Uncertainty Weakens Business Confidence

Posted by Christopher Geehern on Jul 5, 2016 7:30:00 AM

A month of economic uncertainty punctuated by weak US job growth and the United Kingdom’s impending exit from the European Union drove Massachusetts employer confidence lower during June.

BCI.June.2016.jpgThe Associated Industries of Massachusetts Business Confidence Index (BCI) fell 1.6 points to 56.1 as employers took an increasingly bearish view of the US economy. At the same time, the confidence reading remained comfortably above the 50 mark that denotes an overall positive economic outlook. Taken quarterly, confidence rose from 55.8 during the first three months of the year to 56.7 during April, May and June.

The June survey of employers overlapped by a few days the landmark vote in Great Britain the leave the European Union, an outcome that caused financial gyrations and concern about US exports in the face of a rising dollar. The confidence readings also came in the wake of the slowest pace of job creation in the US since 2010.

“Massachusetts employers are trying to balance a range of economic and political distractions that pull them in different directions month to month,” said Raymond G. Torto, Chair of AIM's Board of Economic Advisors (BEA) and Lecturer, Harvard Graduate School of Design.

“The good news is that employers remain highly confident in the Massachusetts economy and in the prospects for their own companies.”

The AIM Index, based on a survey of Massachusetts employers, has appeared monthly since July 1991. It is calculated on a 100-point scale, with 50 as neutral; a reading above 50 is positive, while below 50 is negative. The Index reached its historic high of 68.5 on two occasions in 1997-98, and its all-time low of 33.3 in February 2009.

The index has remained above 50 since October 2013.

Constituent Indicators Fall

All the sub-indices based on selected questions or categories of employer declined slightly during June after rising to a 10-month high in May.

The Massachusetts Index, assessing business conditions within the commonwealth, dropped a modest 0.8 points to 58.5, up 1.6 points from the year earlier. The U.S. Index of national business conditions plunged three points to 48.8. Employers have been more optimistic about the Massachusetts economy than about the national economy for 74 consecutive months.

The Current Index, which assesses overall business conditions at the time of the survey, lost 1.9 points to 55.5 while the Future Index, measuring expectations for six months out, declined 1.5 points to 56.6.

“Despite concerns about the potential effect of a strong dollar on exports, employers continue to believe that Massachusetts has the type of economy that will ride out all the global uncertainty,” said Barry Bluestone, Stearns Trustee Professor of Political Economy Northeastern University.

“As long as the key industries of the Massachusetts economy - health care, higher education, financial services, bioscience and tourism - continue to grow as a share of national and world GDP, the economy of the Commonwealth will be reasonably sound for the majority of households in the state. The challenge is how to spread this prosperity to more households.”

The three sub-indices bearing on survey respondents’ own operations all weakened.

The Company Index, reflecting overall business conditions, fell 1.5 points to 57.7, while the Sales Index dropped 2.8 points to 57.0 and the Employment Index lost 0.6 points to 54.5.

“Uncertainty of the sort created by the Brexit vote certainly impedes investment decisions, and with few signs of any pickup in the global economy we're probably going to see a slower rebound in capital spending," said Sara Johnson, senior research director of global economics with IHS Global Insight.

The AIM survey found that nearly 39 percent of respondents reported adding staff during the past six months while 19 percent reduced employment. Expectations for the next six months were stable – 37 percent hiring and only 10 percent downsizing.

Confidence levels in June were higher in Greater Boston (58.9) than in the rest of the commonwealth (55.6). Non-manufacturing companies enjoyed a significantly brighter outlook at 59.5 than manufacturing employers, who posted an overall confidence level of 54.38

Politics and Economics

AIM’s President and CEO Richard C. Lord, a BEA member, said the Brexit vote underscores the profound effect that political discourse has on the global economic outlook. It’s a pertinent lesson for Massachusetts as the Baker Administration and Beacon Hill lawmakers wrestle with both a billion-dollar budget deficit and critical debates on energy, wage equity and the use of non-compete agreements.

“The sustained optimism that Massachusetts employers have shown toward the state economy reflects the ability of the Legislature and several administrations to maintain disciplined fiscal policy while creating an environment that allows employers to grow,” Lord said.

“We look forward to working with policymakers to continue that record as the two-year legislative session ends next month.”

Topics: AIM Business Confidence Index, Massachusetts economy

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