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December 2001

Business Sentiment in the Local Economy Rebounds
amidst some signs of caution among area firms about their plans for the future 

More Historical...

According to the Business Conditions and Outlook Survey administered at the end of the fourth quarter of 2001 there was a marked improvement in business sentiment between September and December. In the September survey the percentage of firms reporting improved business conditions (25 percent) six months into the future was less than the percentage reporting worsening conditions (37 percent). In contrast, the most recent survey found that about 10 percent of reporting firms felt that future business conditions are likely to get worse while 51 percent indicated that conditions are likely to improve. At the same time, a majority of firms anticipate their own performance to improve or remain at current levels over the course of the next two quarters.

Major findings of the survey include:

bulletA rebound  in business sentiment from four months ago with regard to future business conditions in the local economy.  This is evident in the substantial drop in the percent of reporting firms expecting general business conditions to get worse over the next six months from 33 percent in September 2001 to about 10 percent in December 2001. In the same time period there was an increase in the percent of reporting firms expecting general business conditions to improve from 25 percent in September 2001 to 51 percent in December 2001. 
bulletA small percent of the reporting firms (3 percent) expect to contract their own level of activity during the first half of 2002 while 37 percent expect to increase their level of activity.
bulletThese patterns are broad-based - across firms of different size, type of economic activity, whether or not they export goods and services to other countries, and whether or not they obtain most of their supplies from within the Tri-state area.
bulletThere are some signs of caution among the reporting firms with the percent of firms planning to hire more employees in the future falling from 23 percent in September 2001 to 19 percent in December 2001. Restraint in plans to increase capital spending is indicated as 82 percent of the reporting firms in December either plan to maintain existing levels or increase capital spending compared to 85 percent having similar plans at the end of September 2001.
bulletIndications of a more favorable climate for businesses in the future include an increase in the percent of firms expecting easier access to financing from 15 percent in September 2001 to about 26 percent in December 2001 as well as an increase in the proportion of reporting firms planning to raise average selling prices from 24 percent to 30 percent over the same time period.
bulletThe firms witnessing the sharpest positive swings between September 2001 and December 2001 with regard to expectations about their own levels of activity in the future are those involved in construction and real estate.
bulletThe firms witnessing the sharpest positive swings between September 2001 and December 2001 with regard to their outlook about business conditions in the local economy are those involved in manufacturing, retail and wholesale trade, professional and scientific services, and other services. 

Summary of Returns
December 2001

Questions

Response

Improve/
Increase

Same

Worse/
Decrease

Unsure

(Percentage of Total Responses)

Business conditions in local economy over next six months 

51.1

35.0

10.2

3.6

Level of activity of your firm in next six months 

37.2

55.0

2.9

6.6

Capital expenditures of your firm in next six months 

22.1

59.6

14.0

3.7

Employment by your firm in next six months

18.7

60.4

20.1

0.7

Average selling price charged by your firm in next six months 

30.0

52.6

3.0

13.5

Access to financing by your firm in next six months 

25.7

46.7

16.2

11.4

Employee compensation by your firm in last six months 

46.7

51.1

2.2

0.0

Sales in last six months compared to previous six months 

41.0

26.6

31.0

1.4

Similar to the survey responses for the second and third quarters of 2001, the most recent survey indicated that the percentage of reporting firms expecting increased future activity (37 percent) was greater that the percentage expecting declining activity (3 percent).  Capital spending and employment expansion plans reveal a cautious outlook from a sizeable segment of reporting firms.

Sales performance in the second half of 2001 compared to the first half of 2001 was relatively stable for a majority of firms. The percentage of firms reporting an increase in sales (41 percent) was  greater than the percentage of firms reporting lower sales (31 percent) with about 27 percent of firms reporting the same level of sales. The past six months has also witnessed increased wages and benefits provided to employees by 47 percent of respondents compared to only about 2 percent of respondents reporting a decline in employee compensation. Another 51 percent of respondents kept employee compensation at their existing levels. 

Asked to identify the most serious challenges confronting businesses, the following represented the most cited in order of importance: uncertainty of future economic performance, health care expenses for employees, quality of labor, competition from other businesses, and poor sales.

Survey Responses
Disaggregated by Sector/Activity

Questions by Industry

Response

Improve/
Increase

Same

Worse/
Decrease

Unsure
Manufacturing

(Percentage of Total Responses)
Business conditions in local economy in next six months 60.0 30.0 5.0 5.0
Level of activity of your firm in next six months 40.0 55.0 5.0 0.0
Construction
Business conditions in local economy in next six months 53.3 26.6 6.6 13.3
Level of activity of your firm in next six months 50.0 28.6 14.3 7.1
Real Estate
Business conditions in local economy in next six months 44.0 33.0 22.2 0.0
Level of activity of your firm in next six months 30.0 60.0 10.0 0.0
Retail & Wholesale Trade
Business conditions in local economy in next six months 62.4 18.8 18.8 0.0
Level of activity of your firm in next six months 12.5 75.0 0.0 12.5
Professional & Scientific Services
Business conditions in local economy in next six months 50.0 50.0 0.0 0.0
Level of activity of your firm in next six months 26.3 68.4 0.0 5.3
Health Care & Social Services
Business conditions in local economy in next six months 33.3 44.4 11.1 11.1
Level of activity of your firm in next six months 33.3 55.6 0.0 11.1
Other Services
Business conditions in local economy in next six months 71.4 28.6 0.0 0.0
Level of activity of your firm in next six months 57.1 42.9 0.0 0.0
Communications and Information
Business conditions in local economy in next six months 50.0 33.3 16.7 0.0
Level of activity of your firm in next six months 33.3 50.0 0.0 16.7

Currently, businesses in the other services such as personal care and automotive services, wholesale and retail trade, and manufacturing sectors are relatively more optimistic about future business conditions in the local economy, while firms in  health care and other services and real estate are relatively less optimistic about future economic conditions. With regard to future activity at the firm level, those firms classified as providing other services (e.g. personal care, automotive) and those involved construction appear to have stronger inclinations for expanded activity than firms involved in other types of activity.

In summary, the responses to the third Business Conditions and Outlook Survey indicate that a  slight majority of reporting firms have a favorable outlook about future business conditions. A sizeable proportion of firms also anticipates that they can maintain existing levels of activity and performance. At the same time there are some indications of restraint in future plans with regard to employment and capital spending. At least 30 percent (compared to just over 20 percent in September 2001) of survey respondents felt that business conditions, their level of activity and average selling prices, would be higher over the next two quarters. With a larger percentage of respondents expressing optimism about future business conditions in the local economy there is a much similarity between business sentiment in the local economy and sentiment in other regions of the country.

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For additional Information:

Professor Mohammed Khayum
Department of Economics & Finance

Phone: 812/465-1681
Email: mkhayum@usi.edu

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University of Southern Indiana

College of Business
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Evansville, Indiana 47712