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Concerns About Europe, Economy Depress Employer Confidence

Posted on July 2, 2012

Deepening concern among employers about the European financial crisis and slumping economic growth in the United States drove business confidence to its second largest one-month drop in 21 years during June.

BCI.June.2012.SmallThe Associated Industries of Massachusetts Business Confidence Index (BCI) plunged 8.5 points to 48.3, its lowest reading since last October. The decline echoed a now familiar pattern of summer slumps during 2010 and 2011, and left the Business Confidence Index off 1.7 points over one year and 5.4 over two years. Confidence is now well below the 50-point level that signals a positive economic outlook.

“The economy is obviously in much better shape than it was three years ago, but it remains fragile, and employers are very aware of threats and uncertainties,” said Raymond G. Torto, Global Chief Economist at CB Richard Ellis Group, Inc. and Chair of AIM’s Board of Economic Advisors (BEA).

“In June, they heard about financial storm clouds over Europe, a slowdown in China, and here in the U.S., disappointing reports on employment, industrial production, and retail sales. We’re heading into elections – more uncertainty – and the fiscal cliff is getting closer every month. The road to recovery is a bumpy one.” 

All of the sub-indices based on selected questions and respondent characteristics fell substantially in June along with the main Index.

“There is, however, a notable contrast between the Current Index, assessing overall business conditions at the time of the survey, which was off 6.1 points to 48.7, and the Future Index, measuring expectations for six months ahead, which lost 10.8 to 47.9,” said Sara L. Johnson, Senior Research Director of Global Economics at IHS Global Insight, Inc., a BEA member.

“It appears that respondents are fearful that the deteriorating Eurozone situation, highlighted by the need to recapitalize Spanish banks, will have repercussions in global financial markets and the global economy,” Johnson went on. “In our June forecast, IHS Global Insight incorporated a Greek exit from the Eurozone in 2013 and we downgraded our 2013 and 2014 growth forecasts for most regions of the world.”

The Massachusetts Index of conditions within the Commonwealth was down 7.9 points to 47.6, and the U.S. Index of national conditions had a similar loss to 40.6.

Ebbing employer confidence appears likely to affect employment growth as well. The BCI indicates that while 27 percent of Massachusetts employers added jobs during the first half of 2012 and 23 percent reduced payrolls, 15 percent expect to grow during the second half of the year and 18 percent foresee cutbacks.