Health Care Expenses Dampen Hiring and Pay Raise Plans Among U.S. Business Owners

U.S. business owners are adapting to higher energy prices and interest rates, but rising health care costs are dampening their plans to hire new employees and give pay raises during the next six months, according to the biannual PNC Economic Outlook survey. Of those who offer health insurance, nearly 6 out of 10 said they are likely to reduce their employees’ coverage in the future.

The survey of small- and mid-sized business owners and senior decision- makers across the United States also found that health care reform is the No. 1 issue they would most like to see addressed in the 2006 mid-term elections, followed closely by the nation’s reliance on foreign energy sources and tax reform.

“The results show a stable outlook among business owners for their own sales and profits during the next six months, which suggests they are adapting to higher energy prices and interest rates,” said Stuart Hoffman, PNC chief economist. “Many, however, are taking aggressive steps to counter continued increases in costs for employees’ health care coverage, which could mean reductions in benefits for some employees.”

The survey was conducted for The PNC Financial Services Group, Inc. (NYSE: PNC) in January and February by Harris Interactive, a global market research firm, with responses from 1,041 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.

Sixty-six percent stated that rising health care costs are having a moderate to significant “adverse impact” on salary increases and 59 percent said the same about the hiring of full-time employees. By contrast, 34 percent said these costs would have little to no adverse impact on raises and 41 percent said the same about hiring. At the same time, 57 percent of those offering medical coverage said they are likely to reduce benefits of their employees in the future.

Other Survey Highlights
PNC’s survey revealed the following insights from the business community:

• Mid-Term Election Issues: When asked which issues they would most like to see addressed in the 2006 mid-term elections, health care reform (25 percent) came in first, followed closely by reducing the U.S.’s reliance on foreign energy sources (23 percent). Tax reform (18 percent) was third and the federal budget deficit (16 percent) was fourth.

  
  “It looks as though business owners feel that holding the line on hiring and raises, as well as making investments to enhance employee productivity, can help counter rising costs in the near term,” Hoffman commented. “Longer- term solutions to health care and energy issues, however, will require action by their elected officials in the Administration and the U.S. Congress.”

• Rising Costs & Pricing Power: 67 percent — a PNC survey record high — expect to pay higher prices to suppliers during the next six months, up from 65 percent last fall. Sixty-two percent expect the cost of health care for their employees to increase, and 55 percent expect compensation paid to employees to also rise.
  • Price Hikes for Customers: 42 percent expect to increase the prices they charge customers, down slightly from 46 percent last fall and 50 percent a year ago. Of those who plan to raise prices, 69 percent plan increases of 3 percent or more.

  • Preserve Profits: Of those who plan to raise prices, 78 percent are attempting to preserve profit margins by passing along rising costs, but only 20 percent said more favorable business conditions allowed it. Of those who did not intend to raise prices, 48 percent said market conditions were not strong enough (down from 52 percent in the Fall). Twenty-seven percent reported that productivity growth is helping to contain costs, enabling them to avoid price hikes.
• Business Expectations Remain Stable: The outlook among business owners on sales and profits during the next six months remains stable since last fall — and just below the record high levels reported one year ago — as they manage through higher costs, Hoffman noted.
  • Sales: 67 percent expect increases (up 4 percentage points from last fall, and just below the record high of 70 percent a year ago) and 5 percent expect decreases (down 4 percent) while 26 percent expect no change (down 1 percent).

  • Profits: 54 percent expect increases and 32 percent expect no change (both the same as last fall) while 12 percent expect decreases (down 1 percent).

  • Hiring: 32 percent expect increases (up 3 percent from last fall) and 5 percent expect decreases (down 1 percent) while 63 percent expect no change (down 2 percent).

  • Investing in their business: Despite rising interest rates, eight of 10 business owners plan to invest in their business over the coming six months. Reflecting a desire to enhance worker productivity growth, 28 percent of all owners say technology equipment will receive the largest increase in spending over the next six months, topping all other types of planned investment spending.

The PNC Economic Outlook survey was conducted in the United States by telephone by Harris Interactive among 1,041 owners or senior decision-makers of small- and mid-sized businesses with annual revenues of $100,000 to $250 million. The results given in this release are based on interviews with 500 businesses nationally, while the remaining 576 interviews were conducted among businesses within PNC’s primary region. Quotas were established by company revenue using the Dun & Bradstreet population. The sample was drawn to include a representative sampling of businesses by region and industry. Sampling error for the national results is +/- 4.4 percentage points. Sampling error for the various sub-samples is higher and varies.