REPEAT: US NABE: Businesses Optimistic Despite Soft Growth

Repeats Story Initially Transmitted at 04:01 GMT Oct 23/00:01 EST Oct 23

--Sales and Profit Margins Hiring See Slow Down in 3Q 

--84% of Firms Expect GDP Growth to be Above 2% in Next 4 Qtrs

--Wages and Salaries Expected to Increase; Employment Down

By Holly Stokes and Sara Haire

     WASHINGTON (MNI) - The October 2017 Business Conditions Survey showed some

softening to the third quarter business environment, a new survey from the

National Association of Business Economics showed 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.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com