Thursday, January 17, 2008

It’s official—CEOs are worried (and they should be...)

I guess we can add worried CEO's to the list of everyone else now worried by the tightening credit markets, crashing housing markets, dropping GDP and all that is going on.
It’s official—CEOs are worried

By Frank Byrt
January 16, 2008

Chief executives’ confidence in the U.S. economy has dropped to a seven-year low.

According to the latest survey of CEOs conducted by the Conference Board, inflation concerns and credit market uncertainties have chief executives predicting that it will be tough to maintain profitability for the first half of the year.

My comment: What makes them think things will be limited to the first half of the year?

Lynn Franco, director of the Conference Board’s consumer research center, said the credit crunch and increases in energy prices, along with the recent big write-offs by the nation’s largest banks, have spooked CEOs.

Indeed, the board’s measure of CEO confidence fell to 39 in the fourth quarter of 2007, down from 44 in the third quarter. The last time the index fell below 40 was in the final quarter of 2000, back when the U.S. was entering recession. A reading of more than 50 points reflects more positive than negative responses.

My Comment: I guess we can add this declining measure to the continual slide in housing starts, building permits, manufactuing activity, etc etc.

Only 16% of the CEOs surveyed said they expected general economic conditions to improve over the first half of the year. Their outlooks for their own industries are equally pessimistic: Only 17% anticipate any improvement during the next six months or so. In the previous CEO survey, 27% of the chief executives expected a recovery in their industries.

“Obviously what we’re picking up from the consumer and CEO surveys is the sense that they’re reacting as if we are in a severe slowdown,” said Ms. Franco. “So they’re cautious looking ahead.”

My comment: With the consumer tapped out, the housing piggy bank running dry, tightening credit for credit cards and auto loans, and HELOC's being scaled back unilaterally by banks, why might the consumer think we are in a slowdown?

“We’ve not gotten any feedback…suggesting a turnaround in next quarter or so,” she added. “There will be more negative news than positive for the next several months.”

The erosion in CEO confidence coincides with a marked decline in GDP growth, which slowed to an estimated 1.5% to 2% in the fourth quarter, down from the 5% growth in the third quarter. “It’s very noticeable,” Ms. Franco said, “like going from 100 miles per hour to 45.”

Although CEOs said that they’re seeing some price increases from their suppliers, in general they have been reluctant to pass on any significant price increases to their customers, she said. According to the survey, the majority of CEOs expect changes in their businesses’ selling prices in 2008, but just 9% are anticipating price increases in excess of 10%. More ominously, about 13% said they plan price decreases and 4% foresee no change.

My comment: Businesses continue to fight expanding competiton (from abroad) and rising prices by... lowering prices?

“We’re seeing growing concern and caution,” noted Ms. Franco. “A lot of big decisions, including hiring decisions, may get put on hold until things are clearer.”

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