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Trendsetter barometer®
Business outlook
2Q 2015
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
Hiring
9
Outlook remains strong for US economy – private companies
maintain optimism streak
Healthy profits, strong margins, and not much spare capacity
Borrowing while rates are still low, but not spending madly
Technology help wanted – and some unskilled workers too –
yet little wage movement
International expansion
The Chinese market slows down, investors stay disciplined
Trendsetter barometer – Business outlook
11
“Don’t just sit there. Keep buying things!” If the global economy could talk, that’s probably what it would say to
American businesses and consumers. China and other emerging markets are slowing. Japan is still struggling with
long-term issues. Europe is preoccupied. The US government has been holding the line on spending. Fortunately,
US businesses and their employees have continued to do their part, albeit in a measured fashion. Trendsetter
companies are spending steadily, not frenziedly.
But it’s not because their businesses are performing just so-so. On the contrary, over the past three months, private
companies have painted a positive revenue picture for us, and indeed they’ve been doing that for quite some time
now. The wind appears to be in their sails: Executives at Trendsetter companies forecast rapid revenue growth
throughout the next 12 months. The CFO of a footwear manufacturer spoke for many peers by saying, “We are
optimistic and have markets we can grow in.”
Each quarter, we talk with private-company leaders to hear what they think about the future. We ask about the
outlook for their business, their industry, the economy as a whole, and the factors that shape their opinions. These
days, Trendsetter executives are nearly as upbeat as they were at the start of the year, despite the occasional hint
of uneasiness. On balance, they like the business conditions they see and don’t anticipate much getting in the way.
Our report presents these and other insights obtained through our conversations with 225 executives in the
second quarter of 2015. We are grateful for their input, as always, and pleased to share it with you.
Trendsetter barometer – Business outlook
Rich Stovsky
Ken Esch
Margaret Young
US Leader
Private Company Services
Trendsetter Partner Sponsor
Private Company Services
Partner
Private Company Services
At a glance
Private-company sentiment has gone up (é), down (ê) or
stayed the same (=) across a variety of areas
Optimism about the US
economy is felt by 70% of
private companies, up from
59% a year ago.
Economy
é
ê
Optimism about the world
economy is felt by 38%
of international marketers,
down from 42% a year ago.
é
Improved gross margins
are reported by 34%,
the highest number in over
a decade.
ê
Two-thirds (66%) plan
to increase operational
spending, down from 73%
the prior quarter.
Performance
Expected revenue
growth is 9.8%, up
from 8.1% a year ago.
Over one-third (36%)
plan major new
investments, up from
29% in the first quarter.
Nearly two-thirds
(64%) plan to increase
headcount — the
highest since 2007.
Just over half (52%) of
private companies worry
about lack of demand,
down from 59% a year ago.
International sales
contributed 18%
to overall revenue,
essentially the same as the
prior two quarters’ 17%.
Trendsetter barometer – Business outlook
é
Spending
é
Hiring
Actual planned
headcount increases,
however, are flat at
2.6%, though up from
1.8% a year ago.
é
Headwinds
é
ê
Expansion
44% are concerned
about legislative/
regulatory pressures,
up from 36% last quarter.
Just under one-quarter
(24%) reported increases
in international sales,
nearly the same as last
quarter’s 26%.
1
Economic sentiment
“We are confident. We believe the economy will keep growing for
a while.”
—CFO, Retail residential services company
Outlook remains strong
for US economy, private
companies sustain
optimism streak
At a summer barbecue, we asked
some friends about the economy.
One person said, “The economy’s
doing really well! Stock prices and
corporate profits are up, unemployment’s down, and government
deficits are still shrinking.” Another
retorted, “GDP growth practically
ground to a halt earlier this year,
household incomes are dropping,
and so is the percentage of people
who are working!”
Optimism snapshot – Today and a year ago
US economy
Today
70%
59%
A year ago
The long view – Economic optimism over time
Percentage of respondents
80%
Well, they’re both right. We asked
Trendsetter executives much the
same thing over the course of the
second quarter. Like the responses
at the barbecue, their answers
varied as to particulars (hiring,
corporate headwinds, etc.). But,
big-picture, private companies were
resoundingly positive. The economy
has been turning in a good, solid
performance. And while there are
still issues around employment
and stagnating wages, 78% of
our respondents described the US
economy as growing. This is the
Trendsetter barometer – Business outlook
60%
40%
20%
0%
2Q’06
2Q’07
US economy
2Q’08
2Q’09
2Q’10
2Q’11
2Q’12
2Q’13
2Q’14
2Q’15
World economy*
* World optimism reflects responses only from private companies selling internationally.
2
Economic sentiment
second highest share we’ve seen in
eight years (peaking at 82% in the
first quarter of this year). Meanwhile 70% voiced optimism about
where the economy is heading, just
one point below the prior quarter’s
post-recession high.
We’ve seen high post-recession
optimism levels among these
companies before. Only in the
past year, however, have those
levels been sustainable. Before
that, Trendsetter confidence in the
US economy often rose and fell,
rollercoaster-style, from quarter to
quarter. In contrast, over two-thirds
of companies now voice optimism,
and have done so for several
quarters straight. This bodes well
for the broader economy, since
Trendsetter sentiments about the
direction it’s going have been a
good leading indicator of where
actual US GDP growth is heading.
Where the world economy is concerned, however, ambivalence
predominates. This has been a
near-constant story over the past
Trendsetter barometer – Business outlook
several years, with roughly half
of Trendsetter companies saying
they’re uncertain, quarter after
quarter, about the global economic
outlook. Again, it’s a matter of
perspective. When asked about the
current state of the global economy
(as opposed to the 12-month
outlook), 43% of private-company
executives say it’s growing. This
is up from 31% at the end of last
year. Still, nearly half of Trendsetter
companies feel the opposite way.
As the CEO of an executive search
firm put it, “Things look up one day,
down the next. Inconsistency is the
biggest challenge nowadays.”
Economic barometer – 12-month outlook
US economy
World economy*
70%
5%
25%
38%
12%
50%
Optimism
Pessimism
Uncertainty
* Optimism about the world economy reflects responses only from companies selling internationally.
“While we still see plenty of uncertainty out there, the economic fundamentals look strong for most of the
private companies we talk with,”
says PwC’s Rich Stovsky. “They may
continue to feel challenged, but
that’s not preventing them from
pursuing opportunities. Navigating
uncertainty is something they’ve
learned to do well these past
half-dozen years.”
3
Corporate performance
“We’ve experienced rapid growth recently. We’re looking at this year
as an assessment year.”
—CFO, Software company
Healthy profits, strong
margins, and not much
spare capacity
Ask most people about the economy,
and they tend to generalize based
on their own experience: If things
are going well at home, things are
probably going well for others,
too. Trendsetter companies are
no exception. About five out of six
(87%) expect their revenue to grow
in the next 12 months, and likewise
almost as many (84%) think their
industry will show revenue growth
this year.
But there’s more to it. The projected
rate of 12-month revenue growth
has been steadily climbing for over
a year. Right now it’s at 9.8% — the
highest in several years. As for
the share of companies expecting
dramatic revenue growth (growth
of 20% or more) for the calendar
year, that has doubled since the
second quarter of 2014. However,
the aggregate growth numbers are
flat. So, clearly, some businesses are
more upbeat than others. “We’re
in a terrific place,” the president of
a high-tech construction company
tells us. “We are in a holding pattern
Trendsetter barometer – Business outlook
Private companies forecast higher revenue growth than
a year ago
12-month revenue growth rate*
9.8%
Forecast in 2Q15
8.1%
Forecast in 2Q14
* Projected
Growth expectations
Most private companies project revenue growth for the next 12 months.
Over one-third expect double-digit growth.
2% 4%
7%
37%
Positive growth 10%+
Positive growth less than 10%
Zero growth
Negative growth
Not reported
50%
4
Corporate performance
with these up-and-down oil prices,”
says the CEO of an oil and gas
exploration/production company.
Margins up – but for how long?
We are also struck by the rise in
margins. The number of companies
reporting increases is now 34% —
we haven’t seen a higher rate in the
past decade. Our panelists have seen
their costs inch up, but they’ve got
even more pricing power: 31% say
they were able to raise prices this
past quarter, compared with only
5% that had to lower them. As we’ve
said before, this trend will eventually
reverse, particularly as energy prices
rise. But this might take a while,
with WTI crude oil price forecasts
in the mid-$60 range through 2016.
And for now, at least, inflation
doesn’t seem to be a concern.
Trendsetter barometer – Business outlook
Finally, if it seems that everyone
is busier than usual, it’s because
they are. Thinking about levels
of permanent staffing and operations, the majority of Trendsetter
executives say they’re operating at
near full capacity (92% say they’ve
reached at least three-quarters
operating capacity). The president
of a construction company told us
business is “as good as it has been
in the last eight to 10 years.” But
PwC’s Ken Esch adds, “Capacity
planning is a bit of a balancing act.
When companies operate near
maximum utilization, that means
they’re working harder and adding
overtime shifts rather than rushing
to add new capacity. If growth
forecasts hold true, we’ll probably
see a new round of capital spending
in the future. But for now, the
commitment’s not there.”
Profitability stays at high-water mark
The number of private companies reporting increased gross margins
is higher than it’s been in a decade.
Gross margins
Prices
34%
28%
31%
10%
9%
5%
19% net
26% net
24% net
Up
Costs
Down
Percentages denote the number of companies reporting increases in margins, costs, and prices.
5
Opportunities and barriers
“Capital spending will be minimal. Last year was aggressive.
Now we’re integrating products and players.”
—CFO, Manufacturer and distributor of meat products
Borrowing while rates
are still low, but not
spending madly
One of the biggest guessing games
around, from Springfield to
Stuttgart, is when the US Federal
Reserve will raise interest rates. The
signals have shifted several times
this year already, and there’s still no
consensus on what might happen.
This matters, because everything
from consumer spending to
industrial expansion may ride on
the result.
For now, rates are still bouncing
near their long-term lows, and
companies are taking advantage
of the liquidity while it’s available.
Over the past quarter, 21% of the
executives we asked said their
companies had initiated new financing during the quarter — the
second highest share we’ve seen
since 2004. And 6% took on new
supplier financing, which though
a small number is nonetheless the
most such activity we’ve seen in a
decade. Bank loan interest rates
for Trendsetter companies averaged 3.57% in the second quarter
Trendsetter barometer – Business outlook
Seeking new financing while interest rates remain
historically low
Although most private companies aren't initiating new financing, we did
see an uptick in the second quarter as speculation grew about whether
the Fed would raise rates this year.
% of private companies
initiating new financing
in past 3 months
21%
15%
Today
Interest rates private
companies are paying for
bank financing
3.57%
3.39%
A year ago
— not high, but almost 20 basis
points above the low in 2013. It
seems that many companies have
decided they should take on debt
while it’s still highly affordable.
For their part, lenders are willing
to go along. This quarter, 18%
of Trendsetter companies saw
their credit lines increase — the
highest percentage we’ve reported
6
Opportunities and barriers
since before the recession. We
may soon see a similar uptick in
commercial and industrial loans
generally (not just those made to
private companies particularly):
Credit availability to Trendsetter
companies has been a good leading
indicator in this regard. But is the
uptick itself a good thing? For
now, probably yes. “We’ve all seen
cases in the past where banks have
been too loose with their lending
strategy,” notes PwC’s Margaret
Young. “But that doesn’t appear to
be what’s happening here. For the
most part, Trendsetter companies
are making prudent business
decisions about their capital plans.
They’re investing, but carefully, and
so lending to them should be a safe
bet for banks.”
Concern over interest rates
and a stronger dollar
In the second quarter of this year,
more Trendsetter companies said
they’d spend on new capital projects
in the coming year. Also, investment
as a share of total sales was on
the rise. Still, we’re not reading
too much into the uptick. In both
cases, these figures are returning to
Trendsetter barometer – Business outlook
long-term averages after a period of
lower spending in the past few years.
In fact, we see some wariness in
plans for operating expenses. Each
quarter, we ask companies if they’ll
increase current spending levels
in various categories over the next
year. This past quarter, the overall
number of companies planning
increased expenditures dropped.
We’re also starting to see some growing concern about higher interest
rates (18% of companies, up from
8% a year ago) and about a stronger
dollar (19%, up from 8% a year
ago); as one would expect, markedly
more exporters are concerned than
their domestic-only peers about the
strengthening dollar (48% vs 33%).
“Our business has taken off in the
Asian and Russian markets,” says
the CFO of a restaurant chain and
franchise. “However, the strength
of the dollar is very important and
could impact us there.”
Top areas where private companies plan to increase
their spending over the next 12 months
31%
Information technology
27%
Marketing & sales
promotion
Advertising
22%
15%
20%
11%
New product/
service introductions
Geographic expansion
19%
30%
18%
23%
Today
(2Q 2015)
A year ago
(2Q 2014)
Percentages denote the number of companies who plan increases.
Concern about legislative and regulatory pressures rose somewhat as well
(44% of companies, up from 36%),
against a backdrop of two decisions
that were still pending for most of
the second quarter — the Supreme
7
Opportunities and barriers
Court’s ruling on ObamaCare
and Congressional approval of
the fast-track trade promotion
authority. With fast-track approval
now granted, there remains the
up-or-down votes that the White
House will send to Congress. “We
are optimistic,” a vice president at a
building materials producer told us
partway through the second quarter, “but we don’t yet know precisely
how the TransPacific Partnership
deal will affect imports and exports
in the housing industry.” He’s not
alone: “We’re anxious to learn more
about the TransPacific Partnership
trade agreement and how it will
affect our business,” says the CFO
of an auto parts remanufacturing
company. We’ll continue to assess
Trendsetter responses to the TPP in
upcoming quarters.
Going it alone and keeping
expansion within current
markets
Despite a few high-profile mergers
in the headlines lately, private
companies seem to be pulling back
from tie-ups of various kinds. Only
11% plan to buy another company
in the next year: as low as we’ve
Trendsetter barometer – Business outlook
ever seen, and well off the longterm average of 16%. New joint
ventures? Only 9%, another new
low, and less than half the share
reported in early 2014. And despite
the strong dollar, only 8% think
they’ll expand into new markets
outside the US (which isn’t to say
they won’t keep expanding in their
current markets abroad); that’s as
low as we’ve seen it.
Perhaps this last figure isn’t so
unusual, given circumstances
in the global economy, but the
average between 1995 and 2013
was more than twice as high. “Part
of why we’re seeing less expansion
into new markets abroad is that a
number of private companies feel
they’ve already established enough
of a presence in key places for now,
especially in fast-growth countries
like China,” says Ken Esch. “But
China and other emerging markets
have been slowing down. So it
makes sense that the pace of
Trendsetter expansion in those
countries is slowing down too. But
that doesn’t mean companies are
pulling back or out. Far from it. For
them, international expansion is
part of a long-term strategy.”
Growth barriers in the next 12 months
52%
Lack of demand
59%
44%
42%
Legislative/regulatory
pressures
37%
Lack of qualified workers
32%
28%
26%
Profitability/decreasing
margins
26%
22%
Increased taxation
25%
Pressure for
increased wages
20%
22%
22%
Oil/energy prices
Strength of the dollar
Higher interest rates
19%
8%
Today
(2Q 2015)
18%
8%
A year ago
(2Q 2014)
Percentages denote the number of companies that perceive these factors as growth barriers for their businesses.
8
Hiring
“Companies are cautious about permanent hiring, what with the
cost of benefits and a possible increase in the minimum wage.”
—COO, Staffing and recruiting firm
Technology help
wanted – and some
unskilled workers, too
– while wage increases
remain modest
The US jobs picture has continued
to brighten, for the most part,
if the lens you’ve been looking
through is the Bureau of Labor
Statistics’ monthly jobs report.
And one could posit that the
future looks bright too: Private
(nongovernment) payrolls overall
are apt to increase, according to
Trendsetter hiring intentions, which
are a leading indicator of quarterly
payroll changes across the broader
economy. At 64%, the number of
Trendsetter companies planning to
employ fulltime workers in the next
12 months is now higher than it has
been at any time since the recession. But these same companies
told us that, on average, they plan
to add just 2.6% to their staff in the
next year. The average over the past
decade has been closer to 4 percent1
(since the recession, however, the
average has cleared the 3% mark
only twice2). Employers continue to
target their hiring carefully.
Nearly two-thirds of private companies plan to hire in the
next 12 months
4%
Hire new workers
Keep workforce the same
Reduce headcount
32%
64%
Looking for the right stuff
For the most part, the new jobs
will be created in the categories
we typically see at Trendsetter
companies. For example, 28% of
the executives we spoke with expect
to add technology or engineering
professionals to their headcount—
if they can find them. The president
of an energy-use consulting firm
said, “We need new employees
with specific skills in engineering
1 The average Trendsetter headcount increase over the past decade reached a high of 11.2%
in the third quarter of 2005 and a low of 1.1% in the first quarter of 2009.
2 The average Trendsetter headcount increase was reported as 3.4% in the first quarter of
2013 and 3.2% in the second quarter of that same year.
Trendsetter barometer – Business outlook
9
Hiring
and technology, and we can’t find
them here in the States.” They’re
not the only ones: For the past
three quarters, 37% said that a lack
of qualified workers would be a
barrier to growth. PwC’s Margaret
Young notes, “This is one of the
highest rates since 2008. There are
longer-term solutions to be had in
education or immigration reform,
but that won’t help companies
that are struggling with this issue
right now.”
In one curious development, though,
18% of companies overall said
they plan to add semi-skilled or
unskilled blue-collar workers. This
isn’t a big number — but it’s much
bigger than the 13% that companies
have typically forecast. It also
comes on the heels of measures in
Seattle, Portland, Los Angeles and
elsewhere that will raise minimum
hourly wages considerably. It’s
too soon to know, of course, if our
second-quarter findings are an
Trendsetter barometer – Business outlook
exception. For now, at least, concerns that the $15/hour movement
will cause more unemployment
appear to be unfounded.
Finally, Trendsetter companies are
budgeting for average hourly wages
that will rise 2.97% over the next
12 months. This number has edged
up steadily (if slowly and somewhat
falteringly) over the past six years.
For there to be greater traction,
more companies will need to feel
actual wage pressure. A full quarter
of Trendsetter companies say they
feel precisely that, but until more
of them feel it, wage increases may
continue to hover under 3 percent.
Nonetheless, the current projected
increase is better than none and
signals likely wage hikes across the
broader economy. Trendsetter wage
intentions have been a good leading
indicator of annual growth in the
US employment cost index for the
two decades we’ve been conducting
this survey.
More help wanted, but wage increases remain relatively flat
Which workers are most in demand?
64% of private
companies plan to
hire in the next year
21%
of companies seek
marketing & sales
professionals
38%
of service companies
seek technology workers
Planned workforce increase
Today
Prior quarter
2.6%
2.6%
Planned wage increase
Today
Prior quarter
2.97%
2.62%
40%
of product companies
seek blue collar workers
10
International expansion
“We’re poised to go international shortly; the dollar is strong and we
feel the euro market is ready.”
—CFO, Beverage producer
The Chinese market
slows down, investors
stay disciplined
We believe strongly in the power
of survey data to illustrate big
themes. But we never forget that
behind the numbers, there are
individuals making decisions
every day. As PwC’s Ken Esch
observes, “In good markets and
bad, there are companies that
have better products, production
controls, and marketing plans
than their peers. And, of course,
there’s always an element of
luck, based on forces beyond a
company’s control.”
Nearly half of Trendsetter private companies
sell internationally
56%
International markets
United States only
12%
Emerging markets*
44%
Private-company revenue from international sales
Flat figures mask optimism
The ratio of companies reporting
that their foreign sales have risen
(24%), fallen (14%), or stayed the
same (62%) didn’t change much
this period. International sales as
a percentage of revenue stayed
essentially flat, too, at 18 percent.
But the big picture is made up of
many pixels. The CFO of a frozen
yogurt company, for example,
tells us that “the time is ripe for
franchise expansion in the Far
Trendsetter barometer – Business outlook
Market presence
International markets
generally
Emerging markets*
specifically
Percentage of total revenues
derived from international sales
18%
33%
* Here, the term emerging markets refers to Brazil, China, and India only.
11
International expansion
East and Europe.” But the president
of a high-tech-equipment cleaning
company is worried that “the
economy could crash due to various
global issues, such as the situation
in Greece and disposable income
declining in other key markets,
which would cause electronic
purchases to drop.” Meanwhile,
an auto dealership CFO sees “high
potential for used autos and parts
as business opens with Cuba.”
Whether evaluating an acquisition,
expansion, or hiring, leaders look
beyond what peers are doing.
While the aggregate numbers didn’t
move much, we saw an interesting
inversion in the emerging markets:
Companies selling in fast-growing
countries like Brazil, India, or China
are generally more optimistic than
other Trendsetter companies that
sell internationally, and global
sales tend to make up more of
their total revenues. The opposite
was the case this past quarter. But
these economies are inherently
more volatile, and so we do see the
occasional hiccough in an otherwise
consistently upbeat story where
Trendsetter barometer – Business outlook
Trendsetter companies in emerging
markets are concerned.
Sticking with China, despite
the dip
This past quarter, the Chinese
economy continued to cool off.
And, after a dizzying climb since
mid-2014, the local stock markets
there have given back much of their
gains. This could depress growth for
companies that count on Chinese
demand. In the second quarter,
nearly two-fifths of Trendsetter
companies with international sales
said they felt optimistic about the
world economy – but for those
selling in China, that ratio dropped
to about one out of five. But they’re
still projecting much higher revenue
growth than their Trendsetter peers
(13%, compared with 9.5% for
those selling in the US only). And
those with Chinese sales are actually much more likely to plan major
capital expenditures (planned by
55%) and expand to new markets
(planned by 35%). They’ve made a
strategic bet on the Chinese market,
and they’re sticking with it.
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 innovation
Plan increased
spending on R&D
42%
26%
18%
31%
14%
6%
International
Domestic only
Percentages denote the number of companies planning these expenditures.
12
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 225 chief executive
officers (CEOs/CFOs), including 127 from companies in the product
sector and 98 in the service sector.
How the Trendsetter companies break down
• Products 56%
–– Manufacturing 26%
–– Trade/Distribution 16%
–– All other 14%
• Services 44%
All (225)
Product (127)
Service (98)
Average number of employees
1,270
1,583
864
Average enterprise revenues
$427 million
$522 million
$304 million
Five-year growth rate
73%
67%
80%
Survey interviews were conducted by the independent research firm BSI
Global Research, Inc. by phone between April 3, 2015 and July 7, 2015. 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
13
To find out more about private-company trends and to discuss the survey
findings, please contact:
Rich Stovsky
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 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 PCS 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.
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* Forbes America’s Largest Private Companies 2015
© 2015 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. 29127-2017
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