For the fourth consecutive quarter, optimism in the U.S. economy among CEOs of the nation's leading private companies set a new 16-year low, with only one in eight (12 percent) CEOs surveyed for PricewaterhouseCoopers' Private Company Trendsetter Barometer reporting a positive outlook on the U.S. economy over the next twelve months. Dropping five points from 3Q08's 17 percent, CEO optimism has continued a steady decline from 64 percent in 2Q07. The number of CEOs pessimistic about the U.S. economy over the next 12 months rose 13 points in 4Q08 to 54 percent, up from 24 percent during the same period in 2007.
Optimism in the world economy among international marketers continued to drop significantly, with only 10 percent of Trendsetter CEOs claiming they are optimistic about the global economy over the next 12 months, down nine points from the previous quarter and 45 points below last year's 55 percent. Indicative of this lowered optimism, only 30 percent of international marketers reported increased sales abroad, down 8 points from the prior quarter and 17 points from one year ago (47 percent). The number of international marketers reporting lower international sales in 4Q08 doubled to 16 percent; those reporting no change in 4Q08 stayed constant at 54 percent.
"Under this new economic reality, CEOs are shifting their focus to cost reduction to maintain gross margins and improve cash flow. However, it is very important to identify areas where the changes they make are sustainable once the economy recovers," says Ken Esch, partner with PricewaterhouseCoopers' Private Company Services practice. "Too often in a recession, companies institute across the board cost reduction rather than engaging in a review of cost drivers and their impact on the business. This could result in cuts to key areas that could drive future profitability. Private company CEOs in particular should actively forecast their financial performance, rather than working off historical budgets, to ensure they have a forward-looking view of how the changes they're making today will impact their business tomorrow."
Gross Margins Tighten, Prices Fall
Gross margins tightened considerably in 4Q08, with net 16 percent of private company CEOs reporting lower margins. This number is well below 3Q08's net three percent reporting lower margins and in stark contrast to net six percent reporting increased margins during the fourth quarter of 2007.
Despite a lower number of Trendsetter CEOs reporting higher costs (net nine percent, down from net 27 percent last quarter), the number of respondents citing lower prices rose to net five percent in 4Q08 (net eight percent reported higher prices in 3Q08). "While fewer CEOs reported higher costs in 4Q08, it's important they aren't lulled into a false sense of security in their margin numbers," adds Esch. "Most companies today are enjoying favorable pricing of commodities and transportation costs, but if that situation changes and companies haven't been paying close attention to their cost drivers, they could be in trouble if costs move upward in the months ahead."
Growth Projections Falter
In the face of low levels of optimism in the U.S. and global economies, respondents projected notably lower average revenue growth rates for their companies over the next 12 months, averaging 5.2 percent in 4Q08, down from 10.1 percent in 3Q08 and 15.5 percent last year. Similarly, 57 percent of Trendsetter CEOs are projecting revenue growth over the next 12 months, down 10 points from last quarter and down 30 points from 4Q07; just 25 percent of those companies forecasting growth are projecting a double-digit increase, a 13 point drop from last quarter's 38 percent.
International marketers remain ahead of their domestic-only peers in revenue growth projections for the next 12 months - 6.1 percent vs. 4.5 percent - but the gap narrowed this quarter, from a 3.8 point spread in 3Q08 to a 1.6 spread in 4Q08. "In 3Q08, we saw international companies' growth rate projections hold steady at around 12 percent. Although they cut their projections in half this quarter, it doesn't necessarily indicate they expect international sales to decline at the same rate," adds Esch. Note that those with sales in the emerging markets of China/India/Brazil reflect above average revenue growth (7.5 percent). "Another important reason for private companies to be more forward looking in their forecasts is to anticipate how slowing domestic sales will affect their global business. High-performing private companies continue to expand in the emerging markets to fuel their growth."
Capital Investments Continue at a Slower Pace
The number of Trendsetter CEOs planning major new investments of capital remained flat for the second quarter in a row (29 percent in 4Q08, down one point from 3Q08), however, average investment as a percent of sales continued to drop, falling to 7.4 percent, down from 3Q08 (8.2 percent) and last year (13.6 percent).
The number of respondents planning to increase spending also fell in 4Q08, down six points to 55 percent. Most notably, the percentage of companies planning to increase spending on research and development dropped three points to an all-time low of nine percent. In line with previous quarters' results, more international marketers plan to increase spending over the next 12 months than their domestic-only counterparts (62 percent versus 49 percent for domestic-only), albeit at slower rate.
"In this economy, it's easy to focus on making decisions that impact the bottom line over the next few quarters," adds Esch. "Cutting costs to remain a viable business is obviously necessary, however, it's also important that private company CEOs continue to make strategic investments in areas that will create new revenue in the future. For example, leading private companies are taking advantage of the Research and Experimentation Tax Credit rules to help fund product and process improvements that may benefit their business for years to come."
Weak Demand, Profitability Continue to Present Challenges
Eight out of ten (84 percent) Trendsetter CEOs cite lack of demand as a major potential barrier, up one point from the previous quarter and up 20 points from last year's levels. In line with previous results, the number of respondents citing profitability/decreasing margins rose in 4Q08, up four points from 3Q08 to 44 percent and up 12 points from 4Q07; legislative/regulatory pressures were cited by 35 percent of respondents for the second quarter in a row. Concern over the availability of qualified workers continued to decline, cited by just 19 percent of respondents this quarter as hiring plans slow; this is down from 30 percent last quarter and 45 percent one year ago. In contrast, oil/energy prices dropped sharply as a barrier, off 20 points to 22 percent.
Hiring Plans Slow, Hourly Wages Increase at a Slower Pace
The number of private businesses planning net new hiring over the next 12 months fell 13 points to 35 percent in 4Q08, while the number of Trendsetter CEOs planning to reduce workers rose nine points to 17 percent. Overall, a net increase of 1.7 percent is planned for respondents' composite workforce - a survey low. The mean expected increase in hourly wages decreased from 2.84 percent in 3Q08 to 2.27 percent in the fourth quarter.
Professionals/technicians remain the most sought after new hires, down 12 points from the previous quarter to 22 percent in 4Q08. Sales/marketing executives (eight percent) and administrative support (seven percent) remained the second and third most cited job types.
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