Trendsetter Barometer® business outlook: Q2 2018 top findings
Privately-held US businesses are raising investment in their workforces and in capital projects as an outlook for a future with higher costs--surrounding basic materials, energy or securing crucial skillsets, for example--takes a stronger hold on mindsets.
As a result, even as executives in the US mid-market report the strongest business growth conditions in over a year*, overall US economic sentiment is tempering, according to PwC’s Trendsetter Barometer latest quarterly findings. A net 82% of panelists are optimistic about US economic growth over the next 12 months vs. 83% in the first quarter and 69% at this time last year.**
When asked an open-ended question to cite factors causing concern over the US economy's prospects, numerous panelists cited “inflation”, variously credited to uncertainty around the impact of proposed import tariffs to wage trends. US consumer prices rose to a 12-month pace of 2.9% in June. As the CEO of a construction and real estate management firm put it: “We had two new major projects start this year, and we are hoping for interest rates to stay on the low side. The prices of metals will escalate as well as prices for food.” Meanwhile, pressure to find the help they need to expand is mounting: 63% now believe a lack of qualified workers represents a barrier to their growth prospects, up from 50% in the first quarter. This is the highest-ranked concern, and not seen at this level since 2000.
A net 50% say their workforces will expand over the next 12 months, which is down from 54% in the first quarter. However, panelists continue to expect wages to rise, and are now projecting future increases in hourly wages for their current workforce at an average of 3.60%, above 3.46% in the first quarter and signaling a faster pace for wage hikes than implied in the 2.7% annual rise in hourly wages in US employment report in June. As privately-held company outlooks for wages have been a useful predictor of annual growth in US employment costs overall, this quarter PwC asked panelists to provide greater detail on total spending plans and strategies. Over the next 12-18 months, 66% expect total workforce expenses to rise at an average of 7.05%. While tapping into the ‘gig economy’ of freelancers and contractors is part of the mix, Trendsetter businesses are far more likely to focus on re-training existing staff and bringing in new hires to combat rising worries over a shrinking talent pool with desired skills. Indeed, the findings suggest a high level of activity inside the existing workforce to upskill and re-deploy people is underway.
At the same time, more Trendsetter businesses plan on capital spending: 35% are planning major new investments over the next 12 months, above 26% in the first quarter and 33% at this time a year ago. The mean level of investment is projected higher, now at 6.3% of sales vs. the first quarter’s 4.3% of sales.
A minority of executives expect a direct impact on their businesses over the next 12-18 months as a result of trade discussions between the US and China, and these are evenly split between those anticipating a positive impact (13%) or a negative impact (11%). The broader effect of a potentially more restrictive trading environment is worrisome: just 25% expect little or no impact on the global economy.
While these findings reflect their views in the second quarter, before the world’s two largest economies raised levies on $34 billion on imports on July 6, they nonetheless make clear that the second-order effects of shifting trade policies could deliver greater impact. For some panelists, the uncertainty around tariffs is already impactful. “Steel and aluminum prices are rising due to the panic about potential tariffs, people are buying ahead due to worry,” said the president of a wholesale plumbing and heating materials business in the Midwest. US tariffs on steel and aluminum imports from major trading partners took effect in June with Canada announcing retaliatory measures.
2018 marks PwC’s Trendsetter Barometer's 21st year. Panelists’ views have served as a good leading economic indicator on where US GDP growth is likely to be in a year’s time and whether employment numbers will rise or fall, our analysis of the data show. Second quarter 2018 results reflect the views of 300 CEOs/CFOs interviewed between April 2 and June 29, 2018, representing a cross-sector profile of US privately-held firms with average annual enterprise revenue of $367 million.
*In this case, current business growth conditions reflects the number of respondents who report net higher prices (27%) over the quarter vs. those experiencing net higher costs (9%)
**PwC calculates net economic sentiment as the balance of panelists who are “optimistic” minus those who are “pessimistic” about how they feel about the US economy over the next 12 months. We exclude “uncertain” responses.