Economic Outlook - July 2007

Fuel prices shouldn't keep execs from hitting the gas


Tar Heel businessmen still grumble about taxes and fuel costs — and they probably won’t stop anytime soon — but overall they like what they see in the near future. More than two-thirds of executives responding to KPMG LLP’s first North Carolina Business Climate Survey expect their companies to perform better in 2007, and half expect to increase their number of employees. Paul Chapman is managing partner of the accounting firm’s Charlotte office.

BNC: Why the positive outlook here?

Chapman: CEOs are generally positive people. They are ready for the next opportunity. Also, there are three things that I hear CEOs talk about. They like our climate and the whole quality of life, which is outstanding. Combine that with a strong work force with a good educational system, especially higher education. And the third thing is generally a positive view toward business from our government.

Only about half of respondents had a positive view of the Tar Heel labor pool.

I didn’t see that as a negative, particularly when you consider that 38% were neutral about the pool. I interpret a neutral answer as them being satisfied. When you combine that with the positive responses, that’s 91% — a pretty strong answer.

A third said they expect to make an acquisition in the next two years.

Executives that responded to the survey think they’re going to be the ones doing the acquiring, not being acquired. That stems from a bullish attitude about the economy.

Don’t acquisitions typically result in fewer workers, which could hurt the economy?

I don’t see this as another dot-com phenomenon like we had in the late ’90s and early part of this century. This is more across the board, rooted in a lot of different industries. This is a sustained growth.

Despite the positive outlook, half say they won't hire more workers.

They could already have the people that they think they will need in the next year. Another possibility is that they’re taking advantage of technology to grow, so they don’t have to add bodies. Only 3% said they were going to decrease employment.

More than a third said they spent most of their time on expanding the business.

CEOs have a lot on their plates these days, and typically these are the main agenda items — managing and growing the business and having the quality of growth that they want. That can include more research and development, it can include more training for workers, and it could be acquisitions. All of those issues play into preparing the company for long-term growth.

Were you surprised that more than a quarter focus on morale?

No. What I hear in the marketplace is that the more training and investment employers make in workers, the more valuable they become and the more they help employers succeed. So it’s natural to want to increase employee morale. All that leads to good opportunities for the employees and growth for the businesses. The flip side is, if you don’t invest in your workers, you typically see higher turnover rates, and it costs money to replace them.

Many expressed unhappiness about Tar Heel taxes. Are they too high?

It depends on your perspective. A friend of mine who is in the Midwest is looking to come back to the Southeast. And he said that the 2 feet of snow on Easter sealed the deal, but he also mentioned his property taxes and his state taxes being higher. State taxes in North Carolina are not low, but there are places where they are higher. I do not see state taxes as a major negative for economic development.

In fact, a recent study says our business-tax burden is the lowest in the nation.

The respondents are telling us that it’s a neutral to negative matter. Forty-five percent said the state-and-local tax situation is neutral to them. It’s not a hot button; it’s not a real incentive, either. Forty percent said it was either negative or very negative. If I had to guess, I think everybody thinks their taxes are high.

Execs are worrying a lot about gasoline prices. How are they limiting the impact?

They’re entering into agreements to protect the pricing of the gas that they’re buying for up to six months.

Other states have higher gas prices, so why are CEOs here so concerned?

I don’t know if it’s a comparison to anywhere else. The increase in gasoline prices is a recent change that’s impacting businesses in a way that increases costs, and they’re not able necessarily to pass that on immediately to their customers. Because of the speed with which gasoline costs have increased, companies have not had the opportunity to bake that into their pricing models.

Were respondents in one part of the state more positive than in others?

It was a very consistent response. We interviewed 103 people, from the Charlotte, Greensboro and Raleigh areas. And the consistency was evident that the state’s economy is in pretty good shape and they feel good about it — at least for the next couple of years.

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