Business executives in Orange County are starting the third quarter with the highest level of optimism in nine years, according to the latest business outlook index from California State University, Fullerton.
The quarterly index is based on a survey conducted by the school’s Mihaylo College of Business and Economics, and a reading higher than 50 represents positive prospects about the economy. It reached 93.9 for the third quarter—up from 91.6 notched three months ago and 72.8 a year earlier, when the index last saw a decline.
“Executives continue to feel more optimistic, maybe even upbeat,” said Anil Puri, dean of the Mihaylo College and director of the quarterly index project.
Puri said the consistent increases in the index in recent quarters might be “more of a bounce-back effect,” as the local economy is coming out of a very deep recession. The outlook could fall back after businesses and consumers get used to a more stabilized economy.
“People are feeling substantially better emotionally, and this survey is about people’s sentiments,” Puri said. “They feel much better relative to the past three or four years. Before the recession, things were going well, so although there was some change up and down … there wasn’t an acceleration in sentiments like this.”
Cal State Fullerton’s survey typically asks for participants’ short-term outlook for the overall economy and for their own business sectors across several metrics, including sales and profit projections, and hiring plans.
The latest index was based on responses from 61 local business owners, executives, managers and others.
More than 68% of the respondents—compared with 57% last quarter—said they expect “significant or some” growth in their respective industries from July through September. About 4% of respondents said they anticipate weaker business, similar to a 4.8% rate a quarter earlier.
Construction management company Cumming Corp. is looking forward to finishing this year as “our second-straight year of double-digit growth both in [revenue] and earnings,” according to Chief Financial Officer Brian Ruttencutter.
San Diego-based Cumming has an office in Aliso Viejo. The privately held company sees between $50 million and $100 million in annual revenue and has about 250 employees across 18 offices in the U.S. and abroad.
An increasing number of construction projects here and in other parts of the state have helped drive Cumming’s business recently.
“We’re seeing growth … in what we call the ‘corporate sector’ … with new facilities and expansion of headquarters,” Ruttencutter said. “Healthcare continues to be a strong sector for us. And there’s a slow but sure recovery in the hospitality sector. That’s been one of our primary market segments [for some time], and it really declined in the recession. We’re seeing that come back now.”
The CSUF survey reflected a stronger outlook for employment by local businesses as they enter the third quarter.
Hires
More than 53% of respondents said they intend to boost their workforces, compared with 45% last quarter. It’s the first time in the last 10 years that more than half of the local businesses in the survey said they are planning to hire more.
About 5% said they plan to cut jobs in the third quarter, down slightly from 6% three months earlier.
Thoughts of potential sales and profit in the third quarter were mixed.
About 72% of the firms surveyed indicated they expect increased revenues this quarter, up from 60% in the previous quarter. The share of respondents who expect lower sales also increased, to 7% from 2%.
About 57% of the firms said they expect higher profits in the next three months, up slightly from 55% last quarter. More than 16% of firms said they anticipate lower net income, compared with 6% last quarter.
Survey participants were asked about expected levels of inventory and equipment investment in the third quarter. About 37% indicated they are likely to increase inventory levels, down from 42% a quarter earlier. Nearly 12% of respondents said they are anticipating a reduction in inventories, versus 5% last quarter.
The latest survey revealed a new concern that has surfaced among OC business executives. The overall economy and government regulation remained the two biggest worries—at 45% and 27%, respectively—but concerns over labor costs was the next most significant, at 8.3%. Labor costs were not a concern at all for survey respondents for the second quarter and were cited by 1.5% of respondents in the first quarter.
“That has to do with healthcare and [the healthcare reform] in particular,” said Cal Laird, chief financial officer and chief operating officer of Kenny the Printer. “It’s not the wage-rate kind of thing—it’s an overall impact.”
The Irvine-based company provides printing and marketing services. It has 40 employees and sees about $10 million in annual revenue.
Impending changes from federal healthcare reform apply to businesses with 50 or more employees and “won’t affect us, but we see companies that have gone through renewals … and medical costs have gone up between 9% and 20%,” Laird said.
Kenny the Printer has seen steady growth in business over the past six quarters, increasing sales by about 10% over that period, according to Laird, who added he’d be “happy to maintain the same level of sales and profits for the third quarter.”
Housing
A recurring question in the CSUF survey called for executives’ projections of OC housing prices, a query that usually asks for a projection through the end of the year. The current survey instead asks respondents for their views on where housing prices could be in December 2014.
Responses were more varied compared with recent surveys. Nearly 37% of participants said they expect prices to fall. One in three respondents said they expect prices to rise some, but by no more than 5%. The rest, 30%, said prices will rise by 5% or more.
The comparable question in last quarter’s survey had 99% of respondents to indicating expectations of imminent price increases, a projection that has proved true over the past three months, according to industry data.
