Outlook for Q3 Surges as War Worries Shrink
By ANDREW SIMONS
Fears about war and the economy among Orange County executives at the start of the second quarter have given way to wholesale optimism, according to a California State University, Fullerton survey done in association with the Business Journal.
The Orange County Business Expectations Index for the third quarter leaped to 76.6 from 31.6 at the onset of the second quarter. That was the biggest jump in a single quarter since the survey started in January 2002.
The index is a ratio of businesspeople who think the economy will improve or hold stable to those who believe it will worsen. A number higher than 50 means more people feel the economy is likely to expand.
“The end of the war is certainly a factor,” said Anil Puri, dean of the College of Business and Economics at Cal State Fullerton and director of the survey. “People are taking one step forward.”
The survey’s optimism could reflect relief over a relatively short war rather than clear signs of business improving, Puri said.
“The recovery still is very fragile,” he said. “It’s not clear that we’ll have increased momentum in the quarter.”
While the war in Iraq weighed on business sentiment in April, it seems all but forgotten now. Only 18% of executives surveyed said they expected negative fallout from the ongoing Iraq operation. Last quarter, 59% expected some negative war impact.
Overall business activity for OC companies could increase in the quarter, according to the survey. Eighty-six percent of respondents said they expected overall business activity to rise or stay the same compared to 56% in the past quarter and 78% in the year-ago quarter.
There still is room for worry.
Hiring at OC businesses isn’t likely to improve, according to the survey. Sixty-two percent of responding executives said they don’t intend to make any changes to their hiring this quarter, compared to 57% last quarter. About 26% plan to hire more people, up from 23% in the past quarter.
“That is not a surprise,” Puri said. “Employment is the last thing to improve. There will be no significant employment change until well into the third quarter.”
Executives cited other issues. The most prevalent: the health of the overall economy.
About 68% of respondents said the economy concerned them, down from 70% in the prior quarter. The second biggest worry was the cost of government regulations, such as workers’ compensation insurance. Thirteen percent cited regulations are their top worry, up from 8% in the second quarter.
Nearly half of respondents, 47.5%, said they expect no change in their labor costs in the quarter, down from 58.5% for the second quarter. More than a third, 36.4%, expect labor costs to go up, versus 30.2% in the prior quarter. Sixteen percent said they see no change, up from 11.3% in the second quarter.
Executives still are cautious about buying new business equipment and adding inventory. About 60% said they won’t be altering their buying decisions, down from 62% in the past quarter. Some 17% expect fewer spending and inventory buildup, versus 15% in the past quarter. Twenty-three percent expect to increase spending and inventory, compared to 22.5% in the past quarter.
Nearly 48% of respondents said sales could rise in the third quarter, equal to the second quarter’s reading. About 14% said they expect sales to fall in the quarter, up from 22.6% in the second quarter.
“We will start seeing the impact of the tax cuts,” Puri said. “People are going to see reduced tax withholding this quarter.”
The survey was done in the past couple of weeks. Out of a pool of 732 businesspeople, 118 responded.
More than half of the executives responding employ 100 workers or more. About a third of respondents have less than 20 workers.
By revenue, a third of responding executives work at companies with yearly sales of $50 million or more.
More than half had yearly sales of less than $20 million.
