NABE Industry Survey: A Significant Downshift

The Nov. 3, 2008, report presents the responses of 102 NABE members to a survey, conducted between Oct. 10 and Oct. 23, on business conditions in their firm or industry, and reflects third-quarter 2008 results and the near-term outlook.

“Respondents to the October NABE Industry Survey were considerably more negative than they were in July, suggesting that the ongoing financial crisis is pulling down the overall economy,” said Ken Simonson, Chief Economist, Associated General Contractors of America. “The survey’s measure of demand growth fell by the largest amount in the history of the survey, and for the first time since 2001, more respondents reported declining demand than rising demand. Every time since 1982 that this indicator has turned negative, the economy has later proved to be in a recession. Looking ahead to 2009, 90% of survey panelists said their forecast for 2009 U.S. output growth became more pessimistic between July and October. Falling profit margins outnumbered rising margins 3-1 last quarter among respondents’ firms—the worst reading since 1982. For the first time since 2003, more panelists’ firms cut jobs than added them, and the employment outlook for the next six months is even more negative. The percentage of respondents with rising capital spending fell for the third straight quarter and barely topped the share of firms that reduced it, while forecasts for capital spending over the next 12 months declined sharply.”

Highlights
Demand for goods and services increased at 30% of respondents’ firms and fell at 35%, the first time since 2001 that more respondents reported declines than increases. This is consistent with other evidence that the U.S. economy fell into a recession in the third quarter. Weakness was especially pronounced in the goods-producing sector, where only 6% of firms reported increased demand while 61% reported declining demand.

Respondents to the October survey were significantly more pessimistic about the macroeconomic outlook than they were in the July survey. A full 38% of respondents expect U.S. real GDP to be lower in 2009 than in 2008, and 79% expect growth of less than 1%. Only one respondent expects growth of more than 3% in 2009. Ninety percent of survey panelists said their forecast for 2009 became more pessimistic between July and October, compared to only 2% who said they became more optimistic. Thirty-eight percent became significantly more pessimistic, reflecting the deterioration in financial markets that occurred in September and October.

Weakening U.S. market conditions and past increases in commodity prices continue to squeeze profit margins. For the third consecutive quarter, reports of falling profit margins (44% of respondents) outnumbered reports of rising margins (15%).

October marked the first NABE survey since 2003 where more panelists reported declining employment than reported rising employment. Services was the only sector where employment increases were more prevalent than declines.

The percentage of respondents reporting capital spending growth edged lower for the third consecutive quarter, leaving only a few more companies increasing capital spending than reducing it. Respondents expect capital spending to decline in the goods-producing and FIRE sectors, but to continue to rise in the TUIC and services sectors The dichotomy was especially sharp in capital spending plans for computers and communications equipment (C&C) over the next 12 months. None of the respondents from the goods-producing sector expected capital spending on computers and communications equipment to rise over the next 12 months. By contrast, 49% of the respondents from the services sector expect spending to rise, with only 13% expecting a decline.

The share of panelists who said materials costs rose last quarter tumbled to 41% from a record 75% in the second quarter. Meanwhile, the percentage who said their materials costs fell soared to 21% from low single-digit shares in the previous several surveys. Panelists split, 28%-28%, as to whether prices for non-labor inputs will rise or fall in the next three months.

The fraction of respondents who said their firms raised prices in the latest quarter climbed for the third straight quarter, to 38%, but price cuts occurred at 11% of the firms, double the percentage reported in July. Looking ahead one quarter, more respondents expect to cut prices (23%) than raise them (21%), a sharp reversal from the past four surveys when price-increase expectations outran price-cut expectations by double-digit margins.

Skilled labor remains the only major input that is in short supply. Twenty-seven percent of firms reported a shortage of skilled labor, down from 40% in the July survey.

Tight credit market conditions appear to be having a growing impact on the economy. Forty-eight percent of respondents indicated that the tightening credit conditions had had a moderate or severe negative impact on their businesses, while 71% reported that credit conditions had had a moderate or negative impact on their customers. Slightly more than one-third of respondents stated that actions by the Federal Reserve of either lowering interest rates or liberalizing credit access had a positive effect on their business, with the finance sector experiencing the greatest impact.