CEO Survey: Things are Tough

The takeaway from this week's Business Council CEO summit is that times are going to get more difficult for the U.S. economy.   My view is that may turn out to be a positive in the long-term.

The Business Council is an invitation-only group of 108 CEOs who get together twice per year to discuss the economy, outlook and other primary topics of interest.  They also respond to a survey about economic conditions, and that survey is the primary news source from the conference.   We attend the conference because it gives us access to many of the countries' leading CEOs and thus we can bring it to you through interviews.  This meeting was on Kiawah Island, South Carolina.

This was my 9th Business Council meeting.    It was also the most pessimistic.   CEOs from most of the member companies - all of which are publicly traded save for Cargill, Bloomberg LP and a few others - believe that things will get worse before they get better.    A few key specifics from the survey:

• Most CEOs see unemployment rising to more than 6.3%
• Salaries and wages for those employed will likely stay flat to perhaps moderately higher
• 2/3rds of the member CEOs see the housing market falling further
• The credit crisis has had a marked impact on business since mid-September

The survey also revealed some interesting feelings about the global economy.  When asked in October of 2007 if China's economy would get worse, only 17% of CEOs said it would.   This time that answer rose to 65%.   What the CEOs are saying is that while we certainly have our problems in the United States, it are some of the faster growing economies - specifically China - that are likely to take a bigger hit than America.

Despite the negative tone of the survey, there is reason to be optimistic.

Bottoms in anything - stocks, economies, Rays v. Red Sox, etc - occur at moments of maximum pessimism.  We hear this most with the stock market, the concept of capitulation.   The theory is that we won't hit a bottom in stocks until we have massive selling by everyone and a feeling that we are completely doomed.   When everyone is at their most negative is when we usually see the turnaround.   It's always darkest before dawn.

Take this excerpt from a CEO survey:

Ninety-five percent believe that the deteriorating global economic and financial environment will have an impact on their firms, with many (41%) characterizing the impact as significant. Members indicated actions they were taking to offset the impact included less hiring (64%) and reducing capital spending (36%). Some 38% said they were capitalizing on the conditions to purchase foreign assets at attractive prices.

Sounds familiar, right?   Except that was taken from a Business Council CEO survey in 1998!   That was an extremely negative survey as well.    And the CEOs were right, as they should be since they run the companies that are in the middle of the economy.  They foresaw tougher times and indeed the economy slipped into recession.   But after the rate cuts of 2001/2002, we experienced a 5 year growth period.

We are no doubt in for a rough finish to 2008 and also likely a difficult 2009 for corporate profits and the economy.   The economy in my view is already in recession and will be for a few more quarters.

But call my pollyannaish, but my belief is that this extreme negativity may finally signal that bottom we keep discussing, at least for the economy.  Keep watching the stock market.  As a forward-looking device, if stocks make a bottom and start to move higher over a few weeks or months that's a clear sign the market is prediciting a future turnaround for corporate America.   The overall market usuallly discounts by about 6-9 months.