Orange County business executives are feeling less optimistic about the local economy heading into the third quarter, according to the latest quarterly index of business sentiments published by the Mihaylo College of Business and Economics at California State University-Fullerton.
The index, which is based on a survey conducted late last month, hit 83.8. That’s down from 88.1 for the second quarter and 93.9 a year ago, which was the highest reading in nearly a decade.
A level above 50 indicates a positive outlook for the local economy.
The index is at its lowest level since the start of 2013, when it reached 75.
“I did not expect such a drop,” said Anil Puri, dean of the business school and director of the Orange County Business Expectations Survey, as the index is known.
Puri pointed to some macroeconomic elements that likely played into the dampened sentiments.
“Some factors might have been the bad report on the first-quarter GDP growth, which had a 2.9% decline,” he said. “And the deadlock of Washington, regarding the critical situation in the Middle East, along with the increase in the minimum wage.”
The latest survey is based on responses of 72 local business owners, executives and managers. About 39% of the sample pool were representatives of companies with more than 100 employees. Businesses that have between 20 and 100 employees accounted for 36% of the pool, and those with fewer than 20 workers made up 26%.
The quarterly survey primarily checks the pulse for a general outlook on the local economy. It also measures other variables, such as sales estimates, hiring plans and biggest concerns.
Growth
A smaller portion of participants—65% versus 71% in the second quarter—said they expect some growth in their own industries. About 11% of respondents—up from 8%—said they expect weaker business this quarter.
Dan Struve, chief executive of Irvine-based Helpmates Staffing Services, said there’s been steady growth in the staffing industry, where there is a sense of optimism, “albeit a cautious one.”
“The staffing industry has been very solid, partly because there’s been an increasing pressure on finding qualified candidates,” Struve said. “There is a shortage for qualified skilled people. There are enough people based on a raw count, but the skills are the issue.”
“That Filter”
The challenge in finding the right employee means employers seek out the help of temporary staffing firms, such as Helpmates.
“When our clients post job openings, they get inundated with hundreds of resumes, and we’re that filter they need,” Struve said.
The majority of the survey participants said they expect to hold on to their current work forces for the next three months. About 35% said they expect to add workers, compared with 40% last quarter. About 7% said they are likely to make job cuts, versus 5% last quarter.
“People have found that they can get more production with fewer people than they thought they could, so hiring has been kind of slow,” said Vic Hausmaninger, founding partner of Irvine-based accounting firm HBLA Certified Public Accountants Inc., based on observations of his clients and other businesses. HBLA works mainly with privately owned companies.
“I see a little bit of growth, but there are always sectors that are stronger than some others,” he said. “The healthcare sector, leisure and hotels sectors have been good. Manufacturing … and the financial areas have sort of been flat. But there is some increases in compensation.”
Revenue Expectations
Expectations for revenue generally declined for the second quarter in a row.
About 61%—versus 66% last quarter—said they expect sales to increase. And 14%—versus 10%—said they expect lower sales.
Profit expectations were mixed, as the proportions of respondents expecting higher or lower profits increased. About 58% of the firms surveyed said they expect stronger profits, up from 51% last quarter. About 14% said they expect lower profits, up from 10%.
The bulk of the respondents—63%—said they expect to keep their inventory and equipment investments about the same.
Uncertainty
“Some of the uncertainties that exist today are tax-related,” Hausmaninger said, referring to the Small Business Tax Relief Act, which deals with the amount that small businesses can expense for tax purposes if used for investing in new capital assets. “Clients are asking, ‘What’s going to happen with the equipment expensing rules?’ For the past few years, businesses could expense a heck of a lot of expenses. Now we’re back down to $25,000 unless Congress changes it, and Congress isn’t going to act until after the election.”
Those questions likely played into the survey respondents marking “government regulation” as the second-biggest point of worry, at 38% versus 33% last quarter. The state of the overall economy remained the top concern, at 43%, down from nearly 48%.
Labor Costs
Labor costs were the third-largest concern for business executives here, at 10% versus 1% three months ago.
“It’s the increase in the minimum wage,” Puri said. “There’s also the fact that in this sample [of survey participants], there are more of the smaller-size firms, so the labor cost could affect them more.”
The survey concluded with a question that called for executives’ opinions on the pace of economic growth in California against that of the U.S.
A smaller group of participants—35% versus 41% last quarter—said the state will grow faster than the U.S. Approximately 38%, about the same as last quarter, said California will lag the nation. Nearly 28%, up from 21%, said the two economies will move similarly.