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THE PNC ECONOMIC OUTLOOK Survey of Small & Middle-Market Business Owners April 2016 NC Businesses Cautious Amid Pessimism About Economy KEY FINDINGS: OUTLOOK FOR NEXT SIX MONTHS AN A L Y SI S B Y Mekael Teshome PNC Economist Our spring 2016 survey shows small and mid-sized business owners in North Carolina are cautious about the next six months. Their expectations are stable for sales and profits despite greater pessimism about the economy given the stock market lows and presidential election rhetoric since the start of the year. North Carolina’s economy will likely sustain strong growth through 2016. Financial services, education, health care and professional services will drive above-average payroll growth. Low business costs, increased population and a young, educated workforce will boost the expansion. The smaller-than-average decline in house prices during the recession means that local household wealth is on better footing. The overall findings from our biannual survey reinforce the fundamentals are solid for the U.S. economy. PNC is forecasting real GDP growth of 2.0% this year, a slight slowing from the 2015 pace. Positive Expectations for Sales and Profits When it comes to making money, PNC found North Carolina business owners are upbeat. Their expectations are stable for sales and higher for profits compared to fall. Only 2% expect a decrease in sales, the lowest in four years of this state survey. NC vs. U.S.: Nationally, 51% also expect higher sales and 45% expect profits to go up. Sales Profits ■ Expect increase 42% 51% 51% 37% 42% 9% Fall 2015 2% 13% Spring 2016 Fall 2015 48% ■ No change ■ Expect decrease 42% 44% 7% Spring 2016 Growing Concerns about the Economy 33% 42% Pessimistic Fall 2015 Pessimistic Spring 2016 42% are pessimistic about the U.S. economy, the most since 2014, and a 9 percentage point increase from the fall. 27% are pessimistic about their local economy, also the highest since 2014. At the time the survey was conducted, the stock market was down significantly. Amid the presidential primaries, 56% were not satisfied the potential candidates were addressing the key issues for businesses. 13% Fewer Plan to Hire: One in eight (13%) plan to add employees during the next six months, down from 16% last fall and 19% a year ago. 28% Few Pay Raises on the Way: 28% expect to increase employees’ pay, consistent with 29% in fall and 31% last spring. 27% Shortage of Skilled Workers: 27% say it is harder to find qualified employees compared to 6-12 months ago. The biggest challenge is that candidates don’t have the technical skills specific to the business, i.e., computer applications, tools or machinery. 32% Further Decline in Pricing Pressure: 32% plan to charge higher prices, on par with 30% in the fall. For prices charged by suppliers, 46% expect price hikes unchanged from six months ago. 81% expect consumer prices to rise this year, despite the sharp drop in energy prices over the past year. © 2016 PNC THE PNC ECONOMIC OUTLOOK Survey of Small & Middle-Market Business Owners April 2016 NC Business Owners Expect Strong Profits, Steady Retirement Savings Upbeat about the Bottom Line 72% Profits: Three in four (72%) NC business owners expect to make a net profit this year, up from 62% six months ago. The average profit is about 7% of sales. 24% expect to make more than 10% over operating expenses. Growth: One in four (27%) hope to substantially grow their business by 10% or more over the next two years. Two in 10 cite their own personal drive as the top factor. This is followed closely by rising customer demand, hiring the right people, and understanding the marketplace and competition. PNC INSIGHT What’s Your Vision? Five Steps to Future Success Here are five phases to help make your business vision come true, per the U.S. Small Business Administration: No Changes to Pay or Retirement Savings 79% Eight in 10 (79%) say their own salary and compensation will remain the same during the next six months. Similarly, 70% say their personal retirement savings will remain the same as well. PNC INSIGHT Keys to the Retirement You’ve Always Wanted Today’s retirement has business owners rethinking everything from when it will begin to whether it will be more like shifting to part-time work than quitting altogether. Here are some things to consider: • Investing: Create a simple portfolio with limited risks and little maintenance. Don’t forget to invest in your company, especially if you plan to sell out in the end. • Dedicated Savings: Protect the retirement pot. Create a dedicated account for each savings goal, like your kids’ college. 1. Organization: How will you combine people, resources and structure to achieve your goals? • Trust Funds: A trust can be a great way to ensure your business continues to run – and your family will be taken care of. 2. Observation: Increase your powers of observation to know better what motivates people, solve problems more effectively and distinguish between alternatives. • Hand-Offs: Who gets the business? Proactive succession planning can ease the transition, i.e., address estate and gift tax implications. 3. Views: The environment, marketplace, project and measurement views help to think about outcomes, identify critical elements and adjust your actions. • Selling Your Business: Find out what it’s worth, which allows time to find ways to increase the value. Once it’s ready for sale, consider options for transferring ownership rights, i.e., outright sale or lease. 4. Driving Forces: Individual and organizational incentives, qualitative factors (i.e., defined vision) and quantitative factors (i.e., results, productivity). 5. Ideal Position: As the final phase, your outline should include: the conditions to succeed, your marketplace niche, opportunities, core competencies, and the strategies and tactics to pull it all together. 12% Best Ways to Forecast Cash Flow Little Demand for Loans: Nearly nine in 10 (86%) say they will not pursue new loans or lines of credit in the next six months while 12% will. Asked if the prospect of rising interest rates would impact pursuit of a loan, 83% said it wouldn’t. The creation of a simple forecast to predict when payments come in and go out is key to cash flow management. In the PNC survey, the most common tool for forecasting among owners is professional help from an accountant or banker followed by internal spreadsheets. Next is accounting software and online banking. 36% Health Care – Costs and ACA: 36% said insurance premiums increased in 2015. Looking ahead to 2016, 19% expect these costs to increase, down from 36% in the fall. Asked about the Affordable Care Act, 85% say it had no effect on 2015 hiring; a similar number (83%) expect no impact this year. The PNC Financial Services Group, Inc. (NYSE: PNC) is one of the largest diversified financial services organizations in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. METHODOLOGY: Artemis Strategy Group conducted the telephone survey from 1/21/2016 to 3/8/2016, among small and mid-sized businesses. 502 interviews were conducted nationally. Sampling error for the nationwide results is +/- 4.4% at the 95% confidence level based on 154 interviews in North Carolina. DISCLAIMER: This report was prepared for general information purposes only and is not intended as specific advice or recommendations. Any reliance upon this information is solely and exclusively at your own risk. © 2016 PNC