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Executives’ Economic Outlook Pulls Back for Q3

Orange County executives have tempered their economic outlook going into the third quarter—a turnabout after five straight quarters of rising expectations—according to economists at California State University, Fullerton.

A quarterly index of business expectations is at 60.6 for the third quarter, down from 65.2 at the start of the second quarter.

Overall, executives remain upbeat: An index reading of 50 or more signals a positive outlook for the quarter.

But they likely reined in their optimism after a barrage of negative news about Europe, jobs and consumer spending in the past two months.

“They are reflecting what nationwide businesses are seeing—a sudden slowdown in business activity in the month of June,” said Anil Puri, dean of the Mihaylo College of Business and Economics at Cal State Fullerton. “The national economy is not growing as quickly as expected. The Greece crisis is also affecting national business sentiment.”

The downturn in sentiment is the first since early 2009, when the index fell to 15.2 amid the worst of the recession.

The index had risen every quarter since then and moved into positive territory in the first quarter of this year with a reading of 53.3, the first upbeat showing since the third quarter of 2007.

“The hope that people had at the beginning of 2010 was a flat to slightly up recovery,” said Greg Arbues, a Santa Ana-based consultant for small and midsize businesses. “But now they are thinking we may be headed to a double-dip type of recession.”

The index, based on a survey of more than 100 executives, professionals, managers and business owners, is designed to be a leading indicator of quarterly economic activity.

Its high of 94.9 came in the third quarter of 2004.

The index is based on a survey that also asks respondents about their outlooks on sales, profits and jobs.

The outlook on employment continues to stabilize, with 64%, of respondents saying they plan to keep their workforces steady.

That was up from 61% in the second quarter.

“We had a recent price cut and we had to cut back on staff,” said Rick Muth, a survey respondent and president of Orco Block Co., a Stanton-based maker of concrete blocks, paving stones and retaining walls. “At the same time, we are trying to keep our key staff. We have been through this before and we have to be ready when things turn around.”

Jobs

Some 22% of respondents said they intend to hire this quarter, roughly flat from the second quarter. Some 15% expect to cut jobs this quarter, compared with 17% in the second quarter.

“People aren’t necessarily laying off, but they aren’t hiring, either,” said Arbues, who runs Client Advocate Network LLC.

A big remaining obstacle, especially for small businesses, is access to credit.

“Banks are still very wary to lend,” Arbues said. “A big part of the consulting projects we take on are companies looking for credit and capital. The banks are very picky.”

The bulk of respondents, some 60%, say they’ve seen no change in credit conditions in the past three months.

Roughly 28% said there had been some improvement, albeit slow.

Some 11% of respondents said the biggest factor impacting their business was the availability of credit, up from 5% who picked it as a top concern during the second quarter, the survey showed.

“Anecdotally, I’m seeing more complaining about access to credit,” CSUF’s Puri said. “If you read into it, it appears there is more demand for credit now, so that’s a good sign.”

The state of the overall economy was cited as the top concern among respondents at 59%.

Most respondents see continued improvement or stabilization in profits and sales at their companies.

About 47% of respondents said they expect sales to rise in the third quarter, up from 41% at the start of the second quarter.

Some 24% see sales falling, up from 19% for the prior quarter. Thirty percent expect no change in sales in the current quarter, down from 39% at the start of the second quarter.

Roughly 36% of respondents expect to see higher profits in the next three months, down from 39% for the prior quarter. About 35% expect no change in profits, down from 37% for the second quarter. Twenty-nine percent project lower profits, up from 25% in the prior quarter.

“For the past 18 to 24 months, companies have cut and cut and they can’t cut any more,” Arbues said. “They are running very lean while looking for new ways to increase sales.”

Inventories

Inventories are projected to be stable for the quarter, according to respondents. The vast majority, 64%, plan to keep stockpiles unchanged, about the same percentage as in the second quarter.

Twenty percent said they plan to up inventories, on par with the second quarter. Fifteen percent said they plan to decrease inventories, also the same as in the second quarter.

“There seems to be a little bit more uncertainty about the direction of the economy, but (respondents) continue to be optimistic about OC,” Puri said. “They are going to try to hold on to their employees, they are maintaining inventory levels and they are indicating that they are beginning to see steady improvement in the local county economy.”

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