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Trendsetter barometer® Business outlook 1Q 2016 Private companies remain on track despite economic jitters What’s inside: At a glance Economic sentiment Corporate performance Opportunities and barriers Hiring International expansion Contents At a glance 1 Economic sentiment 2 Corporate performance 4 Opportunities and barriers 6 Confidence tumbles, but without going into freefall Revenue forecasts remain positive despite growing economic uncertainty Companies keep spending, though not with borrowed money Hiring 10 International expansion 12 Fewer businesses hire as US returns to near-full employment Staying the course, but scant new expansion Trendsetter barometer – Business outlook Measure twice. Cut once. That’s the old carpenter’s saying, and it’s also sound advice for anyone seeking insights from data. Get good data and then make your call. There’s certainly no shortage of information about the economy. But that presents its own questions. Which data do you look at? What exactly do you need to measure? For 20 years now, we’ve been taking our measure of private companies, asking their leaders what they’re seeing in the economy, their industries, and their businesses. We’ve learned that their answers can give us a better idea not only of where private companies — still the core of the US economy — are heading, but also the direction of the economy overall. So what have they been telling us lately? The clearest signal from our first-quarter survey is private companies’ growing concern about both the global and domestic economies. There are plenty of issues to watch, including the slowdown in China, US elections, low oil prices, Britain’s future in the EU, Europe’s responses to a refugee crisis, and an upsurge in terrorism. These topics will likely dominate discussion in business and government during coming quarters. We’ll check in regularly with our Trendsetter panel and pass on their insights. This current report is the result of interviews with 220 executives during the first quarter of 2016. As always, we’re grateful for their thoughts and happy to share their collective wisdom with you. Trendsetter barometer – Business outlook Shawn Panson Ken Esch Margaret Young US Leader Private Company Services Trendsetter Partner Sponsor Private Company Services Partner Private Company Services At a glance PwC’s Trendsetter Barometer® At a glance: What’s on the mind of private-company leaders Private-company sentiment has gone up (é), down (ê) or Private-company sentiment has gone up (), down () or stayed the same (=) stayed same (=) across a variety of areas across athe variety of areas Optimism about the US economy is felt by 41% of private companies, down from 71% a year ago. Economy Performance Most (86%) companies expect positive revenue growth, the same as a year ago. Spending One-quarter (27%) plan major new capital investments, roughly the same as a year ago (29%). The majority (52%) plan to increase headcount, but that’s down from the 63% planning this a year ago. Under one-quarter (22%) of private companies worry about wage pressure, down from 33% the prior quarter. International sales contributed 19% of overall revenue for private companies, about the same quarterly contribution for the past decade. Trendsetter barometer – Business outlook But the expected rate of revenue growth is 7%, down from 9.4% a year ago. Nearly three in four (71%) plan to increase operational spending, about the same as a year ago (73%). Hiring At 2.72%, planned wage increases haven’t varied much since the prior quarter (2.96%) or a year ago (2.62%). Headwinds Optimism about the world economy is felt by just 19% of international marketers, down from 38% a year ago. Expansion Over one-third (41%) are concerned about legislative & regulatory pressures, up from 36% the prior quarter. Under one-half (43%) of private companies selling in China plan new capital spending, down from 53% the prior quarter. 1 For more information, please visit: pwc.com/us/pcs Economic sentiment Confidence tumbles, but without going into freefall Trendsetter companies are having a case of economic jitters. That’s the biggest takeaway from our latest quarterly Trendsetter Barometer. Only 59% of Trendsetter executives agreed the domestic economy was growing during the first quarter of 2016. That’s down 11 points from the quarter before and a whopping 23 points lower than a year ago. As for the rest of Trendsetter businesses, their views were best summed up by the CFO of a 3D printer company: “The economy has been stagnant over the past year.” Only 9% thought the economy was actually contracting. The slide in sentiment follows three quarters of declines and puts this data point at its lowest since late 2012, also a time of slowing growth. We see this decline in confidence about the first quarter further reflected in feelings about the coming year. After hitting a high of 71% in early 2015, optimism about the domestic economy’s Trendsetter barometer – Business outlook “T he economy has been stagnant over the past year.” —CFO, 3D printer company Optimism snapshot – Today and a year ago Private-company optimism Today 41% 71% A year ago Percentages denote private companies who are optimistic about the US economy's 12-month prospects. The long view – Economic optimism over time Percentage of respondents 80% 60% 40% 20% 0% 1Q’07 1Q’08 US economy 1Q’09 1Q’10 1Q’11 1Q’12 1Q’13 1Q’14 1Q’15 1Q’16 World economy* * World optimism reflects responses only from private companies selling internationally. 2 Economic sentiment 12-month prospects has slipped every subsequent quarter, dropping to 41% by the time this latest survey closed. That puts optimism at its lowest ebb since the tail end of 2011. Trendsetter companies are even more pessimistic about the world economy, with just 19% of them voicing confidence. Check-engine light is on… but so are the economy’s wheels The worrisome dip in sentiment about the US economy could, in part, be in response to the recent stock market rollercoaster. The Dow Jones index shed around 12% in January and February before making up the lost ground in March. But declining confidence probably reflects weak data about the economy as well. Car sales are down 4.8% so far in 2016 compared to last year, for example. And the Fed has recently cut its GDP growth Trendsetter barometer – Business outlook forecast for the year from 2.4% to 2.2%. As the executive from a logistics firm sees it, “The economy is too uncertain for us to grow.” But while there’s real cause for concern about the economy, it would be a mistake to overreact. “The first-quarter decline in business confidence is notable,” acknowledges PwC’s Shawn Panson. “But it’s the equivalent of a ‘check engine’ light. The wheels aren’t about to fall off the economy. As with all warning lights, though, you should definitely pay attention and take corrective measures where necessary.” Economic barometer – 12-month outlook US economy World economy* 41% 7% 52% 19% 27% 54% Optimism Pessimism Uncertainty * Optimism about the world economy reflects responses only from companies selling internationally. In fact, our first-quarter findings show that while concern is growing, there’s still a lot of strength in the economy, with most private companies continuing to forecast increased revenue for themselves over the next 12 months. 3 Corporate performance Revenue forecasts remain positive despite growing economic uncertainty Economic modelling and surveys are full of pitfalls. The main one is what IT professionals call “garbage in = garbage out.” It’s a simplification of course, but your conclusions can be only as good as the data. During the 20 years we’ve been running the Trendsetter Barometer, we’ve seen how our survey results have consistently been a solid leading indicator for the US economy. Warning lights may be flashing, but the numbers in the first quarter’s Trendsetter also show a lot of economic resilience. When we asked Trendsetter executives about growth prospects for this year, their answers maintained the positive trend seen in recent quarters and contrasted sharply with our respondents’ current economic misgivings. In fact, 86% of companies projected growth in 2016, up slightly from the prior quarter’s projections. Trendsetter barometer – Business outlook “Business has improved, and consumers are spending.” —CFO, Food wholesaler Growth expectations Most private companies project revenue growth for the next 12 months. One-quarter expect double-digit growth. 3% 4% 7% 25% Positive growth 10%+ Positive growth less than 10% Zero growth Negative growth Not reported 61% Private companies forecast slower rate of growth for 2016 Revenue growth rate* Forecast in 1Q16: Forecast in 1Q15: 7.0% 9.4% * Projected 4 Corporate performance But fewer companies are expecting double-digit growth, slipping from 36% to 25% over the latest quarter. Plus, Trendsetter businesses expect growth to happen at a slower clip over the next 12 months. How slow? Seven percent. That’s still an enviable rate, especially if you compare it with first-quarter US GDP growth of 2% — but it’s down markedly from the 9.4% growth rate Trendsetter companies projected a year ago. More firms running full steam, or close to it If Trendsetter revenue growth does indeed decelerate over the next 12 months, it won’t reflect a slowdown in private-company productivity. When we asked executives about whether their companies were operating at full capacity in the first quarter, the number of respondents who said yes (52%) actually increased slightly from the prior quarter. And if we ignore mid-2015 (55%), we’d have to go back to the first quarter of 2008 to find companies busier. In fact, 93% of all firms said they were operating at around, or more than, three-quarters of capacity. Again Trendsetter barometer – Business outlook excluding 2015, we haven’t seen that high a number since before the recession. As the CFO at a food wholesaler told us, “Business has improved, and consumers are spending.” Election fever stokes uncertainty, margins soften The unevenness of the recovery has helped feed the frenzy around the US presidential election, which is shaping up as one for the ages. Insurgent candidates have emerged during the primary season in response to voter resentment, with party leaders struggling to manage an unrulier process than normal. It all helps stoke the general feeling of uncertainty. As the executive vice president at a fluid-management technology company told us, “The election is probably the most important issue. Once it’s done, the uncertainty will be gone.” That might be wishful thinking, but certainly there will be fewer unknowns once the election is over. Among the main points of uncertainty for Trendsetter executives is whether gross margins will continue to soften. The net number of survey respondents reporting margin increases in the first months of 2016 was 10%, down from 24% just a few quarters ago. Although costs came down for Trendsetter companies in Q1, so did their pricing power, and this is reflected in the softening margins. Private companies’ pricing power also tends to be reflected in the broader economy, and the past quarter was no exception, with downward pressure also seen in the US Producer Price Index. But are we really seeing a change in direction for the economy? Not yet. As PwC’s Ken Esch says, “There’s clearly increased pressure on the economy, but we’re not ready to call an inflection point yet. Yes, Trendsetter executives are voicing concern, but we don’t see them substantially scaling back spending or other growth activities. This signals that private companies remain pretty confident about what the rest of 2016 holds for their businesses.” 5 Opportunities and barriers Companies keep spending, though not with borrowed money The end of the first quarter is often a time for reviewing the year’s plans. Are the original targets feasible? Do they need to change? Every quarter we ask companies to think about the next 12 months. Do they see exciting opportunities or worrisome barriers? Despite their rising concern about the economy, private-company leaders are not signaling a proportionate increase in their concern about growth barriers. Nearly a third fewer Trendsetter executives expect pressure for higher wages. However, their anxiety about more regulation and taxation has grown, as one might expect during a heady election season, and their perennial concern about lack of demand has held steady, with the majority of privatecompany leaders voicing this. But are Trendsetter companies tightening their purse strings as result? No. On the contrary, the number of Trendsetter companies that plan to increase their operational spending (71%) and make new capital investments Trendsetter barometer – Business outlook “Business is good. Contracts are secure for now.” —COO, Technical and tactical services provider for Department of Defense Growth barriers in the next 12 months 59% 58% Lack of demand 41% 36% Legislative/regulatory pressures 34% 38% Profitability/decreasing margins 29% 28% Lack of qualified workers 29% 25% Increased taxation 24% 24% Strength of the dollar Pressure for increased wages Oil/energy prices 22% 33% 19% 25% Today (1Q 2016) Prior quarter (4Q 2015) Percentages denote the number of companies that perceive these factors as growth barriers for their businesses. 6 Opportunities and barriers (27%) over the next 12 months has barely changed since the past quarter and is nearly the same as a year ago. Indeed, their planned capex as a percent of total sales (8%) is the highest since mid-2014. So, all in all, Trendsetter leaders seem to feel okay about their own companies in the current economy: “Business is good,” was how we heard things sized up by the COO of a company that provides technical and tactical services to the Department of Defense. “Contracts are secure for now.” Credit still available, but fewer takers And when we asked about the availability of credit, executives’ answers captured the mix of concern and confidence that characterizes this quarter’s Trendsetter Barometer. Trendsetter executives’ collective answer to this quarterly question has been a good leading indicator of changes in credit availability for companies in the broader economy. The survey’s Q4 2015 data was no exception – the rise in Trendsetter credit availability late last year was followed by an uptick in consumer and industrial loans from banks soon after. Trendsetter barometer – Business outlook But fewer Trendsetter companies reported an increase in credit availability in Q1 2016, suggesting there will be a slight decline in future credit growth for businesses overall. And well, fewer Trendsetter companies were seeking credit to begin with. Just 18% said their firm had looked for loans or other financing in the past three months, down from 27% in the prior quarter, bringing the number back to what it had been a year ago. “The fourth-quarter jump we saw in the number of private companies seeking new financing probably had a lot to do with the Fed’s anticipated rate hike in December,” says PwC’s Margaret Young. “Many companies may have seen that as their last chance to obtain credit at rock-bottom prices and so decided to seize the moment. Rates nonetheless remain historically low, and further hikes are expected to be gradual. Therefore, private companies are under no particular pressure to snatch up cheap credit, especially since many of them have built and maintained healthy cash reserves since the recession.” Ahead of the borrowing curve Economic indicator: Credit availability improved for private companies in 4Q15. The next quarter, it improved for companies generally, though not as steeply. Our Q1 findings suggest a slower rate of credit growth is on the horizon for businesses overall. C&I loans in bank credit quarter-overquarter annualized % of private companies with greater credit availability in the past quarter 40% 25% 30% 20% 20% 15% 10% 10% 0% 5% -10% 0% -20% -5% -30% -10% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: PwC’s Trendsetter Barometer quarterly survey question: “In terms of banking relationships this past quarter, has your business’ credit line or amount of credit availability increased, decreased or stayed the same?” Oxford Economics / Haver Analytics The numbers in the right Y-axis are the percentage of Trendsetter respondents answering “increased” minus the percentage answering “decreased.” 7 Hiring Fewer businesses hire as US returns to near-full employment “More companies are transitioning to temporary people.” —President and CFO, Payroll services company While the phrase “since the recession” rolls off the tongue easily enough, there are plenty of reminders that we haven’t returned to the good old days. We see this when we look at the US employment situation. Yes, the economy continues to create new jobs, but the recovery remains an uninspiring, “meh” one. On the other hand, if you’re an HR manager in charge of hiring decisions, things can be downright fraught. Add too many people to the payroll, and you’ll wind up handing out pink slips. Add too few, and you’ll let opportunity slip away. But unless you’re really good at predicting the future, it’s hard to know just how many employees you’ll need at any given time. If you happen to also worry that economic growth might not support much more employment, you might hire very cautiously, if at all. Trendsetter barometer – Business outlook Though fewer private companies plan to hire in the next 12 months, the majority of them do intend to increase headcount during that time 7% Hire new workers Keep workforce the same Reduce headcount 41% 52% Well, more than half of Trendsetter companies do plan to hire over the next 12 months, but this is down from the 63% that intended to increase headcount a year ago and the lowest since the first quarter of 2013 — a time when US economic growth ended up being decidedly slower than expected. As the US now approaches what’s considered full employment, we should expect less hiring in general. And it hardly surprises us to see this happen at Trendsetter companies 8 Hiring first — their hiring intentions have long been a good leading indicator of changes in US payrolls across the wider economy. Trendsetter executives told us that on average they expect to increase their workforce by 1.3%. That’s low. But to put it in perspective, this data point hasn’t broken above 5% since the first quarter of 2008. Technology has had a clear and irreversible impact, allowing businesses to do more with less — including less fulltime staff. Indeed, gig economy workers are projected to make up 40% of the workforce by 2020. “More companies are transitioning to temporary people,” observes the president and CFO of a payroll services company, underscoring what looks more like the new normal than just a protracted response to the latest recession. Wages hold steady With the full-employment benchmark in sight, firms will have to start offering higher pay to attract new workers. We already see Trendsetter barometer – Business outlook this in the wage hikes Trendsetter companies are planning for the next 12 months — another leading indicator in our survey. Over recent quarters, respondents have said they expect to raise their salaries by an inflation-busting 3 percent (approximately). Despite these higher projected employment costs, Trendsetter executives don’t seem especially concerned about wage pressure. Just 22% of them flag this as a potential growth barrier, down from 33% the prior quarter. And whereas a year ago 37% of Trendsetter companies worried about finding qualified workers, that figure has since dropped to 29%. That may change as the economy moves closer to full employment and the skills shortage really starts to bite. Other trends have been holding steady: Unskilled workers continue to bear the brunt of the recession’s fallout, with just 9% of private companies saying they’re looking for unskilled labor. Today’s jobs — even manufacturing Help wanted, but not tons of it Which workers are most in demand? 52% of private companies plan to hire in the next year 18% of companies seek marketing & sales professionals 28% of product companies seek blue collar workers Planned workforce increase Today Prior quarter 1.3% 2.1% of service companies seek technology workers Planned wage increase Today Prior quarter 30% 2.72% 2.96% ones — increasingly call for employees with special skills. “This trend is now some 60 years in the making, going back to the Rust Belt decline that started in the 1950s,” observes PwC’s Margaret Young. “Technology-driven industries and automation have since become the norm in what were once predominantly blue-collar domains. As this is unlikely to change, today’s workers must, by necessity, adapt.” 9 International expansion “T he most critical growth factor for our business is expansion into the Far East outside of China.” —CFO, Logistics company Staying the course, but scant new expansion As readers know by now, the world economy is having a tough time. China is flirting with a hard landing. Refugees, terrorists, and the potential Brexit are putting pressure on Europe. And once-thriving economies in Latin America are now beset by political corruption and violence. Meanwhile, the low price of oil continues to have a double-edged effect. US consumers are enjoying cheaper prices at the gas pumps, but it is of course a different story for oil producers. Some, like Saudi Arabia, can still balance their budgets despite low oil prices, but other producers, such as Venezuela, are having a far harder time. And investors are also concerned that low prices mean demand will remain depressed indefinitely, especially in China. Over half of Trendsetter private companies sell internationally 47% International markets United States only 14% Emerging markets* 53% Private-company revenue from international sales Market presence International markets generally Emerging markets* specifically Percentage of total revenues derived from international sales 19% 34% * Here, the term emerging markets refers to Brazil, China, and India only. Trendsetter barometer – Business outlook 10 International expansion It’s little wonder, then, that only 19% of private-company leaders say they’re optimistic about the world economy. That’s 21 points down from a year ago. We also saw the shakiness of the global economy reflected in answers to questions about plans to expand into new foreign markets. Only 1 in 20 (5%) of Trendsetter executives reported their companies were looking at new markets abroad. That’s a new record low. Although few Trendsetter companies are venturing into new markets abroad, they show no signs of leaving the foreign markets where they’re already established. And staying there appears to be doing them little harm. For one, their revenue forecasts are stronger than those for their domestic-only peers — a long-term trend that held steady this past quarter, at 7.4% vs 6.6%. International sales also make up about one-fifth of overall revenue for these businesses, another long-term trend. Trendsetter barometer – Business outlook Emerging markets still calling For Trendsetter companies with interests in Brazil, India, or China, the international-sales contribution is even higher, at over one-third (34%) of total revenue — which is saying something, given that two of those economies aren’t exactly in the pink. These companies are more upbeat in other ways, too. More than four out of ten are planning capital investments, compared to 35% of businesses with broader global interests and just 19% of domestic-only businesses. Clearly, Trendsetter executives remain alert to growth opportunities, despite concerns about the global economy. The CFO of a logistics firm put this in relief, saying that the most critical growth factor for his business “is expansion into the Far East outside of China.” While the phrase outside of China hardly means instead of China, it’s a reminder that China isn’t the only game in town for international marketers that seek International companies plan to be more growth-focused than their peers over the next 12 months Plan major capital investments Plan increased spending on new product/service introductions Plan increased spending on R&D 35% 29% 17% 42% 29% 26% 19% International overall 19% Emerging markets* 5% US only Percentages denote the number of companies planning these expenditures. *Here, the term emerging markets refers to Brazil, China and India only. sizable growth opportunities. “India’s prospects in particular have improved in recent years,” notes PwC’s Ken Esch. “Thanks, in part to reform efforts from Prime Minister Narendra Modi’s government and a windfall from cheaper oil. Like China, India is a vast market made of many diverse submarkets, and so companies that sell there have to be strategic. A blanket approach won’t work. But as nearly half the companies in our survey will tell you, making the investment can yield substantial returns over the long haul.” And one of the great advantages to being a private company is the liberty to do just that — make investments over the long term. That much we’ve learned in the two decades we’ve conducted the Trendsetter Barometer survey. 11 About this report Since 1995, PwC’s Trendsetter Barometer Business Outlook has tracked the views of top executive officers at privately held US businesses and the trends these reveal. This quarter, we spoke with 220 chief executive officers (CEOs/CFOs), including 119 from companies in the product sector and 101 in the service sector. How the Trendsetter companies break down • Products 54% –– Manufacturing 24% –– Trade/Distribution 13% –– All other 17% • Services 46% All (220) Product (119) Service (101) Average number of employees 1,329 1,525 1,101 Average enterprise revenues $534 million $727 million $307 million Five-year growth rate 80% 77% 83% Survey interviews were conducted by the independent research firm BSI Global Research, Inc. by phone between January 8, 2016 and April 8, 2016. The same companies are interviewed and tracked from quarter to quarter, with occasional changes to the survey population due to turnover. Trendsetter barometer – Business outlook 12 To find out more about private-company trends and to discuss the survey findings, please contact: Shawn Panson Ken Esch Private Company Services Leader [email protected] Trendsetter Partner Sponsor [email protected] Margaret Young Partner, Private Company Services [email protected] To see more charts and graphs, including those showing trends over a span of years, and to download the complete survey findings, go to our website: http://www.pwc.com/us/en/ private-company-services/ publications/pcs-trendsetterbarometer.jhtml About PwC’s Private Company Services Practice Located in all major US markets, PwC’s Private Company Services (PCS) is a national practice comprised of more than 170 partners and 2,000 professionals who provide customized tax, audit and advisory services to private companies, their owners and high net worth individuals. The majority of America’s largest private companies are PwC clients.* They span a broad scope of sectors and industries ranging from manufacturing to retail to industrial to professional services. A hallmark of PCS is a robust thought leadership program that provides clients with timely, thought-provoking information to help manage and grow their businesses and wealth. Visit us online at pwc.com/us/pcs * Forbes America’s Largest Private Companies 2015 © 2016 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. 159530-2016 13