Businesses Expect Even Gloomier Conditions: NABE

U.S. business conditions took a sharp downturn in the third quarter and the near-term outlook is even more gloomy, according to a quarterly survey conducted by the National Association for Business Economics.

For the first time since 2001, more respondents pointed to declines rather than growth in demand for their firms' goods and services. That measure has been a reliable indicator of a looming recession since 1982.

"Respondents were considerably more negative than they were in July, suggesting that the ongoing financial crisis is pulling down the overall economy," Ken Simonson, chief economist at the Associated General Contractors of America, said in summarizing the results.

"The survey's measure of demand growth fell by the largest amount in the history of the survey," Simonson said.

Some 90 percent of panelists said their outlook for 2009 growth had slipped since July, and falling profit margins outpaced rising margins by three to one, the worst reading since 1982.

As profits stagnate or fall, more U.S. companies suggested they would cut payrolls in the next six months through a combination of attrition and significant layoffs. The most dramatic job cuts were foreshadowed in goods-producing companies.

Grim results in the NABE survey were consistent with the Oct. 30 reading on gross domestic product, which showed that the U.S. economy had contracted at a 0.3 percent annual rate in the third quarter.

Many economists anticipate a faster pace of contraction in the fourth quarter, with no meaningful recovery in growth until the second half of 2009.

Among the NABE panelists, 38 percent expect U.S. real GDP to be lower in 2009 than in 2008, and 79 percent expect growth of less than 1 percent next year.

Although commodity prices peaked in early July, the lingering impact of past increases continued to squeeze profit margins, with 44 percent of respondents reporting falling profit margins.

Still, respondents who said materials costs rose in the quarter dropped to 41 percent from a record 75 percent in the second quarter. Twenty-one percent said that material costs fell.

The NABE survey was conducted from Oct. 10-23 during a liquidity lock-down in short-term credit markets that limited many firms' access to operating funds.

Some 48 percent of respondents indicated that tightening credit conditions had had a moderate or severe negative impact on their businesses, and 71 percent reported a similar impact on their customers.

When the survey was taken, any positive impact from the Federal Reserve's interest rate cuts and series of moves to thaw credit conditions had been mostly confined to the financial sector.

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