Downturn Lingers in Bay Area Economy, CEOs and Business Executives in the Region Confirm.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--Nov. 13, 2002

Respondents Expect Increase in Revenues Soon, But Tempered By

Economic Concerns About War In Iraq

Regional economic conditions have worsened in the past six months, according to a majority of Bay Area CEOS and business executives questioned in this quarter's Bay Area Business Confidence Survey.

In this quarterly tracking of the nation's fifth and the world's twentieth largest economy, the Bay Area Business Confidence Index registered a 1 point drop -- from 48 in July 2002 to 47 in October 2002.

Of the 407 CEOs and business executives confidentially surveyed during October 15-31, 2002 across the nine-county Bay Area, 43 percent believe that Bay Area economic conditions are moderately worse than six months ago, and 10 percent think conditions are substantially worse. Another 36 percent consider conditions to be the same as they were six months ago.

Yet the research also revealed possible signs of recovery.

"While the results of the survey confirm that a positive economic outlook has stalled to some degree, there are certainly some important encouraging findings in this quarter's survey," said Sunne Wright McPeak, the president and chief executive officer of the Bay Area Council. "For example, there are more planned workforce increases than decreases, companies are planning significant increases in their Information Technology (I.T.) investments in the next six months, many plan to boost their R&D investments and there are five companies bullish on their revenues in the next six months for every two that expect a revenue drop."

Lenny Mendonca, a director at McKinsey & Company, the international management-consulting firm that helped with the study, noted, "Bay Area executives remain concerned about the general economic outlook. Nevertheless, their planned increases in R&D and IT spending in particular are important. The return to a growing business capital investment is essential for economic recovery."

Expected Revenues, Planned Increases in Work Forces, and I.T. and R&D Spending

In perhaps the most promising finding of this quarter's survey, nearly one-half of the respondents, or 44 percent, expect their company's revenue to increase in the next six months. Another 38 percent think revenue will stay about the same.

The bevy of large-scale layoffs appear to be over as about one-fifth of the poll respondents plan to increase their company's workforce in the next six months and another 56 percent plan to keep their workforce at its current size. Only 18 percent of respondents expect to decrease the number of workers at their company.

As workforces stabilize, companies also plan to maintain or increase their I.T. investments. A full 20 percent of respondents report that they will increase their I.T. spending whereas only 8 percent anticipate reductions. Similarly 47 percent of respondents said that they would either sustain or increase their R&D investments, versus 5 percent who foresee a decrease.

The Economic Impact of War With Iraq

As part of this quarter's survey, the Bay Area Council asked executives to gauge the economic effect of a potential war with Iraq. Only 10 percent of respondents believe a war with Iraq will help business, and a full 59 percent think the potential war will have a negative business effect. Thirty-one percent said a war would have no effect on business.

Confidence for National Economy Rises Slightly, Industry Expectations Fall

Respondents to the survey expressed slightly greater optimism about the national economy and less optimism about the industries they lead. Only 16 percent of the survey's participants think the national economy is better now than it was six months ago, but 51 percent expect it to improve in the next six months. While 43 percent of respondents expected improvement in their industry last quarter, today only 40 percent are optimistic about the next six months.

The 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 October survey is the fifth in a series of quarterly measures of business confidence. The next survey will be conducted and reported during the winter of 2003. 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 407 business executives was conducted October 15-31, 2002, 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, Contra Costa Economic Partnership, 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 or by fax. 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 establishment of a Bay Area Business Confidence Index that tracks changes in business executives' confidence over time. The Index expresses survey results in a single figure based on an average of responses to four key survey questions on the direction of the Bay Area economy. The purpose of the Index is to express the survey results in a single figure that can be related to expected changes in economic performance.

The 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. Sunne Wright McPeak has served as president and CEO of the Bay Area Council since 1996.

About 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 Company Incorporated

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.

For additional information, please visit the Bay Area Council Web site at www.bayareacouncil.org.