Recovery is Softening Say Economists

In the goods-producing sector, more companies report falling profit margins than rising.

While sales are heading downward, employment edged upwards, according to the National Association of Business Economists' July survey.

In the second quarter, 56% of survey respondents reporting higher sales, down from the 63% who reported higher sales last quarter. Both the goods-producing and service sectors reported significant weakness, offsetting stronger sales in the finance, insurance, and real estate and the transportation, utilities, information, and communications sectors, the group said.

Marking the sixth consecutive quarter of increases in hiring, 42% of responding firms reported rising employment, an increase from the 40% reported in April.

"The economic picture continues to be clouded by global uncertainties, including the disasters in Japan," said Shawn DuBravac, chief economist for the Consumer Electronics Association. Global events in the first half of 2011 -- political turmoil in North Africa and the Middle East and the earthquake in Japan -- have led to higher input costs expectations and lower sales and economic growth expectations, the report concluded. Compared to the April survey, the expected impact on input costs from North African and Middle East events has eased, while the expected impact on sales and real GDP growth from Japanese events has worsened.

Expectation that real GDP growth will exceed 2% was held by 76% of panelists down from 94% in April. The share of respondents planning for real GDP growth to top 3% fell to 11% from 37% in April.

In the area of profitability only 29% of respondents indicating rising profitability, down from 45% who held this view in April. In the goods-producing sector, more respondents indicated that profit margins are falling at their firms than those who said they are rising.

The share of respondents whose firms increased capital spending over the prior quarter edged up to 41%, while the share indicating their firms decreased capital spending remained close to its historic low at only 6%. Expectations for future capital spending improved, with positive responses exceeding negative ones by 54% to 5%. Expectations remained positive for future spending both on computers and communications equipment and on structures.

Materials costs continued to rise, whereas selling prices and labor costs did not increase at as many firms as in the last quarter. Current survey results show inflationary pressure easing as fewer survey panelists expect selling prices or primary non-labor input prices to rise in the next three months.

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