Optimism in the world economy slightly recovered in the second quarter of 2008, with 39 percent of respondents optimistic about the global economy over the next twelve months; up three points from the previous quarter but 36 points below last year's 75 percent. However, while optimism has fallen over the past year, international sales have remained steady among those companies selling abroad, up two points to a 19 percent contribution to total revenues over the next twelve months. "Companies still view the international market as the area for growth and are continuing to find new ways to invest in foreign markets and expand their operations," says Ken Esch, partner with PricewaterhouseCoopers Private Company Services practice.
Gross Margins Tighten as Costs, Prices Rise
Gross margins tightened slightly and remained negative, as net 6 percent of CEOs reported decreased margins; this compares to net 3 percent reporting a decrease last quarter and is a significant decrease from the net 12 percent reporting increased gross margins a year ago. Additionally, net 41 percent of all respondents reported higher costs, a three point increase over last quarter and 16 points higher than the previous year. Prices also increased with net 25 percent of Trendsetter companies reporting higher prices, up from net 21 percent from the previous quarter and net 23 percent last year.
Growth Projections Positive But Reset Lower
Own-company revenue targets for the next twelve months were adjusted downward from 11.9 percent to 10.8 percent, despite a slight increase in the number of Trendsetter companies projecting growth over the next twelve months. Nearly 80 percent of respondents are projecting growth, up three points from last quarter but down 12 points from 2Q07. On the growth side, 45 percent now project double-digit growth, a two point drop from last quarter and down 22 points from 2Q07.
International marketers continue to report higher growth forecasts than their domestic counterparts, but lowered overall revenue projections from 15.2 percent to 12.9 percent, a 15 percent drop from last quarter. While domestic- only companies also adjusted revenue targets downward, the readjustment was not as significant, instead falling from 9.8 percent last quarter to 9.4 percent in 2Q08.
"Among domestic companies, the level of pessimism rose dramatically over the past year but may have plateaued," adds Ken Esch. "While we certainly have some major problems in certain sectors of the economy, such as construction, automotive, and financial institutions, our diverse economy has provided some comfort that we can weather this storm and better times lie ahead."
Reductions in Spending Planned
In a change from last quarter, plans for capital investments fell significantly, from 35 percent last quarter to 30 percent in 2Q08 (14 percent decrease). But, the number of Trendsetter CEOs planning increased spending remained relatively stable, off from 68 percent last quarter to 66 percent this quarter (2 point decrease). In line with last quarter, more international marketers plan to increase spending over the next twelve months on: major capital investments, expansion to new markets abroad, and overall increases in operational spending (75 percent versus 59 percent for domestic only).
Surprisingly, the number of Trendsetter CEOs planning to increase spending in R&D has hit an all-time low, with just 10 percent of respondents planning to increase spending in this area, down from 14 percent last quarter. "The most successful companies are continuing to invest in R&D during the downturn and trying to make sure that the products and services they offer are responsive to customers' needs," says Esch. "Companies that aren't investing in R&D are missing a significant opportunity; those that are will emerge from the downturn in a much stronger position."
Lack of Demand, Oil Prices Top List of Major Concerns
In line with last quarter's results, 3 out of 4 Trendsetter CEOs cited concern over lack of demand as the number one barrier to growth, similar to last quarter but up 22 points from last year's 52 percent. Oil/energy prices remained the second highest concern, cited by 51 percent of surveyed companies (up from 44 percent last quarter and 31 percent one year ago). Concern over the availability of qualified workers continued to decline, cited by 35 percent of respondents in 2Q08 (down from 40 percent last quarter and 53 percent one year ago). The number of respondents citing profitability/decreasing margins concerns was off slightly to 35 percent, but it is notably higher than a year ago (22 percent).
Hiring Plans Slow, Hourly Wages Increase at a Slower Pace
While a majority of private businesses plan net new hiring over the next 12 months (57 percent, down five points from last quarter) and few plan net reductions (6 percent, up one point from last quarter), average composite hiring plans dropped one-third, from 5.9 percent to an average of 3.9 percent - 3.6 percent for full-time employees and 0.3 percent FTE part-time or contract employees. The mean expected increase in hourly wages decreased from 3.36 percent in the first quarter of 2008 to 3.03 percent in the second quarter.
Professionals/technicians remain the most sought after new hires, down just one point from last quarter to 39 percent in 2Q08. Sales/marketing executives (20 percent) and administrative support (12 percent) remained the second and third most cited job types.
