Chief executive officers are not as optimistic about the economy as they were a year ago, or even last quarter.
According to the second quarter TEC (The Executive Committee) confidence survey, the index of CEOs’ overall confidence in the economy fell to 103.1 from 109.8 in the prior quarter, a decrease of 6 percent. By comparison, the second quarter confidence index a year ago was 111.9.
More than 2,000 CEOs of small and medium-sized businesses throughout the United States, including Wisconsin, completed the survey.
"Small to mid-sized businesses have become increasingly convinced that interest rates will ease the economy from above trend growth to a more sustainable pace of economic growth during the year ahead," said, Richard Curtin, Ph.D., director of consumer surveys at the University of Michigan.
Specific results of the second quarter survey show that nearly half of all respondents believe that economic conditions have improved over the past year. Not surprisingly, half of all respondents expect economic conditions to remain unchanged over the next 12 months, and about one-third of them think conditions will be better.
A strong measure of future confidence in our economy is the willingness of CEOs to commit to capital investment improvements. Again, about half those sampled expect to increase these investments in the year ahead. Confidence that sales will rise is an obvious corollary, and nearly 80 percent of those queried expect to see increases over the next 12 months.
Likewise, better than two-thirds anticipate improved profitability, partly due to price increases. Forty-six percent of the U.S. sample and half of the Wisconsin sample expect to raise prices, with roughly the same percent expecting prices to remain about the same.
CEOs continue to remain encouraged on the job front, but Wisconsin CEOs trail in this area. Sixty percent of the U.S. sample expects to add jobs, compared with 47 percent of the Wisconsin respondents. In terms of when job additions will occur, more than a third plan to make steady additions through next year.
An interesting related question concerns hiring impediments. Fifty-one percent of the U.S. sample and 30 percent of the Wisconsin sample identify lack of a qualified candidate pool as the biggest impediment, followed by rising health care costs.
Regarding the most significant business issues that TEC CEOs are facing, there were no surprises: energy, raw materials, and health care/worker’s comp issues. What was curious is the impact of foreign competition dropped off the radar screen this quarter. Also mentioned by 25 percent of those surveyed was staffing (hiring/retraining qualified employees) and financial issues.
In terms of general concerns about the economy, the most frequently mentioned issue, which came from the Wisconsin CEO group, was higher fuel costs. That was followed by rising interest rates and a rising deficit.
Wisconsin is the survey’s leader in giving annual merit increases to employees: 88 percent of our responding CEOs, compared with 75 percent of the national sample. About two-thirds of both samples expect merit increases to be the same as last year.
There were a couple of interesting disparities in response to a question about what measures have been taken to offset the rising cost of energy. Twenty-eight percent of the Wisconsin group and 48 percent of the U.S. group have responded by increasing prices. However, 56 percent of the U.S. group, compared with 30 percent of the Wisconsin group, expect to continue to absorb energy cost increases.
Coincidentally, 70 percent of the U.S. sample and 80 percent of the Wisconsin group have seen increased costs from suppliers this past year. Of course, many of these vendors are non-TEC companies.
Finally, a question asking for a preference regarding government focus on deficit reduction vs. tax cuts produced an interesting dichotomy. Half of the CEOs sampled in the United States voted for deficit reduction over tax cuts, compared with 40 percent of the Wisconsin sample. However, 34 percent of the U.S. sample prefers tax cuts over deficit reduction, compared with 41 percent of the Wisconsin CEO group.
Once upon an economic time, there was considerable discussion about "pent up demand" stimulating economic expansion following a recession. That term seems to have been removed from the lexicon to describe the current economic environment.
In its place, we find TEC members talking about creating demand by becoming more competitive and by being willing to use global resource capabilities to create demand for their products and services. This has led to increased aggressiveness and also to increased risk-taking. New partnerships have been forged, especially in China, but not without anxiety.
We continue to hear about instances in which China partners have ignored U.S. patents with their U.S. partners and have gone into direct competition with labor rates that continue to give them definite competitive advantages (1/20th of average U.S. rates). They evenly brazenly label their products these days as "conforms to U.S. standards." Also troubling is China’s unwillingness to float their currency, compounding their "copy cat" advantage.
The second-quarter Confidence Index seems to suggest cautious optimism going forward. But the global economic landscape is so volatile, complex and unpredictable, that what seems like a good conclusion about it today can lead to an unexpected reversal of fortune tomorrow.
The message we keep getting from our membership is "don’t put your eggs in one basket." Spread your risks. The latest word on the street: "Think India, but don’t forget Mexico." In other words, the cheap labor in Mexico is closer than the cheap labor in India.
Until next month, may your own confidence index continue to rise to meet your expectations.
Harry S. Dennis III is the president of The Executive Committee (TEC) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at (262) 821-3340.
July 8, 2005, Small Business Times, Milwaukee, WI
