Business expectations are at their highest level in a year despite some lingering concerns about the economy and labor costs, according to a survey of Orange County chief executives, business owners and managers.
California State University, Fullerton’s second-quarter business expectations index is at 88.7, a tick up from 85.5 in the first quarter.
This is the second upbeat reading in a row after the index fell to 75.9 in the fourth quarter amid fallout from the Gulf Coast hurricanes and rising interest rates.
“In the last 12 months, this is the highest level of optimism we’ve seen,” said Anil Puri, dean of the College of Business and Economics at Cal State Fullerton. “They don’t seem to see any dangers lurking in the near term.”
The expectations index hit a high of 94.9 heading into the third quarter of 2004. Its recent high was 91.3 a year ago.
Cal State Fullerton, which does the survey in association with the Business Journal, launched the survey in the first quarter of 2004.
A reading of 50 or more indicates executives are bullish about prospects in the quarter.
The share of executives who expect overall business activity to improve or stay the same increased to 91% in the second quarter, up from 89% in the prior period.
The overall economy continues to be the biggest factor impacting businesses, according to survey respondents.
The economy was cited by 37% of those surveyed as their main concern.
Interest Rates
Fueling some economy-related concerns are interest rates.
Last week, the Federal Reserve raised short-term rates by a quarter increment to 4.75%, the 15th boost in rates since the fed began reining in inflation in June 2004.
Expectations for rising labor costs tapered off a bit from the prior quarter.
Roughly 60% of respondents expect their labor costs to rise in the second quarter, down from 74% in the first quarter.
Thirty-three percent expect no change in their labor costs, up from 19% in the previous quarter.
Just 7% see labor costs falling in the quarter.
Some 18% said labor costs were their main concern, slightly higher than government regulations, which was cited by 14% of respondents.
Roughly 59% of the executives polled expect no change in their work force in the second quarter, with 4% planning to cut jobs,down from 7% last quarter and 11% a quarter earlier.
Hiring
About 37% of executives polled expect to hire more people in the quarter, down slightly from 41% in the first quarter.
Puri said he expects the pace of wage increases to pick up in 2006, falling just short of the 4% to 5% inflation growth rate that he forecasts.
“With regard to expectations for wage increases, the respondents seemed more sanguine about it,” Puri said. “That is a little bit of a surprise to me.”
About 71% of respondents expect to post a sales gain in the second quarter, down from 81% heading into the first quarter. Sales expectations had fallen for three consecutive periods before perking up last quarter.
Profits are seen rising by 63% of respondents, down from 72% last quarter.
Energy Costs
At Anaheim-based Supreme Castings & Pattern Co., energy costs are more of a concern than labor, said President William Blaney.
The small manufacturer has 15 workers. It makes castings for the aerospace industry.
“We melt aluminum, and that is very energy intensive,” he said.
“I’ve been adding a 4.8% surcharge to all the prices,” Blaney said.
That’s how much the company’s energy costs have gone up since the end of the third quarter.
“I saw some slowdown in December and January, but it bounced back,” he added. “Sales seem to be steady.”
Investment in equipment and inventory didn’t change much for the second quarter, with 59% of executives planning to keep investment steady,the same as last quarter.
The survey was conducted from March 21 to March 24. Seventeen percent of the 735 businesses contacted responded to it.
