MMAC Survey forecasts sluggish quarter

Local business expectations for the third quarter of 2008 are somewhat mixed, according to the latest quarterly business outlook survey conducted by the Metropolitan Milwaukee Association of Commerce (MMAC).

Surveyed metro area businesses are slightly less optimistic toward third-quarter sales levels (vs. year-ago levels), but indicated improved confidence in future profit and employment gains.

“The level of optimism expressed by area businesses remain at sluggish levels overall, but the underlying trend may have turned the corner,” said Bret Mayborne, the MMAC’s economic research director. “The survey’s results hint at the possibility that businesses feel they have weathered the storm and are looking toward improvements in 2008’s second half.”

Improvements were posted in both quarterly profit and employment expectations for the first time in four quarters. The strengthened employment expectations taken with the forecast of moderately higher wage and salary gains suggest that the local employment situation may be warming, Mayborne said.

“But all-in-all, there remains a healthy dose of uncertainty toward near-term business activity,” he said. “Sales forecasts have yet to turn upward and remain at sluggish levels and inflationary pressures are likely to continue building. These mixed signals suggest that improvements for the third quarter are likely to be modest in scale.”

Sales expectations weakened a bit over the past quarter, with 55 percent of businesses seeing rising real sales levels for the third quarter (vs. 2007’s third quarter), slightly lower than the 58 percent who forecast second-quarter gains. Currently, 17 percent see declines in third quarter sales levels, while 27 percent expect no change.

Manufacturers surveyed are more confident of improving third-quarter sales levels than non-manufacturers, with 63 percent of manufacturers seeing third-quarter sales gains (vs. 2007’s third quarter), while 51 percent of non-manufacturers see such increases.

By employment size, 57 percent of small companies (less than 100 employees) surveyed see third quarter sales gains vs. 54 percent among large companies.

Small employers are more likely to forecast third-quarter employment gains (63 percent expect increases vs. year-ago levels) than large companies (where 35 percent see such gains). Non-manufacturers are slightly more optimistic than manufacturers toward near-term job increases (49 percent of non-manufacturers see third-quarter job gains vs. 43 percent for manufacturers).

One half (50 percent) of all businesses surveyed see increases in third-quarter profit levels (vs. year ago levels), up from the 44 percent who predicted second-quarter gains. According to the survey, 23 percent see declines in third-quarter profits, while 27 percent expect no change.

Calendar year expectations

For the year as a whole, Milwaukee area businesses see some slippage in sales and profit levels. At the year’s midpoint, 63 percent of all businesses surveyed see real sales levels increasing for 2008 as a whole, down modestly from the 69 percent who forecast an annual real sales gain at the beginning of 2008. Currently, 16 percent expect sales declines and 20 percent predict no change.

Profit levels expectations slipped more notably, with 49 percent of businesses predicting profit increases in 2008 and 29 percent see declines (the remaining 22 percent predict no change). The current percentage expecting profit increases for the year is down from the 61 percent who opened 2008 expecting profit gains.

Employment expectations for the year were modestly lower than those expressed at the beginning of 2008. 49 percent of employers surveyed forecast employment increases in 2008 for their local operations, down from the small majority (52 percent) who predicted job gains at the start of 2008. Nonetheless, those seeing employment level increases continue to outnumber those who expect job declines (19 percent), and 32 percent see no change in employment levels.

More optimistically, businesses are now more likely to forecast capital spending increases for 2008 than they were six months ago. According to the survey, 44 percent of employers surveyed see increased capital spending for the year, up from the 38 percent who saw such gains at the beginning of 2008.

Inflation expectations among area businesses took a definite turn upward over the past six months. While the vast majority of those surveyed see price inflation of 5 percent or less in 2008 (74 percent), there was a significant upturn in the percentage of businesses who see inflation of 6 percent or higher. Currently, more than a quarter (26 percent) of surveyed business see such inflation effecting their business operations, up from only 4 percent of those surveyed just six months ago.

“The majority are seeing moderate inflation, but it’s obvious that we’re seeing inflationary pressures build,” Mayborne said. “In the beginning of the year it was hard to identify that inflationary pressures would continue, but after six months there’s more of a realization that things have taken hold.”

Rising wage and salary expectations may be further evidence that the local job trend may be on the mend. An average annual increase of 2.8 percent in per employee wages and salaries is projected over the next 12 months, surpassing the 2.6 percent annualized increase forecast three months ago and marks the first quarter-to-quarter up-tick in this rate in six quarters. Manufacturers and smaller employers see the largest increases (2.9 percent and 3 percent respectively), while non-manufacturers and large employers predict smaller than average wage gains (2.7 percent and 2.5 percent respectively).

Editor’s note: The Business Outlook Survey, conducted by the Metropolitan Milwaukee Association of Commerce (MMAC), contains responses from 104 Milwaukee area firms employing more than 49,200 people. The quarterly survey is first published by Small Business Times.

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