Private Companies' Confidence in US Economy Returns to Pre-Recession Levels

NEW YORK, Feb. 22, 2011 /PRNewswire/ -- Nearly two-thirds (63%) of private-company executives surveyed for PwC US's Private Company Trendsetter Barometer say they're optimistic about the US economy's prospects over the next 12 months. This is the highest level of confidence that Trendsetter chief executives have shown about the US economy since the second quarter of 2007 (when their confidence level was 64%) and up 24 points from the third quarter of 2010. Meanwhile, optimism in the global economy also rose, with 56% of private companies that have an international presence expressing their confidence in global economic growth, compared with 43% in the previous quarter.

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"The positive momentum we have seen over the last several months among leading private companies continues to build," says Ken Esch, a partner with PwC's Private Company Services practice. "Throughout the recession they've managed costs and paid down debt, which has allowed them to strengthen balance sheets and preserve bottom-line growth. Now private companies are starting to see increasing demand for their products and services, leading to topline growth."

Optimism about the US and global economies carried over to Trendsetter executives' confidence about own-company growth prospects - 83% forecast positive own-company growth, up from 75% last quarter, with 40% projecting double-digit revenue growth and 43% projecting single-digit growth. The forecasted average growth rate among private companies overall stabilized, with a 9.8% average growth rate forecasted for own-company revenues over the next 12 months, similar to the 9.7% growth rate that private companies forecasted the previous quarter. Within the larger group, however, there was a jump in the forecasted average growth rate of domestic-only private companies (up from 7.7% to 9.8%), pulling them even with their international peers. The increase was due primarily to bullishness among domestic-only service firms.

Service companies in general - both domestic-only and international - were significantly more confident than product firms this past quarter. The revenue-growth rate forecasted by service companies rose to an average of 12.1%, up from 10.8% in the third quarter, while product-company forecasts dropped to 7.8%, down from 9.0% percent. This is in line with service firms' greater optimism about the US economy - 69% voiced optimism, compared with 59% of product firms.

"A year-end boost in optimism isn't so surprising if you consider that the fourth quarter saw key market and legislative developments, including a rebound of M&A activity, a resurgent IPO market, and temporary legislative certainty provided by Congress in December," says Esch. "The continued uptick in optimism about revenue growth among Trendsetter private companies overall is also consistent with what we're hearing from our clients and is certainly a welcome change from previous quarters."

More Spending in 2011: International Companies Outpace Domestic-Only Businesses

Despite similar revenue-growth forecasts among domestic-only and international private companies, those operating abroad remained ahead of their domestic-only peers in prospective spending over the next 12 months. Forty-three percent of companies with an international presence are planning major new capital investments over the next year, as are 52% of private businesses that have a presence in China, India, and Brazil. That's in sharp contrast to the 30% of domestic-only private companies planning to make major capital investments, though this figure is up six percentage points from the third quarter.

"Cash-fortified and newly optimistic private companies are looking to put their capital to work, and so they're going where the growth is," says Esch. "As a result, we're seeing them steadily build and expand their presence in booming markets like China, India, and Brazil. And while it's true that growth in emerging markets has slowed, those markets continue to accelerate at a much faster clip than mature economies. I think that, increasingly, this is where we'll be seeing private companies train their focus."

Significantly, the vast majority (74%) of private companies surveyed plan to increase operational spending. Of those companies, 84% that have an international presence plan to increase operational spending. The percentage was even higher for companies with a presence in China, India, and Brazil (98%). Planned increases focus on information technology, new products/services, and sales promotion.

The breakout of spending by international versus domestic-only companies is shown below:

Majority Plan New Hiring, Mostly in Areas of Increased Operational Spending

Fifty-seven percent of private companies said they plan to hire new employees over the next 12 months, down slightly from the prior quarter but up 10 percentage points from a year ago. Only 3% plan net reductions. Overall, an increase of 1.8% is planned for the survey panel's workforce, down from 2.0% last quarter. Trendsetter chief executives said that over the next year their hiring efforts will primarily target professionals/technicians (32%) and sales/marketing executives (23%), mirroring the areas in which they plan to increase operational spending.

"While most private companies are planning to bring new personnel on board, their focus is less on increasing workforce volume and more on making strategic hires," says Esch. "What we're seeing is that, in line with their renewed optimism about the economy, businesses have started to invest in acquiring workers with the right skills for powering growth - for instance, people who can innovate in areas such as technology and product design, as well as individuals who can attract new customers."

Gross Margins Remain Positive

Gross margins remained positive in the fourth quarter, with 29% of Trendsetter private companies reporting higher margins and 22% reporting lower margins, for a net of plus 7%, similar to the previous quarter's six percent. Net costs were on the rise this quarter, increasing for 12% of companies (up from 4% in the third quarter). In contrast, prices increased for 3% of companies.

"The pricing environment, including the rising cost of commodities, continues to pose a challenge for many private companies," notes Esch. "The price of oil alone can create multiple pressure points for a business, ranging from the cost of making the plastic packaging for its products to the price of shipping those items. In these times of volatile commodity prices, companies would probably be wise to leverage their networks and strengthen relationships with suppliers to help manage costs within the supply chain."

Demand Still Chief Barrier to Growth, Concerns about Legislative Pressure and Taxation Decrease

Private-company concern about oil/energy prices rose 10 points this quarter to 32%, although lack of demand remained the factor that was most cited by Trendsetter chief executives (67%) as a barrier to business growth over the next 12 months (however, this was down five percentage points from the previous quarter). Concern about legislative/regulatory pressure declined three percentage points to 51 percent. Only 35% of private companies expect increased taxation to be a threat to growth, the lowest level since the third quarter of 2009.

"With last December's extension of the Bush-era tax cuts, concern about increased taxation has eased for the moment," says Esch. "We may see that concern resume as we enter an election year and move, once again, toward the expiration date of the extended tax cuts. In addition, the tax increases associated with last year's healthcare act are due to start in 2013 and may affect a number of business owners. Careful planning begun now, however, can mitigate the impact of the tax increases, which may in turn help to ease apprehension."

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(1) 2009 Forbes America's Largest Private Companies List

SOURCE PwC