AIM's Business Confidence Index Stumbled in July

The Associated Industries of Massachusetts Business Confidence Index dropped 5.2 points in July to 48.5, falling below 50 - neutral on its 100-point scale - after moving into positive territory in May and June. "This is the Index's most significant monthly setback since it bottomed out in February 2009," said Raymond G. Torto, Global Chief Economist at CB Richard Ellis Group, Inc. and Chair of AIM's Board of Economic Advisors (BEA). "Despite 14 gains in the previous 16 months, Massachusetts employers' doubts about the strength and staying power of the economic recovery have been evident throughout, and those concerns are now coming to the fore," Torto added. "There are global as well as domestic issues in play - the fate on the euro, for example, will affect Massachusetts exports. The July survey results jibe with forecasts of weaker second-half growth, and reaffirm our expectation that this recovery would be long and halting."

The quarterly Massachusetts Consumer Confidence Index, released today by Mass Insight, showed similar backsliding. Mostly due to concerns on jobs, the July Consumer Confidence Index fell 19 points to 61, its lowest level since last year. "Weakening consumer confidence, nationally and here in Massachusetts, is a grave concern for employers, because there can be no real economic recovery unless consumer spending picks up," Torto noted.

AIM's Business Confidence Index has been issued monthly since July 1991. Its historical high was 68.5, attained in 1997 and 1998; its low was 33.3 in February 2009. The Index was up 3.7 points from July 2009 and 4.1 over two years, but down 6.5 from July 2007.

Expectations Moderate for Second Half

All of the sub-indices based on selected questions or respondent characteristics lost ground in July along with the main Index, but there was marked variation in the magnitude of the declines. The Current Index of conditions prevailing at the time of the survey was off 2.2 points to 49.1, while the Future Index of expected conditions six months ahead plunged eight points to 48.1."We are seeing multiple indications that the economic recovery is losing steam, and these results suggest that there may be no further improvement in business conditions in the second half of 2010," said Fred Breimyer, Regional Economist for the Federal Deposit Insurance Corporation and a BEA member. "Less confidence in the future among employers implies there may be less hiring, and a weak job market further undermines consumer confidence."

The Massachusetts Index of business conditions prevailing within the Commonwealth fell 6.1 points to 41.7, but remained above the U.S. Index of national conditions, which lost 6.6 to 38.2. "These are still recessionary numbers, with the U.S. Index matching its lowest reading of the previous recession (38.3 in October 2001)," said Breimyer. "Only 6% of survey respondents called current national business conditions 'good", and only 10% expected good conditions six months out."

Company Indices Positive, But Small Business Concerns Deepen

The Company Index, which measures survey respondents' overall confidence in the situations of their own operations, was down 3.9 points in July to 55.0. The Employment Index held up well, edging off eight-tenths to 53.7; but the Sales Index dropped seven points to 54.4. "The good news here is that all three indicators are still on the positive side of 50, with substantial year-over-years gains (11.8, 16, and 12.6 respectively)" remarked BEA member Carol C. McMullen, President - Wealth Management at Eastern Bank. "Massachusetts employers retain confidence in ability to cope with a slowing recovery, although hiring expectations for the coming months are less positive than they were in May and June."

Confidence was lower in July among manufacturers (-4.3 to 52.5) and among other employers (-6.2 to 44.2). Manufacturers were more likely to call current conditions for the companies "good" (50% - 35%), were more positive about sales and employment, and foresaw less deterioration of conditions ahead. Respondents outside Greater Boston were slightly more confident (-1.6 to 49.5) than those within the metropolitan area (-7.9 to 47.8). Employers of all sizes were less confident in July, with an especially steep decline among small companies. "Small employers had gained confidence during the spring, but their assessments of conditions for their operations went from 46% positive, 11% negative in June to 25% positive, 46% negative in July," said McMullen. "This may reflect more a reaction to signs of slowing growth, after a reasonably strong first half, than an expectation that the recovery will not be sustained."

Businesses Confidence a Key to Recovery

"The simultaneous decline of business confidence and consumer confidence sets off alarm bells about the strength of the economic recovery in Massachusetts," commented Richard C. Lord, AIM's President and CEO, and a BEA member."The two are closely linked, because we need consumer confidence to drive sales and job creation, and we need business confidence to drive hiring and reassure consumers; we need to see gains - slow improvement, at least - on both sides to break out of this downturn."

"As businesses are doing their best to adjust to the realities they confront, state government can contribute to recovery through confidence-building measures," Lord went on. "We are very pleased that, at the very close of its formal sessions, the Legislature enacted a comprehensive economic development bill that is a significant step towards improving the Commonwealth's economic climate. Its provisions include, among others, tax changes that will assist manufacturers, start-ups, venture capital and international companies; permit extensions for delayed projects; impact analysis for proposed new business regulations; and a study of electricity costs. This is the kind of timely strategic action that can promote confidence among employers, and foster to investment and job creation."

The monthly Business Confidence Index, initiated by AIM's Board of Economic Advisors in July 1991, is based on a survey of AIM member-companies across Massachusetts, asking questions about current and prospective business conditions in the state and nation, as well as for respondents' own operations. On the Index's 100-point scale, a reading above 50 indicates that the state's employer community is predominantly optimistic, while a reading below 50 points to a negative assessment of business conditions. A number of component sub-indices are derived by analyzing responses to selected questions or those of particular groups of respondents.

Media Contacts:
Raymond G. Torto, Ph.D., CB Richard Ellis Group, Inc. (617) 912-5225
Fred Breimyer, Regional Economist, FDIC (781) 794-5675
Sara L. Johnson, Managing Director of Global Macroeconomics, IHS Global Insight (781) 301-9115
Alan Clayton-Matthews, Ph.D., School of Public Policy & Urban Affairs, Northeastern University (617) 373-2909
Carol McMullen, President, Wealth Management, Eastern Bank (617) 897-1107
Elliot Winer, Economist (978) 443-3130
Richard C. Lord, President, Associated Industries of Massachusetts (617) 262-1180
Andre Mayer, Sr. Vice President-Communications & Research, Associated Industries of Massachusetts (617) 262-1180
Brian R. Gilmore, Executive Vice President-Public Affairs, Associated Industries of Massachusetts (617) 262-1180