Even though fluctuating worries about sovereign debt crises, politicians’ stomach for solving them, and more general macroeconomic ire have exploded onto the global capital markets in recent days (not to mention the downgrade of America’s sovereign debt), the world’s executives have been worrying for a while. CEB’s business barometer index – based on data collected in the past six weeks – has dropped from a cautiously pessimistic 48.5 in Q2 to a more worrying 46.9.
We collected the data from over 1,500 senior executives in a wide range of large companies’ corporate functions to understand what they think will happen to some of the most important economic drivers in the coming 12 months. As we’ve said before, what makes this survey interesting is that the views of the executives surveyed are not based on “gut feeling” but on what they are hearing as heads of finance, sales, supply chain, and HR. The findings provide good insight, therefore, on the thinking that will be behind many business decisions in the months to come.
Executives and investors alike have not been reassured by the solid corporate performance of recent months. As the Q2 US earnings season shows, firms have have had a fairly good start to the year (80% of firms have exceeded analysts’ estimates) but markets did not rise on the news and then, when confronted by more bad macroeconomic data (especially about euro zone sovereign debt), fell spectacularly.
Executives do not foresee a looming catastrophe in the real economy but do not see any good news on the horizon either. This has meant that they have continued to refrain from making investments and instead sit on record piles of cash (this piece claims that US firms alone hold $2 trillion); more recent worries about the sovereign debt crisis becoming a second credit crunch have only made them more likely to hold on to the cash.
Growth, Sales, Investment, and Cost
Executives’ views on EU and US growth deteriorated markedly with only 27% of executives predicting growth, down from 45% in Q2-2011 and 50% in Q1-2011. Although 60% of executives expect higher growth in emerging markets, this has also slipped considerably from the previous quarters’ long-term average of 70%. Sales executives provided better news, saying they expected sales to new and existing customers to grow, albeit at a slow pace, and we saw no change in the number of executives planning to make higher discretionary IT or R&D investments.
Costs are expected to stay largely flat as, although 65% of executives expect higher labor costs (compared to 78% in Q1-2011 and 77% in Q4-2010) and 74% expect higher core input prices (84% in Q1-2011), most only anticipate cost increases to be between 1% and 4%.
Breakdown by Function
Finance indicators: More CFOs expect to cut back finance budgets and anticipate lower general and administrative costs than in previous quarters; 51% expect CapEx to rise (compared to 53% in Q2-2011 and 70% in Q1-2011) with investments going into both fixed assets and IT. Further, 47% of finance executives expect an increase in the number of M&A deals (compared to 53% in Q2-2011 and 57% in Q1-2011).
Supply chain and operations indicators: Operations executives expect the costs of core inputs to be essentially the same as they were predicting in Q2-2011, but they’ve revised expectations about the number of new orders downwards: 59% of operations executives expect a higher number of new orders (compared to 64% in Q2-2011, 77% in Q1-2011, and 67% in Q4-2010) and 53% anticipate higher production levels (down from 57% in Q2-2011, 69% in Q1-2011, and 63% in Q4-2010).
Sales indicators: Sales organizations expect to sell more to new and existing customers in the next 12 months, even though their optimism has abated. Further, 40% of executives anticipated a higher reliance on discount incentive policies, up from 32% last quarter.
Marketing indicators: Marketing executives’ sentiment declined but remained positive; the downward change is due to weakening optimism about consumer loyalty, marketing budgets, and dedicated advertising resources.
HR indicators: HR executives remain somewhat concerned about labor costs, although expectations for higher average wages fell, concern in the US about healthcare costs increased. They also expect a lower total hiring volume in the next 12 months and lower employee engagement.
IT indicators: 44% of IT executives expect higher discretionary (non-maintenance costs) CapEx on IT, down from 46% in Q2-2011. However, 56% of executives expect software spending to increase (up from 51% in Q2-2011, and 43% in Q1-2011).
Executives are more shaken by uncertainty than they are by bad news. They have the will and the resources to start investing in labor and capital but will not do so until at least some of the smoke clears on the economic battlefield.
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Click here to view the full Q3-2011 Business Barometer Report