Optimistic Managers Still Not Hiring

By: Chad Hudson | Wed, Dec 11, 2002
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(UNEDITED)

Retailers reported weak results for the last week. The weekly Bank of Tokyo-Mitsubishi retail survey reported that sales fell 2.3% during the first week of December. Additionally, several retailers including Wal-Mart, Federated, and Target reported that their sales were either on the low end of plan or below plan. To be fair to the retailers, the winter storm that wrecked havoc along much of the Eastern US did have an affect. Nevertheless, the weak results last week will likely cause retailers to step up the promotional activity since there is only two more weekends before Christmas.

FAO Schwartz reported two weeks ago that it will miss its sales and earnings forecast this year due to, "Restrained consumer spending and the weak economic environment in the third quarter [and] has continued into the early part of the fourth quarter."

Luxury goods are not protected by the economic downturn. This week, Gucci trimmed its earnings forecasts by 23% after experiencing a weak November. Gucci is also taking a cautious view to the Christmas season.

The recent ABC/Money Magazine consumer confidence survey fell five points to -22. This large of a drop has only happened 19 times during the past 17 years. It also comes at heart of the all-important holiday shopping season. Only 37% responded that it's a good time to buy things they want or need, down 10 points from last year and 19 points from 2000.

Another survey was released by Mercer Human Resource Consulting this week does not bode well for the economy either. The survey found that companies expect healthcare cost to raise 14.6% nationwide next year. This would be on top of a 14.7% increase this year. Employers are not able to absorb these costs, nor are they able to pass along to customers. Employees are bearing the brunt of these increases through higher deductibles, higher co-pays or by employers dropping coverage. Higher healthcare cost are hitting employee's pocketbooks when they can least afford it. Over the past two years personal income has been growing at a very low rate, only 2.8% last year and 4.1% in October. Even more frightening, the LA Times quoted Peter Boland, a health-care expert in Berkley, "When you talk to insurance brokers who have their ears closest to the ground, you hear of 20% to 40% increases for health-care cost in each of the next three years. Some are saying 60% for small to medium companies." The same article noted that Stanford University experienced a 20% increase in its healthcare cost this year.

The New York Times carried a story detailing the mess California is in with its budget. The shortfall could amount to $25 billion in the next 18 months. "That's a whole so deep and so vast that even with we fired every single person on the state payroll - every park ranger, every college professor and every Highway Patrol officer - we would still be more than $6 billion short," according to Assembly speaker, Herb J. Wesson Jr. The problem stems from ballooning cost and a precipitous drop in revenues. In 2000, California received $17 billion from taxes on capital gains and exercised stock options. This year less than $5 billion is expected.

California's $78 billion budget represents one-sixth of aggregate state spending. Even though tax increases could likely counterproductive since the economy needs increased spending and any tax increase will burden businesses and consumers, , the budget is just too far off-kilter. There are several other states that are experiencing large enough budget problems that tax increases seems inevitable

The Institute for Supply Management released its Semiannual Economic Forecast on Wednesday. The results paint a better picture on the economy than last year's survey, but there are several areas that should cause economists to worry. Here is the summary of the survey per ISM:

Manufacturing

Non-Manufacturing

The most notable observation from the survey is that manufacturing and non-manufacturing managers expect employment to decline and non-manufacturing capital expenditures are expected to decline again in 2003. Even though managers were more optimistic regarding revenue increases for 2003. Managers were over optimistic last year about revenue growth. Manufacturing managers forecasted revenue to increase by 3.2%, which ended up being up 1.1% and non-manufacturing managers expected revenues to soar 7.6%, which actually rose only 0.9%.

While results of polls like this are interesting and provide insight to what business managers are thinking, as opposed to what Wall Street interprets, the most important aspect is seeing what the mindset is for areas that they can control. Managers set employment and capital expenditure plans based on business forecasts. The survey results show that even with a sizable anticipated increase in business, managers are unwilling to increase their costs. In fact, managers expect payrolls to shrink payrolls and non-manufacturing managers forecast another decline in capital expenditures. The corporate sector recovery appears to be pushed back another year.


 

Chad Hudson

Author: Chad Hudson

Chad Hudson
Mid-Week Analysis
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