What a difference a month makes.
Amid announcements of new tariffs on China and, at the time of polling, Mexico, CEOs’ outlook for future business conditions plunged 6 percent from May to June, according to Chief Executive’s most recent reading of CEO confidence.
Our June reading of CEO confidence—a poll of 384 US CEOs taken in the midst of President Trump’s moves on trade—found their outlook for business conditions 12 months from now had dropped to 6.5 out of 10 from 6.8/10 in May. Forward-looking confidence is now 10 percent below what it was at this time last year.
The drop was an abrupt U-Turn. Last month, CEOs told us they were feeling increasingly optimistic that a deal between the U.S. and China would soon be reached, and the confidence index reached its high for 2019. Now, despite strong economic fundamentals in the U.S. and potential rate cuts by the Fed, the CEOs we talked to say they are increasingly concerned about the long-term fallout from the President’s latest tariff moves—especially his feint against Mexico (see below).
Chief Executive’s CEO Confidence Index is measured on a scale of 1-10. June poll had 384 responses.
It was the same story for CEO confidence in current business conditions, with the Index showing current sentiment at 7.0 out of 10 in June, down from 7.4/10 in May. That’s the biggest monthly drop of the year and the lowest level of confidence in current conditions since October 2017, when a Congressional standoff created uncertainty over the outcome of the tax reform.
The index of current conditions is now down 3 percent since the beginning of the year and 8 percent since the same time last year.
Against this backdrop, fewer CEOs now expect increases in profits, revenues and expenditures over the coming year than they did even a month ago. Some 69 percent now anticipate an increase in revenues and just 64 percent expect an increase in profits, on par with expectations in the fall of 2016 and well below May levels (74 percent and 72 percent respectively).
And while CEOs haven’t changed their capex forecast this month (with 53 percent of them expecting to increase expenditures over the next 12 months), only half (50 percent) now anticipate adding to their workforce over that period, down from 53 percent last month.
The Mexico Effect
So far this year, CEOs’ rating of business conditions had remained in “good” territory, mainly thanks to robust economic fundamentals and an optimistic view that the U.S. would reach a trade deal with China. A majority of CEOs told us that although it has forced them to remain cautious in their strategy, the China-U.S. trade battle had not—at least so far—hindered their growth or affected their pipelines.
President Trump’s announcement of potential tariffs on Mexico was a very different story. Looking at the polling data on a day-by-day basis from June 4 to 11, CEO confidence plunged with the announcement, before rebounding once a deal had been announced. CEOs polled once the deal had been reached rated their Confidence in Business Conditions 12 Months Out a 6.7 out of 10, much more in line with the 6.8 recorded in May.
“Tariffs are hurting small business and the constant threat of additional tariffs and a large amount of uncertainty making planning very difficult,” said the CEO of a wholesale/distribution business polled pre-deal. For that reason, he rated his confidence in current business conditions a 5 out of 10 and his outlook for the year even lower, at 4 out of 10.
“Trade uncertainties are impacting demand,” chimed the CEO and president of an upper-middle market international construction company, who rates both current and future conditions a 5 out of 10 as he anticipates profits to decrease over the next 12 months.
“Lack of clear trade policy and spastic threat and application of tariffs is hurting our customers’ confidence in economic conditions,” said Tim Zimmerman, president of Wisconsin-based Mitchell Metal Products. “Business confidence is critical right now, and I see it declining.”
Confidence Drops Across Industries and Sizes
When looking at CEO confidence by industry, most sectors have reported a loss of confidence since May, with the exception of retail/trade and professional services.
“I do not see any fundamental reasons for economic weakness other than the tariff situation of which I expect a resolution shortly,” explained the CEO of a U.S. retail business who rates both current and future conditions an 8 out of 10.
We observe a similar scenario when looking at confidence levels by industry on a year-over-year basis, with half of the sectors reporting double-digit drops in confidence. Of the two sectors showing an increase—advertising/media (up 8 percent) and wholesale/distribution (up 5 percent)—CEOs of the latter say local demand is strong and they are optimistic it will continue to grow, barring new sets of unexpected tariffs.
“Market remains strong. Lots of cranes in Silicon Valley and promise of more buildings and jobs for thousands of workers,” said the CEO of a mid-sized organization who observes the sector’s cautionary stance seems to be easing as companies continue to grow and add to their workforce.
In a reversal of May trends, CEO confidence in future business conditions by company size (revenues) is down across all ranges this month. The biggest loss comes from the upper middle-market range ($100M to $999.9M), where confidence has reached a multi-year low, down 10 percent month over month, 8 percent since January and 15 percent since the same time last year.
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.