U.S. chief executive officers’ view of the economy darkened in the third quarter, with top executives saying they were less willing to hire new workers as they fear sales growth will slow.
The change in mood reported in a Business Roundtable survey on Tuesday bodes poorly for the tepid U.S. economic recovery, which has been held back by stubbornly high unemployment. The news was not entirely grim, though — more CEOs expect to boost their capital spending over the next six months, a trend that reflects both strong corporate balance sheets and a desire to lift productivity.
“This is and will continue to be somewhat of a long and uneven recovery. We’re not seeing a lot of major momentum develop here,” said Ivan Seidenberg, CEO of Verizon Communications Inc (NYSE:VZ – News), who also serves as chairman of the Roundtable. “Until we see aggregate demand start to materialize, hiring will continue to be on somewhat of a slower pace.”
The Business Roundtable’s CEO Economic Outlook Index declined to 86 in September from 94.6 in June, breaking a five-quarter streak of improvement. The reading remained well above the 50 mark, which separates forecasts of growth from expectations of decline. The CEOs’ view is still markedly improved from early 2009, when the index stood at a record low of negative 5.
U.S. companies have by and large reported strong profits this year despite soft revenue, as last year’s aggressive cost-cutting actions, including millions of layoffs and cuts to employee benefits, boosted their profit margins.
“They are lean and mean and they have laid off lots of people. They are very efficient and their output is enough to meet demand, so results look good,” said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California. “That doesn’t help the overall economy because it doesn’t help more people get jobs.”
Investors will get a more in-depth reading of CEO confidence over the next month, as a slew of U.S. corporate heavyweights including Alcoa Inc, JPMorgan Chase and Co and General Electric Co report quarterly results.
Comparisons may grow tougher in the coming quarters as companies step back from some of their most draconian cost-cutting measures. Package-delivery company FedEx Corp, for instance, next year plans to resume matching employees’ contributions to their 401(k) retirement plans.
The CEOs’ forecast of 2010 economic growth dropped sharply to 1.9 percent from a prediction of 2.7 percent in June.
JOBS, CONFIDENCE LINKED.
As was their habit through the recently ended recession, CEOs responded to their lower sales forecasts by becoming more conservative in their hiring plans.
Just 31 percent of the 125 CEOs surveyed told the Roundtable they expected to add jobs in the United States over the next six months, down from 39 percent who expected to do so in June. Twenty-three percent expected to cut jobs, up from the 17 percent who reported that in June.
Sixty-six percent said they expect increases in revenue over the next six months, down from 79 percent in June.
Almost one in ten Americans who want to work are currently without jobs, while some of those who are employed worry that their jobs could be vulnerable if the economy takes another leg down. That has hurt consumer confidence and weighed consumer spending, which accounts for the lion’s share of U.S. economic activity
A key report on Tuesday from the Conference Board showed the U.S. consumer confidence in September fell to its lowest level since February. Consumer confidence has tracked CEO confidence reasonably closely over the past few years — it fell to its lowest level in early 2009, a time when 71 percent of CEOs planned to cut jobs.
Many top U.S. companies are sitting on extra-large cash reserves they amassed during the credit crunch, when some sources of short-term financing that corporate America had come to rely on had dried up.
CEOs’ plans to spend more on capital equipment is a sign of confidence, Seidenberg told reporters.
“Business fundamentals at the micro level are reasonably strong,” Seidenberg said.
Business Roundtable member companies, who were surveyed between September 1 and 21, collectively employ 12 million people and generate close to $6 trillion in annual revenue.