Small, medium companies turn sour on economy: survey

By Alexandra Alper

NEW YORK (Reuters)- Small and medium-sized companies are increasingly glum about the chances of a pickup in growth in the U.S. economy over the next year, a survey published on Tuesday showed.

The percentage of chief executives of small companies who expect the economy to improve over the next 12 months dropped sharply to 31 percent from 50 percent last quarter, according to a quarterly survey by Vistage International, which represents small business owners.

The survey comes hard on the heels of a surprisingly weak payrolls report that showed rising unemployment in June, and added to suspicions that the economic slowdown may not be temporary.

"We are seeing a pretty substantial reversal in confidence," said Rafael Pastor, CEO of Vistage International.

He said concerns over healthcare costs, tight credit markets, slow progress on new trade agreements and anemic economic growth underlie the "growing frustration" among CEOs.

"They are seeing an economy that is going to stagnate, putter along," he said.

Confidence gains since the first quarter of 2010 have been erased, with CEOs citing customer demand as their biggest challenge.

Just half of all companies expect to grow profits in the next year, the lowest level in two years, the survey showed.

HOLDING BACK ON HIRING

Dim expectations are keeping CEOs from expanding their long-term operations -- 52 percent of those polled are holding back on permanent hires, though 49 percent said they would increase the total number of employees. That's a drop from the 54 percent who said they would add workers in each of the previous two quarters.

Only 42 percent of businesses plan to invest in new plants and equipment, lower than last quarter's 48 percent but above the 37 percent recorded in the second quarter of last year.

The CEOS were gloomier than Federal Reserve Chairman Ben Bernanke, who said on June 22nd that the economy will pick up in the second half of 2011.

Attributing the slowdown to high oil prices and companies' difficulties obtaining parts from Japan, Bernanke has said no stimulus was planned after the Fed's $600 billion bond-buying program ended last month.

CEOs were also much more negative about the current economic situation -- only 37 percent said it had improved, down from 63 percent in the first quarter.

There was some good news for workers: 66 percent of CEOs said they planned to increase wages over the next 12 months. No comparisons are available for the previous period. Hourly earnings decreased in June for the first time in a year, according to the government's non-farm payroll data released last week.

Small businesses represent the backbone of the economy, accounting for about half of gross domestic product and three-quarters of jobs, according to some estimates.

The nationwide survey, which was conducted from June 14 through June 24, included responses from 1,719 CEOs. The margin of error was 1.6 percentage points.

(Reporting by Alexandra Alper; Editing by Jan Paschal)