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Business Confidence Rose in December Ahead of Cliff Agreement

Posted on January 8, 2013

The Associated Industries of Massachusetts Business Confidence Index rose a point in December to 47.8 as Massachusetts employers watched Washington for movement on pressing tax and budget issues ” action that did not occur until after the survey was completed.

BCI.December.2012“The small uptick presumably reflects optimism in the course of the month that we would avoid the ‘fiscal cliff,’ ” said Raymond G. Torto, Global Chief Economist at CB Richard Ellis Group, Inc. and Chair of AIM’s Board of Economic Advisors (BEA).  “Nevertheless, the Index recouped very little of prior months’ losses and is down 3.2 from its level in December 2011.”

Even with the agreement on taxes, many employers still face significant uncertainty, Torto added.

“Federal spending reductions, still ahead, are now likely to be larger than they might have been had the tax settlement produced more revenue,” he said, “so affected sectors and businesses are waiting for the other shoe to drop.  Also in question are the effects of these policies on the broader economy, along with persistent concerns such as the European fiscal and monetary situation. The January survey results will be interesting ” will confidence be up because there was no cliff, or down because there was no solution?”

The AIM Index, which has appeared since July 1991, 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.

Most of the sub-indices based on selected questions and respondent characteristics had small gains in December, although all were down from a year earlier.

“The Future Index, measuring expectations for six months out, added 1.7 points to 47.8, edging back ahead of the Current Index of overall business conditions at the time of the survey, which rose 1.1 to 47.7,” noted BEA member Sara L. Johnson, Senior Research Director, Global Economics, at IHS Global Insight, Inc. “This at least suggests that survey respondents did not foresee deteriorating conditions going forward.”

The U.S. Index of national business conditions gained 1.6 points in December to 38.2, while the Massachusetts Index of conditions within the Commonwealth, continuing to run ahead of its national counterpart, was up two points to 46.8.

“All of these numbers are much lower than we would expect given the actual performance of the American economy, which speaks to lack of confidence in the effectiveness of policy leadership,” Johnson pointed out. “Negative business sentiment will, however, affect economic performance by discouraging investment and job creation.”

Two of the three company-related sub-indices registered small gains in December. The broad Company Index added three-tenths to 51.3, and the Employment Index gained 1.5 to 50.6, but the Sales Index lost six-tenths to 50.3.

“Employers tend to be relatively confident about the situations of their own operations, but this is less true in times of high uncertainty,” said Alan Clayton-Matthews, professor at the School of Public Policy and Urban Affairs at Northeastern University, a BEA member.

“Under the circumstances it’s good to see the Employment Index up a bit and above 50, though the readings are barely positive ” for the past six months 28 percent of respondents reported adding staff while 25 percent reduced; for the next period 20 percent expect to add personnel while 18 percent foresee reductions.”

Confidence rebounded somewhat among manufacturers (+3.5 to 48.0) but declined among other employers (-2.5 to 47.4). Similarly, employers outside Greater Boston were more confident (+3.0 to 48.2) while within the metropolitan area confidence edged off (-0.3 to 47.5).

“The results of our December Business Confidence Survey have been overtaken by events ” to some extent,” commented Richard C. Lord, President and CEO of AIM and a BEA member.

“We do have, at last, an agreement on taxation, the larger part of the ‘fiscal cliff’ crisis; and that outcome is relatively favorable for Massachusetts, which as a high-income state had disproportionate exposure to higher rates. There are some very positive aspects to the negotiated settlement, including a permanent fix for the alternative minimum tax and restoration of the research and development tax credit.”

“But,” Lord went on, “the tax agreement falls far short of a ‘grand bargain’ that would have embraced spending cuts and the debt ceiling. The next round of negotiations will be much tougher, and will require even more difficult compromises. With the interests of major sectors of the Massachusetts economy and of many of AIM’s employer members will be at stake, we will be monitoring developments closely  and articulating positions as appropriate.”