Bay Area Executives' Confidence in Regional Economy Softens; Quarterly Index Shows Limited Growth Expectations Over Next Six Months.

SAN FRANCISCO -- The Bay Area Business Confidence Index, a quarterly survey of Bay Area CEOs and top executives, registered a 59, a four-point drop since July. The drop was driven by reduced expectations for the Bay Area economy in the next six months.

Of the 510 CEOs and top executives surveyed between October 11-19, 2004, 52 percent forecast improvement in the Bay Area economy over the next six months, and ten percent predicted that the regional economy would worsen. The respondents signaled continued hiring in the Bay Area, albeit less than in previous months, with 26 percent planning to increase their local workforce and seven percent planning layoffs of Bay Area employees. This compares with the 33 percent of employers that planned workforce increases in January of this year.

Separated by industry, the manufacturing sector looked particularly strong in terms of hiring, with 40 percent of that industry planning increases and only eight percent planning layoffs. On the other hand, the construction/transportation sectors indicated layoffs, with 13 percent saying they will cut and five percent saying they will increase their Bay Area workers. Two of the most prominent Bay Area business sectors, Information Technology and Financial Services, have employment plans in line with the Bay Area average.

"While the Index remains in positive territory, the drop in confidence is of significant concern and reflects the reality of economic uncertainties Bay Area businesses confront," said Jim Wunderman, president and CEO of the Bay Area Council. "While the region remains an economic engine and a hub of innovation, businesses are proceeding cautiously as they access marketplace needs and weigh the relatively high cost of doing business in the Bay Area."

Results of the Bay Area Business Confidence Survey over the past year tell an interesting story about the cost of doing business in California. In August 2004, nearly one in every six (14 percent) Bay Area companies has "seriously considered" moving their entire operations out of the nine-county region within the past two years. A greater amount (31 percent) of business leaders said that their company has considered moving entire business functions outside the region. This follows the November 2003 results where executives on a sliding scale of one to ten ("1" being "poor" and "10" being "excellent") rated the business climate in the United States as a 6.12. California's overall rating was significantly worse at a 4.44 and the Bay Area received the lowest rating at a 4.25.

"We're encouraged by the continued efforts of Governor Schwarzenegger to improve California's business climate, yet much work remains," said Lenny Mendonca, a director at McKinsey & Company, the international management-consulting firm that helped develop the survey. "Efficient transportation, affordable housing and smart regional planning are essential assets needed by businesses to maintain the region's economic prosperity and ensure growth."

While the business outlook is relatively stable for the region as a whole, confidence levels vary by industry. For example, an astounding 100 percent of respondents from the leisure and hospitality sector see the upcoming six months showing signs of improvement. But, only 40 percent of construction/transportation executives surveyed see moderate improvements.

Bay Area Business Confidence Survey

The Bay Area Council developed the Bay Area Business Confidence Survey to measure employer expectations of the Bay Area economy. The fall survey is the thirteenth in a series of quarterly measures of business confidence. Survey findings will be published in an upcoming edition of the Bay Area Economic Pulse and can be accessed from the Business Confidence survey page at www.bayareacouncil.org.

The confidential survey of Bay Area business executives is conducted quarterly by Evans/McDonough Company Incorporated for the Bay Area Council with the assistance of McKinsey & Company. Participating organizations include: Bay Area Council, Contra Costa Council, Economic Development Alliance for Business, Oakland Chamber of Commerce, San Jose Silicon Valley Chamber of Commerce, San Francisco Chamber of Commerce, San Rafael Chamber of Commerce, Santa Rosa Chamber of Commerce, Silicon Valley Manufacturing Group, Solano Economic Development Corporation, and Tri-Valley Business Council. All members in the database were invited to participate through the Internet. The survey results are weighted to reflect the approximate percentage of employees in each Bay Area county.

A key element of the Bay Area Business Confidence Survey is the Bay Area Business Confidence Index that tracks changes in business executives' confidence over time. The Index value is the average of the percent of positive or negative responses to four questions: current own industry conditions vs. 6 months ago; expectation for own industry 6 months ahead; current Bay Area economic conditions vs. 6 months ago; and expectations for Bay Area economy 6 months ahead.

Bay Area Council

Founded in 1945, the Bay Area Council (www.bayareacouncil.org) develops and drives regional public policy initiatives and researches critical infrastructure issues. Led by CEOs, the Bay Area Council presents a strong, united voice for more than 275 major employers throughout the Bay Area region in promoting economic prosperity and quality of life.

McKinsey & Company

McKinsey & Company (www.mckinsey.com) is an international management consulting firm that helps leading corporations and organizations make substantial and lasting improvements in their performance. With approximately 6,000 consultants deployed from eighty-two offices in forty-three countries, McKinsey has expertise on strategic, operational and technological issues.

Evans/McDonough

Evans/McDonough Company Incorporated (www.evansmcdonough.com) is a full-service opinion research and strategic consulting firm serving a broad range of corporate, political and institutional clients. Founded in 1989, EMC principals have been involved in thousands of public opinion studies, ranging from political and public policy strategy polls to extensive market share and customer satisfaction surveys.