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Fiscal Deadlock Erodes Employer Confidence in November

Posted on December 4, 2012

An election that did little to break the nation’s fiscal deadlock eroded the confidence of Massachusetts employers during November as the Associated Industries of Massachusetts Business Confidence Index fell into negative territory for the first time since June.

BCI.November2012.FinalThe Index dropped 4.3 points to 46.8 as employers found themselves swept toward the fiscal cliff of drastic federal budget reductions and tax increases. Manufacturing led the decline, which left employer confidence three points lower than it was a year ago and 5.3 points lower than in November 2010.

“The tax increases set to take effect unless Congress acts will affect virtually every business, and the automatic spending cuts will hit hard at both defense and non-defense sectors in Massachusetts ” and serious macroeconomic effects are also projected,” said Raymond G. Torto, Global Chief Economist at CB Richard Ellis Group, Inc., and chair of AIM’s Board of Economic Advisors (BEA).

“After an election that did little to break the deadlock in Washington, we are very close to the edge. Whereas October’s results merely pointed to this concern, November’s treat an adverse outcome as a probability.”

State officials predict that federal budget reductions caused by sequestration would cause Massachusetts to lose $300 million in tax revenue this year and $1 billion next year. Federal spending cuts would also affect Massachusetts industries that rely heavily on federal government spending – Defense funding for Massachusetts, for example, would drop by $1.2 billion and National Institutes of Health spending would drop nearly $200 million.

The pall cast by the deadlocked fiscal negotiations appears to be seeping into employer outlooks for their own companies.  Three company-related elements of the overall Business Confidence Index fell during November – the broad Company Index was off 4.9 points to 51.0, the Sales Index dropped 3.5 to 50.9, and the Employment Index lost 4.6 to 49.1.

“Most businesses are subject to the personal rather than the corporate tax regime, and they don’t know what their tax rates will be two months from now,” said BEA member Elliot Winer, Chief Economist, Northeast Economic Analysis Group LLC. “This kind of uncertainty makes it difficult to think about hiring and investment.”

It is an uncertainty that appears to dominate the thoughts of employers as the year comes to an end. The BCI Current Index, tracking employers’ assessment of existing business conditions, was off 3.2 points to 47.6, while the Future Index, measuring expectations for the next six months, lost 5.4 to 46.1. And while survey respondents tilted slightly positive about staffing changes in the past six months (27 percent up, 20 percent down), the balance went negative for the six months ahead (16 percent up, 24 percent down).

 “The large drop in the Future Index suggests that many employers now expect some combination of spending cuts and tax increases to affect their businesses and the economy in the near future,” commented Michael Goodman, chair of the Department of Public Policy at the University of Massachusetts-Dartmouth, a BEA member.

AIM’s Business Confidence Index has been issued monthly since July 1991 under the oversight of the Board of Economic Advisors. Its historical high was 68.5, attained in 1997 and 1998; its all-time low was 33.3 in February 2009.  November’s reading is down 3.3 points from a year before and 5.3 over two years, and up only 1.9 from November 2009.

The November report was based upon responses from 147 Massachusetts employers.