CEO Confidence Rebounds in May, But Labor Is a Growing Concern

U.S. CEOs’ outlook for business conditions 12 months from now rebounded in May after three months of decline, making the first five months of 2018 the strongest on record since 2004.

Chief Executive’s most recent CEO Confidence Index indeed shows overall sentiment among the country’s business leaders remains “very good,” registering 7.29 out of 10, up from 7.16 in April, although still shy of its 7.62 high in January.

Once again, the majority of the 289 CEOs who participated in our survey said overall economic conditions—including inflation and interest rates—are fueling their optimism, alongside strong consumer demand.

“The tax cuts and removal of regulations have sent a wave of optimism throughout consumers and business,” said the CEO and president of a mid-market industrial manufacturing company who said his company is reporting profits for the first time in 16 years. He expects profits to be up more than 20% over the coming year.

Worries over trade wars and geopolitical discord also seem to be fading, although the Index suffered a slight drop after last week’s announcement that the US-North Korea summit could be cancelled.

Some CEOs said they are choosing to err on the side of caution in their optimism and strategic planning, pointing at the state of unpredictability in government and on the global scene. Others told us they fear the short-term gains that are driving the current state of euphoria will lead to long-term problems that will negatively impact the U.S. economy.

The CEO of a mid-sized professional services firm told us his main concerns are “the very high probability of a trade war with Europe and Asia, [the U.S.] leaving NAFTA, and the very good chance that there will be a conflict in the Middle East.” He says CEOs should not ignore the economic impact of these events on their strategic plan and on the country as a whole.

Nevertheless, high levels of confidence on the part of businesses typically translate to an outpour of investments and increased capital expenditures, which is what the vast majority of CEOs told us they intend to continue doing for the next 12 months.

Overall, 83% of respondents forecasted revenue growth and and 76% predicted profit growth in the months ahead. Two-thirds anticipate they’ll increase capital expenditures. Month over month, these numbers have been holding relatively steady, except for a notable upswing in February when the Tax Cuts and Jobs Act was officially implemented.

The one area of real concern for CEOs is labor. “The market still appears strong,” commented the CEO of an upper-mid market wholesale/distribution company. “But it is hard to find employees, and the cost of living is outpacing the ability to pay more.”

Labor availability is indeed driving up costs, and few industries have the ability to pass those increases onto the consumer. A shortage of qualified talent also means potential hires are asking for higher pay, which would explain why fewer CEOs are considering adding to their workforce in 2018. Of note, 10% now say they plan to decrease their number of employees, a number we hadn’t encountered since last November and a trend we will continue monitoring over the coming months.

Changing tides

Looking at specific industries, construction continues its upward streak, adding more than half a point to register at 8.22 out of ten this month. It is now up 12% year over year.

Financial services and consumer goods manufacturing each reported significant setbacks last month, but they appear to now be steadying. Both are up from the same time last year.

After a steep decline in March and April, IT/Telecomm recovered almost all of its losses in May. “Our industry is going through a technology shift,” explained the CEO of a mid-sized provider of business communications systems and services. “Small businesses in general are doing well in this economy.” While some of the sector’s chief executives reported feeling optimistic about the lessening of regulations, others say there is still a very long way to go before the climate is truly business-friendly.

Professional services firms also enjoyed an increase in confidence. “The drivers for our business are M&A activity, C-level turnover, and funding of leadership development, all of which are strong,” commented the managing partner of a small company in Illinois.

Much like in the IT sector, CEOs of professional services firms are looking forward to more deregulation. “There’s a high degree of optimism that the restrictive regulatory issues will continue to be addressed and that the tax cuts will foster continued business investments,” said the CEO and president of another Illinois corporation.

Across almost every industry we are seeing an uptick in from last year’s confidence levels, with the exception of wholesale/distribution, where CEOs tell us that despite positive fundamentals and lower taxes, there are concerns over the instability in both the future of the U.S. economy and Washington politics.

By size, in terms of annual revenues, all categories are up month over month, but small and large companies continue to be the most positive in their outlook, finishing the month up 7% and 6% respectively from the same time last year.

Large company CEOs attributed their confidence to their ability to pay for talent and rising wages, while their smallest counterparts say they feel optimistic due to an increase in consumer activity and easier access to capital.

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.