NEW YORK, March 31, 2003 As uncertainty extends its grip on America’s next-generation economy, service businesses appear to be on a steadier course than their counterparts in the product sector—with comparatively brighter prospects for industry growth, corporate revenue growth, new hiring, and major new business investments. These are highlights from PricewaterhouseCoopers’ latest Trendsetter Barometer, released today.

View of the U.S. Economy, Industry Sector, and Own Company’s Performance

In first quarter interviewing, only 41 percent of CEOs of the nation’s fastest growing companies were optimistic about the economy’s direction over the next 12 months—down sharply from 55 percent in the prior quarter. A growing plurality, 43 percent, was uncertain—and a recent high of 16 percent was pessimistic.

• However, within this changing and jittery landscape, service company CEOs expect to be the beneficiaries of a 5.3 percent composite growth rate from their industry sectors over the next 12 months, and have raised their own company’s revenue growth hurdle from 15.8 percent to 17.8 percent—a 13 percent increase, quarter-to-quarter.

• Viewed separately, product sector companies lagged, expecting a lift of only 4.1 percent from their industry sectors, and holding their latest 12-month growth target steady, at 15.2 percent.

“In our increasingly uncertain economy, CEOs of service businesses have greater flexibility in their planning than their counterparts in the product sector—who must navigate through more-complex capacity, overhead, inventory, export, and energy issues,” said Steve Hamm, managing partner of middle market advisory services for PricewaterhouseCoopers. “This may help to account for service companies’ more-upbeat perspective.”

Hiring Plans

Overall, 69 percent of “Trendsetter” companies are planning net additions to their workforce over the next 12 months, a quarter-to-quarter increase of three points. Twenty-six percent expect no change, and five percent anticipate a reduction. New workers are expected to comprise 8.1 percent of their composite employee pool, including 7.0 percent full-timers, and 1.1 percent full-time-equivalent part-timers.

• However, among service companies, 77 percent expect to add workers, a gain of seven points from the prior quarter. New hires are expected to grow to 12.1 percent of workforce—including 9.0 percent full-timers, and a high 3.1 percent FTE part-timers.

• In contrast, only 59 percent of product sector businesses expect to add workers (a drop of two points since the prior quarter). New hires are expected to slip to 4.0 percent of workforce, made up of 5.0 percent full-timers, and elimination of 1.0 percent FTE part-timers.

“The workforce is the engine of the service sector, and it is a positive sign that so many more service companies are expecting to add so many more workers,” said Hamm. “But we must note that this seemingly vibrant job growth is in comparison to an anemic product sector.”

Plans for New Investments

Also, more “Trendsetter” companies (39 percent, a quarter-to-quarter increase of three points) are planning major new investments of capital over the next 12 months. But they are now expecting to spend at a lower level, 11.4 percent of revenues, down from the prior quarter’s estimate of 13.7 percent.

• However, the number of service companies expecting to make such investments increased markedly, to 41 percent (up eight points). And, over the next 12 months they are planning to spend at a 10.9 percent rate, or 22 percent higher than the prior quarter’s estimate.

• Viewed separately, fewer product companies, 36 percent, (off three points), are planning increased spending—with the average investment of 12.1 percent of revenues.

Overall, 40 percent expect a budget increase for information technology over the next 12 months (off three points, quarter-to-quarter); 37 percent, new product development (off two points); 37 percent, sales promotion (off two points); and 30 percent, advertising (unchanged). The strongest mover this quarter was research & development, with increased spending planned by 24 percent (up five points)—with gains by both service companies (planned by 24 percent, up three points) and product businesses (23 percent, up five points).

“It is encouraging that service companies are planning a significant increase their business investments,” said Hamm. “We live in hope that their rising business investments will spark a modest boost in economic growth that will slowly build. But in contrast, the product sector is rightfully cautious, and apparently won’t be of much help in restarting the economy.”

Potential Barriers

Among surveyed CEOs, 77 percent are concerned about lack of demand as potential barrier to revenue growth over the next 12 months, up six points since the prior quarter. This includes 75 percent of service companies and 79 percent of product businesses.

Concern about decreasing margins was a distant second in importance, cited by 35 percent (up one point)—a worry for CEOs of 32 percent of service companies and 38 percent of product businesses.

Barriers on the rise this quarter were legislative and regulatory pressures, cited by 25 percent (up three points) and, for the first time in several years, concern about increased taxation, noted by 23 percent (up eight points).

“This growing concern about regulation and taxation may be related to worries about prospective costs of compliance for the Sarbanes-Oxley Act of 2002,” said Hamm.

Also increasing in importance was competition from foreign markets, cited by 15 percent (up four points), including 22 percent of product companies (up seven points) and ten percent of service businesses (up three points).

“These CEOs may be worried about acceptance of U.S. products and services abroad, given the political and consumer sentiments aroused by the Iraq war,” said Hamm.

PricewaterhouseCoopers’ “Trendsetter Barometer” is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.

PricewaterhouseCoopers (www.pwcglobal.com) is the world's largest professional services organization. Drawing on the knowledge and skills of more than 125,000 people in 142 countries, we build relationships by providing services based on quality and integrity. “PricewaterhouseCoopers” refers to the member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

If you have a question about this “Trendsetter Barometer” survey, please contact Pete Collins, survey director and publisher, at 646-394-4496 or e-mail to: pete.collins@us.pwcglobal.com

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