CEO Outlook 2017

America’s CEOs are sending three messages as they head into 2017:

• They’re wary about the course of the U.S. economy no matter the White House occupant.
• They’re concerned about the uncertainties created by issues such as regulatory over-reach and geopolitical volatility.
• And they’re even more worried about the sure things of the new year, which they see as more terrorism and cybercrime.

In fact, the 17 diverse CEOs surveyed by Chief Executive about their outlooks for the new year (see sidebar below) collectively fear that the completion of a nasty political season won’t salve many of the substantial doubts they have for their companies, their industries and the American economy as 2017 unfolds. Several of our interviewees expressed apprehension about both business investment and consumer sentiment and spending.

STUCK IN NEUTRAL
“We have not seen much change in the general economy in North America,” Dave Farr, CEO of industrial and electronics giant Emerson Electric, told investors recently. “On the consumer side of our businesses, we’ve seen growth, but even the consumers are being cautious…. On the industrial side, companies continue to cut.” Adds Steve Jones, CEO of Allied Universal, the newly merged, largest physical-security company in America: “We were seeing the economy grow previously. But now I think it’s in maintain mode.” Underscoring that sentiment, Cheryl Black, CEO of digital-coupon leader You Technology, suggested that “economic uncertainty will drive people to be frugal and cautious, which will probably cause a slowdown.”

CEOs in the Business Roundtable reflected this same glum prospect for 2017 in the group’s third-quarter Economic Outlook Survey. The chiefs expressed lower predictions for sales, roughly unchanged plans for hiring and nearly flat expectations for capital spending through the first quarter of the new year, while their consensus projection for GDP growth for 2017 was just 2.2%, or no better than the average gain during the seven-year-old, wheezing economic expansion.

As Doug Oberhelman, chairman and CEO of Caterpillar and chairman of the Business Roundtable, put it, the survey results reflect an “unfortunate new normal—where the U.S. economy is pretty much stuck in neutral rather than moving forward.” Layer on top of such domestic worries the unmitigated worldwide volatility being imposed by jihadist terrorism, immigration surges, anxieties about climate change, more invasive cyber attacks, the spread of the virulent Zika virus and other factors. “We will have movements and epic sways,” says Andreas Fibig, CEO of International Flavors & Fragrances, a huge ingredients supplier to CPG companies around the world. “We believe volatility is here to stay.”

POSITIVE PREDICTIONS
Despite these gloomy outlooks, some business chiefs are more sanguine, expressing hope that strong and stable growth could possibly take hold next year and in the years ahead. Domino’s CEO J. Patrick Doyle, for example, is “fairly optimistic” about growth in 2017 because he expects the continuation of a huge positive for the U.S. economy that he believes has been under-appreciated: the boom in U.S. oil and gas production and the resulting softness in prices. “We’ve all underestimated the extent to which lower energy costs have driven manufacturing gains, income gains and so on,” Doyle says. “I think it’s been very powerful globally, and particularly in the United States. In particular, it’s helping to fuel job growth.”

Certainly, gasoline prices that have fallen by nearly half in the last few years are one big reason that U.S. auto sales reached a record level in 2016, climaxing in demand, sales and prices, many CEOs also cite fears that 2017 will present continued difficulties in getting proceeds to the bottom line. One of the biggest challenges they see is the costs of dealing with ever-expanding regulation by the federal government. And it’s no surprise that CEOs in healthcare seem among the most distressed, as Obamacare continues to transform their industry while failing at this point to achieve the democratization of care and reduction in medical costs that was promised with the overhaul.

For example, toward the end of 2016, every medical provider in the country was dealing with the impact of freshly minted rules for physician reimbursement from Medicare, causing “a lot of consternation,” says Mike Murphy, president and CEO of Sharp HealthCare, the largest hospital operator and medical provider in San Diego. And overall, he says, “The industry is continuing to be more and more challenged. Cost increases are significantly outpacing the revenue increases, and the industry will be challenged next year to be more cost-effective while also delivering higher-quality service to consumers and stakeholders. It will continue to get more difficult.”

Other CEOs complain about a costly wage squeeze at the same time that consumer and business demand remains tepid. A companion problem is their inability to find and keep truly qualified workers even if they are paying higher wages. “We’re having to respond to all the rising minimum wages at the federal, state and city levels,” says Jones, whose company employs thousands of low-wage security guards around the country. “Unfortunately, raising wages really doesn’t help you get people, because if you’re paying the new minimum, it doesn’t mean anything to anyone you’re hiring; everyone’s paying it.”

ANSWERS—AND ANTIDOTES
In an environment they expect to be challenging again in 2017, CEOs are turning to a number of expected antidotes, including innovation. Newell Brands CEO Mike Polk, for instance, is counting on “innovation, brand development, insights and e-commerce” to enable his company—which owns dozens of popular marques, including Calphalon, Elmer’s, Oster, Rawlings and Sharpie—to “outperform the macros” in the wake of its 2016 merger with Jarden, another big manufacturer of consumer goods.

Meanwhile, International Flavors & Fragrances spent more than 8 percent of its revenues on R&D in 2016, about the same as in 2015. One of its biggest innovation plays is a “modulator” that will help food and beverage companies reduce sugar content by up to half as they cope with greater global demand for ways to reduce sugar content. As always, change and even uncertainty are also creating new opportunities for just about every industry. For many CEOs, just the glimmer of such openings is enough to generate optimism for the year ahead.

For example, growing safety concerns pressing from all around are boosting demand for security services. Damages from identity theft rose by 43 percent in 2015, and companies are trying to cope, fueling sales for LexisNexis Risk Solutions, for instance. Meanwhile, clients of TransPerfect Translations are “very interested in the translation of material” into other languages, says CEO Phil Shawe, “but if you want to sell services to Goldman Sachs, for example, they want the highest level of security possible.”

And, for audit, tax and advisory services firm KPMG, business quandaries only boost demand, says Lynne Doughtie, U.S. chairman and chief executive. “The major headline for our clients is transformation,” she says. “And that translates into more opportunities for KPMG across all our businesses.” Clarke Murphy, CEO of executive-search titan Russell Reynolds, also sees heightened demand as boards continue to seek great leaders to take them into an uncertain 2017. “If someone can grow revenue faster, be more agile in adapting their company to a changing world, or take a longer-term horizon for a family business, [boards] want that person,” Murphy says. “That’s separate from any economic decision. So the people business is a good business.”

Sidebar: CEOs’ Top 4 Concerns for the Future
Sidebar: Roster of CEOs