Top findings from Q1 2016
Measure twice. Cut once. That’s the old carpenter’s saying, and it’s also sound advice for anyone seeking insights from data. But which data do you look at? What exactly do you need to measure?
Well, you might start by sizing up private companies. For over 20 years, we’ve been taking measure of privately held businesses through our Trendsetter Barometer survey, asking their leaders what they’re seeing in the economy, their industries, and their businesses. We’ve learned that their answers can give us a better idea not only of where private companies — still the core of the US economy — are heading, but also the direction of the economy overall.
So, what have private companies been telling us lately?
They’re nervous about the US and world economies, but not nervous enough to pull back much on spending, slash revenue forecasts, or reduce headcount. Instead, they’re taking uncertainty in stride and keeping a steady eye on long-term growth — the kind of big-picture thinking that private companies are known for and that the economy benefits from time and again.
Find out more. Download the Trendsetter Barometer Q1 2016 survey
PwC's Ken Esch, Private Company Services Partner, discusses the Trendsetter Barometer survey and highlights key findings from US private companies in the first quarter of 2016.
Private companies are having a case of economic jitters. After hitting a high of 71% in early 2015, optimism about the domestic economy’s 12-month prospects has slipped every subsequent quarter, dropping to 41% by the time this latest survey closed. That puts optimism at its lowest ebb since the tail end of 2011. Trendsetter companies are even more pessimistic about the world economy, with just 19% of them voicing confidence.
While there’s certainly cause for concern about the economy, it would be a mistake to overreact. And indeed, private companies are not behaving as though the sky is falling. Although they sound worried, the actions they’re planning are those of companies anticipating and pursuing growth for their businesses.
So you could say that the decline in private-company confidence is the equivalent of a “check engine” light. The wheels aren’t about to fall off the economy. As with all warning lights, though, businesses and policymakers should definitely pay attention, taking corrective measures where necessary.
Warning lights may be flashing, but the numbers in the first quarter’s Trendsetter Barometer also show a lot of economic resilience. When we asked private-company executives about growth prospects for this year, their answers maintained the positive trend seen in recent quarters and contrasted sharply with our respondents’ current economic misgivings. In fact, 86% of companies projected growth in 2016, up slightly from the prior quarter’s projections.
However, Trendsetter businesses expect growth to happen at a slower clip over the next 12 months. How slow? Seven percent. That’s still an enviable rate, especially if you compare it with first-quarter US GDP growth of 2% — but it’s down markedly from the 9.4% growth rate private companies projected a year ago.
In the face of rising concern about the economy, are private-company leaders tightening their purse strings? No. On the contrary, the number of private companies that plan to increase their operational spending (71%) and make new capital investments (27%) over the next 12 months has barely changed since the prior quarter and is nearly the same as a year ago. Indeed, their planned capex as a percent of total sales (8%) is the highest since mid-2014.
And when we asked about the availability of credit, executives’ answers captured the mix of concern and confidence that characterizes this quarter’s Trendsetter Barometer. Private-company executives’ collective answer to this quarterly question has been a good leading indicator of changes in credit availability for companies in the broader economy. The survey’s Q4 2015 data was no exception — the rise in Trendsetter credit availability late last year was followed by an uptick in consumer and industrial loans from banks soon after. But fewer Trendsetter companies reported an increase in credit availability in Q1 2016, suggesting there will be a slight decline in future credit growth for businesses overall.
More than half of private companies plan to hire over the next 12 months, but this is down from the 63% that intended to increase headcount a year ago and the lowest since the first quarter of 2013 — a time when US economic growth ended up decidedly slower than expected. As the US now approaches what’s considered full employment, we should expect less hiring in general. And it hardly surprises us to see this happen at Trendsetter companies first — their hiring intentions have long been a good leading indicator of changes in US payrolls across the wider economy.
Private companies told us that on average they expect to increase their workforce by 1.3%. That’s low. But to put it in perspective, this data point hasn’t broken above 5% since the first quarter of 2008.
With the full-employment benchmark in sight, firms will have to start offering higher pay to attract new workers. We already see this in the wage hikes private companies are planning for the next 12 months — another leading indicator in our survey. Over recent quarters, respondents have said they expect to raise their salaries by an inflation-busting 3 percent (approximately).
Only 19% of private-company leaders say they’re optimistic about the world economy. That’s 21 points down from a year ago. We also saw the shakiness of the global economy reflected in answers to questions about plans to expand into new foreign markets. Only 1 in 20 (5%) of private companies reported they were looking at new markets abroad. That’s a record low.
Although few Trendsetter companies are venturing into new markets abroad, they show no signs of leaving the foreign markets where they’re already established. And staying there appears to be doing them little harm. For one, their revenue forecasts are stronger than those for their domestic-only peers — a long-term trend that held steady this past quarter, at 7.4% vs 6.6%. International sales also make up about one-fifth of overall revenue for these businesses, another long-term trend. International companies are more upbeat in other ways, too — more of them are investing capex dollars and spending on other growth-focused activities.
Video: What Trendsetter companies envision for 2016
Private companies see clouds on the economic horizon for 2016 but have sunny corporate forecasts, intend to keep hiring, and are planning capex projects for the coming year.
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