Most Businesses See Few Signs of Recovery

A number of economic surveys and indicators have surfaced in the past week, most of them mixed or uninspiring with regard to an economic recovery. But there are some positive signs.

U.S. consumer confidence took a dive in February by more than 10 points in the Conference Board’s index, reaching its lowest level since last April. A similar indicator, the CEA-CNET Index of Consumer Expectations of the Consumer Electronics Association, dropped nearly eight points, and is at its lowest level since October 2008. The drop in both indicators is a sign that increased consumer spending, which might fuel the recovery, is still lacking.

“Consumers remain wary as the economy continues to find its footing,” said Shawn DuBravac, CEA’s chief economist and director of research. “Consumers remain concerned over the employment market and their own personal financial health in the months to come.”

Other indicators were similarly sluggish. A survey conducted by the American Institute of CPAs and the University of North Carolina’s Kenan-Flagler Business School found that expectations among CPA executives for the U.S. economy remained pessimistic in the first quarter.

“It is good to see signs of optimism, especially from the manufacturing sector,” said AICPA vice president for business, industry and government Carol Scott, CPA. “Unfortunately 40 percent of our CPA members in business and industry — chief financial officers, controllers and CPA financial professionals — are now telling us that they do not expect their business to return to pre-recession levels until 2012 and beyond.”

On the positive side, the Institute for Supply Management said that the service sectors grew at the fastest pace in two years in February, and ADP’s employment report indicated that the 20,000 jobs lost in February were the fewest jobs lost since January 2008. Moreover, nine of the Fed’s 12 regional banks said that economic activity improved in February, according to the Fed’s Beige Book.

There are some more positive signals, according to Lori Reiner, an audit partner at Northeast regional firm Amper, Politziner & Mattia, LLP. “It really depends on what industry you serve and who your customers are,” she said. “Last year was clearly a terrible year for a lot of companies, but it wasn’t a terrible year for everyone.

“Many companies controlled expenses successfully in 2009, and because of that their bottom line went up,” she added. “As a result, they may start inching up their expenses in 2010 because of increased confidence. And that will help the rest of the economy because they’ll be more willing to loosen up their purses strings in 2010.”

However, some small to midsized businesses continue to struggle, she observed.

“A number of companies have already right-sized their workforces and the rest of their expense structure to suit their new lower volume of sales,” she said. “But even with all of the cutting of infrastructure that many executed in 2009, some still haven’t cut enough.”

Reiner noted that pharmaceutical industry service companies are among those feeling the pinch. “The outlook for them is starting to improve, but it’s nowhere near where it needs to be,” she said. “We’re hoping for an early recovery in 2010, but for some it will not be as early as they hoped. So we’ve been talking about further reductions and negotiations with landlords to make sure expenses are more in line with projected revenues.”

A big concern is how the banking community will structure line-of-credit renewals in light of the forthcoming 2009 financial statements, according to Reiner.

“For a lot of midsized businesses, the renewals take place between now and June. It’s a bad time to have to open or renegotiate your credit agreement when financial statements are not as strong as they were 12 months ago,” she said. “Under more normal conditions, a renewal of a line of credit was routine, especially if there were no violations of covenants. Now companies are bracing themselves for pricing and fees to be higher than ever.”

As a result, it is especially important for companies to understand their bank agreement and what the covenants require, she observed.

“Even a stronger company may unwittingly violate a covenant, and this can get very expensive,” she said. “For example, many covenants require companies to maintain a certain level of financial health calculated by different measures, such as debt to equity, EBITDA [earnings before interest, taxes, depreciation and amortization], or a requirement to get audited financial statements in by a certain date. Failure to do this might be only a technical default of the loan agreement, but it gives the bank a reason to take action, such as call the loan or charge a fee to waive the covenant.”