Voices

Private Companies Feeling Less Optimistic

Privately held companies are scaling back their hiring plans, according to a survey from PricewaterhouseCoopers, partly due to fretfulness over the presidential election.

PwC’s Trendsetter Barometer for the second quarter of 2016 found that only 39 percent of the 200 private company executives polled felt optimistic about the U.S. economy in the second quarter, down slightly from 41 percent in the first quarter. Twenty-two percent of the survey respondents felt optimistic about the world economy in the second quarter, only slightly more than the 19 percent in the first quarter of the year. Only 41 percent plan to increase their headcount, down from 52 percent in the first quarter.

“There are quite a few economic and political headwinds out there that are affecting the results,” said PwC Trendsetter Barometer leader and tax partner Ken Esch. “The global economy continues to struggle, with low growth rates, if not recessionary environments, in many foreign countries that weigh on U.S. companies’ ability to export products or perform services in foreign jurisdictions. I think the strong U.S. dollar has an impact as well. Then you’ve got the Brexit vote, which has really thrown a lot of uncertainty into not only the E.U., but also the U.S., because they’re substantial trading partners with the U.S. Thirdly you’ve got a U.S. election going on that is like none other in recent history, where we’ve got candidates vying for the president role, both of whom have pretty high unfavorable ratings.”

The PwC Trendsetter Barometer results tend to decline in an election year, he acknowledged. “We went back and took a look at our survey results for the prior elections going back to about 2004, and our recent history shows that the results on optimism levels and growth expectations tend to trend downward leading into an election,” said Esch. “There are many other factors other than just the U.S. election that bear on these survey results, but we have been seeing some optimism and growth levels drop around a U.S. election.”

The low growth expectations also seem to align with the tepid growth in the gross domestic product. The U.S. Commerce Department reported in late July that GDP grew only 1.2 percent in the second quarter. The Commerce Department also revised downward its GDP figures for the first quarter to an average of 1 percent for the first half of the year. However, Esch sees some signs of optimism in the PwC report belying the gloomy growth expectations for the economy. For example, over one fourth (27 percent) of the private company leaders polled in the second quarter plan major new capital investments, the same as in the first quarter. More than three-quarters (77 percent) of the survey respondents intend to increase their operational spending, up from 66 percent a year ago.

“The good news is there is a little bit of divergence between the GDP reports we saw and what we’re seeing in our Trendsetter results,” said Esch. “Capital investment is one of those. Reading the GDP reports, it looks like businesses have been pulling back a little bit on their investment, and the consumer has been holding up the economy for now. In our Trendsetter results, we’ve seen stable reading on investment within the businesses, both in terms of capex and operational spending, which we feel is a testament to private companies, owners and leaders taking a long-term view of the economy. They know they need to continue to invest in their business in order to grow it, and they’re reluctant to pull back on those investments just because we’re seeing slower growth rates in the overall economy.”

Another positive is the 91 percent of private company leaders who said in the second quarter they expect their own businesses to grow, up from 86 percent in the first quarter.

“A positive for me was the sheer number of companies that expect to grow,” said Esch. “Being above 80 percent was a very high reading for our surveys. There are very few who expect a revenue drop out there. While there are a number of headwinds in the overall economy, companies still expect to grow and they’re continuing to invest in their business.”

Despite the robust jobs report last Friday from the U.S. Bureau of Labor Statistics, indicating that employers added 255,000 jobs to payrolls in July, including 8,100 in accounting and bookkeeping, PwC’s survey indicates some weakening in hiring plans in the future, at least within private companies. Less than half (41 percent) of the private company leaders plan to increase headcount at their businesses, a decline from 52 percent in the first quarter. Planned wage increases are only 2.29 percent, roughly the same as the 2.72 percent in the first quarter.

“We’re seeing that fewer companies plan to hire over the next 12 months,” said Esch. “That’s not good news for payroll expansion over the next year. That tends to be a leading indicator for what’s going on in the economy. For those that are expecting to hire, the average headcount is going to increase less than 2 percent, and the wage growth is stuck below 3 percent as well, so there’s just not a lot of positive momentum in the report regarding the labor market.”

Companies are also dampening their international expansion plans, with only 23 percent of private companies that are already selling in China planning new capital spending, down from 53 percent six months ago. But Esch believes that in the long run, companies will continue to invest in international growth.

“Companies are tapping the brakes a little bit about how much they’re going to invest for international expansion,” said Esch. “We can break out the data between those that operate internationally, and those that operate just domestically. The international companies routinely achieve and expect higher growth rates than their domestic-only peers, and they often spend a little bit more in the way of capex and operational expenditures to fuel the growth of their business. We do see ebbs and flows with the investment expectations out there, but companies are not abandoning their growth strategy or the expectation that the international markets are going to be significant contributors to their growth over a long period of time.”

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