CEO confidence in economy continues to climb: YPO survey

Despite a slowdown in economic growth of 1.2 percent in the second quarter, continued risk of a weaker global economy, and the latest data indicating a sharp drop in private investment, U.S. CEOs are relatively positive about economic prospects.

Economic confidence from U.S.-based CEOs trails only their counterparts in Asia, which reported the most optimistic economic outlook in the world, according to the quarterly YPO Global Pulse survey conducted in July. Confidence rose 1.2 points in July, to 60.8, for the United States. It increased modestly around the world, rising 1.4 points.

That makes a streak of seven straight months of gradual improvements in global CEO confidence, a major about-face from global CEOs who came into 2016 with a largely pessimistic outlook.

The erosion of U.S. CEO confidence began in the second half of 2014 and continued through the early part of this year. The rise in the value of the dollar had caused U.S. exports to become more expensive for foreigners to purchase. As a result, exports declined 7.5 percent last year and the trade component subtracted 0.6 percent from GDP growth.

The modest gain in confidence appears to be a reflection of a slight drop in the value of the dollar, along with a significant drop in long-term interest rates triggered largely by the Brexit decision, and an apparent acceleration in the pace of economic activity. More specifically, the pace of economic activity in the United States has picked up from a tepid 1.1 percent rate in the first quarter to 2.5 percent or so in the second quarter, with the prospect of 2.5 percent growth continuing into the second half of the year.

Oil prices also factored in the latest CEO confidence reading. While consumers benefited from the commodities collapse, oil companies closed inefficient wells and cut back on their purchases of oil-drilling equipment and on expenditures for exploration and research. This had caused investment spending to weaken steadily and actually contract in the fourth quarter of last year and the first quarter of 2016. But as oil prices rebounded in the second quarter, some drillers chose to reopen previously closed wells. Following the survey results, we have seen, once again, downward pressure on oil prices. Thus, it remains to be seen if this specific economic headwind has disappeared.

A significant percentage of U.S. CEOs remain cautious. More than a fifth (22 percent) of business leaders in the United States expect the business and economic conditions affecting their organizations to worsen over the next six months, while 31 percent believe the economic landscape will improve. This is a more cautious picture than in the previous quarter's survey, when only 19 percent expected to see a deterioration in conditions and 37 percent believed the economic environment would improve.

The British decision to leave the EU caused stock markets to plunge, but in every instance, the decline was erased in a matter of days as global investors sought the safety of dollar-denominated investments. Indeed, the S&P 500 index soon climbed to a record high, which has bolstered consumer confidence, created wealth and, apparently, enhanced consumers' willingness to spend.

The level of confidence region to region remains uneven.

Most notably, Canada reported a significant jump in CEO confidence, coinciding with the recovery of commodity prices, followed by Asia, reflecting India's rapid growth in business outsourcing, IT and software services.

GDP growth in India reached a five-year high of 7.6 percent in 2015 and is expected to maintain a 7.5 percent pace in 2016 and 2017, reinforcing its position as the world's fastest-growing economy.

The biggest losses in CEO confidence between the first and second quarters of 2016 occurred when the EU recorded a loss of 3.1 points following the decision of the U.K. to leave the EU.

Compared to other regions in the world, U.S. business leaders are still bullish about prospects. Despite concerns about the wider economy, chief executives and business leaders reported high levels of confidence in each of the three main indices of the YPO Global Pulse Index, tracking estimates for sales, hiring and fixed investment.

Two-thirds of participants forecast an increase in revenue over the next year, with only 5 percent projecting a decline in sales. In terms of employment, 43 percent expect to increase headcount in the next 12 months, versus only 5 percent who expect a reduction in the size of their workforce, suggesting that employment figures will continue to improve in the United States for the rest of this year and into 2017.

Similarly, 43 percent of CEOs expect to increase fixed-investment levels over the next 12 months, versus only 7 percent who expect a reduction in fixed investment.

While old challenges fade and new ones emerge, CEOs of the world's biggest developed economy face the second half of the year with greater optimism than most of their global counterparts.

By Brent M. Skoda, chairman and CEO of Vapergy. Skoda is a serial entrepreneur and also chairman and CEO of Ahkeo Holdings.

The YPO Global Pulse survey was conducted in the first two weeks of July 2016, among more than 2,300 chief executive officers across the globe, including 1,177 in the United States.

About YPO

CNBC and YPO 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 global network of 24,000 top executives from 120 countries who are on the front lines of the economy and run companies that collectively generate $6 trillion in annual revenue.