Hurricanes, inflation, higher interest rates,they’re starting to weigh on local executives’ minds.
That’s according to California State University, Fullerton’s fourth-quarter business expectations index, which checks in at 75.9, its lowest level since the war in Iraq began more than two years ago.
The latest reading is down from 83.6 last quarter and marks the second consecutive quarter of decline.
The index hit a low of 31.6 in the spring of 2003 at the onset of the Iraq war. It dramatically rebounded a few months later after the initial ground war ended quickly. The index has been at 80 or higher for the past two years.
The current outlook certainly isn’t one of doom and gloom.
Some 84% of executives surveyed expect overall business activity to improve or stay the same in the fourth quarter, down slightly from 87% last quarter. And a general index reading above 50 indicates that Orange County executives, business owners and managers are optimistic.
The index, which began in 2002, hit a peak of 94.9 for its forecast in the third quarter 2004. The quarterly index is based on a survey by Cal State Fullerton’s Institute for Economic and Environmental Studies in association with the Business Journal.
“The index indicates that business is concerned about the future, and both the immediate reasons are Hurricanes Katrina and Rita,” said Anil Puri, dean of the College of Business and Economics at Cal State Fullerton. “But the longer-term concerns are indicated by fear of higher interest rates and energy pricing.”
The biggest business threat, according to executives?
Roughly 37% of respondents cited the Federal Reserve’s 11 rounds of 25 basis-point hikes in the federal funds rate since last summer. Higher interest rates affect everything from a company’s cost of borrowing money to fund expansion to a potential homebuyer’s ability to make a deal.
Oil Fears
Another 31% of respondents said the biggest threat was the rising price of gas to above $3 a gallon, which is hitting businesses and their workers in the pocketbook.
Another worry on the energy front: November natural gas futures on the New York Mercantile Exchange have shot higher, boosted by concerns about damage done to Gulf Coast gas facilities by the recent hurricanes and about heating needs this winter.
“That obviously has people concerned about the impact on the total economy,” said Bob Divine, chief executive and founder of O’Shea, Divine & Co., a Newport Beach-based executive recruiting firm.
Still, Divine isn’t downbeat: “I don’t see any cause for panic at this point,” he said.
Half of the executives polled expect to keep their workforce steady in the fourth quarter, with 11% planning to cut jobs. That’s in line with the third quarter’s results. Some 46% of respondents expect overall labor costs to stay flat in the fourth quarter, the same as last quarter.
About 64% of respondents expect to post a sales gain this quarter, down from nearly 76% heading into the third quarter.
Profits are seen rising by 57% of the respondents, down from 62% last quarter.
Meanwhile, 54% of respondents expect “significant or some growth” in their industry in the quarter, compared to 72% in the past period.
It looks like OC businesses are becoming more cautious in managing their inventory or equipment in the coming quarter.
About 74% of respondents don’t expect to make a change in their inventory in the fourth quarter, compared to 58% in the past quarter. Meanwhile, just 18% expect to boost inventory, compared to 33% going into the third quarter.
Energy Use Down
Energy use by manufacturers continues to decline here, said Jeff Lebow, project manager for economic and business development for Edison International’s Southern California Edison operation in OC.
Lebow, who responded to the survey, said there’s been an annual 2% to 3% erosion in electricity use by industrial customers during the past decade or so.
“In the early 1990s we saw moving vans drive up to buildings, now we are seeing a hollowing out of corporations where they move key production elements out of state and leave sales and distribution here,” Lebow said. “We are seeing a diminishing of the load, it’s a slow process.”
The survey was conducted from Sept. 20 to Oct. 2.
Of the 720 businesses contacted, 18% responded to the survey.
