri.
“I’m not surprised that overall index is down,” Puri said, adding that the current quarter hasn’t done much to invigorate the business landscape.
The index bottomed out at 15.2, at the depths of the recent recession in the first quarter of 2009.
It reached its high point of 94.9 in 2004.
The index is based on a survey of 77 executives, professionals, managers and business owners here, who are polled on their views of the economy in general in addition to outlooks on their own industries.
Respondents appear to be more optimistic about the economy at large than their own lines of business.
The number of executives and business owners who expect the overall economy to get better or hold steady in the fourth quarter was 67%, down from 82% in the third quarter.
Only 33.8% of executives forecast growth in their own industry, however. That’s down from 49% in the prior index.
Ronald Stein, vice president of PTS Staffing Solutions in Irvine, said it’s an “irony” that his consulting business is doing well targeting the energy industry while much of the rest of the economy faces uncertainty.
“We went through two years of nothing,” he said. “But the energy infrastructure is now making a little money, and they’re investing that. It is good news and bad news.”
THE NEWS:
Cal State Fullerton index of local business expectations dips into negative territory
BACKGROUND:
Index has been reliable indicator, with high of 94.9 in 2004 and low of 15.2 in first quarter of 2009
WHAT’S AHEAD:
Fears of a slowdown in China will join the federal debt and unemployment, Europe’s financial system, as areas of concern in coming months
Almost a third— 32.5%—of respondents said they anticipated weaker business for their industry. That’s up from 19% in the third quarter.
The percentage of executives who expect sales to rise in the fourth quarter was flat at about 48%.
More businesses cut their outlook for revenue in the fourth quarter, according to the survey, with 20.8% of companies forecasting lower sales.
That was nearly double the amount who expected a dip in sales in the third quarter.
Despite rising expectations of decreased revenue, employers here appeared unlikely to make major changes in payroll.
A majority of the companies surveyed— 53.6%—said they had no intention of making changes in their workforce. That’s down about five percentage points from a quarter earlier.
It could be that companies are “expecting the slowdown to be temporary in nature, and it’s expensive to let people go and then re-hire, so they hold on,” Puri said.
More than 35% of respondents said they intend to hire more in the fourth quarter, which includes the year-end holiday season, which typically sees many temporary hires. That was up about one percentage point from the third quarter.
Nearly 11% of respondents said they plan to cut jobs in the fourth quarter, up from about 7% three months earlier.
Labor Costs Up
Labor costs are a growing concern for OC executives, which could be a positive sign for the economy.
“Looking forward, people anticipate future labor costs to be higher,” Puri said. “Again, that’s sort of a positive sign that companies are expecting to hire.”
Fewer companies are anticipating higher profits in the fourth quarter. About 39% of the respondents said they expect an increase in profits, compared with 45% last quarter.
The number of executives expecting lower profits more than doubled to 28.6% from 14% last quarter.
Credit Picture
Access to credit has stayed the same for the majority of the companies surveyed, with 58.7% indicating no change. Conditions have improved for 21.4% of respondents, down from 33% in the third quarter. Credit has gotten tougher for 20%, up from 10% in the third quarter.
“People’s expectations became very positive in 2010,” said Fred Helms, senior vice president at the Newport Beach office of Minneapolis, Minn.-based U.S. Bancorp. “But it just hasn’t panned out or yielded further growth. A lot of companies are basically staying at levels that they’ve been at for the last 12 to 18 months.”
New Questions
The latest survey included two new questions for executives.
One asked about expectations for the national economy. More than half of executives said a pick-up is due in the next six months. Nearly a quarter of respondents said the economy is on the verge of another recession.
The survey also gauged sentiments regarding the housing market and residential construction in OC. Nearly 62% of respondents said that any substantial activity here is at least three years away.
About 12% said they expect a construction recovery within the next year.
