Orange County’s business owners and executives have become more optimistic going into the final quarter of the year, according to California State University-Fullerton’s Orange County Business Expectations Survey.
The index on the year’s final quarter rose to 84.4, up from a three-year low-water mark of 79.4 in the prior quarter, and about on par with a year ago.
The index ranges from zero to 100; any number higher than 50 indicates that business owners expect future growth in the economy.
The current survey was based on responses from 54 executives in Orange County. About 39% employ more than 100; 33% have 20 to 100 employees; and the remaining 28% employ 20 or fewer.
The recent optimism is the “likely result of an improving employment picture, somewhat improved international scene in Europe, and lesser concern for the short-term outlook for the Chinese economy,” said Anil Puri, project director for the survey and dean of the Mihaylo College of Business and Economics at CSUF, in an analysis of the survey results.
The knowledge that the U.S. presidential election will wrap up—one way or the other—during the current quarter also removed the damper on local business expectations, Puri said.
“Businesspeople never like uncertainty,” he said.
About 91% of the business owners, chief executives and managers surveyed indicated they expect commercial activity to improve or remain the same in the upcoming quarter. That’s up from 87% in last quarter’s survey and slightly higher than the 90% recorded a year ago.
About 54% said they expect some growth or significant growth in their own industries, up from about 52% last quarter. Fewer respondents, about 8%, predicted decreases in their industries—down from 11% in the prior survey. Slightly more, 39%, believe their own industries will remain stable, an increase from 37% the previous quarter.
A year ago, 54% expected some growth or significant growth in their own industries, and 39% expected their industries to remain the same.
Cautious on Sales
OC business leaders’ sales expectations seem to have dipped slightly.
About 44% of firms surveyed expect their sales to increase, down from about 57% last quarter. About 43% expect little to no change, up from about 33% the prior quarter.
A year ago, 52% of respondents expected a sales increase in the fourth quarter, and 35% expected no increase.
About 13% of respondents, the same as a year ago, expect lower sales. That’s up from about 7% last quarter.
Business owners also lowered their expectations for operating profits this quarter.
About 37% of respondents expect their profits to increase, down from about 56% in the last survey. A year ago, 42% expected higher profits.
About 46% of firms surveyed expect no change in profits, up from about 35% last quarter. A year ago, 45% expected no change.
Nearly twice as many firms, 17%, expect to have lower profits, up from about 9%. A year ago, 13% of firms expected lower profits.
Puri said the expectations on sales and profits show that optimism remains tempered by recent ups and downs.
“Last quarter was a little tough for them,” he said, “so they are being careful about their growth.”
Expectations about inventory are mixed.
About 67% of respondents expect to hold inventory steady, up from 54% last quarter. About 22% of firms expect to increase inventory, down from about 32%. About 12% of firms expect to reduce inventory, down from 15%.
Jobs
The outlook on jobs also is mixed.
About 25% of firms plan to increase their labor forces, down from 34% last quarter. A year ago, about 41% of respondents intended to hire.
About 66% of firms do not expect to hire new staff, up from about 57% last quarter. A year ago, 54% said they would like keep their work forces unchanged.
About 9% of firms expect to cut jobs, the same as last quarter. A year ago, 6% of respondents said they expected to cut jobs.
Orange County’s low employment rate and high salary expectations among applicants might explain much of the scaled-back hiring plans, said Brent Good, senior district president in Orange County for placement firm Robert Half.
Employees who have jobs usually need a compelling reason—such as significantly higher pay—to leave their current employer.
“Any business that hasn’t actively searched the market in 18 months for a new hire is going to be very surprised by salary expectations and requirements,” Good said.
Macro Issues
The survey also asked respondents about their greatest concerns.
About 43% of firms said the overall state of the economy was their top issue, up from about 39% last quarter. Government regulation was second with about 20%, down from about 33%. Labor costs were third on the list with about 17%, up from 15%. Taxes were fourth with 7.4%, up from 3.7% last quarter.
Respondents continued to say the biggest threat to the economy was “congressional inaction,” at about 46%, up from about 43%. About 28% of firms said possible interest rate increases by the Federal Reserve Bank are the next threat to the economy; that’s up from about 21%. Federal debt payments remained the third highest concern at 11%, down from about 21%. The performance of China’s economy was the next concern with about 11%, down from 13%.
The survey also asked executives for the first time about their strategies to adjust to the higher minimum wage of $11 per hour—a 22% increase since 2014—that takes effect in January.
About 57% of executives said they would increase prices. About 63% said they would begin to automate their work force.
About 56% said they would reduce hiring.
The companies that automate their work forces are most likely to be the ones that reduce hiring.
About 40% of employers said they planned to cut costs by reducing employee benefits. About 33% said they are considering laying off employees. About 20% of firms said they would likely relocate, and about 6% of respondents said they were “somewhat likely to close” because of the higher minimum wage.
The higher wages, Puri said, don’t seem to be forcing businesses to leave Orange County or California.
“We’re still the place to be—growing, vibrant, abundant warm weather, and optimistic,” he said.
