December 23, 2000

CEOs of America's fastest growing companies had clearly grown uneasy prior to the Federal Reserve Board's surprise announcement of an interest rate cut with bias toward a further loosening of monetary policy. "'Trendsetter' CEOs had become concerned about the economy and their own prospects," said G. Steve Hamm, managing partner of PricewaterhouseCoopers' middle market advisory services. "In the 4th quarter they trimmed their projected revenue growth for the next 12 months by seven percent. And, with their margins slipping, they scaled back their plans for major new investments and hiring. Although the actions of the Fed will not produce an instant stimulus, now at least the longer term possibilities are improved."

Revenue Forecasts Had Lost Steam, Margins Softened, and Concerns Were Up

"In our 4th quarter interviewing, the good news was 'Trendsetter' CEOs were projecting year-end revenue growth of 24.3 percent... and this was an almost-perfect match with the 24.6 percent increase they initially targeted for calendar 2000," said Mr. Hamm. "But, unfortunately, this result was a let-down rather than a cause for celebration," he added. "This latest projection was eight percent below what had been expected just a quarter earlier (26.3 percent). And along the same lines, the growth rate targeted for the next 12 months (24.4 percent) was seven percent less than the previous estimate (26.2 percent)."

The gross margin picture was similar. Overall, there was a positive outcome for "Trendsetter" companies: 37 percent increased their margins over the past 12 months, while 24 percent saw their margins decrease, for a net of 13 percent on the plus side. But this favorable balance was dwindling: in the prior quarter, a net of 19 percent had increasing margins, but a year ago, it was 24 percent.

Other red flags were up: almost half of "Trendsetter" CEOs (48 percent) cited concern about weakened market demand as a potential growth barrier over the next 12 months, nearly twice as many as in the prior quarter (27 percent). And, 26 percent mentioned concern about decreasing margins as a barrier, up from 20 percent. "Good news was scarce. Ironically, in our weakened economy, a shrinking number of CEOs was concerned about a shortage of qualified workers (65 percent; off six points)," noted Mr. Hamm.

Planned New Investments and Hires Were Scaled Back

Given these business conditions, only 46 percent of "Trendsetter" CEOs were planning major new business investments over the next 12 months, nine points fewer than in the third quarter. And, those planning to invest had reduced their budget to 14.8 percent of revenue, from 15.8 percent. Overall, this represented an average cut of approximately 22 percent in planned new investments, quarter-to-quarter. "These businesses were caught in difficult circumstances," said Mr. Hamm. "With shrinking margins, it became increasingly difficult to self-finance investments for future growth. And, with lending capital in short supply, they were further frustrated."

CEOs planning new investments had targeted several key areas: information technology, cited by 61 percent (up ten points quarter-to-quarter); new product development, 53 percent (up two points); and Internet commerce, 47 percent (up three points). In addition, some were apparently redirecting funds from advertising into sales promotion. New investments in sales promotion were planned by 47 percent, up five points, while advertising slipped five points, to 38 percent.

"Judging from these plans, some CEOs may have seen IT's productivity benefits as a way to offset a scaling back of new hires," said Mr. Hamm. "In the 4th quarter, 80 percent of 'Trendsetter' companies expected to be adding an average of 12.6 percent to their composite workforce over the next 12 months. This was down from 81 percent and 13.1 percent respectively, in the 3rd quarter-an overall quarter-to-quarter reduction of five percent."

Lower Expectations for the Economy

If "Trendsetter" CEOs had become uneasy about prospects for their own business, they were even more so about the broader U.S. economy. They were predicting a 3.1 percent final growth rate for the economy in 2000, off 14 percent from their estimate of the prior quarter (3.6 percent).

Looking ahead, only 53 percent cited optimism about the direction of the U.S. economy over the next 12 months, a significant slide of 24 points from the prior quarter. Outright pessimism grew to nine percent (up seven points), while uncertainty increased to 38 percent (up 17 points).

International marketers had a parallel view of the global economy. Only 50 percent were optimistic, down 21 points; 11 percent were pessimistic (up ten points), and 39 percent were uncertain (up 11 points).

"Prior to the Fed's actions, 'Trendsetter' CEOs were feeling down about their own prospects and the direction of the economy," said Mr. Hamm. "I would suggest they are feeling a bit relieved today, with hope for a brighter future."

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