The latest 451 Alliance survey on business trends shows an improving outlook that is peppered with pockets of concern, but nothing that seems problematic enough to derail the gradual improvement we have seen over the past year.
Also, the further we look into 2021, the better the outlook gets, because respondents feel confident the second half of the year will be healthier than the first half, likely due to a believe that the negative impact of the coronavirus pandemic will continue to recede. And while there are areas where smaller companies continue to struggle, they also have renewed optimism for the remainder of the year. Completed in March 2021, 451 Alliance's poll asked approximately 600 corporate respondents from 451 Research’s Leading Indicator panel about the outlook of US businesses.
RECOVERY FOR LARGE ORGANIZATIONS IN FULL SWING AS SMALLER ONES CONTINUE TO STRUGGLE
Starting with the top-line results, this quarter’s survey shows a bit of a sideways move, with 25% of respondents now saying they expect their organizations to come in below plan and 16% saying above. While this move is another eight points in the right direction, the pace is slower than the improvement seen over the previous two quarters.
Also, while the dip in the number of respondents saying their organization expects to come in above plan is a bit worrisome, the data shows a corresponding increase in the number saying they will come in even, which is a sign of stability, even if it means the overall business environment isn’t quite ready to break out into positive territory.
The reduction in the number of companies saying they expect to come in below plan is also at work across larger and smaller companies alike. Again, this quarter, survey revealed both groupings tracked experiencing improvements, but larger companies (>1,000 employees; +5) have popped into positive territory, as smaller ones (<1,000 employees; -13) remain well in the negative. It’s important to note that the overall drop in companies coming in above plan is driven by a similar drop among smaller companies. This has led to a wider gap between companies of different sizes, since larger ones have improved 15 points since last quarter, while for smaller ones, it’s only a 6-point improvement.
In a follow-up question, they asked respondents about the specific macroeconomic forces posing the greatest threat to their company's sales. COVID-19 (51%) remains the top concern, but it has eased greatly (12 points) since our previous survey in December 2020. In contrast, labor/skills shortages (27%; up 3 points) have ticked up again, along with commodity prices (15%; up 7-points), energy prices (12%; up 8 points) and US inflation (12%; up 7 points). The increase in concerns across multiple areas is a bit troubling, but looking at the top-line data, they see these apprehensions have so far only served to blunt the full potential of an improving business environment rather than derail it completely.
Furthermore, we asked respondents specifically about the impact of COVID-19 on corporate sales, and found a big drop in the level of concern compared to the previous survey. This further supports our previous findings that the COVID-19 pandemic has been normalized into the current business environment, and thus, is already accounted for in current planning and adaptation. It is also highly likely that the improvements seen regarding the coronavirus pandemic are directly attributable to the optimism many feel around the vaccine rollout and the loosening of COVID-19 restrictions across the country.
2021 OUTLOOK BRIGHTENS
Going beyond the first quarter, respondents expect the business environment to improve throughout the remainder of the year. When asked about Q2 2021, 20% of respondents now say they expect their company's sales to come in above plan, with 17% saying below. This is a 13-point improvement over our Q1 reading and the first net positive since December 2019. Interestingly, since the bottom seen in March 2020, the number of respondents saying below plan has dropped like a rock quarter-over-quarter. This is a good indicator that the overall business environment was steadily improving, even if it lacked to momentum to break out to the upside.
In another positive sign, you will find both large and small companies are showing net positives this quarter, indicating organizations of all sizes see light at the end of the COVID-19 tunnel, and expect conditions to continue improving going forward. With that said, large enterprises (+8) remain much more positive about their sales pipelines than smaller organizations (+1). As we’ve highlighted throughout the past year, larger companies have been in much better positions to weather the pandemic than smaller ones, and that aspect of the recovery doesn’t appear to be changing anytime soon.
Similar to what the survey uncovered about Q1 sales, capital spending for Q2 is moving a bit sideways. When asked about their companies' overall capital budget, 13% of respondents say they expect it to decrease, while 12% expect it to increase – a net 5 points better than December despite a slight decline in the number of respondents saying they plan to increase spending. On the other hand, just like the sales pipeline, the number of respondents saying they expect less capital spending has dropped dramatically since it bottomed out a year ago. This is another sign that the business environment is steadily improving, and able to compensate for any hiccups along the way.
The one point of caution is a decrease in planned capital expenditures by large enterprises (+3; down 3 points) compared to last quarter. Smaller organizations (-3) continue to lag, but are showing a 7-point improvement. Capital spending is usually one of the biggest competitive advantages for larger companies, and has been especially so in the current business environment. This is likely a momentary pause, but regardless, we will need to watch this closely in future surveys.
Despite what looks like a blunting of the pace of capital budget increases for Q2, looking ahead to the second half of 2021 shows expectations for capital expenditures to accelerate. The survey shows 20% of respondents expect their company's capital spending will be higher compared with the first half of 2021, and 16% saying it will be lower. This is a net 11 points better than our December reading, and more than offsets the slowdown in this metric seen last quarter. This data point adds to our belief that the business cycle will continue to improve throughout 2021 as vaccinations continue and COVID-19 restrictions are lifted, resulting in a steady reduction in the negative impact of the coronavirus pandemic.
Capital budget expectations last quarter were split by company size, with larger enterprises showing an improvement and smaller organizations pulling back. The current results show an evening out as both larger (+10; up 6 points) and smaller (+3; up 14 points) companies are in net positive territory. This huge improvement on the part of smaller organizations highlights the optimism many small businesses have that they can get back on track later this year if they can just weather the remainder of the storm.
Source: 451 Alliance Business Survey