U.S. Business Owners Vote ‘Dependence on Foreign Energy’ as No. 1 Mid-term Election Issue, Followed by Health Care Reform, PNC Survey Finds

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Biannual PNC survey reveals business owners' growth expectations have reached a record-low as only 49% expect profits to increase during next six months. Energy and health care remain top of mind concerns as mid-term elections approach.

Amid unpredictable energy costs, U.S. business owners want Congress to make the United States more energy-independent even as high health care costs remain a concern, according to the biannual PNC Economic Outlook survey.

When asked which issues they would most like to see addressed in the 2006 mid-term elections, reducing U.S. dependence on foreign energy sources (29 percent) topped the list, followed by health care reform (24 percent) and tax reform (16 percent), PNC’s findings revealed. The order of the top two issues is reversed from the Spring survey of small and mid-sized business owners across the United States.

“Business owners are able to adapt to the significant cost pressures related to energy and health care in the near term,” said Stuart Hoffman, chief economist of PNC. “At the same time, however, they are looking to their elected officials to provide longer-term solutions.”

Other public policy issues that business owners would like to see addressed in the mid-term elections included the U.S. budget deficit, which was fourth (11 percent), and immigration policy, which was fifth (10 percent). These results reflect a disconnect between the legislative agenda of many in politics versus business owners.

The survey was conducted for The PNC Financial Services Group, Inc. (NYSE: PNC) in July and August by Harris Interactive, a global market research firm, with responses from more than 1,000 business owners and senior decision makers. This survey, done every six months since April 2003, gauges the mood and sentiment among business owners about business expectations, economic factors and other issues.

Tempered Business Outlook

Uncertainty over energy prices along with concerns over the possibility of faster inflation and higher interest rates, meanwhile, have also led business owners to temper their business outlook for the coming six months, PNC found. Energy costs are the dominant concern, with 50 percent saying the higher prices have the greatest adverse impact on their business.

Higher interest rates have led business owners to scale back plans to invest in their business, with 32 percent reporting a significant adverse impact on capital spending. Recognizing that a further acceleration in inflation could lead the Federal Reserve to push interest rates higher, 66 percent say the possibility of higher inflation would have a negative impact on the performance of their business.

“The latter half of 2006 finds the U.S. economy in a transition phase. Not only is the pace of economic growth slowing, but the drivers of growth are shifting as well,” said Hoffman, who just completed his term as president of the National Association for Business Economics.

He added: “While the outlook for sales, profits and hiring have fallen to levels not seen since the Spring 2004 survey, the responses in total point to expectations for continued growth, but at a more moderate pace compared to this past Spring’s survey.”

Other Survey Highlights

  • Prices Charged To Customers: 40 percent say the prices they charge their customers will increase, the lowest share since the Spring 2004 survey. Of those who plan to raise prices, 76 percent plan increases of 3 percent or more, with the most aggressive price increases (5 percent or more) planned by owners of service-providing businesses.
  • Preserve Profits: Of those who plan to raise prices, 79 percent are attempting to preserve profit margins, with only 21 percent indicating that more favorable business conditions allow it. Of those not intending to raise prices, 54 percent said market conditions were not strong enough (up from 48 percent a year ago). Along with rising costs, this is depressing the outlook for profit growth – only 49 percent expect profits to rise over the coming six months, the lowest over the life of the PNC survey.
  • Investing In Their Business: Reflecting the impact of a series of interest rate hikes since June 2004, 70 percent intend to invest in their business over the coming six months, down from 77 percent in the Spring 2006 survey. Of those who do plan to invest, spending on technology equipment remains the top priority.
  • Rising Costs: 67 percent expect to pay higher prices to suppliers, a level seen consistently since the Spring 2005 survey; 57 percent expect the cost of health care for their employees to increase, and 54 percent expect compensation paid to workers will also go up.

National and Local Expectations

  • Attitude About U.S. Economy: 11 percent are optimistic (rating 8-10 on a scale of 1 to 10) and 56 percent are moderately optimistic (rating 5-7) about the performance of the U.S. economy over the coming six months, but 33 percent are not at all optimistic (rating 1-4), which is more than ever before in the survey.
  • Attitude About Local Economy: The view of their local economy for the next six months is a bit more encouraging, with 21 percent optimistic, 55 percent moderately optimistic, and 24 percent not at all optimistic.

The PNC Economic Outlook survey was conducted by Harris Interactive for PNC by telephone within the United States between July 31 and Sept. 1 among owners or senior decision-makers of small- and mid-sized businesses with annual revenues of $100,000 to $250 million (501 national and 589 within PNC’s primary region). The sample was drawn to include a representative sampling of businesses by region and select industries. The data are not weighted. With a pure probability sample of 501, one could say with 95 percent probability that the overall results have a sampling error of +/-4.4 percentage points. However that does not take other sources of error into account.

Harris Interactive (http://www.harrisinteractive.com) is the 12th largest and fastest-growing market research firm in the world. The company provides research-driven insights and strategic advice to help its clients make more confident decisions, which lead to measurable and enduring improvements in performance. Harris Interactive is widely known for The Harris Poll, one of the longest running, independent opinion polls and for pioneering online market research methods.

The PNC Financial Services Group, Inc. (http://www.pnc.com) is one of the nation’s largest diversified financial services organizations providing retail and business banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and global fund services.

This report has been prepared for general informational purposes only and is not intended as specific advice or recommendations. Information has been gathered from third party sources and has not been independently verified or accepted by The PNC Financial Services Group, Inc. The PNC Financial Services Group, Inc. makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. The PNC Financial Services Group, Inc. cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Any reliance upon the information provided in the report is solely and exclusively at your own risk.

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Patrick McMahon
PNC
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