Orange County’s executives have regained some optimism as they head into 2014, according to the latest business expectations index published by the Mihaylo College of Business and Economics at California State University, Fullerton.
The quarterly index, which is based on a survey of 60 local executives conducted in mid-December, reached 88.8 for the first quarter, up from 85.2 three months ago and 75 a year earlier.
A level above 50 generally indicates positive expectations. The index reached a peak of 93.9 at the beginning of the third quarter in 2013, just prior to a year-end dip.
Shutdown, Healthcare
“I think last quarter’s sentiment may have been a result of the government shutdown that happened at the same time as the survey,” said Anil Puri, dean of the Mihaylo College and director of the quarterly research project.
“Going forward, I think that we have some momentum building, and business sentiments will continue to get better over 2014,” said Puri, adding that uncertainties and costs related to the “healthcare fiasco” continue to temper the outlook among local executives.
The latest survey included greater representation from larger companies than in prior reports. About 40% of the respondents, versus 34% in the fourth quarter, were managers or owners of companies with more than 100 workers. Smaller companies, with fewer than 20 employees, made up about 23% of the survey pool, compared with 31% last quarter.
The index reflects the general outlook on the economy and also measures a range of variables, such as prospects on revenues, profits, inventory and hiring.
About 92% of survey respondents said they expect overall business activity to improve or stay the same, compared with 90% a quarter earlier.
Executives’ views toward their own industries also improved over the past three months. More than 66% of the respondents said they are projecting stronger business from now through March, compared with 61% last quarter. Nearly 9% of respondents said business could slow down, a drop from 12% a quarter prior.
About 70% of firms said they expect sales to grow, while nearly 7% said they anticipate weaker sales. Quarter-earlier figures were 67% and 10%, respectively.
Companies appeared careful about projecting profitability, as a larger share of the respondents said they expect steady levels of operating profits. About 50% of executives predicted increases in quarterly profit, down from 53% last quarter. The proportion of respondents anticipating decreases in profits shrank from 15% to 10%.
More companies are looking to make changes to their workforces this quarter, with 39% of survey participants—compared with 32% in the fourth quarter—indicating plans to hire. Those intending to cut jobs also increased to 12% from 7%.
Inventory, Equipment
A larger share of the executives surveyed held a conservative outlook regarding their inventory and equipment levels. More than 10% of the companies said they plan to reduce inventory, versus 7% last quarter. About one-third, nearly the same proportion as last quarter, said they plan to increase inventory-related investments.
The study asked executives about macroeconomic factors that could significantly affect their businesses. The state of the overall economy and government regulation remained the two biggest concerns, while other worries surfaced more prominently in the latest survey.
The proportion of survey participants who are concerned about credit availability nearly doubled to 10%, and alarm over labor costs rose to 5% from 2%.
“I think that is a reflection that the economy is improving, and therefore, credit is going to be tighter with higher interest rates,” Puri said, citing the Federal Reserve’s recent announcement that it will start tapering its bond-buying program, which has helped maintain interest rates at near zero for the past five years or so.
Local business executives showed more confidence about California’s pace of economic growth than they did three months ago. Half of those surveyed—compared with 39% last quarter—said California could grow faster than the U.S. overall, and 31% said the state will lag the nation, down from 35%.
“There’s quite a reversal about the state of California’s economy versus the national economy,” Puri said. “Overall, the state’s unemployment levels have fallen, and there’s a definite sense of a much better economic condition throughout California.”
The jobless rate for California was 8.3% in November, down from 9.6% year-over-year, based on the latest data available. That remains higher than the U.S. jobless rate of 7% in November, but it reflects a more significant change, considering the nationwide level was 7.4% a year earlier.
OC’s unemployment rate was 5.6%, down from 6.9% a year ago.
Expectations for housing prices in Orange County continue to soften, according to the study. About 65% of respondents—up from 56% last quarter and 37% two quarters ago—said they expect prices to fall over the year.
