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September 2001 *

Rise in pessimism about general business conditions but most area firms do not anticipate contraction in their own activity

More Historical...

According to the Business Conditions and Outlook Survey administered at the end of the third quarter there was a dramatic reversal in business sentiment between June and September. In the June survey the percentage of firms reporting improved business conditions (35 percent) six months into the future was greater than the percentage reporting worsening conditions (14 percent). In contrast, the current survey found that 33 percent of reporting firms felt that future business conditions are likely to get worse while 25 percent indicated that conditions are likely to improve. At the same time, however, a majority of firms anticipate their own performance to remain at current levels rather than worsen over the course of the next two quarters.

Major findings of the survey include:

bulletA reversal in business sentiment from three months ago with regard to future business conditions in the local economy. An increase in the percent of reporting firms that expect general business conditions to get worse over the next six months from 14 percent in June to 33 percent in September. 
bulletAt the same time only a small percent of the reporting firms (5 percent) expect to contract their own level of activity.
bulletThese patterns are representative 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 mixed signals with some indications of resilience and some areas of concern for firms in the local economy. Signs of resilience - a majority of the firms surveyed indicated that they did not plan cuts in capital spending or employment over the next six months contrary to trends in the national economy for the last four quarters.
bulletA few areas of concern - increases in the percent of firms indicating uncertainty about their plans for expansion in activity, in access to financing, and in hiring more workers. In addition, there is a reduction in the percent of firms anticipating that they will increase average selling prices and an increase in the percent of firms expecting to experience more difficulty in obtaining financing in the future.
bulletThe firms witnessing the sharpest negative swings between June and September with regard to expectations about their level of activity in the future are those involved in construction, retail and wholesale trade.
bulletThe firms witnessing the sharpest negative swings between June and September with regard to their outlook about business conditions in the local economy are those involved in manufacturing, professional and scientific services, health care, and other services. 

Summary of Returns
September 2001

Questions

Response

Improve/
Increase

Same

Worse/
Decrease

Unsure

(Percentage of Total Responses)

Business conditions in local economy over next six months

25.0

37.0

33.0

5.0

Level of activity of your firm in next six months

28.0

59.0

6.0

7.0

Capital expenditures of your firm in next six months

20.0

65.0

13.0

2.0

Employment by your firm in next six months

23.0

66.0

7.0

4.0

Average selling price charged by your firm in next six months

24.0

54.0

8.0

14.0

Access to financing by your firm in next six months

15.0

45.0

19.0

21.0

Employee compensation by your firm in last six months

49.0

49.0

1.0

1.0

Sales in last six months compared to previous six months

46.0

25.0

27.0

2.0

*NOTE: Most of the responses reflected in this Survey were completed after the terrorist attacks on September 11, 2001.

In consecutive quarters the percentage of firms reporting increased future activity (27.8 percent) was greater that the percentage reporting a decline (5.1 percent). At the same time there were mixed signals from other indicators. Capital spending and employment expansion plans reveal some optimism since the percentage of firms reporting likely increases exceeded the percentage reporting decreases in both of these areas of activity. However, compared to the June survey these indicators are quite restrained. A decline in the percentage of firms reporting increases in capital expenditures from 25 percent to 20.4 percent between the June and September surveys is associated with an increase in the percentage of firms reporting a constant level of capital spending from 58 percent to nearly 65 percent. With regard to plans for hiring more workers the percentage of firms reporting likely future increases in employment was 22.8 percent compared to 34 percent in the previous survey. Similarly the percent of firms that do not expect to change their existing level of employment rose to 65.8 percent from 57 percent in June. 

On balance the performance of firms in the past two quarters compared to the previous two quarters was encouraging with a majority of firms achieving the same or higher levels of sales over the past twelve months. The percentage of firms reporting an increase in sales (46 percent) is much greater than the percentage of firms reporting lower sales (27 percent) with about 25.6 percent of firms reporting the same level of sales. The past six months has also witnessed increased wages and benefits provided to employees by 49 percent of respondents compared to only 1 percent of respondents reporting a decline in employee compensation. Another 49 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, availability of employees, health care expenses for employees, competition from other businesses, and cost of labor.

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 21.0 36.0 43.0 0.0
Level of activity of your firm in next six months 25.0 53.0 14.0 8.0
Construction
Business conditions in local economy in next six months 27.0 45.0 27.0 1.0
Level of activity of your firm in next six months 18.0 72.0 10.0 0.0
Real Estate
Business conditions in local economy in next six months 33.0 56.0 0.0 11.0
Level of activity of your firm in next six months 11.0 67.0 11.0 11.0
Retail & Wholesale Trade
Business conditions in local economy in next six months 22.0 44.0 26.0 8.0
Level of activity of your firm in next six months 19.0 63.0 7.0 11.0
Professional & Scientific Services
Business conditions in local economy in next six months 25.0 40.0 35.0 0.0
Level of activity of your firm in next six months 20.0 70.0 0.0 10.0
Health Care & Social Services
Business conditions in local economy in next six months 21.0 36.0 43.0 0.0
Level of activity of your firm in next six months 29.0 710. 0.0 0.0
Other Services
Business conditions in local economy in next six months 24.1 38.0 27.6 10.3
Level of activity of your firm in next six months 45.0 45.0 0.0 10.0
Communications and Information
Business conditions in local economy in next six months 30.0 10.0 60.0 0.0
Level of activity of your firm in next six months 20.0 60.0 10.0 10.0

Currently, businesses in the real estate and communications and information sectors are relatively more optimistic about future business conditions in the local economy, while firms in manufacturing, retail and wholesale trade, health care and other services such as personal care and automotive services 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 providing health care services appear to have stronger inclinations for expanded activity than firms involved in other types of activity.

In summary, the responses to the second Business Conditions and Outlook Survey indicate that a relatively large number of reporting firms have some optimism, albeit reduced from three months ago, that they can maintain existing levels of activity and performance. At the same time there is concern about overall sluggishness in the local economy six months into the future. Over one-fifth (compared to one-third in June) of survey respondents felt that business conditions, their level of activity and employment would be higher over the next two quarters. With a larger percentage of respondents expressing pessimism about future business conditions in the local economy there appears to be greater 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
8600 University Boulevard
Evansville, Indiana 47712