Private Companies Gain Confidence in Economy

Nearly two-thirds of private company executives say they're optimistic about the U.S. economy's prospects over the next 12 months, according to a new survey by PricewaterhouseCoopers.

At 63 percent, this is the highest level of confidence that chief executives have shown about the U.S. economy in PwC’s quarterly Trendsetter survey since the second quarter of 2007, when their confidence level was 64 percent, and up 24 points from the third quarter of 2010.

Meanwhile, optimism in the global economy also rose, with 56 percent of private companies that have an international presence expressing their confidence in global economic growth, compared with 43 percent in the previous quarter.

The PwC survey also found that the prospects for own-company growth rates have risen, and the vast majority of private companies say they plan to increase operational spending. Private companies plan to make strategic hires over the next 12 months.

“The positive momentum we have seen over the last several months among leading private companies continues to build,” says Ken Esch, a partner with PwC’s Private Company Services practice. “Throughout the recession they've managed costs and paid down debt, which has allowed them to strengthen balance sheets and preserve bottom-line growth. Now private companies are starting to see increasing demand for their products and services, leading to topline growth.”

Optimism about the U.S. and global economies carried over to Trendsetter executives’ confidence about own-company growth prospects. Eighty-three percent forecast positive own-company growth, up from 75 percent last quarter, with 40 percent projecting double-digit revenue growth and 43 percent projecting single-digit growth. The forecasted average growth rate among private companies overall stabilized, with a 9.8 percent average growth rate forecasted for own-company revenues over the next 12 months, similar to the 9.7 percent growth rate that private companies forecasted the previous quarter.

Within the larger group, however, there was a jump in the forecasted average growth rate of domestic-only private companies (up from 7.7 percent to 9.8 percent), pulling them even with their international peers. The increase was due primarily to bullishness among domestic-only service firms.

Service companies in general—both domestic-only and international—were significantly more confident than product firms this past quarter. The revenue-growth rate forecasted by service companies rose to an average of 12.1 percent, up from 10.8 percent in the third quarter, while product-company forecasts dropped to 7.8 percent, down from 9.0 percent percent. This is in line with service firms' greater optimism about the US economy—69 percent voiced optimism, compared with 59 percent of product firms.

Despite similar revenue-growth forecasts among domestic-only and international private companies, those operating abroad remained ahead of their domestic-only peers in prospective spending over the next 12 months. Forty-three percent of companies with an international presence are planning major new capital investments over the next year, as are 52 percent of private businesses that have a presence in China, India, and Brazil. That’s in sharp contrast to the 30 percent of domestic-only private companies planning to make major capital investments, though this figure is up six percentage points from the third quarter.

Significantly, the vast majority (74 percent) of private companies surveyed plan to increase operational spending. Of those companies, 84 percent that have an international presence plan to increase operational spending. The percentage was even higher for companies with a presence in China, India, and Brazil (98 percent). Planned increases focus on information technology, new products/services, and sales promotion.

Fifty-seven percent of private companies said they plan to hire new employees over the next 12 months, down slightly from the prior quarter but up 10 percentage points from a year ago. Only 3 percent plan net reductions. Overall, an increase of 1.8 percent is planned for the survey panel's workforce, down from 2.0 percent last quarter. Trendsetter chief executives said that over the next year their hiring efforts will primarily target professionals/technicians (32 percent) and sales/marketing executives (23 percent), mirroring the areas in which they plan to increase operational spending.

“While most private companies are planning to bring new personnel on board, their focus is less on increasing workforce volume and more on making strategic hires," said Esch. "What we're seeing is that, in line with their renewed optimism about the economy, businesses have started to invest in acquiring workers with the right skills for powering growth  for instance, people who can innovate in areas such as technology and product design, as well as individuals who can attract new customers.”

Gross margins remained positive in the fourth quarter, with 29 percent of Trendsetter private companies reporting higher margins and 22 percent reporting lower margins, for a net of plus 7 percent, similar to the previous quarter’s six percent. Net costs were on the rise this quarter, increasing for 12 percent of companies (up from 4 percent in the third quarter). In contrast, prices increased for 3 percent of companies.

Private-company concern about oil/energy prices rose 10 points this quarter to 32 percent, although lack of demand remained the factor that was most cited by Trendsetter chief executives (67 percent) as a barrier to business growth over the next 12 months (however, this was down five percentage points from the previous quarter). Concern about legislative/regulatory pressure declined three percentage points to 51 percent. Only 35 percent of private companies expect increased taxation to be a threat to growth, the lowest level since the third quarter of 2009.

“With last December's extension of the Bush-era tax cuts, concern about increased taxation has eased for the moment.” says Esch. “We may see that concern resume as we enter an election year and move, once again, toward the expiration date of the extended tax cuts. In addition, the tax increases associated with last year's healthcare act are due to start in 2013 and may affect a number of business owners. Careful planning begun now, however, can mitigate the impact of the tax increases, which may in turn help to ease apprehension.”

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