Companies Turn Optimistic About The Economy, But Continue To Shrink Revenue, Investment & Hiring.

CEOs of the nation’s fastest growing companies have turned positive about the economy’s prospects over the next 12 months. But, when it comes to their own operation, they continue to hedge their bets with more-conservative revenue goals, investment and hiring plans—suggesting that the economic tide has not yet turned.

A Change In Outlook, But With Underlying Caution

Leaders of the nation’s fastest growing companies are feeling more upbeat about the economy. In second quarter interviewing, 59 percent were optimistic about business conditions over the next 12 months (up substantially from 41 percent in the prior quarter); only nine percent were pessimistic (off from 16 percent); and the remaining 32 percent were uncertain. Viewed separately, a majority of both service and product sector CEOs have adopted a positive outlook: 62 percent, and 55 percent, respectively.

Yet despite this change in perspective, a noteworthy 73 percent said their company’s revenue growth could be stymied by weak market demand in the year ahead—only three points fewer than in the prior quarter—including 72 percent of service companies and 76 percent of product businesses. Their next most-important concerns were minor by comparison: shrinking margins, cited by 36 percent (up a point); and lack of capital for investment, 24 percent, (up a point).

“Rebounding optimism may be traced to anticipation about the impact of the latest Bush tax cut package, and the hope that it will re-ignite discretionary consumer spending,” said Rich Calzaretta, managing partner of Private Company Services for PricewaterhouseCoopers. “But, despite this change in outlook for the broader economy, these CEOs continue to have nagging concerns about demand for their own products and services. This suggests their business hasn’t yet experienced an uplift.”

Slower Growth, Thinner Wallets, And Fewer New Jobs

With their concerns about demand trumping their newfound optimism, “Trendsetter” CEOs have pulled in their horns a bit. Their latest 12-month projection is for revenue growth averaging 14.9 percent, off from 16.6 percent estimated in the prior quarter—a cutback of ten percent. Service companies lowered their target to 15.2 percent, a quarter-to-quarter drop of 14 percent. But, in contrast, product businesses are now expecting a 14.5 percent growth rate—a cut of only five percent.

“These businesses are taking a wait-and-see approach,” said Calzaretta. “By reining in their revenue targets—rather than increasing them or holding them steady—these CEOs are telling us that current business conditions remain soft.”

And, consistent with their tightened revenue projections, fewer “Trendsetter” companies are planning major new investments of capital over the next 12 months: only 34 percent, down from 39 percent in the prior quarter. Planned spending is also off slightly, to an average of 10.7 percent of revenues—from 11.4 percent in the prior period.

The major pullback was among service companies, where 34 percent are now planning major new investments, down from 41 percent. Their average planned spending also slipped—to 9.9 percent of revenues from 10.9 percent.

Product sector companies held relatively steady: with 34 percent planning new investments, off from 36 percent—and with planned spending dropping to an average of 11.5 percent of revenues, from 12.1 percent.

Specifically, fewer are budgeting increased spending over the next 12 months for information technology, (33 percent, off seven points from the prior quarter); new product development (33 percent, off four points); sales promotion (32 percent, off five points); and advertising (27 percent, off three points).

Fast growth companies are also maintaining a cautious approach to new hiring. Although six percent are planning a net workforce reduction over the next 12 months, and 30 percent will stay about the same—64 percent expect to hire net additions, down from 69 percent in the prior quarter. New workers are expected to average 7.0 percent of current workforce, off from 8.1 percent, estimated in the prior quarter.

Among service businesses, 69 percent are planning to add personnel, down from 77 percent. And, average planned additions slid to 11.0 percent of workforce from 12.1 percent.

In contrast, 57 percent of product companies are planning net additions, off only slightly, from 59 percent. But their average number of planned new workers slipped to only 2.8 percent, from 4.0 percent.

“Until they experience renewed vitality in their business, the vast majority of these CEOs will be tightening their belts and delaying their decisions on new investments and hiring,” said Calzaretta. “They will need solid, sustained evidence of a stronger economic pulse before they risk adding to existing operations.”

A Bright Spot: International Sales

International sales are a highlight for many of the 43 percent of “Trendsetter” companies doing business outside the United States. Over the past quarter, 46 percent reported increased international revenues, up from 37 percent in the prior period—while 41 percent saw no change, and only 13 percent noted a decrease.

On average, international sales are expected to account for 22.0 percent of total revenues for those marketing abroad—including 26.8 percent for product companies, and 15.8 percent for service businesses.

With the weaker dollar, only 17 percent see competition from foreign markets as a potential barrier to growth, down from 26 percent in the prior quarter.

International marketers expect revenue growth of 15.7 percent over the next 12 months, compared to 14.2 percent for those that are domestic-only—an eleven percent edge.

“Fast growth companies in international markets are benefiting from their strategy of diversification outside the U.S., and the dollar’s relative weakness,” noted Calzaretta.

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