July 9, 2007
Executives’ Q3 Outlook Slips to Four-Year Low
By Dan Beighley
Orange County Business Journal Staff
Economic sentiment among local chief executives, business owners and managers has turned lower for the second straight quarter, according to a survey by California State University, Fullerton.
An index measuring local sentiment came in at 61.9 for the third quarter, down from 70.6 at the start of the second quarter and 83.1 at the onset of the first.
Survey participants still are optimistic—any reading above 50 represents anticipated economic growth. But concerns about slower growth seem to be weighing on respondents.
“I did not expect such a dramatic drop,” said Anil Puri, dean of the College of Business and Economics at Cal State Fullerton.
The crash of the subprime mortgage sector drove a decline in sentiment at the start of the second quarter. What’s notable this time is that the outlook didn’t rebound this quarter, as it has after some past dips.
The index now is at a four-year low.
“Overall, the firms are showing greater caution,” Puri said. “People feel we’re heading for a slowdown in the national economy.”
More than half of respondents cited overall economic health as their main concern.
The number of those expecting an overall improvement in business activity dropped from 81% in the second quarter to 77% this time around.
Respondents said they expect their own businesses to slow modestly this quarter.
About half, 51%, said sales would increase in the third quarter, down from 62% in the second quarter. Twenty-one percent anticipate less revenue in the quarter, versus 17% in the second.
Labor costs were cited as the second most important concern after the overall economy.
Forty-nine percent of respondents said they see their company’s earnings growing in the third quarter, down from 60% in the second. About 23% expect their profits to decrease, compared to 20% a quarter ago.
Businesses are showing caution with their inventories, according to Puri.
About 22% of participants said they would increase their inventories, down from 32% a quarter ago. Those who said they wouldn’t make any changes rose from 52% in the second quarter to 67%.
Sixteen percent said they intend to lay people off. About 32% of respondents said they plan to do more hiring, compared to 30% the prior quarter.
Shockwaves from the subprime downturn are starting to be felt outside the mortgage sector, according to Ralph Rodheim of Costa Mesa’s Rodheim Marketing Group, who took part in the survey.
About 30% of Rodheim’s clients are in businesses related to real estate, he said, including Irvine-based Brookstreet Securities, a stock brokerage that closed last month after suffering losses from investments in mortgages.
“There’s some fear out there,” Rodheim said. “Brookstreet was a stable, hard working company that is no more.”
Rodheim said he is optimistic about the economy and believes the homebuilding market will strengthen in the next year and a half.
“Things aren’t bad, but they’re not as strong as they have been.”