purchasing and employment plans survey of Lehigh Valley businesses

Local businesses are becoming more optimistic. It appears that April ‘09 was the nadir.

Introduction
The October 2009 survey shows that Lehigh Valley businesses are more optimistic about the future than they were since July 2008. This is the third time in a row that the overall index has risen, and now is significantly above its April ‘09 level. While the index has been inching up since January 2009, it is still shy of 50 which is the neutral point, above which signifies positive sentiment.
The October Purchasing and Employment Plans Index for the Lehigh Valley stood at 47.5 (adj) – this is at the same level as the Oct. ‘08 level, however, it is 4.5% above April ‘09 level. The survey results indicate an interesting split between the future and past indicators; the past indicators are both below their Oct. ‘08 levels, the future indicators are both above their Oct. ‘08 levels. Of significant interest is an 18.2% increase in plans for future expenditures over October 2008.

The 40th survey of the members of the Greater Lehigh Valley Chamber of Commerce was conducted in October 2009. The estimated error term for the survey is 3.7%. The participants represented: professional- tech (17%), finance-insurance (10%), retail (10%), other services (8%), health care (7%), construction (6%), education (5%), real estate (3%). The remainder represented transit, wholesale, and other businesses. For analysis, we benchmark our data to the actual business distribution of the Valley published by the Census Bureau.

Hiring in the last 6 months
The index of actual employment in the last 6 months was 45.1 (adj), a drop of 6.2% below its October '08 level. This index was at its lowest level in April ‘09, it has since increased a significant 8.4%. Employers reduced the number of people they laid-off more than the number they hired in October. The small increase in hiring that we observed in July was not repeated in Oct ‘09.
We also measured the net average number of people who were hired in the last six months. The average number of people hired by each business had been declining for some time and this marks the fourth negative score for this indicator in as many quarters. In July 2007 (before the start of the recession), the average per company hiring was 0.9 new employees, according to the participants in the survey. This number dropped to 0.4 new employees in July ‘08 and then plunged to an average of 0.7 layoffs per company by October 2009. The range from July 2007 to October ‘09 is from hiring 0.9 employees to laying off 0.7 employees, a decline of 1.6 employees on average per company.
Also, the net percent of companies which hired (that is percent of companies which hired minus the percent of companies which laid-off) was 14.1% in July 2007, this number dropped to a negative 9.7% in October 2009, a swing of 23.8% in the wrong direction.

Plans for hiring, next 6 months
The index stood at 54.7 (adj) in October 2009. This index 3.4% above its October 2008 level. While a shade below its July ‘09 level, it is an indication of less lay offs in the future.
In October 2009 the overall net percent of companies who were planning to increase their employment was 21.9%, a slight increase over October 2008 level of 19.7%. The percent of companies which were planning to reduce employment in the next 6 months was 12.1%. A significant drop below October 2008 level, however, still well above the July 2008 level of 7.8%. It appears that local companies, are significantly slowing down lay-off but are also in no hurry to plan to increase employment.
Our experience in Lehigh Valley has been that plans for future employment have always been higher than the actual hiring. Historically, when this index had been above the 63-65 band, overall employment increased, and when it dropped below the band, employment decreased. This index, has been below the expansion-contraction band since October 2007.
The data continues to indicate weak demand for labor in the next 6 months. The average participant in the surveys planning to hire 0.1 employees in the next 6 months, slightly below October 2008 level of 0.2 employees, however, significantly below July 2008 level of 0.9 employees. Accordingly, we still forecast future increases in unemployment for the next 3 to 6 months.

Purchasing, the last 6 months
In October 2009 the index of actual purchases for the last six months, while still well below 50, rose by 5.5% above its historical low established in April 2009. At 37.5 (adj) this index is still 15.4% below its October 2008 level and has been scoring below 50 for five quarters in a row. While it is above its April ‘09 level, it did drop slightly below its July 2009 level.
The index of actual purchases for the last six months is a very important index particularly because this is where the "rubber meets the road." Actual purchases are the realization of previous plans. This is the fourth consecutive quarter that this index is scoring below 50. The good news is that it did not establish a new low, something that it did in the previous three quarters.
The data indicates that only 23% of companies in the Valley have increased their purchases, while a whopping 46% reduced theirs. The remaining 31% have kept their purchases the same as the previous 6 months. This is the fifth quarter in a row that we observed the percentage of companies reducing their purchases to be larger than those which increased their purchases. The last time percentage of companies increasing their purchases exceeded those decreasing theirs was July 2008, when 36% of the respondents increased their purchases while 29% reduced theirs. What we are observing now didn't just happen yesterday, it has been coming for more than a year now and while it doesn't appear that it is going to go away overnight it has started to slow down.
The average participant in the survey reduced their purchases by 4.7% for the 6 months ending in October 2009, while this is still negative, it is a better performance than what we observed in April 2009 when the average participant reduced their purchases by 6.1%.

Plans for purchasing, next 6 months
In October 2009, the index of plans for future purchases popped up above 50 at 52.7(adj) a significant increase both in amount and in moving into the segment which is considered optimistic. This index is now 18.2% above its October 2008 level. And has been up 21.7% for the year.
This index was above the expansion-contraction band of 63-65 in April 2007, it dropped below the expansion-contraction band in July ‘07, the current recession started in December 2007, making this index a fairly consistent predictor of future economic activities.
Based on the results of this study, we estimate that 32% of the companies in the Valley were planning to increase their purchases in the next 6 months, while another 27% have plans for reducing purchases. The remaining 41% are not planning to make any changes in their purchases in the next 6 months.
In October 2009, the average local business, was planning to reduce its expenditures by 0.9% in the following 6 months. This is slightly better than October 2008 level of negative 1.0% and significantly above January 2008 level of negative 2.2%. Further more this is important because it is not below last year's level. This index is also a significant 9.7% above its April ‘09 level – a sign of optimism about the future.

Summary
The October survey, for the second quarter in a row, shows a more optimistic business sentiment in the Valley. Businesses again marked April ‘09 as the bottom of the recession. Recovery, however, is not expected to be rapid.

Appendix
An index of 50 indicates an even split between those who plan to increase and those who plan to decrease either employment or purchasing. When the index is above 50, it indicates that the number of those who plan to increase exceeds those who plan to decrease and vice versa. However, our experience in the Lehigh Valley has proven that businesses' projected intentions on the surveys are more optimistic than their future actions. During the last five years, only once did any of these indices drop below 50. Accordingly, we interpret the indices based on their historic trends. We used the boom years of 1998 through early 2000 for establishing the expansion base and the recession years of 2001 - 2002 for establishing the contraction base. Accordingly, indices above 65 were associated with expansion, while indices below 63 became aligned with the contraction period in the Valley. Thus the range 63 to 65, and not 50, marks the expansion-contraction even split for the Lehigh Valley.