Confidence in the US economy dropped sharply this past quarter among private company executives surveyed for PwC US'sPrivate Company Trendsetter Barometer.Just 27% expressed optimism, down 16 points from last quarter. The percentage of executives voicing uncertainty, meanwhile, continued to rise, increasing to 49% -- up 7 points from last quarter and still well above the percentage expressing outright pessimism (24%). Among international private companies, pessimism about the global economy (28%) exceeded optimism (21%), with 51% voicing uncertainty.

Despite this drop in optimism for the second straight quarter, revenue forecasts and planned operational spending remain strong. Trendsetter executives forecast a 7.2% average revenue growth rate for the next 12 months. As has generally been the case these past couple of years, international marketers project higher levels of revenue growth than their domestic-only peers (7.6% versus 6.8%). Seventy-eight percent of private companies expect continued growth over the next 12 months -- 30% projecting double-digit growth and 48% forecasting single-digit growth.

While planned hiring for the next 12 months has eased (down 10 points, to 48% of respondents), just 3% of private companies intend to reduce their number of employees, with an overall planned increase of 1.6% in private companies' composite workforce.

"On the face of it, the drop in optimism is significant because the reading hasn't dipped this low since a couple of years ago," saysKen Esch, a partner with PwC's Private Company Services practice. "But private companies are in a much different place now. Back in early 2009, outright pessimism among Trendsetter executives was considerably higher than what we've seen this past quarter, because many companies were fighting for outright survival. This time, uncertainty ranks highest, with twice as many private companies registering that sentiment as those citing pessimism. Having made it through the economic crisis of 2008, they recognize the difference between the need to navigate a stop-and-start economy and being in survival mode. And so rather than watching Trendsetter companies retrench, we're seeing them continue to increase their operational spending and make strategic hires -- a much different picture than in 2009."

Operational Spending Plans Remain Strong, Focused on Information Technology

While the percentage of private companies planning major capital investments for the next 12 months declined slightly this quarter to 38% nearly three-quarters (72%) plan to increase operational spending over the same period. Consistent with what we've seen for some years now, international Trendsetter companies lead their domestic-only peers in planned operational spending -- 83% versus 63%. Information technology remains the top area of operational spending for Trendsetter companies overall (39%), followed by new products/services (34%), marketing and sales promotion (23%), geographic expansion (22%), and facilities expansion (21%).

"Trendsetter companies' focus on IT spending mirrors what we're seeing among our clients," says Esch. "Increasingly they're looking to leverage technology to drive profitability. Many of them are sitting on a wealth of data -- about customers, their buying habits, etc. -- which they recognize is an asset, and yet they haven't fully figured out how to mine, analyze, and monetize it. But that's apt to change. The hiring numbers suggest this -- more private companies say they plan to hire technicians over the next 12 months than other types of employees."

The breakout of spending by international versus domestic-only companies is shown below (including a breakout of higher spending in key fast-growth markets abroad):

Potential Decrease in Margins a Growing Concern as Costs Continue to Rise and Prices Lag

The percentage of private companies concerned about profitability/decreasing margins as a barrier to growth rose 7 points this quarter to 37%. Overall, costs rose for a net 17% of Trendsetter companies, while prices saw an increase for only 10% (net). Gross margins remained flat for a third consecutive quarter.

"Much of the concern around margins is tied closely to commodity prices and labor," notes Esch. "That includes labor abroad, prompting private companies to rethink the location of their manufacturing operations. While higher wages for workers in fast-growth markets likeChinaandBrazilmake those countries increasingly attractive places for Western companies to sell their goods and services, those locations simultaneously become less attractive as manufacturing sites -- particularly when you combine higher wages abroad with foreign exchange issues and shipping costs. We may start to see manufacturing for US customers migrate back tothe United Statesas a result of these pressures."

Other top barriers to growth include lack of demand (77% of respondents), legislative/regulatory pressures (54%), and increased taxation (34%) -- similar to the percentage of Trendsetter executives citing these barriers last quarter. The percentage of respondents voicing concern about oil/energy prices, however, dropped 12 points to 33%, while the percentage registering concern about lack of capital for investment rose 6 points to 26%. "Barriers to growth notwithstanding, cool heads are prevailing among leading private companies," says Esch. "Having learned a good deal from weathering the economic crisis a few years back, most of them are well equipped to ride out this current rough patch. The real question is whether they will make the strategic decisions to distance themselves from their competition as the economy improves."