CEO Outlook Dips Further Amid Midterm Elections

CEO confidence in future biz conditions hits 2018 low from CNBC.

Chief Executive’s most recent reading of CEO confidence in future business conditions slipped from 7 out of 10 in October to 6.9 in November. It was a new low for 2018—the rating is down 8.8% since January—and also for the past 12 months.

Polled at the time of the midterm elections, CEOs told Chief Executive that while they feel good about the strength of the current business climate, their confidence in the next 12 months continues to waver due to the ongoing trade war, talent shortages, the Fed’s tightening of interest rates, end-of-cycle fears and the potential problems related to divided government in Washington.

The founder of a small professional services firm was blunt about his fears, echoing what we heard from a number of CEOs this month: “Now that the midterm elections are over, and the results are in, I am concerned that the House of Representatives will be spending all their time and energy attacking instead of governing—i.e., doing the job they have been elected to do. This cannot bode well for future business conditions.”

Many CEOs said they worried that a Democratic majority in the House is likely to dampen the now-good economy. CEO confidence in current conditions actually registered a small gain in November up 3.2% from October, to 7.7/10. Although this is 1% lower than the recent peak in February 2018 in the wake of the tax cuts, it nevertheless represents an increase of 9.5% year-over-year and 1.7% since the start of 2018.

CEOs say several elements are keeping the business environment strong, including greater cash reserves brought on by the corporate tax cuts, less onerous business regulation and strong customer demand. Despite those positives, many fear the landscape is about to take a turn for the worse.

James Riley, president and CEO of Laclede Chain, a mid-sized industrial manufacturing company in Missouri, said the trade dynamics are shifting and the lack of workers qualified to take on more sophisticated jobs as businesses move to automation could cause the next economic downturn. “Businesses will not be able to take advantage of opportunities, thus stifling the economy.”

Tim Zimmerman, president and CEO of Mississippi-based Mitchell Metal Products, another mid-sized manufacturing company, said he’s most concerned about trade. “In the industrial markets we serve, the impact of tariffs and uncertain trade policy are beginning to force through unprecedented cost increases,” he said. “This situation, combined with an exceedingly tight labor market, creates a situation where current levels of economic activity are not sustainable.”

Another CEO, the owner of a small wholesale/distribution company, said he expects both revenues and profits to be down up to 10% over the next 12 months. The reason: “Continued tariff escalation is finally coming through the pipeline and hitting end users, which will slow the overall economy.”

CEOs say that, overall, there are a significant number of unknowns and that there are likely to be gains and losses on both sides. “Thus, equilibrium,” said the founder, owner and managing partner of a small professional services firm. “The business climate is strong enough to give a boost to consumer confidence, and that is what will carry the economy for the next year, after which the pain (i.e., the realization of the global reality) will start to creep in.”

Planning for Uncertain Times

Our polling indicates that the number of CEOs expecting an increase in their company’s revenues and profitability over the next 12 months remains high, despite the fact that some are revising their forecast downward this November: 76% now expect an increase in revenues over the next 12 months, compared to 82% last month, and 72% expect an increase in profits (versus 73% in October). This marks the lowest proportion of CEOs predicting an increase in revenue this year and the second-lowest predicting profit increases (in August it was 70%).

The number of CEOs expecting to add to their workforce in 2019 has also hit a new low: 54% compared to its previous low of 58% in October. The only increase was in capital expenditures, with 68% of CEOs expecting to increase their spending in the year ahead—up 2.2% month-over-month.

Confidence Levels Lag January Optimism Across All Industries

While confidence has been falling across all industries since the start of the year, November marked the first time forward-looking confidence levels dropped out of “very good” territory for the first time in 13 months.

The advertising/media sector is the hardest hit, down 22.6% since January. CEO confidence among these firms was at 6.0/10 in November after declines every month since hitting a peak in February at 8.1/10.

Manufacturing/consumer goods was the second biggest drop, down 5.8% M/M. The sector’s CEO Confidence Index is now at its lowest level of the year—6.5/10—down 20% from its January peak of 8.1/10.

The third largest decline is in the wholesale/distribution industry, where confidence was 6.3/10, down 8.8% M/M after spiking 14.2% gain September-October. The Index is down 15.2% from its where it started the year (See charts below).

Not everyone is pessimistic. Max Avery, CEO of Bolding Construction, a small Arizona construction company, rates his confidence in future business conditions a 10 out of 10 and credits “continued growth, good market conditions and strong client relationships” for this outlook.

YTD CEO Confidence in Negative Territory Across All Sizes

CEO confidence in future business conditions is down from its January levels across all company sizes. Small-company (revenues of less than $10 million) CEO confidence registered 6.9 out of 10 in November, up 1.5% M/M but down 10.8% since peaking in January.

“My business is 16.5 years old but losing clients. The future isn’t looking too promising. When clients make more money, my sole proprietorship seems to flounder,” says Kim Beeler, owner of Beeler Marketing, a small Oregon PR company, who rates both the current and future business climate as weak (4 out of 10). She says more support systems, including tax breaks, are needed for sole proprietorships to thrive in the U.S.

Mid-sized company CEOs rated their confidence at 7.0 out of 10, only 0.2% off October levels but down 7.3% since January and 8.4% since their peak in February (7.7/10). They list political uncertainty, the shift of power in Washington, tariffs and rising interest rates as their main concerns.

Upper middle-market company CEOs were the most optimistic this month, with an Index of 7.1 out of 10, up 7.3% since last month but, like the others, down 5.2% since its January high. They also say interest rates and inflation are affecting their rating, although their outlook remains positive thanks to the corporate tax cuts, a reduced regulatory burden and hopes for growth opportunities over the next 12-18 months.

“We are still seeing new orders coming in, and our customers are still talking about expanding next year,” says the CEO of an upper middle-market wholesale/distribution company who expects both revenues and profits to increase by 10% to 20% over the coming year.

Large-company CEOs rated their confidence in future conditions 6.7/10 this November, down 8.2% M/M and 18.2% since their January peak.

About the CEO Confidence Index

The CEO Confidence Index is America’s largest monthly survey of chief executives. Each month, Chief Executive surveys CEOs across corporate America, at organizations of all types and sizes, to compile our CEO Confidence Index data. The Index tracks confidence in current and future business environments, based on CEOs’ observations of various economic and business components. The results are used as key indicators by media outlets throughout the world.

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