CEOs Have High Hopes For The Year Ahead

At the threshold of 2018, most CEOs we talk with share two outlooks: a conviction that the U.S. economy will continue to grow and even strengthen, tempered by concerns about what’s going to come out of Washington. More than anything they want tax cuts.

Based on Chief Executive’s interviews with 20 CEOs of large and mid-sized U.S. companies, the C-Suite has returned to an assumption of growth after the Great Recession and eight years spent wincing at most things the Obama administration did. They foresee the continuation of gains that the U.S. economy began consolidating in 2017 as President Donald Trump rolled back regulations and demonstrated his trust in CEOs to stoke the economy with capital investments and job creation and grow their companies through mergers and acquisitions.

Interest rates and inflation are simmering just enough. Housing values and construction keep rising. Tightening labor markets have begun creating an updraft in household income and consumer confidence.

Even the economic devastation wrought by hurricanes hitting Texas, Florida and Puerto Rico in September has an upside, as massive rebuilding efforts in 2018 will help offset the retardation of activity in the fall of 2017.

“We see an engaged consumer, a healthy consumer and a very buoyant credit market.”

“We’re expecting continued GDP growth, in the two- to three-percent range,” says John Schlifske, CEO of Northwestern Mutual Insurance. “We’re not talking about breakout growth, but all the measures we track are neutral to positive” for 2018. “They’re not signaling anything that has me alarmed.”

As Jim Peck, CEO of TransUnion, the $1.7 billion credit-monitoring giant, puts it, “We just see an engaged consumer, a healthy consumer and a very buoyant credit market.”

Businesses “are doing reasonably or very well on the whole and economic growth is picking up some steam, and I think that will translate well in the new year,” says Steve Steinour, CEO of Huntington Bank, a major regional player.

“I’m traveling the country doing town hall meetings with our employees, and there are cranes in every city and development going on,” reports Steve Jones, CEO of Allied Universal, a $5 billion provider of security services, “So I look at that and ignore a lot of other metrics.”

For the first time in many years, CEOs have also built in benign economic assumptions about the rest of the world, with sustainable growth taking hold at strong levels in China and the European economy finally getting it together. “If you look at the last 30 to 50 years of globalization, the whole global economy is a lot more resilient than many people think, and everything in general is improving,” says Matt Rizai, CEO of business-software provider Workiva. “I’m very optimistic.”

To be sure, there are caveats aplenty. U.S. auto sales—still one of the economy’s biggest engines—leveled off in 2017 after a seven-year boom, and carmakers idled plants for weeks at a time. “We expect to see some continued softening of the market in 2018,” says Jim Lentz, CEO of Toyota North America. “But we still anticipate robust sales overall.”

Then there’s the White House. CEOs didn’t like President Obama’s nonchalance about the importance of economic growth and his efforts to saddle the rich and business with the costs of social restructuring. For many chiefs, his departure has been addition by subtraction.

But they don’t like Trump’s bluntness, unpredictability and determination to pursue socially divisive policies, such as his immigration ban. Many have expressed their discontent by dropping off White House panels they had joined early in 2017.

Even the business-friendly Trump won’t be able to engender implicit trust by many CEOs until he comes through on three of his biggest campaign promises: tax cuts and tax reform, an overhaul of healthcare and the start of a massive program to rebuild America’s infrastructure. Most important, they believe that a lighter tax load will give businesses enough extra slack to fuel expanding investments in the economic future.

“If there’s no progress on tax reform, it could take some luster off of optimism in the new year.”

“Generally, manufacturers remain optimistic,” says Vicki Holt, CEO of Proto Labs, a low-volume and prototype manufacturer. “There are more projects and things are more robust” than a year ago. “But there’s concern that the things we wanted to get done, such as tax reform and infrastructure overhaul, are just taking a long time. If there’s no progress on tax reform, it could take some luster off of optimism in the new year.”

Some CEOs continue to worry about America’s bifurcated economy, where the rich get richer and everyone else struggles to rise. They also recognize that black-swan events can blow up any positive expectations, from natural disasters to man-made miscalculations. But because they can’t control Kim Jong-un or Donald Trump, they soldier on.

Stability Doesn’t Cut It
Dan Knotts believes that many CEOs and politicians have become far too complacent with an economy that has continued growing only anemically, with few signs of more dynamism in 2017. “We have to find a way as a country to drive a higher level of growth in the economy,” says the CEO of RR Donnelley, a Fortune 500 marketing-services
provider. “A stable economy is okay but we should not settle for a stable economy. We need growth to drive this economy higher, and we have to figure out how to do that.”

“We’ve had debates over tax reform and tax decreases, and those are important elements, but we need to get the economy growing again in order to truly create the environment we want here in the U.S.”

“Everyone’s looking for growth,” says Grant Thornton CEO Mike McGuire, noting that M&A activity is strong and half of CEOs also believe that they’re going to make an acquisition in the next 12 months. “Everyone is bullish. It’s a matter of how they’re going to take advantage of a market opportunity,” he says. “They’re at a fork in the road. How are they going to capture market share? Now it’s about an execution risk, not a business risk.”

The Wide-Angle View
Lawson Products’s Mike DeCata and Citizens Parking’s Jerry Skillett, who both run companies with broad perspectives on the U.S. economy because their companies are involved in so many verticals, share an optimistic outlook.

Lawson Products is a Chicago-based supplier of what might be called consumable industrial trinkets: fasteners, drill bits, hydraulic fittings, automotive body clips and more. It’s got 70,000 active B2B customers. “We’re seeing no change in 2018 from the current trajectory,” says DeCata, who says his company achieved solid gains throughout 2017. “At this point we don’t see any slowdown, just a challenge for us in topping year-to-year gains that have been eight percent a quarter. Every region is improving. Every product category is improving, so we see continued, broad-based growth.”

Meanwhile, Skillett has a front-row seat on the consumer side of the American economy, because most Americans still use cars to conduct economic activity. Skillett, who is CEO of Citizens Parking, a $1 billion operator of parking facilities based in New York City, is bullish about 2018. Parking volume flattened out in 2017, he says, guessing that many companies “put off their investments until later” in part “because of all the political noise.” Heading out of 2017, Skillett predicts that those who took a wait-and-see approach will be more aggressive in 2018, having seen “that year be relatively safe for corporate earnings…They just delayed things a year.”

Retail Running Out of Runway?
One thing some CEOs worry about for 2018 is the continued crumbling of the traditional bricks-and-mortar retailing business across America, exemplified by the recent Chapter 11 bankruptcy filing by Toys “R” Us and indoor shopping malls falling prey to the disruptive power of e-commerce.

While recognizing that Amazon and other online retail giants are creating thousands of jobs in warehousing and distribution, many CEOs believe that the dislocation caused by the accelerating demise of so many stores will be difficult for the economy—as well American workers—to absorb.

“Retail is facing significant disruption. So is healthcare. We need to put greater focus on what’s happening to these individual industries.”

“Historically, the economy has been a rising tide, but now it’s critical that we’re starting to see significant differences within industries operating within the same economy,” says Knotts. “Retail is facing significant disruption. So is healthcare. We need to put greater focus on what’s happening to these individual industries.”

Anything that hasn’t been reimagined and was a legacy shopping mall—even if it’s been renovated in the last decade—we’ve seen a pretty significant falloff of traffic,” reports Citizens Parking’s Skillet.

Barbara Moran-Goodrich, CEO of Moran Family of Brands, a collection of automotive-aftermarket franchises based in Midlothian, Illinois, worries about the ripple effect of “big box retailers” closing locations. She wonders “how the auto industry will be impacted by changes that are occurring in how people shop and whether that will impact employment, even next year.”

Millennials, says Moran-Goodrich, “have changed the dynamic in how you go about shopping for things.” As traditional retailing jobs vanish, she adds, spending by American consumers will drop.

The Trouble with Tech
Many CEOs see technology topping the list of big risks for their companies, their industries and the economy. Cybersecurity is a big vulnerability, as evidenced by the Equifax breach that exposed the Social Security numbers and other private data of as many as 143 million Americans to theft.

McGuire of Grant Thornton adds that many CEOs’ biggest risks in 2018 will involve how “you keep your customer base in the face of technological disruption,” such as that being wrought by Amazon’s takeover of Whole Foods Markets, which is rattling verticals from consumer packaged goods to trucking. “These kinds of things can be threats to your business models, and that alone creates lots of uncertainty for 2018,” says McGuire, pointing out that disruptors can lure customers away by coming up with a faster, cheaper or more convenient model. “CEOs know disruption is coming. But do they have the right technology platform and strategy as business becomes more digital and data becomes more and more important?”

Jesse LaFlamme, CEO of Pete & Jerry’s Organic Eggs, a $180 million producer based in Monroe, New Hampshire, predicts that “all food prices will see more pressure on prices and margin” because of the Amazon-Whole Foods deal. “It’s a simple fact that there’s too much capacity in food retail right now, and Amazon-Whole Foods is changing that dynamic, adding to the pressure.”

Today’s disrupt-or-be-disrupted competitive environment looms large for many CEOs, says Proto Labs CEO Holt, whose company provides 3-D printing and other new-era services to help manufacturers compete. “What I find is that with CEOs—particularly CEOs of traditional companies that have been producing and behaving in certain ways for many years—it’s a huge education and change-management issue for them to move toward a more digital world.”

At the same time, businesses have been quick to embrace cloud technology, notes Workiva’s Rizai, who sees that trend continuing in 2018. “CEOs are empowering IT groups to do things with cloud tech even though the tech people themselves were relatively skeptical just two or three years ago. Acceptance of that means quicker decision-
making processes.”

Banking on Consumer Confidence
The mindset of American consumers remains a paramount factor in the stew that warms prospects for a strong 2018. Heading into the new year, “We see people seeking out consumer credit, and whetherthey’re approved or denied, things are looking solid,” says Tim Chen, CEO of NerdWallet, a provider of online financial information and advice.

“with CEOs—particularly CEOs of traditional companies—it’s a huge education and change-management issue for them to move toward a more digital world.”

“On the demand side, consumers are definitely hungry for credit, and issuers are seeing pretty good dynamics as well. They’re aggressively courting new customers, and as long as jobs are strong, the credit cycle can keep expanding. Plus default rates are still far below historical norms, and unemployment is still low.”

Yet, because household incomes haven’t been rising strongly enough to suit most Americans and inflation remains contained, the Fed has signaled a continued bias toward only very gradual increases in interest rates. Steinour, who is a member of the Cleveland Federal Reserve Board, believes raising interest rates will continue to be necessary, partly to restrain wage inflation that he believes is stronger than commonly perceived.

“My personal view is that interest rates, for the benefit of the economy, need to increase,” he says. “We need to have some gas in the tank for the next downturn, whenever that might happen.”

Bracing for Bumps
How do CEOs retain confidence, understanding that geopolitical events, political miscalculations and the occasional perfect storm of multiple negative events regularly create catastrophes such as the financial collapse and subsequent worldwide recession of 2008?

“We run the business expecting bad things to happen,” answers Schlifske of Northwestern Mutual. “I could have told you with 100 percent certainty that something like 2008 was going to happen. I just couldn’t tell you what year.

“I feel the same way now. There will be a recession and the market will go down 20 or 30 percent. I can’t tell you when. I just don’t think it will be next year. We’re not running the business with blind optimism. But we’ve fared well since 2008, so we can back up that optimism with a historical track record.”

For Sheldon Yellen, CEO of Birmingham, Michigan-based Belfor Restoration, being able to shake off worries about economic adversity is largely a matter of focusing on building his company’s book of business one day at a time. That got significantly easier for the $1.5 billion property-cleanup business leader in the wake of the fall hurricanes, which spiked demand for Belfor’s services.

“Our offices already were rocking every day,” recounts Yellen. “We always focus on ourselves and individual productivity, goals and achievements and [don’t] worry about the big world at large as it comes to what next year brings. I’ve tried to always look at things from the viewpoint of what I can do to make next year good for the effort I’m going to put forth, and I’ve tried to convey that to our people.

“So we just keep focusing on what we’re doing, not looking at the competition or geopolitical scenarios or the economy or even interest rates. We’re focused on doing what’s right for our business and our people.”

Labor Pains
Official wage and income statistics might not show it yet, but wage gains are grabbing hold across the economy and—along with accompanying competition for talent—causing many CEOs more anxiety than any other issue.

Jones, for instance, is finding it increasingly difficult to land and keep security guards at Allied Universal. The company has begun taking some drastic new steps.

“We never competed for employees with the fast-food industry before,” Jones said. “Now people can make $12 an hour by flipping burgers—and get a free lunch. Meanwhile, our employees have to be able to read and write and speak English, if they’re [emergency] first responders. They perform CPR in many cases. So they’ve always been a few dollars higher than minimum wage, and now all these other types of jobs are, too.”

To guarantee the requisite human capital in an increasingly competitive labor environment, Allied Universal recently quintupled its employee-referral bonus, to $1,000—and up to $2,000 if someone recommends a candidate who winds up being an armed security officer.

And the company has put more than 100 new recruiters on the streets of major cities across the country, combing places where Allied Universal provides security services – churches, senior centers, employment offices, community centers – for referrals.

Steinour of Huntington Bank said he’s seeing “wage inflation and skills gaps and needs” expressed by hundreds of the bank’s business clients these days.

“They talk about not being able to hire and retain qualified employees and say that they would grow faster if they could get more labor,” said the Cleveland Fed member. “’We’d even do the training,’” they say.”

Wages aren’t yet inflating as much as they typically do in such a period, Steinour said, because economic growth finally is pulling more non-participant into jobs than in many years. So while the labor participation rate is increasing, the typically low wages of the new workers are masking inflation elsewhere in the labor pool.

Political Effects
Without a doubt, freewheeling politics and change in Washington are having more direct and acute impact on CEO sentiment, the business environment, corporate performance and even consumer attitudes than ever before, chiefs insisted. Several pointed to notable positive and negative effects on their companies in 2017 and their outlooks for 2018.

Some of this sentiment consists of real but vague unease about a federal government that has gotten totally unpredictable. “The X factor is what’s happening in Washington,” said Steve Upshaw, CEO of Cross Country Home Services, a home-purchase warranty provider based in Ft. Lauderdale, Fla. “What’s going on between the White House and Capitol Hill has us all concerned.”

Moran-Goodrich said that growth for most of 2017 in her brands’ auto-aftermarket business was below the 5- and 6-percent rates of 2016, attributing it to consumer “caution” during a political “transition.”

And Skillett attributed a flatness in Citizens Parking’s business in 2017, compared with 2016, to “political noise” that made many of his CEO peers “hesitant to expand,” keeping a lid on their employees’ need for more parking spaces. “Most of the expansion has been in M&A, not the deep sort of investments. They seemed to be putting them off until 2018.”

Jennifer Cue has plunged deep into a battle that could pose an existential threat to the company she heads, Seattle-based Jones Soda Co.: a growing number of municipal taxes on sweet beverages. “The soda industry has been labeled – and ridiculously so – the culprit for all obesity,” she said. “It’s hard to say which way this is going to go outside a few progressive cities.”

On the other hand, the Trump administration’s rampage through the federal book of regulations has encouraged some CEOs who see the government noose loosening. “The government is more small-business friendly,” said Joe Magnacca, CEO of Massage Envy, a Scottsdale, Ariz.-based chain with $1.3 billion in top-line revenues. “That enhances our franchisees’ prospects.”