WASHINGTON — Some softening in the third quarter business environment was suggested by the National Association of Business Economics’ October 2017 Business Conditions Survey, released Monday.
However, the survey showed a tension between near term slowdown and longer term optimism, NABE Survey Analyst Julia Coronado told MNI.
Sales and profit margins for Q3 received softer reports from the 85 members surveyed on business conditions in their firms or industries, compared to July's survey findings. However, this did little to stifle optimism for 2018, as 84% of respondents expect GDP growth to be above 2% in the next four quarters, which Coronado attributes partially to a potential optimism bias by firms, but also due to what she described as a global economic "sweet spot."
The October survey showed a slip in the number of firms reporting gains in sales for Q3, down to 46%, while the percentage reporting falling sales climbed to 22%. The finance, insurance, real estate (FIRE) sector and the transportation, utilities, information, communications (TUIC) sector saw the largest share of rising sales, as the goods-producing sector continued its decline since the April report. But, showcasing a potential optimism bias, over 50% of panelists from both good-producing and FIRE sectors expect sales to rise in the next three month.
Profit margins also saw moderation in Q3, as the percentage of panelists reporting rising profit margins fell from 29% to 21%. This decline was largely driven by slower sales growth and changes to materials costs, which 33% of those surveyed reported as increasing. While fewer panelists now expect profit margins to rise in the next quarter, 28% still anticipate gains.
Despite firms expecting sales to increase in coming months, the labor market continues to remain tight, suggesting firms have found a way to utilize existing employees. 32% of firms report that they are not hiring, while 36% report a shortage of skilled labor. However, a growing trend is developing where 26% of firms are addressing the difficulty in hiring by offering internal training programs, investing in automation, and raising wages, among other steps.
Even though firms are attempting to increase profits without the skilled labor they need, they are still expecting to increase hiring rather than decrease in 2018. Of all industries surveyed, the goods producing industry is facing the tightest conditions with all respondents indicating they had at least one open position.
While firms report wage increases as one way to combat skilled labor shortages, the NRI for wages was down to 37 from July's 45, suggesting that these wage incentives may not have been as broadly implemented in Q3 as other approaches. Despite this large decline, 49% of firms expect wages to rise in the next three months, up from 47% in July. In particular, 63% of the goods-producing sector expect wage costs to rise in the next three months, as they attempt to combat the tight labor market.
Partially due to the use of automation and internal training, the NRI for employment fell 15 points to 10, its lowest level in over a year. However, Coronado was quick to point out that this is a noisy measure, prone to large swings. She also explained that this could not be attributed to hurricane effects, which has been the case with much of the government employment data seen recently.
Looking at hurricane effects, the survey found that 81% of firms were not impacted, while 17% experienced negative effects, and 2% experienced positive impacts. The survey emphasized that these impacts are expected to be short lived, with 80% of firms anticipating no impact to Q3 and Q4.
Outside of the traditional NRI measures, the survey also conducted an investigation into firms' business decision making in regards to public policy. NAFTA was on the list of firms' concerns, with 54% ranking their primary NAFTA concern as the change to rules of origin.
While the survey does not differentiate the response rates to NAFTA concerns by sector, Coronado stated that the goods-producing sector could expect to take a hit. Despite this concern, the survey found that there was limited impact on business decision making for hiring and investment.
Also among concerns, 67% of firms expect rising health care costs.
When asked if they have delayed or altered hiring and investments in anticipation of changes in economic policy, 15% of the FIRE sector said that they have delayed hiring. Asked for a possible causation of this decision, Coronado stated that one potential reason would be immigration policy's effects on real estate via a change in labor supply.
Even as firms report softening sales and profit margins amidst tightening labor markets and political uncertainty, their 2018 outlook remained optimistic. 69% of those surveyed expected higher sales in 2018. As stated earlier, these expectations could be skewed by an optimism bias, something Coronado hopes that NABE can begin to correct for in future surveys.
However, Coronado urged that these expectations for rising sales and above 2% GDP growth should not be entirely discounted. She attributed much of this positivity as due to what she considers an economic sweet spot, where for the first time in the recovery there are broad-based gains, and an end to the rolling series of crises.
