Last week, the Federal Open Market Committee (FOMC) issued the following statement: "Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses." On this point at least they are probably correct, as the new Employee Outlook Index -- a joint effort of UBS and The Gallup Organization* -- shows employee confidence fell for the second straight month in January.
The FOMC went on to say that as these geopolitical risks lift, we are situated to enjoy an improvement in the economic climate over time. Whether or not they'll be right on this score is debatable. Regardless, this position on the part of monetary policy-makers suggests that the most we can hope for is a continuation of the marginal growth that occurred during the last quarter of 2002 -- at least until the ultimate economic impact of the volatile international situation is clarified. The upshot: employees have good reason to be less optimistic about the business environment in the months immediately ahead.
Employee Confidence Is Deteriorating . . .
The Employee Outlook Index fell six points in January, following its five-point decline in December. Over the past two months, the Index has fallen from 71 (November 2002) to its current level of 60, similar to the low levels the Index experienced in the summer and early fall of 2002. Employee confidence is now barely above its August low of 58 and far below its April benchmark high of 72.
All three dimensions of the Employee Outlook Index decreased in January:
- The Present Company Conditions Index decreased seven points, going from 84 to 77. This places employee perceptions of how their companies are doing in the marketplace close to where they were in July (77) and just above their October (75) and August (74) lows.
- The Future Company Conditions Index, which reflects employee expectations for the future, decreased to 61 in January. This dimension is down nine points from December (70) and almost down to its August and October lows (60).
- The Job Security Index decreased two points in January from 44 to 42, placing this dimension at essentially the same level as its July-August low of 41, and well below its May high of 53.
. . . As Is the Short-Term Outlook
Neither the FOMC's statement nor its inaction on interest rates was unexpected. Whether you term it a "soft spot" or a "double-dip recession," the economy is clearly not growing. Employees have good reason to be concerned about the prospects for their businesses and their jobs during the remainder of the first quarter.
Of course, as the FOMC confirms, policy-makers are going to attribute the weakness of the economy during the early months of this year to the potential for war. And that's part of the explanation. However, as we have noted over the past several months, consumer, investor, and employee optimism have been on downward trends for a long time. As the minimal growth of the fourth quarter shows, the economy was stagnating before it was impacted by war worries.
Given the public's focus on the Iraq situation and the fact that the next major election is nearly two years away, blaming our economic problems on the uncertainties of war probably makes sense for the political leaders in Washington, D.C. However, American businesses and their employees must prepare for the probability that current business conditions may be the best they're going to see for the remainder of this quarter -- and possibly the entire first half of 2003.
*Results are based on telephone interviews with 641 adults who are employed with non-governmental, for-profit companies having five or more employees, aged 18 and older, conducted Jan. 13-16, 2003, and Jan. 20-22, 2003. For results based on the total sample, one can say with 95% confidence that the maximum margin of sampling error is ±4%.
