Expectations of economic rebound lead private companies to increase investments.

After a year of pessimism and uncertainty, a greater number of CEOs of the nation’s leading private companies surveyed for PricewaterhouseCooper’s Private Company Trendsetter Barometer are anticipating an economic upturn in the U.S. and world economies within the next 12 months (34 percent optimistic about the U.S. economy). Accordingly, for the first time in the last year, companies are beginning to increase their investments, particularly in new product or service introductions, followed by information technology and marketing & sales promotion. This represents a major change in outlook going forward, given that three-fourths of these top executives viewed the U.S. economy as declining in the second quarter of 2009. However, a considerable 39 percent responded that they are still “uncertain” about the U.S. economy next year, and 27 percent were pessimistic.

Expectations among international marketers showed parallel results, with 30 percent of Trendsetter executives claiming they are optimistic about the global economy over the next 12 months, up 15 points from the previous quarter. Interestingly, those marketing to emerging countries (China, India and Brazil, specifically) are more optimistic than those marketing abroad to other countries, 39 and 21 percent, respectively. Additionally, those marketing to these emerging countries also project a higher revenue growth projection rate (7.9 percent) in comparison to their international marketing peers who anticipate a 4.6 revenue growth percent rate.

“This resurgence in optimism and falloff of pessimism has lead to a resetting of revenue growth targets and moderate prospective spending increases over the next 12 months,” says Ken Esch, partner with PricewaterhouseCoopers Private Company Services practice. “This increase in investments is a strong indication that private-business owners are planning for a turn in the economy.”

Although Gross Margins Remain Tight, Growth Projections Increase

After revenue projections hit a low 3.4 percent in the second quarter of 2009, Trendsetter executives have increased their 12-month revenue projections to 5.2 percent; with 57 percent of those surveyed now planning positive own-company prospective growth. Interestingly, despite larger private companies ($100M +) being more optimistic about the U.S. economy than smaller private companies (under $100M), a greater number of smaller private companies are anticipating a higher rate of revenue growth (6 percent versus 3.8 percent), but the gap has narrowed.

This increase in projections is happening despite gross margins holding tight to where they were in the second quarter of 2009 at a net minus 12 percent, with only 22 percent of surveyed executives reporting higher gross margins in the second quarter and 34 percent reporting lower gross margins. Additionally, both costs and prices are down, net minus 17 percent and 13 percent, respectively.

“There is some concern about decreasing margins acting as a barrier to private company growth,” says Esch. “However, businesses need to be planning ahead for when the economy does rebound to ensure they leave the recession in a strong position.”

Companies Look Abroad For Increased Spending and Growth

Although growth projections increased overall among surveyed executives, private companies doing business abroad remain ahead of their domestic-only peers in both revenue growth—where the gap has narrowed—and spending, over the next 12 months. Additionally, those in emerging markets of China, India and Brazil are planning more capital investments and increased operational spending on new products and services (42 percent) than both their international and domestic-only peers (37 percent and 17 percent, respectively).

Investment and expansion plans are stronger among international marketers, particularly those in the emerging markets, than among their domestic-only peers.

“These results reflect how we’re seeing clients react to the economy,” says Esch. “Many businesses believe the U.S. consumer is tapped out. They are now looking to the emerging markets as the place to grow their business.”

However, it is important to recognize that the average prospective contribution from international sales to total revenues among those selling abroad has continued to fall over the past year, landing at 15 percent, down one point from the second quarter and down four points from 12 months ago.

Potential Barriers Create Caution, But Don’t Intimidate Capital Investment & Spending

In spite of rebound expectations, concern about lack of demand remains the principal potential barrier to growth. Additionally, several concerns have increased dramatically over the last 12 months including legislative and regulatory pressures, profitability and decreasing margins, and possibility of increased taxation.

Despite these concerns, 28 percent of all executives surveyed are planning major new investments in capital over the next 12 months, increasing four points from last quarter and only missing the projections from 12 months ago by two points. With an eye towards innovation, the primary focus of spending is new product and service introductions, followed by information technology. Private companies are also increasing their geographic expansion (17 percent, up 7 points) and business acquisitions (16 percent, up 3 points).

In favor of these efforts, concern about pressure for increased wages has greatly tapered off from 27 percent 12 months ago to seven percent today. Additionally, a drop in oil and energy prices from 12 months ago has relieved pressure from increasing costs.

Hiring Positive with Plans to Increase Workforces

Increased expectations of a rebound over the next 12 months are in line with 34 percent of panelists planning to increase their workforce over this time period (up three points) versus only nine percent planning to decrease workforces. This results in a projected overall composite increase of 1.4 percent up from 1.1 percent in the prior quarter. As expected, smaller private companies plan more increases in their workforce than do their larger counterparts. Smaller companies are anticipating an overall composite workforce increase of 4.0 percent while larger companies are planning for a 1.2 percent increase.

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