While many companies are emerging from the economic downturn with a renewed focus on stability and profits, employers and executives remain cautious about long-term prospects, particularly on the global level, new reports show.

Although business conditions appear to be improving, with many companies working to return to earlier levels of profitability, new research shows the long-term outlook for employers remains cautious due to concerns over maintaining consumer demand and dealing with imbalances in global markets. In the United States, a sustainable recovery increasingly depends on resumed customer and business spending, but with consumer confidence on the decline, challenges lie ahead.

According to a February global business survey from McKinsey Quarterly, the number of respondents expecting a rise in profits for 2010 rose to 76 percent, up from 46 percent who expected profit gains in 2009. McKinsey reports that 12 percent of executives across industries expect profits to decrease in 2010, compared with 38 percent in 2009. Meanwhile, 9 percent forecast no change in profits this year.

“What’s more, although corporate cost cuts are continuing to make the news, many respondents seem to expect higher profit to come from successful sales rather than cuts alone,” the report explains. “Indeed, among executives who expect their companies’ profits to rise, 60 percent also expect a rise in customer demand; they also report a greater focus on sales-related tactics than do executives at other companies.”

Fifty-one percent of respondents to the McKinsey survey consider current economic conditions to be “moderately better” compared to six months ago, with 6 percent claiming conditions are “substantially better.” While 12 percent believe conditions are “moderately worse,” only 2 percent believe they are “substantially worse.” Looking ahead, 59 percent of respondents believe conditions will become moderately or substantially better over the next six months, while 12 percent expect they will become moderately or substantially worse.

Despite the positive outlook, companies across industries rightly have lingering concerns. Nearly half (46 percent) expect “constrained global markets [to] perpetuate imbalances” over the next three months, indicating a perception of rising strength in emerging markets but a failure to address fundamental economic policies and a weaker U.S. consumer base.

“This finding is consistent with the view that low consumer demand is the single biggest threat to growth, which is particularly strong among respondents in developed economies; 53 percent of respondents overall say so, and the figures rise to 57 percent in North America and 60 percent in Europe,” the report notes.

In testimony given to the U.S. Congress yesterday, Federal Reserve Chairman Ben Bernanke highlighted the importance of consumer demand and spending in strengthening the economy, particularly as government stimulus measures begin to wear off.

“As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services,” Bernanke said. “Private final demand does seem to be growing at a moderate pace, buoyed in part by a general improvement in financial conditions. In particular, consumer spending has recently picked up, reflecting gains in real disposable income and household wealth and tentative signs of stabilization in the labor market.”

Although consumer demand has seen a modest uptick, partly boosted by holiday retail sales, a sustainable return to higher spending levels is far from guaranteed considering decreasing consumer confidence. The Conference Board’s latest consumer confidence index, announced this week, declined to 46 points in February, down from 56.5 last month. Consumer perception of present-day conditions also declined from 25.2 in January to 19.4 in February, the lowest level in 27 years.

“Consumers’ short-term outlook also took a turn for the worse, with fewer consumers anticipating an improvement in business conditions and the job market over the next six months,” Lynn Franco, director of The Conference Board Consumer Research Center, said in an announcement of the findings. “Consumers also remain extremely pessimistic about their income prospects. This combination of earnings and job anxieties is likely to continue to curb spending.”

Earlier: Consumer Confidence and Retail Spending on the Rise

Resources

Economic Conditions Snapshot, February 2010: McKinsey Global Survey Results
McKinsey Quarterly, February 2010

Semiannual Monetary Policy Report to the Congress
by Ben S. Bernanke
The Federal Reserve, Feb. 24, 2010

The Conference Board Consumer Confidence Index Declines Sharply
The Conference Board, Feb. 23, 2010