Zafran: US CEO Confidence Stuck in a Rut
With a tip of the hat to Stealers Wheel's 1972 classic song "Stuck in the Middle with You," U.S. CEO confidence remains listless, lethargic and dispirited.
The latest evidence of this sobering fact is Monday's first on CNBC release of the quarterly YPO Global Pulse Confidence Index, a real-time CEO economic indicator of executives' perspectives on the current and forward-looking business climate.
Nearly 1,000 U.S. CEOs were asked how they viewed the pace of their companies' sales, hiring plans and capital expenditures, both in the most recent quarter and prospectively over the next year. What was the CEOs' overwhelmingly common response to the survey across all dimensions? "About the same."
Sadly, such stoicism was paralleled by another roughly 1,000 CEOs across the globe who were simultaneously asked about their level of confidence in their respective businesses' sales, capital needs and hiring plans looking forward.
Per the YPO Global Pulse, other than in Latin America, CEO confidence in each geographic region across the world fell modestly over the past three months and remains in largely uninspiring territory.
What accounts for such lackluster enthusiasm on the part of America's CEOs, let alone almost all global business leaders?
We certainly know the usual list of suspects: falling rates of Chinese economic growth, feeble U.S. GDP growth and faltering European economies. Add in a healthy dose of hyperbole surrounding the U.S. elections, rising gas prices and persistent uncertainty in the Middle East and you can well see why CEOs might be hesitant to invest meaningfully in their businesses at this time.
Most importantly, however, uncertainty relating to America's tax code and regulatory environment as well as its health care and retirement systems — particularly in the face of our nation's "fiscal cliff" — has stymied many American CEOs' willingness to add jobs and buy business equipment today. Such uncertainly is squelching our nation's economic growth. (Read More: Why CEOs Are on the 'Fiscal Cliff' Warpath.)
After all, the economy can be viewed as a fairly straightforward, self-sustaining system. Confidence on the part of CEOs is needed to drive capital spending and investment. Such spending, in turn, drives job creation, consequently creating income in the hands of workers who buy the goods and services produced by the same companies, thereby driving higher business sales and leading to even more capital spending and job creation. (Read More: America's Top States for Job Creation.)
The fact is CEO confidence is the primary driver of much economic growth. Once confidence erodes, so does capital spending and job growth. And let's face it, it isn't hard to imagine why CEOs have lost faith in the lawmakers who determine the tax code and regulatory environment in which their businesses must operate.
Imagine for a moment that you are the CEO of a small company. Let's pretend that your business generated $2.4 million in annual sales this year, but it incurred annual expenses of $3.4 million. What's more, let's pretend that this year's $1.0 million budget deficit has occurred for four consecutive years. Moreover, let's pretend that your business already has $16 million in outstanding debt. If you were to approach your local banker and say: "Times are tough, and I'd like to borrow some money to run my business," how do you think your banker would react? Do you really think the banker would willingly lend you any money?
Now take the U.S. government, which has collected $2.4 trillion in revenues in the last year while spending $3.4 trillion. Moreover, the U.S. government has generated a $1 trillion loss for four consecutive years. Meanwhile, the country's debt load is up to $16 trillion and counting. If you were a banker, would you lend the U.S. government any money? For that matter, if the U.S. government were a corporation and you were its owner, for how long would you keep its executives (i.e. Democratic and Republican Congressmen) employed? CEOs recognize an unsustainable ecosystem when they see one. They also distrust the band of undisciplined politicians who will continue to set the tax and regulatory rules under which they must operate.
In short, U.S. CEO confidence is materially linked to our nation's financial sustainability. Waning CEO confidence adds pressure to the politicians who realize that lenders to the U.S. government have just about lost their patience. (Read More: October Surprise: Americans Feel Better About the Economy.)
In the absence of Congress passing credible and actionable fiscal policy measures leading to long-term budget reform, CEO confidence will not rekindle, thereby only deepening the financial ditch in which the U.S economy currently lies. It's time for meaningful fiscal action, before U.S. CEO confidence — and the economy — take a material turn for the worse.
The YPO Global Pulse Confidence Index combines CEO answers about expected and most recent-quarter sales, employee numbers, fixed investment and business conditions. The index is centered on 50. An index reading below 50 indicates a negative outlook — the lower the number, the more negative the outlook. A reading above 50 indicates a positive outlook — the higher the number, the more positive the outlook. The quarterly electronic survey, conducted during the first two weeks of October 2012, gathered answers from 1,743 chief executive officers across the globe, including 811 in the United States. Globally, 26 percent of participants were from large companies (more than 500 employees), 39 percent from medium-sized companies (100-500 employees), and 35 percent from small companies (less than 100 employees). By business sector, 25 percent of participants were from the production sector, 9 percent from construction, and 66 percent from the services sector.
Alan Zafran is Partner of Luminous Capital, an SEC-registered investment adviser (RIA) that provides wealthy individuals, family offices, and institutional clients with investment advice, asset allocation strategies and portfolio construction recommendations.
CNBC and YPO (Young Presidents' Organization) have formed an exclusive editorial partnership, consisting of regional "Chief Executive Networks" in the Americas, EMEA and Asia-Pacific. These "Chief Executives Networks" are made up of a sample of YPO's unrivaled global network of 20,000 top executives from 120 countries who are on the frontlines of the economy. The opinions of "Chief Executive Network" members are solely their own and do not reflect the opinions of YPO as a whole or CNBC.