PricewaterhouseCoopers' Management Barometer is a Quarterly Survey
of Top Executives in Large, Multinational Businesses
131 CFOs and Managing Directors Were Interviewed About the First
Quarter Business Climate, Through April 27, 2006
NEW YORK, June 12, 2006 (PRIMEZONE) -- In the first quarter, senior executives held to their revenue growth projections, and gross margins remained strong -- but optimism about the domestic economy softened. Business leaders are now expecting to make significant precautionary cuts in new investments and hiring planned for the next 12 months -- particularly the sizeable cadre that views escalating energy costs as a potential barrier to growth of their company.
Optimism softens but revenue targets hold
Although 87 percent of surveyed executives view the domestic economy as growing, only 67 percent are optimistic about its prospects over the next 12 months -- a slight drop from 70 percent in the prior quarter, but well below the 77 percent of a year ago. Currently 30 percent take an uncertain view of the economy, up from 26 percent in the prior quarter and 20 percent a year ago. Only three percent are pessimistic.
In connection with this modest softening, business leaders held their revenue growth targets steady at 8.6 percent, only marginally below the 9.0 percent they projected in the prior quarter, and slightly ahead of their 8.1 percent goal of a year ago.
Higher prices continue to chase higher costs
Driven by higher energy prices, costs continued to increase, with prices attempting to keep pace: 49 percent reported increased costs, and 43 percent raised their prices.
On balance, gross margins were up: 34 percent reported higher margins, and 22 percent said margins were lower.
Half of surveyed executives (50 percent) cited escalating energy costs as a potential barrier to their company's growth over the next 12 months. Among this group, a larger percentage faced increased costs (56 percent) and raised their prices (47 percent).
Cutbacks on new investments and hiring
Fewer executives are now planning major new investments of capital over the next 12 months: 49 percent, off from 55 percent in the prior quarter. And they expect to spend at a much lower level, 6.8 percent of revenues, off from last quarter's high of 9.5 percent.
The majority (60 percent) expects to be adding employees over the next 12 months, with only 12 percent reducing. An average of only 0.3 percent net new hires is expected, well below the prior quarter's estimate of 2.1 percent. This lower level may be traced to several expected workforce cutbacks.
"Because of pricing power, the continuing run-up in energy costs has led to only a modest softening of optimism about the domestic economy," said John O'Connor, vice chairman of PricewaterhouseCoopers. "But in these uncertain times, these leaders are maintaining their flexibility by scaling back plans for new investments and hiring."
Energy barrier underlies softening
Over the past 12 months, higher energy prices have had a strong negative impact on profit margins for 56 percent of the companies where increasing energy prices are seen as a potential barrier to growth -- but they have had only a moderate impact on all others.
Among companies where escalating energy costs are viewed as a potential growth barrier:
-- Only 62 percent are optimistic about the domestic economy over
the next 12 months, versus 69 percent of all others.
-- 7.2 percent revenue growth is projected over the next 12
Months -- twenty-nine percent less than the 10.1 percent
expected by all others.
-- 53 percent are planning a net increase in hiring over the next 12
months, versus 68 percent of all others. Workforce shrinkage of
1.5 percent is expected, versus growth of 3.3 percent for all
others.
-- 29 percent reported decreasing gross margins in 1Q06, versus
only 15 percent of all others.
-- 26 percent are concerned about decreasing profitability over the
next 12 months, versus only 19 percent of all others.
"It seems clear that although all businesses are in some ways impacted, there is a sizeable energy-sensitive segment that is feeling the pain considerably more than the others," said O'Connor.
Brighter global outlook
Seventy-nine percent of surveyed executives believe the global economy is growing, and 72 percent are optimistic about its prospects over the next 12 months, up from 67 percent a year ago. Only 26 percent take an uncertain view, and two percent are pessimistic.
-- Last quarter, 50 percent of those marketing abroad recorded an
increase in international sales, while only six percent had a
decrease.
-- Looking ahead over the next 12 months, international marketers
expect to grow their company's revenue at an 8.8 percent rate,
compared to 7.2 percent for domestic-only marketers, or twenty-two
percent faster.
Energy prices appear to have had little impact on optimism about the global economy:
-- 70 percent of those who see rising energy prices as a potential
barrier to their company's growth are optimistic about the next 12
months; and
-- 74 percent of those who see their company as not threatened by
energy prices are optimistic.
"Right now, growth opportunities appear comparatively stronger outside the U.S.," said O'Connor, "and the energy-related barriers seem less of a factor there."
PricewaterhouseCoopers' Management Barometer is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.
For more information about Barometer surveys, including recent economic trend data and topical issues, please visit our web site: http://www.barometersurveys.com
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