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Despite more hiring and investment, is economic pessimism on the rise?

Despite continued strength in business fundamentals, economic pessimism is on the rise among middle-market companies. In rating the state of the U.S. economy compared to six months ago, a majority of these companies still sees a downshift.

Even though there’s a solid job market, low interest rates and positive consumer spending, perceptions of an economic slowdown have increased, according to a survey.

A first quarter economic outlook survey of middle-market firms in Pennsylvania and mid-Atlantic regions showed that these companies are concerned about financial volatility and signs of a weakening national economy. Yet they continue to hire, invest and grow revenue at rates consistent with the expansion norm.

“We took a look at our region’s general trends, there’s a real disconnect in what people are sensing and what they are seeing in the economy,” said Gary Keith, regional economist for M&T Bank in Buffalo, N.Y., which conducted the survey “Households and consumers are feeling a bit of trepidation about the future.

“Companies are saying they are still hiring. It takes some pretty good confidence to say, ‘I’m going to invest in my business.”

Overall, the Greater Lehigh Valley doesn’t show much of a different sentiment, but it appears more upbeat, according to Keith.

Of course, forecasting the future is never certain, and so many disparate, seemingly unrelated factors on the global level contribute to the sentiments of businesses owners at the smallest level.

The latest survey feedback suggests that while economic sentiment may have stumbled earlier this year, mid-size companies are staying cautiously optimistic about their business prospects.

As an example, when asked, “How do you expect the economy in your metro area to perform relative to the U.S. over the first half of 2016?” 30 percent of Pennsylvania middle-market companies expect the economy to perform moderately better, while mid-Atlantic and New York City metro regions expect to outperform the U.S. average in economic growth.

It’s a mixed bag, but here are some key insights Keith shared from the survey:

• Consumer spending plays a vital role in the health of the economy, particularly with 80 percent of the economy more service-oriented. Health care will benefit from increased consumer spending and will carry the economy forward this year. It starts with having a job, and the economy is seeing growth in car and home sales.

• Manufacturing will be subject to more of a slowdown, and the decline in energy production could have a negative effect with fewer orders for the products.

• Millennials are not as keen to borrow as previous generations. However, the availability is there, and the financial sector has done a lot of work to rebuild its ability to offer loans. But it comes down to demand. Do young people want to use credit the same as previous generations? The answer is no.

• Companies are still hiring, and that’s a good sign.

• Commercial real estate sales have been strong, with much activity over the past couple of years. However, expect investors to hit pause as cash flow needs to support future transactions, which are getting pricey.

• While many employers are talking about wage increases in the 2 percent to 3 percent range, higher and more frequent wage increases are necessary for a healthy economy, as every business needs labor.

 

 

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