Survey: Executives still cautious about long-term economic outlook

Optimism among senior executives about the future of the economy increased slightly in the last three months, as companies anticipate continued growth but face challenges adjusting to the new post-recession marketplace. Measuring the economic assumptions of more than 400 executives across six functional business roles, the latest Business Barometer released November 11 by the Corporate Executive Board (CEB) shows that sentiment among business leaders is improving due to a positive outlook for sales, IT spending and emerging market growth.

CEB's Business Barometer increased to a reading of 48.9 in Q4, roughly the same level it was in Q1 2010 after a drop in the third quarter (47.8 in Q3 compared to 51.1 in Q2). Notably, there is an increase in the number of survey respondents who expect their company's revenue to increase in the next 12 months (76 percent compared to 68 percent in Q3) and many are more optimistic about their respective industries' growth, with 62 percent expecting increases compared to just 50 percent last quarter.

Despite these improvements, most executives expect only modest business growth due to sluggish growth expectations for developed economies. Adding further conservatism to executives' outlook are expectations about increasing cost pressures from rising labor costs and input prices.

"The uptick in optimism we see among senior executives reflects a moderation in concerns about downside economic scenarios as well as increased confidence from continued sales and earnings growth in a challenging economic environment," said Michael Griffin, executive director, Global Research for the Finance and Strategy Practice at CEB. "Faced with modest growth expectations and increasing cost concerns, executives have little margin for error in setting budgets for next year. Leading companies are taking a highly selective approach to resource allocation, working back from key growth and efficiency bets."

Areas for Vigilance
In light of QE2, the Federal Reserve's plan to purchase $600 billion in treasury bonds, rate and currency volatility are key areas for vigilance. Although this quarter's survey saw little change in executives' expectations about inflation, which remain muted, more executives anticipate an increase in inflation rather than a decrease. Forty-two percent of executives also expect the US dollar to decline in value in the year ahead.

"While downward pressure on the dollar will present a tailwind for U.S. exporters, currency volatility remains an area for vigilance," according to Oleg Polishchuk, senior director, Global Research for the Finance and Strategy Practice at CEB.

One of the more significant signals from CEB's Q4 Business Barometer is the continued increase in the number of executives who expect rising cost pressures. Overall, 68 percent of executives expect greater cost pressures (up from 63 percent in Q3). Specifically, 74 percent of executives surveyed expect higher core input prices and 69 percent expect higher labor costs (up from 70 percent and 67 percent in Q3 2010, respectively). In addition, half of executives anticipate that energy costs will increase.

Senior executives also have a moderate outlook when it comes to their company's hiring practices. While 65 percent of executives expect hiring volume to improve, only 50 percent of executives now expect total headcount to improve (a slight increase from 48 percent in Q3).

Areas for Optimism
Despite these challenges, executives are feeling optimistic in a number of key areas that point to a steady improvement in the business landscape. Most notably, growth expectations for emerging markets are increasing. While 32 percent of executives see strong growth prospects in the U.S. and Europe, in contrast a startling 71 percent of executives anticipate accelerating growth in emerging economies (compared to 59 percent in Q3).

CEB's Q4 Business Barometer also indicated an improvement in the overall sales outlook with more than two-thirds of sales executives expecting sales to new and existing customers to rise in the year ahead. Fewer expect to rely on customer discounts compared to the last quarter (77 percent compared to 80 percent in Q3 2010).

Compared to Q3 2010, sentiment among IT executives has continued to increase with 56 percent saying they expect higher discretionary spending (up from 54 percent in Q3 and 47 percent in Q2 2010) and 60 percent saying they expect software spending to increase.

Additional notable findings from CEB's Q4 Business Barometer include:

• Finance executives continue to expect increases in the number of M&A deals this year (up to 53 percent compared to 51 percent in Q3) although are not yet as optimistic as they were in Q2 (63 percent expected an increase in new deals).
• Executive sentiment about consumer confidence remained unchanged since last quarter, with only 39 percent of executives anticipating that it will rise in the year ahead.
• Outside of increased spending in IT, finance executives expect declines in CAPEX for facilities and manufacturing equipment as well as R&D spending, with only 43 percent of executives planning to increase their spending in that area (down from 52 percent in Q3 2010).
• Seventy-three percent of human resources executives believe unemployment will remain high or grow higher. In relation to current employees, 47 percent of executives believe employee engagement will increase and 48 percent believe unwanted turnover will rise.
• Sixty-seven percent of supply chain and operations executives expect an increase in the number of orders their company will receive in the next year and 63 percent anticipate higher production levels (which is only slightly down from 67 percent in Q3).

CEB's Business Barometer is a forward-looking diffusion index of expected business conditions, condensed from a survey of more than 460 senior executives in North America and Europe across 33 industries. The Business Barometer provides a unique measure of business sentiment among a representative sample of CEB's executive member network. The index measures the assumptions of senior executives across six functional disciplines, including HR, corporate finance, operations, sales and marketing, real estate and IT, on the impact 12 key business and economic indicators will have on their business in the year ahead.

For more information on CEB's Business Barometer, visit http://cebviews.com/economic-outlook/.