State business confidence seen bottoming out

Published on Tuesday, May 05, 2009

The Associated Industries of Massachusetts Business Confidence Index added 1.9 points to 35.4 in April, its second consecutive monthly rise following February’s historic low (33.3). “Though two small gains barely constitute a trend, we have been seeing signs in the AIM survey since February that the economic decline – now the longest of the post-World War II era – could bottom out soon,” said Raymond G. Torto, Global Chief Economist at CB Richard Ellis Group, Inc. and Chair of AIM's Board of Economic Advisors (BEA).

He cautioned, however, that finding a bottom does not imply immediate recovery. “When asked about the timing of a return to growth, only 18% of survey respondents opted for the second half of 2009; 45% chose the first half of 2010 and 25% the second half, while 12% said 2011 or later,” Torto noted.

The Index, which is based on a 100-point scale on which 50 is neutral, was down 14.7 points from April 2008, when it recorded its last “positive” reading (50.1). The past five months have produced the five worst readings since the Index was initiated in July 1991.

Current Conditions Worst in Survey’s History; Future Seen Brighter

The Current Index, assessing overall conditions at the time of the survey, lost ground for an eighth consecutive month in April, edging off two-tenths to 30.1, while the Future Index of prospects for six months ahead added four points to 40.9. “The current conditions number is an all-time low, but the decline there was marginal, in contrast to the solid gain for future prospects,” observed André Mayer, Senior Vice President for Research at AIM, who oversees the survey. "Like other recent indications, this suggests that the economy is at an inflection point but still some distance from resuming growth."

The Massachusetts Index of conditions within the Commonwealth rose a half-point in April to 30.0 to remain above the U.S. Index of national conditions, which gained 1.8 points to 27.4. “We have been seeing evidence that the national economy's recession is abating," said Mayer. “The question for Massachusetts is whether our stabilization and recovery will coincide with the nation’s, or lag behind as in past business cycles.”

The Company Index, the broadest of the sub-indices relating to respondents' own operations, was up 2.3 in April to 39.7. “Half of the survey respondents called current conditions for their companies ‘bad,’ which is the worst in 18 years,” said Fred Breimyer, Regional Economist for the Federal Deposit Insurance Corporation and a BEA member. “On the positive side, respondents expect conditions for their companies to improve substantially in the next six months – much faster than state or national economic conditions.” The Sales Index gained 2.5 points to 36.6, and the Employment Index rose 2.9 to 38.4. “Although the employment results are very negative on balance, we are beginning to see more firms contemplating expansion,” Breimyer noted.

April confidence levels were similar in Greater Boston (35.9) and elsewhere in the state (34.8), and did not vary systematically by company size. Manufacturing employers were somewhat less confident (33.8, +0.8) than those in other sectors (38.0, +4.1). "Manufacturers continue to confront very weak domestic and global markets, and most presumably apparently see little direct benefit from the recovery initiatives coming out of Washington,” said Breimyer.

“Reform First” Will Speed Recovery

"As we see signs that we have reached the trough of the recession, it is critical that Massachusetts adopt forward-looking policies that will promote our timely participation in the recovery,” commented Richard C. Lord, President and CEO of AIM and a BEA member. “These must include not only continuing commitment to key economic infrastructure, such as education at all levels, but also responsible tax policy accompanied by much-needed reform of government programs and practices.”

“Reform first” has been our mantra, Lord went on. “We in the business community recognize that the Commonwealth may need new revenues – but we believe that raising taxes should be a last resort, and that due account must be taken of potential negative effects of increases on economic recovery and employment. And we agree with what Governor Patrick told the Legislature: ‘Before we consider any broad-based tax increases, we must first regain the public’s confidence in government’s ability to steward public funds wisely.’”

The monthly Business Confidence Index, initiated by AIM's Board of Economic Advisors in July 1991, is based on a survey of AIM member-companies across Massachusetts, asking questions about current and prospective business conditions in the state and nation, as well as for respondents' own operations. On the Index's 100-point scale, a reading above 50 indicates that the state's employer community is predominantly optimistic, while a reading below 50 points to a negative assessment of business conditions. A number of component sub-indices are derived by analyzing responses to selected questions or those of particular groups of respondents.